Q2 2020 Earnings Call

[music].

Ladies and gentlemen, thank you for standing by and welcome to CDK Global second quarter 2020 earnings Conference call.

At this time, all participant lines, all right I'll listen only mode.

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I'd now like to hand, the conference over to your Speaker today is Jewish leader director of Investor Relations. Please go ahead of him.

Thank you and good afternoon I'd like to welcome you to CDK second quarter fiscal 2020 earnings call. Joining me on today's call, our CDK CEO, Brian advantage and our CFO Joe coaches.

Throughout today's call I would like to remind everyone that we will be discussing our continuing operations only which do not include the digital marketing business that continues to be held for sale and presented as discontinued operations.

Unless otherwise noted all references to financial amount on a non-GAAP adjusted basis reconciliations of adjusted amounts to the most directly comparable GAAP amounts are included in this afternoon's press release and are available in the Investor Relations section of our web site.

I would like to remind everyone that remarks made during this conference call will contain forward looking statements.

These statements involve risks and uncertainties, including risks detailed in our filings with the FCC, which could cause actual results to differ materially from those set forth in the forward looking statements.

And finally, we anticipate that our form 10-Q will be available tomorrow.

Next week, we will be attending NEDA, the national Automobile dealers Association show in Las Vegas, and in March management will be at the Morgan Stanley Technology Media and Telecom conference in San Francisco.

With that is my pleasure to turn the call over to Brian.

Thank you Julie Thanks to all of you for joining us on the call today.

I have to share with you our second quarter results as well as a significant progress we continued to make it further strengthening our business and building a strong subscription based software company for the long term.

I'll start with comments on the quarterly results and then update you on on three key areas of focus for building a better business for today and the future.

One, creating a differentiated customer experience socket, making it easier to do business with CDK and third modernizing our technology to bring the best in class software to the auto industry.

Let's start with some of the financial results for the quarter.

I'm quite happy with what we've accomplished revenues came in ahead of expectations at $500 million up 4% year over year.

We earned $191 million of EBITDA and EPS.

80 cents.

This quarter, we continued our investments and as I'll share in a minute they are having a big impact on improving the health of our long term business.

The key metric to focus on regarding the health of our core business at our is our site count and the CDK team performed strongly this quarter year over year auto site growth in North America was up 86 sites or about 1%.

We have now seen four quarters in a row with year over year site growth and has set yet another record for total North American auto and adjacent see sites.

Joe will provide more financial details in his section.

I'd like to share more insights about the things we're doing to enhance the business starting with improving how we serve our customers and early positive results we foresee.

How we serve our customers is critical because it's the foundation for customer satisfaction.

For building, a solid relationships that drive our customer retention as well as new sales.

As a reminder, where things were doing to improve how we serve our customers are focused on increasing our installation quality.

Increasing to satisfy satisfaction with our customer call center support.

Investing in advocates and performance managers to make sure our customers are getting the maximum benefits from our software.

Our message is resonating a few quarters ago, Ken plus site dealer cancel their service for two reasons.

Our business practices on contract terms and our support.

The CDK sales team stay close to this dealer and shared the many things we're doing to improve.

This month, the dealer side of the cancel their contract with the other provider in signed a new five year contract with CDK.

And added six more incremental sites to our platform.

When you look at this example, it's been such a change from when I joined the company until now.

This is just one example of many where customers are looking at how we are serving them and the quality of what we're doing and their confidence in us is growing.

On our last earnings call.

I mentioned, a 40 plus site dealership win for our sales team.

I'd like to give you an update on the next steps with this important customer because this is critical proof points the industry about our ability to accomplish such a large and complex install.

I'm happy to report that two weeks ago I was there onsite to watch the first phase of the installation and they went live with high quality satisfied customer.

CDK has been focusing heavily on our implementation qualys you ensure smooth conversion install and training experience for our customers.

We're very excited to move forward on the rest of the installation for this customer and many others.

We're making very good progress on creating a differentiated experience and our customers and the entire industry are seeing the positive momentum.

In addition to growing sites North America, automate auto Dms sales produced double digit growth year over year.

Losses and retention both improved in fact, our retention rate is at the highest level over the last nine quarters.

This is especially impressive given the high number of renewals schedule that came during this quarter.

Our team has really turned the corner on implementing our customer focused strategies and I'm very proud to see that their hard work is paying off.

Our second area of focus is being easier to do business with.

Starting with being more open and delivering more dms agnostic solutions.

And quite excited about the breakthroughs our technology teams have had this quarter.

The team has been busy converting more of our applications to be dms agnostic, meaning that they can be sold to dealers that use our competitors Dms.

I'd like to highlight two apps that we've recently converted.

One is a service work flow product built in partnership with one of our major Oems.

The team overcame many technical hurdles.

And within eight weeks was able to reengineer application to be agnostic and available to integrate other dms its.

A second application is CDK mobile service there.

Dealers are using our software and they're fully equipped van which come to customers location or home to provide onsite service and repairs.

This CDK mobile service span App can now be integrated with non CDK Dms dealers.

These are just two examples.

Going full speed to make more and more of our product Dms agnostic expanding our addressable dressel market as a result.

[noise] being more open and easier to do business with.

Includes better aligning our pricing to our value our customers place on our solutions.

As we have acknowledged before our partner program has been a source of friction with our customers.

They appreciate the need to ensure data security and integrity.

But they tell us that the value they placed on a partner program activities it out or step with the cost.

Through new approaches to packaging and pricing, we are allowing customers that participate in our rewards program to eliminate most partner program data access fees.

Better demonstrating value.

While the transition is a headwind on the financial performance, we're being very thoughtful about our approach and believe it's the right thing to do for the long term.

I would like to share with you our progress on one final customer facing initiatives that addresses one of the biggest complaints I hear during my visits with dealers.

Which is about simplifying our quoting contracting configuration installation and billing process.

As we announced in August our business process modernization initiative.

He is a fundamental we architecture of our business practices.

Over the next two years dealers will experience a much simpler sales process.

With tools that show there could figure ability of our products and result in a much better installation experience and simple easy to understand invoicing.

Currently one of our key focus areas has been.

