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| TRAK > SEC Filings for TRAK > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
The following is a table consisting of EBITDA and certain other business statistics that management is continually monitoring (amounts in thousands, except active dealers, financing source data, and product subscriptions):
Three Months Ended September 30, Nine Months Ended September 30,
2008 2007 2008 2007
EBITDA and Other Business Statistics:
EBITDA (1)(6) $ 6,713 $ 17,534 $ 33,951 $ 51,030
Capital expenditures, software and web site development costs $ 5,627 $ 3,520 $ 13,568 $ 9,220
Active dealers in our network as of end of the period (2) 21,001 22,551 21,001 22,551
Active financing sources in our network as of end of period (3) 706 495 706 495
Transactions processed (4) 19,219 23,810 65,359 70,033
Product subscriptions (5) 33,123 27,469 33,123 27,469
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(1) EBITDA represents net income before interest (income) expense, taxes, depreciation and amortization. We present EBITDA because we believe that EBITDA provides useful information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We rely on EBITDA as a primary measure to review and assess the operating performance of our company and management team in connection with our executive compensation plan incentive payments.
EBITDA has
limitations as an
analytical tool
and you should
not consider it
in isolation, or
as a substitute
for analysis of
our results as
reported under
Generally
Accepted
Accounting
Principles
(GAAP). Some of
these limitations
are:
• EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
• EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
• EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;
• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and
• Other companies may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only supplementally. EBITDA is a measure of our performance that is not required by, or presented in accordance with, GAAP. EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our liquidity.
The following table sets forth the reconciliation of EBITDA, a non-GAAP financial measure, to net (loss) income, our most directly comparable financial measure in accordance with GAAP (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2008 2007 2008 2007
GAAP net (loss) income $ (2,603 ) $ 4,512 $ 2,801 $ 15,621
Interest income (1,105 ) (991 ) (3,813 ) (3,742 )
Interest expense 87 96 253 231
Provision for income taxes 1,155 3,217 5,323 11,276
Depreciation of property and equipment
and amortization of capitalized software
and website costs 3,704 2,686 9,785 7,391
Amortization of acquired identifiable
intangibles 5,475 8,014 19,602 20,253
EBITDA (Non-GAAP) (6) $ 6,713 $ 17,534 $ 33,951 $ 51,030
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(2) We consider a dealer to be active as of a date if the dealer completed at least one revenue-generating credit application processing transaction using the DealerTrack network during the most recently ended calendar month.
(3) We consider a financing source to be active in our network as of a date if it is accepting credit application data electronically from dealers in the DealerTrack network, including financing sources visible to dealers through drop down menus.
(4) Represents revenue-generating transactions processed in the DealerTrack, DealerTrack Digital Services and DealerTrack Canada networks at the end of a given period. The second quarter transaction volume has been revised upwards by 1,204,000 transactions from the number previously reported.
(5) Represents revenue-generating subscriptions in the DealerTrack and DealerTrack Canada networks at the end of a given period.
(6) Included in EBITDA for the three and nine months ended September 30, 2008, is an impairment charge of $5.7 million, related to the significant decline in certain auction rate securities. Refer to Note 4 in the accompanying notes to the consolidated financial statements included in this Quarterly Report on From 10-Q for further information regarding the impairment charge.
Revenue
Transaction Services Revenue. Transaction services revenue consists of
revenue earned from our financing source customers for each credit application
or contract that dealers submit to them. We also earn transaction services
revenue from financing source customers for each financing contract executed via
our electronic contracting and digital contract processing solutions, as well as
for any portfolio residual value analyses we perform for them. We also earn
transaction services revenue from dealers or other service and information
providers, such as aftermarket providers, vehicle sales lead distributors, and
credit report providers, for each fee-bearing product accessed by dealers.
Subscription Services Revenue. Subscription services revenue includes revenue
earned from our customers (typically on a monthly basis) for use of our
subscription or license-based products and services. Some of these subscription
services enable dealer customers to manage their dealership data and operations,
obtain valuable consumer leads, compare various financing and leasing options
and programs, sell insurance and other aftermarket products, analyze inventory,
and execute financing contracts electronically.
Cost of Revenue and Operating Expenses
Cost of Revenue. Cost of revenue primarily consists of expenses related to
running our network infrastructure (including Internet connectivity and data
storage), amortization expense on acquired intangible assets, compensation and
related benefits for network and technology development personnel, amounts paid
to third parties pursuant to contracts under which a portion of certain revenue
is owed to those third parties (revenue share), direct costs (printing, binding,
and delivery) associated with our residual value guides, installation and
hardware costs associated with our dealership management system product
offering, expenses related to our digital contract business, allocated overhead
and amortization associated with capitalization of software.
