OPENLANE, Inc. Q3 FY2024 earnings call

• OPENLANE had a positive third quarter with $75 million in adjusted EBITDA, a 10% year-over-year increase. Year-to-date, cash from operations was $260 million.
• The Marketplace segment experienced 6% volume growth, with revenue and gross profit rising, and $36 million in adjusted EBITDA, a 34% increase from the third quarter of the previous year. It has been the third consecutive quarter where the Marketplace segment contributed nearly 50% of consolidated adjusted EBITDA, up from ~39% in the same period last year.
• AFC contributed approximately $39 million in adjusted EBITDA in the third quarter, with SG&A costs reduced and risk managed effectively.
• Strategy is centered around three pillars: delivering the best marketplace (expanding buyers and sellers, offering diverse inventory), best technologies (innovative products and services), and best customer experience (AI integration in processes, launch of an NPS system).
• In the Marketplace, there was a sixth consecutive quarter of year-over-year growth; gross merchandise value reached nearly $7 billion, a 12% increase year-over-year; new dealer recruitment and unique buyers saw growth.
• In technology, investments were made in condition reports, an absolute sale feature, AI-powered recommendations, and self-service offerings in Europe; it received the Fleet Europe Remarketing Innovation award.
• In customer experience, AI was integrated into operations, an NPS system was launched across regions, and positive feedback was received regarding ease of use and support.

Consolidated revenue stood at $448 million, marking an 8% increase. Adjusted EBITDA reached $75 million, a 10% rise compared to the prior year. The Marketplace segment saw revenue jump 12% to $354 million, with total volumes growing by 6% (commercial up 8% and dealer up 3%). Marketplace adjusted EBITDA amounted to $36 million, a 34% increase. The Finance segment's revenues declined by 6%, while its adjusted EBITDA was $39 million, a 5% drop. Year-to-date, cash from operations totaled $260 million. The Marketplace segment contributed nearly 50% of consolidated adjusted EBITDA, up from around 39% in the corresponding period last year.

• Adjusted EBITDA guidance was updated to $285 million to $295 million.
• The share repurchase program was extended to $100 million through the end of 2025. Approximately 1.8 million shares were bought back in the third quarter.
• SG&A spend is expected to remain at similar levels to recent quarters, with a focus on funding core go-to-market and customer-facing investments.

• Lower vehicle values within the AFC portfolio impacted revenue growth.
• Independent dealers' disciplined approach posed a challenge to AFC's revenue growth, with the volume challenge expected to persist through early 2025.
• Commercial off-lease volumes were affected by lower lease originations in late 2021 and 2022, with off-lease volumes not expected to materially grow until 2026 and beyond.

Q: Rajat Gupta inquired about D2D volumes in the US versus the industry and share gains.

A: Brad Lakhia stated that dealer volumes improved, gained share versus physical, saw a positive swing compared to the first half, had improving momentum, and increased marketplace participation with growth in both sellers and buyers, with more growth on the buy side.

Q: Rajat Gupta asked about the pricing strategy.

A: Brad Lakhia said the focus was on providing value to customers in terms of speed to sale, cost of sale, and customer service. Prices were at or below alternatives, a price increase was made in Canada in the late third quarter and a modest increase in the US Open marketplace recently, and it was still attractively priced versus alternatives.

Q: John Murphy asked about the volume ramp and inflection in industry-wide volume.

A: Brad Lakhia expressed satisfaction with volume growth (six consecutive quarters), noted that dealer volumes improved versus the first half, had improving momentum, and inventory on dealer lots increasing could impact dealer consignment. Commercial volume was challenged in the next few quarters, with real acceleration expected in 2026.

Q: John Murphy asked about contagion or trouble in the AFC dealer base.

A: Peter Kelly said no trouble was seen, risk metrics at AFC were improving, AFC was performing well with $39 million in adjusted EBITDA in the third quarter, and used vehicle values had stabilized. Brad Lakhia added that independent dealers were disciplined, recent rate cuts were helpful, and AFC's risk management was strong.

Q: Will Joseph asked about the mix of off-lease auctions changing.

A: Brad Lakhia said more franchise dealers were buying in the open marketplace, saw improvements in off-lease vehicles selling in the open channel, and the blended ARPU across the off-lease category ticked up with more vehicles in higher revenue channels.

Q: Gary Prestopino asked about dealer participation and recruitment.

A: Peter Kelly said the paths were varied, many dealers first experienced as buyers in private label marketplaces, then the sell side solution was explained, and more dealers were now integrating at the front end of the funnel. Brad Lakhia added that field resources were optimized and early positive results were seen.

Q: Craig Kinnison asked about the path dealers take to become sell-side customers.

A: Peter Kelly said the paths were varied, many first as buyers in private label marketplaces, then the sell side solution was explained, and now more dealers were integrating at the front end of the funnel.

Q: John Healy asked about the commercial side in 2025 and ARPU.

A: Peter Kelly said there were lower off-lease maturities in 2025, offset by a possible decline in preterm payoff rate, commercial volumes grew in Q3, and 2026 and beyond were expected to be positive. Brad Lakhia added that scenarios were modeled and the worst case was not a significant headwind to the marketplace business