On our re invoices and I'm very happy to report that in December we started rolling out the new invoices.

Which deliver a streamlined content better descriptions and improved transparency to help dealers understand what has changed out a glance.

Customers will also have easy online access where they can opt for paperless state.

We've received very positive early feedback on this critically important initiative and our plan is to continue the invoice rollout throughout the rest of this fiscal year.

In addition, we're looking closely at our contracting process to make it quicker and simpler to buy our software and service solutions.

As we look forward hammons enhancements to our go to market process will enable CDK to provide even greater results for our customers.

All of these initiatives are helping to improve the customer experience and we're seeing the positive results.

Now moving onto our third area of focus we've been very busy behind the scenes modernizing our technology and infrastructure.

We hired a new CTO in 2019 at have been staffing our technology group with enterprise class software leadership.

They're working on modernizing our core software, which will not only make it better for our customers and easier to use.

But more cost effective for us to fix and enhancing the future.

Our strategy centered on innovation, and providing software and technology that our dealers will need for the future.

We will do this by driving an open and agnostic software portfolio.

With a world class Dms and applications that enhance our dealers ability to differentiate their sales and service experience as well as efficiently operate their dealerships.

As part of our push into an open ecosystem. We will continue expand our four teluss platform and data driven tools to enable our customers with decision, making engines to drive innovation across the industry.

So let's start with an update on dry flex.

We've made a lot of development progress this quarter, but drive flux team is focused on two key areas.

First enhancing drive flexes functionality.

The usability and adding new capabilities.

Second.

Getting more OEM certified as we approach a broad roll out of the product.

On the first item the team has delivered significantly increased capabilities, which improve existing users experience and allow us to add more dealerships.

At the end of January the team rolled out other changes that reduced our costs and amount of time to install by almost half.

On the second item, we have now completed the certification process with the big three Oems.

And we're working on several other manufacturers currently.

These improvements give me confidence that we'll be adding more than a doesn't drive flex customers a month by our fiscal year end.

While our focus on expanding our Dms business establishes a strong operating system for our dealers are flotel. This program is focused on building industry standard platform that enables a broad range of experiences that will benefit the entire auto ecosystem.

I firmly believe that no other platform has the potential to transform the auto industry like for tell us.

We now have several npis on for toss that can connect to our dms, including the lift Heyler apiay.

And we'll be demonstrating some of our newest innovations at the upcoming made a show next week.

For for tell us to be an industry wide platform you need three things one.

Publishers to publish npis to the platform.

Second application developers to create new value added experience.

And third customers consume those new capabilities or experiences.

Our Best example, the current use case is the lift apiay and the progress we've made with our Heyler apiay.

CDK published the Apiay to for tops lift built an application in conjunction with CDK to integrate that ride hailing service to dealers.

And dealers are consuming the service.

As of the end of January we had more than 600 dealers using the service with many more to come.

Well I think of the success of the Fratellis platform or any industry platform. One of the best measurement is how many transactions are going through that platform.

As of this month, we expect to reach about 1 million transactions per month through for tell us.

With much more coming.

For tell us as the future of a better connected experience for the auto industry and you will see us continue to invest there.

As you can tell we're driving a lot of positive changes CDK.

We're also addressing many of the distractions that hampered our growth such as the digital marketing business and the transition of the partner program.

The pace of our investments has been very thoughtful in terms of allocation of both our human and financial capital.

The results coming in justify that we should continue to lead into our strategy, which is grounded in our conviction that the long term outcomes for our customers employees and shareholders are well aligned.

Thus, we will continue to both the resources necessary to move forward with our growth strategy and reaffirming our guidance numbers for revenues and EPS for the year.

While lowering our EBITDA range, which Joe will describe in more detail in his remarks.

As we look to the next few quarters, we will challenge ourselves to deliver beyond our expectations.

We want every dealer to be able to say that they are getting a high quality customer experience.

Getting better value for their dollar.

And seeing how technology can help them as they adapt to the future.

On behalf of the entire management team.

I'd like to thank all of our CDK employees for embracing our values.

Which we launched in November.

No the guide for how we should interact with our customers and one another every day.

I'm extremely proud of the teams accomplishments and their shift to a growth culture I.

Im very pleased with the results we have achieved in the second quarter and the progress we've made on our strategic initiatives.

With that I'll turn it over to for Joe for the financial results.

Thank you, Brian and good afternoon, everyone.

Before I cover our Q2 results I wanted to share my perspective on the continuing transformation, we are executing at CDK and add to some of the comments blindly in his remarks.

Our top priority CDK is providing exceptional software and services to our customers and we expect that focus will result in increasing although sites.

Selling more applications.

And ultimately delivering sustained growth.

We've been focused on executing on this path for the past year and the results we are seeing our exciting.

It was increased revenues for the last five quarters, and a pace of 4% or more.

We have delivered sequential North America auto site growth. The last four quarters ended this quarter with growing sites by 1% ahead of the expectations we've shared in the past.

We strengthened our application portfolio with the acquisition of the lead and are investing in a wide range of solutions to ensure we are well positioned to provide value added technology to our customers as we go forward immediately grow our listing application.

An important part of all of this foresee K is continue to execute on our key initiatives, which are critical to us for us to accelerate our level of performance.

We've been able to make this progress as a result of disciplined investments in the areas that impact our customers and improve our technology.

As we see progress in executing against our initiatives. We will continue to increase our investment and we will continue to pull forward investments as we see opportunities to execute our transformation more quickly.

Brian The CDK leadership team and I are very focused at me into the kids sustainable globally and attractive business for the long term.

Now moving on to our quarterly results.

Q2 was another strong quarter of execution died syndicating.

The results of our investments are paying them Inc. NBC in our key performance metrics starting with revenue.

Consolidated revenues of $500 million for the quarter.

4% year over year on inorganic basis, driven by growth in North America of 3% and international of 13%.

Digging deeper into North America performance subscription revenue was up 2%.

The performance was driven by gains in key applications like not cloud.

Lead CRM in service plus an increase in application penetration.

Offset by the expected declines from the partner program transition equal to two points of subscription revenue.

