Continued investment in TradeRev, an online auction and appraisal tool, has trimmed KAR Auction Services Inc.'s operating income in 2018, but the company still posted hefty profit gains in the third quarter.
KAR's net income rose 23 percent in the third quarter to $77.5 million as revenue grew 11 percent to $933.5 million. KAR CFO Eric Loughmiller told Automotive News Wednesday that net earnings increased because results from core business units were "quite strong," offsetting the costs TradeRev's rollout in the period. TradeRev's expenses exceeded its revenue by about $15 million in the period.
The company's earnings before interest, taxes, depreciation and amortization rose 4.1 percent to $216 million.
In a conference call Wednesday to discuss third-quarter results, CEO Jim Hallett said TradeRev has rolled out across Canada and in many major U.S. markets, and the company is working to expand to smaller markets.
The company sees a potential network of 55,000 dealerships using the platform in the U.S., based on the total number of franchised and independent stores, Hallett said.
The company expects TradeRev to "lose money during the next couple of years as we focus on expanding to new markets and develop our existing markets and adapt the customer-service model to the needs of our customers," Hallett said. " ... The focus is on volume right now, and we need to win the volume and we need to win that leadership position."
KAR bought 50 percent of TradeRev in 2014 and acquired the rest of the company in October 2017 for $50 million in cash and an additional $75 million paid the next four years -- with the additional sum contingent on certain terms and conditions of TradeRev's performance.
During the quarter, total volume at the ADESA auction unit increased 11 percent, with same-store volumes up 7 percent. Off-lease vehicles continued to drive growth, the company said, and the supply of off-lease vehicles is expected to peak in 2019.
Inventory volumes at the company's IAA salvage auction unit were up 6 percent overall but fell 9 percent in North America because of a comparison with higher year-ago volumes of hurricane-damaged vehicles. KAR's planned spinoff of its auction salvage business is proceeding as planned and is expected to be completed in 2019.