Product Development Expenses. Product development expenses consist primarily
of compensation and related benefits, consulting fees and other operating
expenses associated with our product development departments. The product
development departments perform research and development, as well as enhance and
maintain existing products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of compensation and related benefits,
facility costs and professional services fees for our sales, marketing, customer
service and administrative functions.
We allocate overhead such as occupancy and telecommunications charges, and
depreciation expense to all departments based on headcount, as we believe this
to be the most accurate measure. As a result, a portion of general overhead
expenses is reflected in our cost of revenue and each operating expense
category.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and
results of operations is based on our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these consolidated financial
statements requires management to make estimates and judgments that affect the
amounts reported for assets, liabilities, revenue, expenses and the disclosure
of contingent liabilities.
Our critical accounting policies are those that we believe are both important
to the portrayal of our financial condition and results of operations and that
involve difficult, subjective or complex judgments, often as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. The estimates are based on historical experience and on various
assumptions about the ultimate outcome of future events. Our actual results may
differ from these estimates in the event unforeseen events occur or should the
assumptions used in the estimation process differ from actual results.
Management believes there have been no material changes during the nine months
ended September 30, 2008, except as noted below, to the critical accounting
policies discussed in the section entitled "Management Discussion and Analysis
of Financial Condition and Results of Operations" in our Annual Report on Form
10-K for the year ended December 31, 2007, filed with the SEC on February 28,
2008.
Impairment of auction rate securities
We reviewed our auction rate securities portfolio for an impairment charge in
accordance with FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments" and Staff Accounting
Bulletin Topic 5M "Other-Than-Temporary Impairment of Certain Investments in
Debt and Equity Securities," to determine the classification of the impairment
as "temporary" or "other-than-temporary". A temporary impairment charge results
in an unrealized loss being recorded in the other comprehensive income component
of shareholders' equity. It occurs if a loss in an investment is determined to
be temporary in nature and we have the ability and intent to hold the investment
until a recovery in market value takes place. Such an unrealized loss does not
reduce our net income for the applicable accounting period because the loss is
not viewed as other-than-temporary. An impairment charge is recorded against
earnings to the extent we determine that there is a loss of fair value that is
other-than-temporary.
As of September 30, 2008 our auction rate securities portfolio consisted of
$1.9 million of short-term and $1.6 million of long-term investments in
tax-exempt state government and university obligations and $3.9 million of
auction rate securities invested in tax-advantaged preferred stock trust
securities. The $1.9 million in short-term investments in tax-exempt state
government and university obligations were liquidated at par subsequent to
September 30, 2008. Our intent for the $1.6 million of long-term investments in
tax-exempt state government obligations is not to hold to maturity, but rather
to use the interest rate reset feature to provide liquidity as necessary. The
$3.9 million of auction rate securities funds invested in tax-advantaged
preferred stock trust securities, which have a par value of $9.6 million, are
associated with failed auctions and amounts will not be accessible until a
successful auction occurs, a buyer is found outside the auction process or the
trust dissolves and distributes the underlying securities. Included in our
preferred stock trusts auction rate securities portfolio is a trust with a par
value of $2.2 million for which the underlying investment is a Freddie Mac
preferred stock that was significantly impaired and is no longer paying
interest.
The funds invested in tax-advantaged preferred stock trust securities were
historically recorded at par, which approximated fair value based on quoted
market transactions. Due to the lack of observable market quotes on our
preferred stock trust securities due to failed auctions within the industry, we
no longer had evidence that the par value of these investments approximated
their fair market value and were required to seek other alternatives to
determine the fair value of these securities which are not based on observable
market transactions. As a result, we began estimating the fair values of these
securities utilizing a discounted cash flow analysis as of March 31, 2008. Our
valuation analyses consider, among other items, assumptions that market
participants would use in their estimates of fair value, such as the collateral
underlying the security, the creditworthiness of the issuer and any associated
guarantees, the inability to sell the investment in an active market, the timing
of expected future cash flows, and the expectation of the next time the security
is expected to have a successful auction or when callability features may be
exercised by the issuer. We believe there are several significant assumptions
that are utilized in our valuation analysis, such as the discount rate and the
probability of an auction passing or failing at each auction date and its
associated expected discounted cash flows. Through the first six months of 2008
we recorded a temporary unrealized loss of $0.5 million (net of taxes). However,
due to the continued deterioration of the auction rate securities market
subsequent to June 30, 2008, we continued to assess the fair value our auction
rate security positions, and as a result, we reduced the fair value of the
investments in the preferred stock trusts from a par value of $9.6 million to
$3.9 million and recorded an other-than-temporary impairment charge of
$5.7 million for the three months ended September 30, 2008. We believe there is
a reasonable likelihood that the trust securities could liquidate in the near
term, and as such the fair value of the resulting securities we would own would
be the underlying preferred instruments. Although these assumptions are subject
to change as market conditions change, the underlying fair value of the
preferred stock securities in the trusts is $4.6 million as of September 30,
2008. Refer to Note 4 in the accompanying notes to the consolidated financial
statements included in this Quarterly Report on Form 10-Q for further
information regarding the impairment charge.