Also driving revenues in North America was growth in other revenue, which benefited from the change in accounting for hardware as a service under AMC 842, partially offset by lower volumes and Nicholson.

Now, let's double click into the drivers of subscription growth.

North America auto sites were up 1% year over year.

We've been working hard on improving our site performance across the board and are seeing many improvements within our one to two and three plus a good metrics.

This quarter gives us confidence that we will exit the year at greater than 1% cycle.

This quarter and the one to two site group. We're pleased to see continued positive results, including double digit improvements installed in the losses.

While the overall say count was down low single digits year over year, the retention rate increase and was at the highest level over the last five quarters.

Within the three plus site group you saw ending sites up low single digits year over year and improvements in installed in losses.

Retention rates were also the highest in five quarters.

Cycles in the adjacent to the market increased 2% year over year, primarily due to strong growth in the heavy equipment sector from industry consolidation by existing CDK customers and expanding new locations.

Turning to revenue per site North America auto revenue per site was up slightly and 0.3% year over year.

The performance was driven by gave the key applications like dark cloud.

He lead CRM in service.

Offset by the expected declines from the partner program transition.

Hey, Jason see revenue per site saw year over year increases of over three person.

The only from higher penetration of applications.

Moving onto our international business second quarter revenues were up 13% year over year or 15% on a constant currency basis, driven by strong subscription revenue growth primarily from increases in revenue per se.

International revenue growth was also benefited from the timing of certainly point in time revenue that negatively impacted the prior year period.

However over the six month period, the impact was normalized.

Looking at the site performance International sites were down 2% year over year, primarily due to dealer consolidations. As a reminder, most of our international software is on a per user fee basis, not psyche and you saw the number of users increased year over year.

We ended the quarter with revenue per se up 11% year over year through incremental installed of solutions to exit the dealers and higher Dragons.

Now to earnings.

EBITDA of $191 million declined by 2% in the quarter with an EBITDA margin of 38.2%.

We saw solid underlying earnings from the business for the second quarter consistent with our stated outlook for high single digit growth as expected.

Earnings growth was more than offset by the impacts from our investments the partner program transition.

FX and increases in certain general and administrative expenses.

And a segment level North America pre tax earnings were down 7% with a margin of 39.1%.

Down 400 basis points, principally due to our strategic investments.

And impacts from the partner program.

For international pre tax earnings were up 66%, but the margin of 19.8%.

Up 630 basis points, mainly because of earnings on higher revenues, partially offset by increased employee related costs.

For the total company, our effective tax rate was 25%.

In diluted earnings per share were 80 cents down 4% year over year.

The decline in EPS was primarily driven by decreases in EBITDA as long as higher interest expense depreciation and amortization.

Partially offset by lower weighted average diluted shares outstanding.

Our cash balance on December 31 was $222 million of which 200 million was held outside the United States.

Free cash flow for the first half was $113 million, which was lower year over year, primarily driven by payments of legal settlements.

Absent those payments free cash flow grew by 11% demonstrates the powerful cash generation of our business model.

During the quarter, we paid out $18.3 million and cash dividends to shareholders and ended with a net debt to adjusted EBITDA ratio of 3.3 times down from 3.4 times last quarter.

We will continue to de lever over the next two quarters and expect to end the fiscal year approximately at the top end of our two and a half two three times net debt to adjusted EBITDA target range.

Moving on to guidance.

We are reaffirming our annual guidance range for revenue of $2 billion to $2.05 billion.

EPS of $3.30 to $3.50.

Effective tax rate of 24% to 25% and shareholder returns of 75 $250 million.

As we look under spending levels in the second quarter, particularly focused on areas of installations customer training and sales calls we are appropriately lowering our adjusted EBITDA guidance range to $780 million to $100 million for the full year.

Before taking your questions I would like to highlight an item regarding the digital marketing divestiture.

As we continue to refine our views of the business through the sale process, we have reduced our assessment of the share value of the business and recorded a valuation allowance of 60 or $69 million and associated income tax valuation allowance against capital loss carryforwards of $15 million in the quarter.

In terms of tiny we're making very good progress on finalizing the sale of the business and we'll update you when this occurs.

In closing, we continued executing against our strategic plan, which has allowed us to strengthen the business and provides better value for dealers.

We sold we will maintain a disciplined and balanced approach to our capital deployment strategy and well continue to successfully execute on our investment initiatives to drive long term growth for the benefit of their customers employees and shareholders.

I'll now turn it back to the operator, and we'll be happy to take your questions.

Thank you to ask the question, we need to press Star one of your telephone to address your question. Please press the pound key.

Please standby along with a public you any roster.

Our first question comes on in the Pheno of Oppenheimer. Your line is open.

Hey, Good afternoon, guys. This is mark on for Ian Thanks for taking our questions also thanks for going through all the guidance details bookie guys share a bit more on the I guess incremental investment spend I was just announced for where the spend will I guess I can't be allocated towards maybe what types of additional initiatives.

And I guess like when the majority of the spend will commence aside from I guess like you mentioned.

On the quarter. Thanks.

Sure. This is Brian I'll start the conversation and then I'll, let Joe gets you into more of the numbers and and some of the other detail.

What we're seeing and hopefully it's not.

From our results for the quarter continued growth in sites.

Just our overall customer satisfaction is that the investments, we're making an roadmaps wear out showing to our partners now around the technology investments our data in a lot of excitement and so we are seeing nothing but positives from us and we're really is not an incremental in that we're going to say.

And more in the total.

Some of these efforts, we're still targeting the same numbers that Joe and I presented about a quarter ago.

What we are going to try and do we are trying to do is accelerate some of the spending because of the good results were seeing from that span.

Those spends will go in really.

Three main areas.

First is around what we call customer success, which is really.

Getting the install teams to be able to do more installs you saw the growth in sites and so we need to be able to have more people able to do more installs.

Because we're actually seeing incremental increase in our business growth there.

There are people out doing calls on customer satisfaction and make sure. The software they have bought as operating properly they've got the right people trained things like that again that brings a lot of positives factor.

Then the other area is in the technology modernization, we've talked about nuts everything from for tell us through to our current drier than in our future drive flex products plus.

