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TRAK > SEC Filings for TRAK > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for DEALERTRACK TECHNOLOGIES, INC

Form 10-Q for DEALERTRACK TECHNOLOGIES, INC


6-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements. Certain statements in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements involve a number of risks, uncertainties and other factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that could materially affect such forward-looking statements can be found in the sections entitled "Risk Factors" in Part II, Item 1A in this Quarterly Report on Form 10-Q, as well as Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on February 26, 2013. Investors are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date hereof and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances except as required by law.

Overview

Dealertrack's web-based software solutions and services enhance efficiency and profitability for all major segments of the automotive retail industry, including dealers, lenders, OEMs, third-party retailers, agents and aftermarket providers. Dealertrack operates the largest online credit application networks in the United States and Canada. We believe Dealertrack delivers the industry's most comprehensive solution set for automotive retailers, including:

Dealer Management solutions, which provide independent and franchised dealers with a powerful dealer management system (DMS) featuring easy-to-use tools and real-time data access to enhance their efficiency;

Sales and F&I solutions, which allow dealers to streamline the in-store and online sales processes as they structure deals from a single integrated platform;

Inventory solutions, which deliver vehicle inventory management and transportation offerings to help dealers accelerate used-vehicle turn rates and assist with the facilitation of vehicle delivery;

Processing solutions, which include online motor vehicle registration, lien and titling applications and services, and collateral management services;

Digital Retailing solutions, which integrate advanced vehicle search, pricing and payment tools directly into a retailer's website; and

Interactive solutions, which deliver digital marketing and website offerings to assist dealers in achieving higher lead conversion rates by helping optimize the maximum amount of shoppers to their websites.

Executive Summary

Below are selected highlights of operations for the three months ended June 30, 2013:

On April 1, 2013, we completed the acquisition of the net assets of Casey & Casey NPS, Inc. (doing business as "Auto Title Express") (Casey& Casey) for $21.3 million in cash, reflective of final working capital adjustments. Casey & Casey is Louisiana's first electronic general public license tag agency and the largest provider of electronic vehicle registration, lien and title services, among other related services, in the state.

Revenue for the three months ended June 30, 2013 was $121.8 million, an increase of $25.4 million from the three months ended June 30, 2012.

Net income for the three months ended June 30, 2013 was $3.8 million as compared to $5.9 million for the three months ended June 30, 2012. Net income for the three months ended June 30, 2012 was impacted by a $3.5 million gain (net of taxes) from the sale of certain Chrome branded assets that were not contributed to the Chrome Data joint venture.

Below are selected highlights of operations for the six months ended June 30, 2013:

Revenue for the six months ended June 30, 2013 was $230.8 million, an increase of $42.8 million from the six months ended June 30, 2012.

Net income for the six months ended June 30, 2013 was $3.8 million as compared to $22.9 million for the six months ended June 30, 2012. Net income for the six months ended June 30, 2012 was positively impacted by $16.1 million (net of tax) from a non-cash gain related to the contribution of Chrome to the Chrome Data Solutions joint venture and the $3.5 million gain (net of taxes) from the sale of certain Chrome branded assets that were not contributed to the Chrome Data joint venture.

Non-GAAP Financial Measures and Other Business Statistics

We monitor our business performance using a number of measures that are not found in our consolidated financial statements. These measures include the number of active dealers and lenders, active lender to dealership relationships in the Dealertrack network, the number of transactions processed, average transaction price, transaction revenue per car sold, the number of subscribing dealers in the Dealertrack network, and the average monthly subscription revenue per subscribing dealership. We believe that improvements in these metrics will result in improvements in our financial performance over time.

The following table consists of our non-GAAP financial measures and certain other business statistics that management continually monitors (amounts in thousands are GAAP net income, adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA), adjusted net income, capital expenditure data and transactions processed):

                                            Three Months Ended June 30,            Six Months Ended June 30,
                                             2013                 2012              2013               2012
GAAP net income                         $        3,839       $        5,925     $       3,805       $    22,886

Non-GAAP Financial Measures and Other
Business Statistics:
Adjusted EBITDA (non-GAAP) (1)          $       32,835       $       25,037     $      57,064       $    44,456
Adjusted net income (non-GAAP) (1)      $       16,702       $       13,714     $      28,738       $    23,158