Results of Operations
The following table sets forth, for the periods indicated, the selected
consolidated statements of operations data expressed as a percentage of revenue:
Three Months Ended September 30, Nine Months Ended September 30,
2008 2007 2008 2007
(% of net revenue) (% of net revenue)
Consolidated Statements of Operations Data:
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %
Operating costs and expenses:
Cost of revenue 46.1 44.0 44.9 42.2
Product development 4.8 4.4 4.9 4.3
Selling, general and administrative 44.0 40.7 44.9 40.0
Total operating costs and expenses 94.9 89.1 94.7 86.5
Income from operations 5.1 10.9 5.3 13.5
Interest income 1.8 1.6 2.0 2.1
Other income 0.2 - 0.1 -
Interest expense (0.1 ) (0.2 ) (0.1 ) (0.1 )
Impairment on auction rate securities (9.4 ) - (3.0 ) -
(Loss) income before provision for income taxes (2.4 ) 12.3 4.3 15.5
Provision for income taxes (1.9 ) (5.1 ) (2.8 ) (6.5 )
Net (loss) income (4.3) % 7.2 % 1.5 % 9.0 %
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Three Months Ended September 30, 2008 and 2007
Revenue
Three Months Ended
September 30,
2008 2007
Transaction services revenue $ 33,007 $ 39,096
Subscription services revenue 23,797 20,378
Other 3,721 3,397
Total net revenue $ 60,525 $ 62,871
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Total net revenue decreased $2.4 million, or 4%, to $60.5 million for the
three months ended September 30, 2008 from $62.9 million for the three months
ended September 30, 2007.
Transaction Services Revenue. Transaction services revenue decreased
$6.1 million, or 16%, to $33.0 million for the three months ended September 30,
2008 from $39.1 million for the three months ended September 30, 2007. The
decrease was primarily the result of a decline in the volume of transactions
processed through our network to 19.2 million for the three months ended
September 30, 2008 from 23.8 million for the three months ended September 30,
2007. The 19% decrease in transaction volume, as compared to the same period of
the prior year, resulted in a $7.9 million reduction in revenue in the current
quarter. The ongoing tightening of the credit market caused a significant
decline in the number of lending relationships between the various financing
sources and automotive dealers available through our network; this, together
with the continual decline in automobile sales has meaningfully impacted our
transaction volume compared to historical levels. The revenue decline of
$7.9 million related to the decrease in transaction volume was offset by a
$1.5 million increase in the average transaction price to $1.72 for the three
months ended September 30, 2008 from $1.64 for the three months ended
September 30, 2007. The contributing factor to the increase in average
transaction price was the 43% increase in financing source customers active in
our network to 706 as of September 30, 2008 from 495 as of September 30, 2007.
The additional 211 financing source customers added are lower transaction volume
customers with higher price per application tiers.
Subscription Services Revenue. Subscription services revenue increased
$3.4 million, or 17%, to $23.8 million for the three months ended September 30,
2008 from $20.4 million for the three months ended September 30, 2007. Revenue
growth was favorably impacted by the increase in the total number of
subscriptions to 33,123 as of September 30, 2008 from 27,469 as of September 30,
2007, offset by a 5% decrease in the average subscription price to $244 for the
three months ended September 30, 2008 from $256 for the three months ended
September 30, 2007 resulting from a change in the subscription product mix.
These factors contributed $2.9 million to the increase in revenue.
Cost of Revenue and Operating Expenses
Three Months Ended
September 30,
2008 2007
Cost of revenue $ 27,940 $ 27,678
Product development 2,875 2,761
Selling, general and administrative 26,654 25,598
Total cost of revenue and operating expenses $ 57,469 $ 56,037
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Cost of Revenue. Cost of revenue increased $0.2 million to $27.9 million for the three months ended September 30, 2008 from $27.7 million for the three months ended September 30, 2007. The $0.2 million increase was primarily the result of increased compensation and benefits related costs of $1.1 million and . . .
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