Ram service, many Atlanta applications really modernizing those bringing loudly enhancements that have been being requested for some period of time and actually coming to market now and.

And bringing them up with CPI is at a more modern structure and then the last areas.

Around that other area that is.

Issue for our partners is.

The ERP system in the ERP modernization and we're continuing to invest there.

Looking for opportunities to accelerate that whenever possible and that's really about simplified clearer or more clear.

Simpler or smaller shorter billing right no. No 30, 40, 50 page bills, but very simplified billing that really shows people, what they're paying for and whats change month to month. So we're accelerating as much of that as we can because the benefits are there, but we don't think the total spend is going to change.

As much in that and that we're just really trying to go a bit faster and then.

I'll, let Joe talked beyond that yeah, Mark I think Brian covered it quite well when we look at.

The approach we're going through investments, we're very focused on just continue to.

Improved fundamentals and the foundation of the business and.

We're really seeing good momentum out of the particularly when you look at sites for this quarter growing 1%.

And when we look to the second half you see installations and the second half since the only more than 30% more in the second half than we did in the first half and we really want to.

Take advantage of momentum in some of the opportunity and you continue to build on that so I think that covers your question.

Okay. Okay. That's very helpful. Thanks, guys.

Then just a quick follow up good to see site count continues to grow can you guess sure I know you guys mentioned small dealers for the four large deal or any more additional details of which saw more strength.

How has I guess like how your initiatives like Dr. flex.

Helped small dealers and what sort of all retention have you seen.

In each category. Thanks.

Sure, we don't break out the absolute numbers in those two categories, but I'll give you a general office, Brian I'll give you a general feeling and Joe can jump in.

Let me kind of try and give you. The general picture you saw we continued to grow sites and in fact grew sites quite well and if you remember from last quarters earnings announcement. This was a quarter, where there are quite a few renewals coming due in this quarter. So we're quite pleased with.

The site growth that site growth means two things really occurred one we had better retention and second we did have additional new sites come on board.

Tell you that the strength continues to be.

A bit stronger in those larger sites, the three and above let's call. It rooftops.

We continue to see quite a bit of strength to not area. We're seeing very good improvement in our renewal process and retention of customers and the smaller dealerships those wanting to rooftop dealerships.

I think we still have to do some work to get to where we're actually.

Growing more in those smaller dealerships that work been drives you into dry flux.

Dr. flex if you remember we slowed down a bit on really out trying to grow much faster.

In this quarter, because we run it there do do some improvements in both the installation.

The simplification lowering the cost to making it easier to do.

And then there were some improvements that we saw the first couple of installs that we wanted to get in before we really grew the expansion of drive flex.

Those things are being put in place now.

Those are really then targeted dry flexes towards those one into rooftop dealers and independence, we seem quite a bit of strength in independent dealerships, which is an area market remember that we havent really address than the past.

We are turning on again, our dry flex installs and starting to kick those in our goal is to exit the into this year.

The number of like 15 to 20 a month.

Installs of drive flux and that were should then lead into even more growth as we go into the fiscal 2021, right. So that July and beyond the growing even far faster than that so that'll be where I think we can transition to growth in those smaller sites. So strength in the high end.

Better retention in the lower smaller dealerships and positioning low for dry flex to get the growth of those lower.

While our dealerships.

Yeah and then this is Joe just add to some numbers with what Brian shared and you look at those dealership market and it's largely flat in terms of a site.

Perspective, and so we're happy with the 1% growth that we produce this quarter and theres not a lot of trash select sites in there and so when you look at the opportunity going forward and with the new.

The updated software they came out in January in progress and the confidence we have as we exit the year installing the numbers. Brian described we're focused on Investees scaling.

To be able to drive better performance as we head into next fiscal year.

Okay, great. Thank you guys very much.

Thank you.

Thank you. Our next question comes from Gary Prestopino Barrington Research Your line is open.

Good afternoon, everyone.

Hey, Brian that that store you told about the dealership that.

Was going to replace you actually signed up for a new.

System, if I recall that your words correctly, and then came back obviously X months later, it's fairly interesting cause considering the switching cost of doing that Thats just got to be an astronomical drain on the on the dealerships. So maybe you could just dive into that a little bit more as to to the extent you can as to what happened there.

And what made what actually led them to come back to you.

Sure I'll go into as much of it as we can.

I can't give your names numbers and days, but.

One of the things we do as.

We take every loss.

So really seriously and I'd tell you Thats one of the things, we've really done well over the last year or more is really get the organization focused on retention.

So when a customer leaves us now or talks about leaving us.

We go it is really trying to understand what the issues are what's their competition offering and really trying to understand our their gaps we can close.

We are still I'd say kind of catching up we're not proactive enough yet in other words really talking about people, who are going to renew six nine months from now and and saying are what can we do now to make sure you are there.

But when somebody does lever, we don't necessarily go in and Rip everything out.

We'll actually leave it there for some period of time.

And we'll continue to talk to them and let them know, we're still interested in earning back their business and that was the cases and this specific example, and I think there are several examples over this quarter, where we've done that so if a customer comes back and says hey, I want to turn that layered applications on or I want to turn that dms spot on.

It's actually pretty easy for us to do it we just have to go extract the data that were may be missing for that period of time, when they've been working with the competition, but this the infrastructure and the system as AOS build there and clearly they're all trained up on it now so the switching costs as you describe it our AG.

Actually fairly low from both sides because.

We are able to turn it back on literally within days typically.

Okay.

Thank you and then then just a couple other quick ones will you have all OEM certifications completed by the end of your fiscal year. The end of calendar year. This year.

So who said earlier in the.

Prepared remarks was we had the big Threed done we're now working on the other ones I tell you will have the majority of the I'll call them the larger Oems done probably by the end of this fiscal year, but we won't have all of the Oems done probably until the into the calendar year. It just takes you know we have to get on the.

Our calendar as we're somewhat victims of their schedule and their timing and so.

Some of them just pick a bit longer.

But the fact, we've got the big Dthree GM Board FDA.

You know that gives me a lot of confidence that the system. This healthy we know how to do it and there aren't going to be road blocks. So it's just a matter of getting us all through the schedules now and then just two more quick months. Other did you say you're Dms site.

