What happened

Shares of IAA (NYSE:IAA), an auction marketplace to buy or sell damaged and low-value vehicles, jumped over 10% Tuesday after the company reported stronger than expected third-quarter results.

So what

Third-quarter revenue increased 11.3% to $357.3 million, compared with the prior year, which easily topped analysts' estimates calling for $347.3 million. The top-line improvement was driven by a combination of 4.8% higher volumes and a 5% increase in revenue per vehicle. Adjusted earnings per share checked in at $0.35, a 7.2% increase from the prior year and better than analysts' estimates calling for $0.33 per share.

Gavel and set of car keys.

Image source: Getty Images.

In a press release, CEO John Kett said:

We are pleased with our third quarter top and bottom line performance. Our strong revenue growth was broad-based across U.S. and International markets and was driven by both higher volumes and higher revenue per vehicle. In our short time as an independent public company, we have made significant progress on our near-term priorities, and we are very focused on driving our longer-term strategic growth initiatives.

Now what

Even better news for investors was improving gross margins. Thanks to strong top-line growth, which outpaced the company's increase in cost of services, gross profit increased by 14.7% and gross margin was up 100 basis points to 38.1%, compared with the prior year.

Management also tweaked full-year guidance for revenue to increase in the range of 7% to 7.5%, from the prior range of 5% to 7%. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is now expected to grow in a range of 6% to 7%, narrower than the previous 6% to 8%. While many investors are cautious about automotive stocks, not all auto stocks are the same: IAA is more resistant to recessionary trends, and operates with a capital-light business model.

The strong third quarter could also be a sign that the decision to spin off from KAR Auction Services -- leaving IAA more focused to make strategic decisions and to drive revenue growth -- was the right move.

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