Capital expenditures, software and
website development costs               $       19,721       $        7,688     $      29,302       $    15,652
Active dealers in our U.S. network as
of end of the period (2)                        20,205               18,638            20,205            18,638
Active lenders in our U.S. network as
of end of the period (3)                         1,355                1,212             1,355             1,212
Active lender to dealer relationships
as of end of the period (4)                    184,273              177,570           184,273           177,570
Transactions processed (5)                      26,176               22,562            50,282            44,313
Average transaction price (6)           $         2.79       $         2.59     $        2.70       $      2.56
Transaction revenue per car sold (7)    $         7.38       $         6.12     $        8.04       $      7.12
Subscribing dealers in U.S. and
Canada as of end of the period (8)              18,076               16,280            18,076            16,280
Average monthly subscription revenue
per subscribing dealership (9)          $          757       $          697     $         747       $       693

(1) Adjusted EBITDA is a non-GAAP financial measure that represents GAAP net income (loss) excluding interest, taxes, depreciation and amortization expenses, stock-based compensation, contra-revenue and certain items, as applicable, such as: impairment charges, restructuring charges, impact of acquisition-related activity (including contingent consideration changes, compensation expense, basis difference amortization, and professional service fees), realized gains on sales of previously impaired securities, gains or losses on sales or disposals of subsidiaries and other assets, rebranding expenses and certain other non-recurring items.

Adjusted net income is a non-GAAP financial measure that represents GAAP net income (loss) excluding stock-based compensation expense, the amortization of acquired identifiable intangibles, contra-revenue, and certain items, as applicable, such as: impairment charges, restructuring charges, impact of acquisition-related activity (including contingent consideration changes, compensation expense, basis difference amortization, and professional service fees), realized gains on sales of previously impaired securities, gains or losses on sales or disposals of subsidiaries and other assets, adjustments to deferred tax asset valuation allowances, non-cash interest expense, rebranding expenses and certain other non-recurring items. These adjustments to net income (loss), which are shown before taxes, are adjusted for their tax impact at their applicable statutory rates.

Adjusted EBITDA and adjusted net income are presented because management believes that they provide additional information with respect to the performance of our fundamental business activities and are also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We rely on adjusted EBITDA and adjusted net income as primary measures to review and assess the operating performance of our company and management team in connection with our executive compensation plan incentive payments.

Adjusted EBITDA and adjusted net income have limitations as analytical tools and you should not consider them in isolation from, or as a substitute for, analysis of our results as reported under GAAP. Some of these limitations are:

Adjusted EBITDA and adjusted net income do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

Adjusted EBITDA and adjusted net income do not reflect changes in, or cash requirements for, our working capital needs;

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA and adjusted net income do not reflect any cash requirements for such replacements;

Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it from adjusted net income and adjusted EBITDA when evaluating our ongoing performance for a particular period;

Adjusted EBITDA and adjusted net income do not reflect the impact of certain charges or gains resulting from matters we consider not to be indicative of our ongoing operations; and

Other companies may calculate adjusted EBITDA and adjusted net income differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, adjusted EBITDA and adjusted net income should not be considered as measures 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 adjusted EBITDA and adjusted net income only as supplements to our GAAP results. Adjusted EBITDA and adjusted net income are measures of our performance that are not required by, or presented in accordance with, GAAP. Adjusted EBITDA and adjusted net income are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income or any other performance measures derived in accordance with GAAP or as alternatives to cash flow from operating activities as a measure of our liquidity.

The following table sets forth the reconciliation of adjusted EBITDA, a non-GAAP financial measure, from net income, our most directly comparable financial measure, in accordance with GAAP (in thousands):

                                            Three Months Ended June 30,             Six Months Ended June 30,
                                             2013                 2012              2013                2012
GAAP net income                         $        3,839       $        5,925     $      3,805       $       22,886
Interest income                                   (117 )               (184 )           (241 )               (414 )
Interest expense - cash                            981                  988            2,043                1,442
Interest expense - non-cash (10)                 2,364                2,220            4,666                2,923
Provision for income taxes, net                  1,903                1,443              733               12,832
Depreciation of property and
equipment and amortization of
capitalized software and website
costs                                            7,165                6,295           13,746               11,395
Amortization of acquired identifiable
intangibles                                      7,759                6,653           15,075               13,532

EBITDA (non-GAAP)                               23,894               23,340           39,827               64,596
Adjustments:
Stock-based compensation                         3,855                3,382            7,126                6,712
Contra-revenue (11)                              1,381                  996            2,735                2,098
Acquisition-related and other
professional fees                                  573                  538            1,056                  737
Acquisition-related contingent
consideration changes and
compensation expense, net (12)                     594                 (220 )            629                  (42 )
Integration and other related costs              1,567                  221            2,366                  221
Gain on disposal of subsidiary and
sale of other assets                                 -               (5,500 )              -              (33,193 )
Amortization of equity method
investment basis difference (13)                   706                  996            1,412                1,993
Rebranding expense                                 265                  284            1,913                  334
Change in fair value of warrant                      -                1,000                -                1,000