Sales North America site sales were up double digits in the quarter.

That wouldn't be reflected in the in the number of installs right.

That's right I mean, there's there's some of that that some of that that comes in quarter and if there's a dealer that acquired a site and we can integrate it quickly but the majority of that is in backlog and will come online over the next two quarters.

And that is we talked about investing and trying to grow even at a faster rate that is some of what we're pushing that spending towards right is to be able to shorten the install duration and shorten the backlog timing of that growth from a sites perspective.

That's all good news then just lastly, you said that foretells was doing about a million transactions a month, where there were 1 billion transactions a month going through four till this is that correct.

Yes, Sir.

So our all I mean can you share maybe the revenue model. There I mean is there anything you can share on the average revenue per transaction.

Just to give us an idea of.

What the early success is with that with the overall product.

Sure. So you know we will have to go back I don't want to answer this on a.

And just a revenue perspective, because I think that really misses the point of Vertellus and and the whole partner program that we're doing right. So if you've ever the old partner program was really a direct connection.

And it had cost related to any extraction of data or processing of data or scripture that data.

We've talked about how that's been a major road block or our customers and.

Bonus attention.

But for tell us is a very different system in that.

It's really designed to be open architecture from from the standpoint.

This is eight guys its modern.

But on top of that we've got a step structure for those apiay. So each one of those guys now has.

Spec about how they operate.

Those guys can be anything from a a relatively simple data extraction.

<unk> dealer and you want to extracts your sales data, our inventory data or whatever to very complex extractions like their repair order, where you have encryption calculations and data flowing in both directions.

And so the revenue model is those is very very different.

For a simple data extraction.

That revenue model is virtually non existent were really shutting down up that dot is.

The dealers data and Thats really where the that.

Friction came from in the past.

In something like a repair order there is a fee because it has a highly complex level of calculation and integration into the dms than.

Encryption and things like that and so right now.

The.

The the different types of applications and the number of applications. It such that it would be hard for me to give you an average revenue for these.

We'll start to give that kind of information probably in the future right. Now we're really focused on growing this ecosystem and getting more and more partners. So we talked about.

Our partnerships that we've developed we've talked over the last couple of quarters Cox joining our repair order. We've got several other partnerships coming that will talk about it NEDA.

And it's really about getting partners remember, we said first you have to you have to build the platform than you have to go get partners.

Then you have to go get applications and not how you grow a platform like this and so it made a will make a bunch of announcements in this space, but it's really way too early to talk about an average revenue model.

So that's why I wanted to like that's not an answer I I'm I'm going to focus on over the next year or so.

And trends damaging PRASM.

Yeah, and that's why what you'll see US do is continue to up our disclosures, we start to get more volumes of insights and data points. It will be more focused on number of transactions. Another relevant measures that give our investors in any outside world view into the traction and success will make it with the platform yeah.

Sorry on for Joe We've got to move onto the next caller. Thank you appreciate it. Thank you. Thank you.

Thank you.

The question comes from Josh Bear Morgan Stanley Your line is open.

Hi, Thanks for taking my question one for Brian a couple for Joe for Brian have you picked up any changes from your competition as far as response to your initiatives around customer store support and innovation, that's leading to the higher retention and site growth.

I'd say, it's a competitive market.

It may be getting a little bit more competitive I think in some cases, we've talked about we settled some of our lawsuits we've talked about those on some of the other quarters. We showed you partnerships with.

Some of our competitors like Cox, where I think we're really finding that there's going to be spaces, where we compete to there's going to be spaces. We can work together.

So in general I'd tell you I don't see the market any more or less competitive now than it was six months ago.

I'd tell you the team here is probably getting a little bit more competitive but.

I haven't seen the market place really shift that much.

That's helpful in for John I'm wondering how drive flex will impact the financial model and maybe more so for next year when you're at that 15 to 20 cite a month.

Install and not asking for like the dollar impacts, but generally is there a different gross margin profile for dry flex, where we see any benefit to site growth if its installs for new sites or if it's primarily existing sites, where we see any ARPU uplift.

Changes to the revenue recognition from Dr. flat.

Thanks.

Thanks for the question when I look at your I'll start and Brian connected when I look at the model with Dr. flux in our our experience that we have so far we're focused on the package solution to sell to a dealer, which reflects another integrations and applications that we have as part of it.

And so what I would point you to the revenue recognition model.

In the pricing model is very similar to how we price or other products today in the portfolio in terms of the mechanism.

And so subscription revenue very much sat in SaaS based which is expect.

But when you look at the pricing we've seen.

An opportunity to be able to deliver more value in more upside for the customers that we sold both saving them money as they drive better integration with the new dry flux platform and in an opportunity for us to bring more risk solutions to market.

And that the thinking I would add is the beauty of dry flexes, it's scalable and and so.

You heard us talk about that.

Several of the early.

Installations have actually gone into independents and in those cases, we scaled back.

The complexity in the needs and at all our yearly as high there necessarily as you know a dealer group that may have multiple stores.

And has a lot of layered apps attached to that Dms. So the the beauty of this system is that it is modern architecture that is get modular light modularized add scalable and so as a result.

When you take a look at drive Fracs. Our goal is to move into new areas like the independent dealers. That's a new marketplace. So Joe will tell you not to revenue growth area. That's untapped right. Now then will also go into the existing.

Smaller dealerships the two and below dealerships that we are currently.

Supporting.

That's really how we get back to growth in my opinion in that space and then over time, we'll get it into those larger dealerships as well.

And so you will see.

A different levels of revenue and margin as a result across those.

But we expected to be very profitable and.

Growing in all three of those segments and so when you look at an average for drive but it may be kind of skewed by the fact that they're all three of those segments moving whereas if you look at drive today it doesn't have those independents, though.

Very small percentage of the of the smaller guys.

But when would you look at it against any one segment it should be equal.

Very helpful. Thanks.

Thank you.

Our next question comes from map out one Blair Your line is open.

Hi, guys. This is David Robinson on for Matt I, just had a question around the you lead one business.

Were there any updates to how that's progressing relative to your expectation.

