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Auto auctioneer invests big in tech as sales go online

March 6, 2014

KAR Auction Services Inc. expects to spend as much as $125 million on technology this year as the Carmel-based company steers more of its business onto the Internet.

The investment snowballs the vehicle auction business’ investments in software and hardware after a major shift to digital in 2011 with the $210 million acquisition of online auction firm OpenLane Inc.

“This is a situation where the company continues to grow and mature into a larger technology company,” CEO James Hallett told IBJ. “I tell everybody that we’re not really in the auction business, we’re in the technology business.”

Of that $125 million, about $52 million would cover hardware and software. Another $13 million would cover leases for IT equipment, and another $50 million to $60 million would be spent on operating costs like upkeep and development.

KAR operates three subsidiaries: ADESA Inc., the largest, trades used cars wholesale; Insurance Auto Auctions focuses on salvaged vehicles; and Automotive Finance Corp. provides lending to independent used-car dealers.

ADESA operates auctions at 65 locations in North America, and Insurance Auto Auctions has 164 sites in the U.S. and Canada. But the OpenLane online platform is increasingly important.

About 35 percent of ADESA’s vehicles sold online in 2013, up from 31 percent in 2012 and 22 percent in 2011, when KAR bought OpenLane. Online transactions for Insurance Auto, meanwhile, have consistently been about 50 percent of total sales since 2011.

That’s only going to keep growing, Hallett said.

“KAR’s ability to grow and take market share in the auction market depends, in part, on its ability to maintain a competitive, user-friendly online platform for buyers and sellers,” analysts for Robert W. Baird & Co. wrote in a Feb. 20 note to investors. “Additionally, as more volume transacts ‘upstream’ outside of the physical auction, the competitive advantages of KAR’s physical auction network could diminish.”

Furthering the digital shift, KAR is working on a mobile platform for phones and tablets. There's no definitive release date for the big-ticket project, which would include separate apps for ADESA and Insurance Auto Auctions.

KAR will likely develop most of the technology in-house, but Hallett “wouldn’t exclude” the possibility of another acquisition.

The auction firm has boosted its technological expenses as its sales have climbed back from the auto industry’s nosedive during the Great Recession.

The company finished 2013 with $2.17 billion in revenue, up from $1.96 billion in 2012. However, larger operating expenses combined with steeper taxes chewed up some of its profit, which ended 2013 at $67.7 million, down from $92 million in 2012.

Trading on the New York Stock Exchange, KAR's shares have risen about 55 percent in the last 12 months, to about $32 per share.

 

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