Adjusted EBITDA (non-GAAP)              $       32,835       $       25,037     $     57,064       $       44,456

The following table sets forth the reconciliation of adjusted net income, a non-GAAP financial measure, from net income, our most directly comparable financial measure in accordance with GAAP (in thousands):

                                            Three Months Ended June 30,            Six Months Ended June 30,
                                             2013                 2012              2013               2012
GAAP net income                         $        3,839       $        5,925     $       3,805       $    22,886
Adjustments:
Interest expense - non-cash (not
tax-impacted) (10)                               2,364                2,220             4,666             2,923
Amortization of acquired identifiable
intangibles                                      7,759                6,653            15,075            13,532
Stock-based compensation                         3,855                3,382             7,126             6,712
Contra-revenue (11)                              1,381                  996             2,735             2,098
Gain on disposal of subsidiary and
sale of other assets                                 -               (5,500 )               -           (33,193 )
Acquisition-related and other
professional fees                                  573                  538             1,056               737
Acquisition-related contingent
consideration changes and
compensation expense, net (12)                     594                 (220 )             629               (42 )
Integration and other related costs              1,810                  221             2,609               221
Rebranding expense                                 265                  284             1,913               334
Amortization of equity method
investment basis difference (13)                   706                  996             1,412             1,993
Accelerated depreciation of certain
technology assets (14)                               -                  929                 -               929
Change in fair value of warrant                      -                1,000                 -             1,000
Amended state tax returns impact
(non-taxable)                                        -                    -                56                 -
Tax impact of adjustments (15)                  (6,444 )             (3,710 )         (12,344 )           3,028

Adjusted net income (non-GAAP)          $       16,702       $       13,714     $      28,738       $    23,158

(2) We consider a dealer to be active in our U.S. network as of a date if the dealer completed at least one revenue-generating credit application processing transaction using the U.S. Dealertrack network during the most recently ended calendar month. The number of active U.S. dealers is based on the number of dealer accounts as communicated by lenders on the U.S. Dealertrack network.

(3) We consider a lender to be active in our U.S. network as of a date if it is accepting credit application data electronically from U.S. dealers in the U.S. Dealertrack network.

(4) Each lender to dealer relationship represents a pair between an active U.S. lender and an active U.S. dealer at the end of a given period.

(5) Represents revenue-generating transactions processed in the U.S.
Dealertrack, Dealertrack Aftermarket Services, Dealertrack Processing Solutions and Dealertrack Canada networks at the end of a given period.

(6) Represents the average revenue earned per transaction processed in the U.S.
Dealertrack, Dealertrack Aftermarket Services, Dealertrack Processing Solutions and Dealertrack Canada networks during a given period. Revenue used in the calculation adds back (excludes) transaction related contra-revenue.

(7) Represents transaction services revenue divided by our estimate of total new and used car sales for the period in the U.S. and Canada. Revenue used in this calculation adds back (excludes) transaction related contra-revenue.

(8) Represents the number of dealerships in the U.S. and Canada with one or more active subscriptions at the end of a given period. Subscriptions to Dealertrack CentralDispatch have been excluded as their customers include brokers and carriers in addition to dealers.

(9) Represents subscription services revenue divided by average subscribing dealers for a given period in the U.S. and Canada. Revenue used in the calculation adds back (excludes) subscription related contra-revenue. In addition, subscribing dealers and subscription services revenue from Dealertrack CentralDispatch have been excluded from the calculation as a majority of these customers are not dealers.

(10) Represents interest expense relating to the amortization of deferred financing costs and debt discount in connection with the senior convertible notes and revolving credit facility.

(11) For further information, please refer to Note 15 in the accompanying notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q and Note 15 and Note 17 in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012.

(12) Represents the change in the acquisition-related contingent consideration from the eCarList and ClickMotive acquisitions and other additional acquisition-related compensation charges.

(13) Represents amortization of the basis difference between the book basis of the Chrome assets contributed to the Chrome Data Solutions joint venture and the fair value of the investment in Chrome Data Solutions.

(14) Represents the accelerated depreciation of certain technology assets due to the discontinuation of those projects.