Sure absolutely.

Easily continues to do well it continues to exceed our expectations, we continued to see site growth.

Over this quarter.

Businesses.

Going quite well leave.

Put it on.

To me that was a great technology that we acquired.

One of the things that I'm trying to be very careful of is that we don't acquire a great technology and then let it sit idle and and then become sale and eventually not a great technology, So what you're going to see and this is some of those investments is.

There were two layered applications that we're going to push the technology team to really do upgrades over this next 12 to 18 months and those are going to be around our service application.

He leads CRM.

So we access funds to invest into that that product. So that it continues to grow we believe we can grow at even up faster rate out into the future as we make those investments.

Thank you.

Our next question comes a child Knob at Wells Fargo. Your line is open.

Hi, Thanks for taking my question just a two part question about the auto market I guess, firstly I was wondering if you could comment on what you're seeing from within the you asked what you're seeing from a financial health standpoint, among your.

Your customer base, maybe if you could speak to spending trends, what you're seeing from a consolidation standpoint, and as we think about the international market. I know you made some comments on that business, but.

Wondering if you could provide some specifics around geography, where youre seeing strength realm, and weak or weakness Conversely, and if the study.

The other fees than you've been penetrating over the past couple of quarters.

Sure I'll start and Brian can add so first of all on the in the us auto market.

Any da published is quite good report the last one published was June in a new will be coming up we look at the statistics in there.

It while while volumes and Saar have been under pressure.

The use of hung in there quite well.

And and so there's not them, we'll really knew the point out we continue to see consolidation of dealerships in the bigger deal receive seen an opportunity to scale their operation in some of their practices more so we continue to see a push towards revenues in the service arena.

And Thats why you Brian talked about how do we think about the service applications in the accelerated growth opportunities. There. There is there's a robust discussion around digital retailing and and out of store research connected all the way through to the end. We think we have a unique opportunity to provide.

Great software solution for that as we can work at so so when you look at that runs of the auto market continues to be to be good and then you see the you.

The new franchise dealerships also selling more used cars. The used car market is robust and and there is increasing so on balance I think the when you look at them in a market in aggregate I think they're doing quite well whether in some of the declines in over onto vehicle sales and in finding other ways to bring value to their.

Customers in and we're focused on bringing into solutions they need to meet your dealerships successful.

When I look at the international space, We're really happy with the performance in the quarter with international as you look at the subscription growth and the overall business growth I think you should look at the international through six months and see it's growing mid single digit Theres a number of things are doing well as they look at their basin and win new there.

And this and bring solutions to two customers. They are also as you saw in the site count decline.

Facing a number of dynamics you see across many areas of Europe, a lot of site consolidation and we've been fortunate that site consolidation has yielded increased users and existing customers of ours and is increased rate for us.

As we look at Asia, particularly China continues to be.

Pressure on that business and and we continue to watch it closely and so I think the management team is doing a lot of the right things to look at where where there's pressures and find opportunities to grow the business and delivered a solid quick ones.

Got it and if I could just sneak in a quick follow up for Joe I believe you mentioned there with a change in accounting that impacted impacted the other line in risk.

Could you could you, possibly quantify that for us and maybe give us a little more color around that.

I'm not familiar with a change in accounting that I think it what you're referring to is maybe lease account we adopted.

842, this year on branch offices in first quarter second quarter will be each quarter.

And I don't have the exact number there is a footnote.

In the 10-Q that you can go to that will publish the exact impact of the lease accounting.

Got it okay and again, we're very good when we look at the numbers of the revenue growth overall, we printed 4% organic revenue growth. If you look at it on a constant currency basis, it's 5% and when you start to pulling apart I think what you'll find is roughly the benefit from the lease accounting transition is largely netted.

By the partner program transition and add on that's out in the noise you see the business continued to improve on the topline.

Got it okay. Thanks for the color guys. Appreciate it thank you.

Thank you.

Im showing no further questions, it's Tom I'd like to turn the call back over to Brian for closing remarks.

Okay. Thank you operator, so I just want to close with statements, saying that we're very pleased on how our strategies are proving successful.

I would like to once again, just really acknowledge the entire CDK team.

Around the world for all their hard work and dedication.

It's really showing in the results and then I'd like to thank you all on the call today, Greg questions.

To close out a great quarter. So thank you very much.

Okay.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you for to Fannie Mae all disconnect.

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Ladies and gentlemen, thank you for standing by and welcome the CDK Global second quarter 2020 earnings Conference call.

At this time, all participant lines, Florida listen only mode.

Speakers presentation, there will be a question and answer session to ask a question. During the session you will need to press Star then one on your telephone keypad.

Please be advised that today's conference maybe recorded.

If you require any further assistance. Please press star then zero to reach an operator.

I'd now like to have the conference over to your speaker today, There's Jewish leader director of Investor Relations. Please go ahead.

Thank you and good afternoon I'd like to welcome you to CDK second quarter fiscal 2020 earnings call. Joining me on today's call, our CDK CEO, Brian percentage and our CFO Joe talked to.

Throughout today's call I would like to remind everyone that we will be discussing our continuing operations only which do not include the digital marketing business that continues to be held for sale and presented as discontinued operations.

Unless otherwise noted all references to financial amount on a non-GAAP adjusted basis reconciliations of adjusted amounts to the most directly comparable GAAP amounts are included in this afternoon's press release and are available in the Investor Relations section of our website.

I'd like to remind everyone that remarks made during this conference call will contain forward looking statement.

These statements involve risks and uncertainties, including risks detailed in our filings with the FCC, which could cause actual results could differ materially from those set forth in the forward looking statements.

And finally, we anticipate that our form 10-Q will be available tomorrow.

Next week, we will be attending made up the national automobile dealers Association show in Las Vegas, and in March management will be at the Morgan Stanley Technology Media and Telecom conference in San Francisco.

With that is my pleasure to turn the call over to Brian.

Thank you Julie and thanks to all of you for joining us on the call today I'm excited to share with you our second quarter results as well as a significant progress we continued to make.

Further strengthening our business and building a strong subscription based software company for the long term.

I'll start with how much on a quarterly results and then update you on three key areas of focus for building a better business for today and the future.

