ACV Auctions Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
ACV operates a digital wholesale auction marketplace connecting automotive dealers and commercial enterprises to buy and sell used vehicles. Its offerings include auction services, transportation, financing, vehicle-condition assurance, inspections, data services and inventory-management software. The filing covers the unaudited three and nine months ended September 30, 2021, compared with the same periods in 2020.
ACV completed its initial public offering in March 2021, raising approximately $388.9 million in net proceeds. In July 2021, it acquired Max Digital LLC for approximately $61.4 million in cash.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $91.8 million | $67.5 million | $258.3 million | $154.6 million |
| Marketplace and service revenue | $79.3 million | $56.4 million | $221.6 million | $129.3 million |
| Customer assurance revenue | $12.5 million | $11.1 million | $36.6 million | $25.3 million |
| Net income (loss) | $(24.8) million | $3.2 million | $(51.9) million | $(28.8) million |
| Adjusted EBITDA | $(12.4) million | $3.3 million | $(28.4) million | $(22.6) million |
| Operating income (loss) | $(24.7) million | $3.5 million | $(51.1) million | $(28.7) million |
| Operating margin | (26.9)% | 5.2% | (19.8)% | (18.5)% |
| Marketplace Units | 140,734 | 118,373 | 422,394 | 288,849 |
| Marketplace GMV | $2.0 billion | $1.1 billion | $5.4 billion | $2.4 billion |
Revenue increased 36% year over year in Q3 and 67% for the nine-month period. Marketplace Units increased 19% in Q3 and 46% year to date. Marketplace and service revenue growth reflected higher auction activity, transportation, data and other services. Customer assurance revenue increased 13% in Q3 and 45% year to date.
Profitability deteriorated despite revenue growth. Q3 total operating expenses were $116.4 million, or 127% of revenue, compared with 95% in the prior-year quarter. Marketplace and service cost of revenue rose to 45% of revenue from 37%, while selling, general and administrative expense rose to 37% from 17%. Stock-based compensation increased to $9.8 million in Q3 and $16.4 million for the nine-month period, compared with $0.3 million and $3.5 million, respectively, in the prior-year periods.
Cash flow from operating activities was $88.4 million for the first nine months of 2021, compared with $20.3 million in 2020. The cash inflow was substantially affected by a $223.5 million increase in accounts payable, which exceeded a $112.0 million increase in trade receivables.
Cash used in investing activities was $97.6 million, including $59.9 million for acquisitions, $8.5 million of capitalized software costs and $27.0 million of net increases in finance receivables. Financing activities provided $377.2 million, primarily from the IPO. Cash and cash equivalents totaled $601.7 million at September 30, 2021, compared with $233.7 million at December 31, 2020.
Total debt was $0.5 million at September 30, 2021, down from $4.8 million at year-end 2020. The 2019 Revolver had $49.5 million of unused availability. A new $160.0 million secured 2021 Revolver had no borrowings outstanding, but included a $0.5 million letter of credit.
Material changes versus the prior comparable period
- Revenue growth was driven by higher transaction volume and increased adoption of transportation, data and other services.
- Operating losses increased sharply, with Q3 net loss of $24.8 million versus net income of $3.2 million in Q3 2020.
- Operating expense growth exceeded revenue growth, particularly in marketplace and service costs, operations and technology, and selling, general and administrative expenses.
- Q3 selling, general and administrative expense included approximately $3.4 million of compensation expense from an amendment resolving the TruePartners earn-out liability, as well as higher public-company, advertising, insurance and personnel costs.
- The Max Digital acquisition added data and inventory-management capabilities and increased goodwill and acquired intangible assets.
- The IPO substantially increased cash and stockholders’ equity and converted all outstanding convertible preferred stock into Class B common stock.
Guidance, outlook, commentary and risks
The filing does not provide specific quantitative revenue, earnings or Adjusted EBITDA guidance. Management expects to continue investing in sales, marketing, personnel, technology, marketplace expansion and new products. It expects Adjusted EBITDA to fluctuate in the near term and improve over the long term if the company achieves scale and operating efficiencies.
Management stated that cash and cash flows from operations are expected to support working capital and capital expenditures for at least the next 12 months, although future acquisitions, expansion and investment may require additional debt or equity financing.
- Used-vehicle supply was constrained during Q3, with dealer inventories at historically low levels. Lower wholesale supply could reduce transaction volumes and revenue.
- Used-vehicle prices, demand, seasonality, semiconductor-related vehicle shortages and broader automotive and economic conditions may materially affect results.
- COVID-19, variants, government restrictions and potential employee impacts remain uncertain.
- The company faces competition from traditional auction operators expanding online and from digital auction platforms.
- Inspection errors, assurance claims, fraud, settlement risk, transportation disruptions and customer nonpayment could adversely affect results.
- A putative class action alleges antitrust violations relating to alleged bid-setting activity on the marketplace. The company cannot estimate a potential loss but believes the matter will not materially affect its consolidated financial position.
- The company previously identified a material weakness in internal control over financial reporting. Management reported that disclosure controls and procedures were effective as of September 30, 2021, while acknowledging the inherent limitations of control systems.
- The dual-class structure gives Class B holders ten votes per share. Class B holders collectively represented approximately 87.8% of voting power as of September 30, 2021.
Investor verification points
- Reconcile operating cash flow to changes in accounts payable, receivables and marketplace settlement timing; assess the sustainability of the working-capital benefit.
- Monitor whether revenue growth continues to exceed growth in direct costs, personnel expense, stock-based compensation and public-company costs.
- Assess Max Digital’s contribution to revenue, margins, customer adoption and integration costs.
- Evaluate used-vehicle supply, pricing, dealer inventory levels and the effect of seasonality on Marketplace Units and GMV.
- Review the potential exposure from vehicle-condition guarantees, including $284.0 million of vehicle sale value subject to outstanding guarantees at September 30, 2021.
- Track the antitrust litigation, regulatory developments, cybersecurity and privacy risks, and any recurrence of internal-control weaknesses.
- Consider dilution, concentrated voting control and approximately $84.0 million of remaining stock-based compensation expense related to unvested awards.