(15) The tax impact of adjustments for the three and six months ended June 30, 2013 are based on a U.S. statutory tax rate of 38.2% applied to taxable adjustments other than amortization of acquired identifiable intangibles and stock-based compensation expense, which are based on a blended tax rate of 38.1% and 37.8%, respectively, for the three months ended June 30, 2013, and 38.1% and 37.7%, respectively, for the six months ended June 30, 2013. The tax impact of adjustments for the three and six months ended June 30, 2012 were based on a U.S. statutory tax rate of 37.4% applied to taxable adjustments other than amortization of acquired identifiable intangibles and stock-based compensation expense, which are based on a blended tax rate of 37.3% and 36.8%, respectively, for the three months ended June 30, 2012, and 37.3% and 36.9%, respectively, for the six months ended June 30, 2012.

Revenue

Transaction Services Revenue. Transaction services revenue consists of revenue earned from our lender customers for each credit application or contract that dealers submit to them. In addition, we earn transaction services revenue from lender customers for each financing contract executed via our electronic contracting and digital contract processing solutions as well as from lender customers for collateral management transactions.

We also earn transaction services revenue from dealers or other service and information providers, such as aftermarket providers, accessory providers and credit report providers, for each fee-bearing product accessed by dealers. This includes transaction services revenue for completion of on-line registrations with department of motor vehicles, completion of inventory appraisals, and accessing of credit reports.

Subscription Services Revenue. Subscription services revenue consists of revenue earned from our dealers and other customers (typically on a monthly basis) for use of our subscription or license-based products and services. Our subscription services enable dealers and other customers to manage their dealership data and operations, compare various financing and leasing options and programs, sell insurance and other aftermarket products, analyze, merchandise, and transport inventory and execute financing contracts electronically.

Other Revenue. Other revenue consists of revenue primarily earned through forms programming, data conversion, hardware and equipment sales from our Dealer Management solution, shipping fees and commissions earned from our digital contract business. Training fees are also included in other revenue.

Operating Expenses

Cost of Revenue. Cost of revenue primarily consists of expenses related to running our network infrastructure (including Internet connectivity, hosting expenses, and data storage), amortization expense on acquired intangible assets, capitalized software and website development costs, compensation and related benefits for network and technology development personnel, amounts paid to third parties pursuant to contracts under which (i) a portion of certain revenue is owed to those third parties (revenue share) or, (ii) fees are due on the number of transactions processed and direct costs for data licenses. Cost of revenue also includes hardware costs associated with our DMS product offering, and compensation, related benefits and travel expenses associated with DMS installation personnel, compensation and related benefits associated with strategic inventory consulting personnel, compensation and related benefits, and temporary labor associated with personnel who process transactions for our digital contract, collateral management, and registration and titling solutions, and advertising expenses associated with certain of our search and media product offerings.

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, in addition to enhancing and maintaining existing products.

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of compensation and related benefits, facility costs, professional services fees for our sales, marketing, customer service and administrative functions, and public company costs.

We allocate overhead such as occupancy and telecommunications charges, and depreciation expense based on headcount, as we believe this to be the most accurate measure. As a result, a portion of general overhead expenses are reflected in each operating expense category.

Acquisitions

On April 1, 2013, we completed the acquisition of the net assets of Casey & Casey for $21.3 million in cash, reflective of final working capital adjustments.For further information, please refer to Note 11 in the accompanying notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Fair Value Measurements

We have segregated all financial assets that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.

A reconciliation of the beginning and ending balances of the contingent consideration, a Level 3 liability, is as follows (in thousands):

Balance as of December 31, 2012                    $ (1,000 )
Change in fair value of contingent consideration        500

Balance as of June 30, 2013                        $   (500 )

In connection with our October 1, 2012 acquisition of ClickMotive, a portion of the purchase price included contingent consideration that is payable in the first quarter of 2014 based upon the achievement of certain performance targets in 2013. The fair value of the contingent consideration is determined based upon probability-weighted revenue forecasts for the underlying period. The contingent consideration is revalued each reporting period, until settled, with the resulting gains and losses recorded in the consolidated statements of operations. We estimated the fair value of the contingent consideration as of June 30, 2013 to be $0.5 million. We recorded income of $0.5 million for the six months ended June 30, 2013 as a result of the decrease in the estimated settlement of the contingent consideration from the estimated amount of $1.0 million as of December 31, 2012.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of our operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. 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. Management believes there have been no material changes 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, 2012, except as set forth below.

Stock-Based Compensation Expense and Assumptions

Expected Life

As of January 1, 2013, we determine the expected life of any issued stock-based awards based upon our historical exercise patterns and the period of time that the awards are expected to be outstanding. Previously, due to our limited public . . .

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