One, creating a differentiated customer experience.

Socket, making it easier to do business with CDK.

Third modernizing our technology to bring the best in class software to the auto industry.

Let's start with some of the financial results for the quarter.

White happy with what we've accomplished revenues came in ahead of expectations at $500 million up 4% year over year.

We earned a $191 million of EBITDA and EPS.

80 cents.

This quarter, we continued our investments and that's I'll share in a minute, they're having a big impact on improving health of our long term business.

The key metric to focus on regarding the health of our core business at our is our site count and the CDK team performed strongly this quarter year over year auto side growth in North America was up 86 sites or about 1%.

We have now seen four quarters in a row with year over year site growth.

Set yet another record for total North American auto and adjacent see sites.

Joe will provide more financial details in his section.

I'd like to share more insights about the things work doing to enhance the business starting with improving how we serve our customers and the early positive results we are C.

How we serve our customers is critical because it's the foundation for customer satisfaction.

And for building, a solid relationships that drive our customer retention as well as new sales.

As a reminder, that things were doing to improve how we serve our customers are focused on increasing our installation quality.

Increasing to satisfy satisfaction with our customer call center support.

Interesting advocates and performance managers to make sure our customers are getting a maximum benefits from our software.

Our message is resonating a few quarters ago, Ken plus site dealer cancel their service for two reasons.

Our business practices on contract terms and our support.

The CDK sales team stay close to this dealer and shared the many things we're doing to improve.

This month, the dealer side of the cancel their contract with the other provider and signed a new five year contract with CDK.

And added six more incremental sites to our platform.

When you look at this example, it's been such a change from what I joined the company until now.

This is just one example of many where customers are looking at how we are serving them and the quality of what we're doing and their confidence in us is growing.

On our last earnings call.

I mentioned, a 40 plus site dealership win for our sales pace.

I'd like to give you an update on next steps with this important customer as this is critical proof points the industry about our ability to accomplish such a large and complex install.

I'm happy to report that two weeks ago I was there onsite to watch the first phase of the installation.

I went live with high quality satisfied customer.

CDK has been focusing heavily on our implementation qualities you ensure smooth conversion install and training experience for our customers.

We're very excited to move forward on the rest of the installation for this customer and many others.

We're making very good progress on creating a differentiated experience and our customers and the entire industry are seeing a positive momentum.

In addition to growing sites North America, automate auto Dms sales produced double digit growth year over year.

Losses and retention both improved in fact, our retention rate is at the highest level over the last nine quarters.

This is especially impressive given the high number of renewals schedule that came during this quarter.

Our team has really turned the corner on implementing our customer focused strategies and I'm very proud to see that their hard work is paying off.

Our second area of focus is being easier to do business with.

Starting with being more open and delivering more dms agnostic solutions.

I'm quite excited about the breakthroughs our technology teams have had this quarter.

The team has been busy converting more of our applications to be dms agnostic, meaning that they can be sold to dealers that use our competitors Dms.

I'd like to highlight two apps that we've recently converted.

One is a service work flow product built in partnership with one of our major Oems.

The team overcame many technical hurdles.

And within eight weeks was able to reengineer application to be agnostic and available to integrate our there do you have assets.

A second application is CDK mobile service there.

Dealers are using our software and then fully equipped band, which come to a customer's location or home to provide onsite service and repairs.

This CDK mobile service, we add up to now be integrated with non CDK Dms dealers.

These are just two examples.

Going full speed to make more and more of our product Dms agnostic expanding our addressable vessel market as a result.

[noise] being more open and easier to do business with.

Includes better aligning our pricing to our value our customers placed on our solutions.

As we have acknowledged before our partner program has been a source of friction with our customers.

I appreciate the need to ensure data security and integrity.

But they tell us that the value they placed on a partner program activities it out or step what the cost.

Through new approaches to packaging and pricing, we are allowing customers to participate in our rewards program to eliminate most partner program data access fees.

Better demonstrating value.

While the transition is a headwind on the financial performance, we're being very thoughtful about our approach and believe it's the right thing to do for the long term.

I would like to share with you our progress on one final customer facing initiatives that addresses one of the biggest complaints I hear during my visits with dealers.

Which is about simplifying our quoting contracting configuration installation and build process.

As we announced in August our business process modernization initiative.

It's a fundamental we architecture of our business practices.

Over the next two years dealers will experience a much simpler sales process with tools that show the configurability of our products.

And result in a much better installation experience and simple easy to understand invoicing.

Currently one of our key focus areas has been.

Our re invoices and I'm very happy to report that in December we started rolling out the new invoices.

Which deliver a streamlined content.

Better descriptions and improved transparency to help dealers understand what has changed out a glance.

Customers will also have easy online access where they can opt for paperless state.

We've received very positive early feedback on this critically important initiative and our plan is to continue the invoice rollout throughout the rest of this fiscal year.

In addition, we're looking closely at our contracting process to make it quicker and simpler to buy our software and service solutions.

As we look forward hammonds enhancements to our go to market process.

While enable CDK to provide even greater results for our customers.

All of these initiatives are helping to improve the customer experience and we're seeing the positive results.

Now moving onto our third area of focus we've been very busy behind the scenes modernizing our technology and infrastructure.

We hired a new CTL in 2019 at have been staffing our technology group with enterprise class software leadership.

They're working on monetizing our core software, which will not only make it better for our customers and easier to use.

But more cost effective for us to fix and enhancing the future.

Our strategy centered on innovation, and providing software and technology that our dealers will need for the future.

We will do this by driving an open and agnostic software portfolio.

With a world class Dms and applications that enhance our dealers ability to differentiate their sales and service experience as well as efficiently operate their dealerships.

As part of our push into an open ecosystem, we will continue expand our four tell us platform.

Data driven tools to enable our customers with decision, making engines to drive innovation across the industry.

So let's start with an update on dry flex.

We've made a lot of development progress this quarter, but drive flex team is focused on two key areas.

First enhancing drive flexes functionality.

The usability and adding new capabilities.

Second.

Getting more OEM certified as we approach a broad rollout of the product.

On the first item the team has delivered significantly increased capabilities, which improve existing users experience and allow us to add more dealerships.

At the end of January the team rolled out other changes that reduced our costs and amount of time to install by almost half.

On the second item, we have now completed that certification process with the big three Oems.

And we're working on several other manufacturers currently.

These improvements give me confidence that we'll be adding more that doesnt drive flex customers a month by our fiscal year end.

While our focus on expanding our Dms business establishes a strong operating system for our dealers are for tell US program is focused on building industry standard platform that enables a broad range of experiences that will benefit the entire auto ecosystem.

I firmly believe that no other platform has the potential to transform the auto industry like for tell us.

We now have several 80 eyes on for toss that can connect to rtms, including the lift Taylor Apiay and will be demonstrating some of our newest innovations at the upcoming data show next week.

For for tell us to be an industry wide platform you need three things one.

Publishers at your publish CPI is to the platform.

Application developers to create new value added experience.

And third customers to consume those new capabilities or experiences.

Our Best example of a current use case is still left CPI and the progress we've made with our Heyler apiay.

CDK published the Apiay to for jobs lift built an application in conjunction with CDK to integrate that ride hailing service to dealers.

And dealers are consuming the service.

As of the end of January we had more than 600 dealers using the service with many more to come.

What I think of the success of the for tell us platform or any industry platform. One of the best measurement is how many transactions are going through that platform.

As of this month, we expect to reach about 1 million transactions per month through for tell us.

With much more coming.

But tell us as the future of a better connected experience for the auto industry and you will see us continue to invest there.

As you can tell we're driving a lot of positive change at CDK.

We're also addressing many of the distractions that hampered our growth such as the digital marketing business and the transition at the partner program.

The pace of our investments has been very thoughtful in terms of allocation at both our human and financial capital.

The results coming in justify that we should continue to lead into our strategy, which is grounded in our conviction that the long term outcomes for our customers employees and shareholders.

Well aligned.

Das we will continue to both the resources necessary to move forward with our growth strategy and reaffirming our guidance numbers for revenues and EPS for the year.

While lowering our EBITDA range, which Joe will describe in more detail in his remarks.

As we look to the next few quarters, we will challenge ourselves to deliver beyond our expectations.

We want every dealer to be able to say that they are getting a high quality customer experience.

Getting better value for their dollar.

And seeing how technology can help them as they adapt to the future.

On behalf of the entire management team I'd like to thank all of our CDK employees for embracing our new values.

Which we launched in November and other guide for how we should interact with our customers and one another every day.

I'm extremely proud of the teams accomplishments and their shift to a growth culture.

I'm very pleased with the results we have achieved in the second quarter and the progress we've made on our strategic initiatives.

With that I'll turn it over to for Joe for the financial results.

Thank you, Brian and good afternoon, everyone.

Hi cover our Q2 results I wanted to share my perspective on the continuing transformation, we are executing that CDK and add to some of the comments blind made in his remarks.

Our top priority at CDK is providing exceptional software and services to our customers and we expect that focus will result in increasing although sites.

Selling more applications.

And ultimately delivering sustained growth.

We've been focused on executing on this path for the past year and the results we are seeing our exciting.

We've increased revenues for the last five quarters at a pace of 4% or more.

We have delivered sequential North America auto site growth. The last four quarters ended this quarter with growing sites by 1% ahead of the expectations we've shared in the past.

We strengthened our application portfolio with the acquisition of easy and our end up being in a wide range of solutions to ensure we are well positioned to provide value added technology to our customers as we go forward meaningfully grow our layered applications.

An important part of all of this foresee K is continuing to execute on our key initiatives, which are critical to us for us to accelerate our level of performance.

We've been able can make this progress as a result of disciplined investments in the area the impact on customers and improved like technology.

As we see progress in executing against our initiatives. We will continue to increase our investments and we will continue to pull forward investments as we see opportunities to execute our transformation more quickly.

Brian the CDK leadership team and I are very focus that making CDK as sustainable well, we ended attractive business for the long term.

Now moving on to our quarterly results.

Q2 was another strong quarter of execution died syndicating.

The results of our investments are paying inc. NBC in our key performance metrics starting with revenue.

Consolidated revenues of $500 million for the quarter.

4% year over year on inorganic basis, driven by growth in North America of 3% and international of 13%.

Digging deeper into North America performance subscription revenue was up 2%.

The performance was driven by gains in key applications like back cloud.

CRM in service plus an increase in application penetration.

Offset by the expected declines from the partner program transition equal to two points of subscription revenue.

Also driving revenues in North America was growth and other revenue, which benefited from the change and accounting for hardware as a service under AMC 842, partially offset by lower volumes in the call. Some.

Now, let's double click into the drivers of subscription growth.

North America auto sites were up 1% year over year.

Working hard on improving our stock performance across the board and are seeing many improvements within our one to two and three plus cyclic metrics.

This quarter gives us confidence that we will exit the year at greater than 1% cycle.

This quarter and the one to two site group. We're pleased to see continued positive results, including double digit improvements in installed and the losses.

While the overall site count was down low single digits year over year, the retention rate increase and was at the highest level over the last five quarters.

Within the three plus site group, we saw ending sites up low single digits year over year and improvements in installed in losses.

Retention rates were also the highest in five quarters.

Cycles in the adjacent to the market increased 2% year over year, primarily due to strong growth in the heavy equipment sector from industry consolidations by existing CDK customers and expanding new locations.

Turning to revenue per site North America auto revenue per site was up slightly at 0.3% year over year. The performance was driven by gains in key applications like Dot cloud.

CRM in service.

Set by the expected declines in the partner program transition.

Hey, Jason see revenue per site saw year over year increases of over three person.

Lead from higher penetration of applications.

Moving on to our international business second quarter revenues were up 13% year over year or 15% on a constant currency basis.

Driven by strong subscription revenue growth primarily from increases in revenue per se.

International revenue growth was also benefited from the timing of certain point in time revenue that negatively impacted the prior year period.

However over the six month period, the impact was good morning.

Looking at the site performance International sites were down 2% year over year, primarily due to dealer consolidations. As a reminder, most of our international software is on a per user fee basis, not cycles, and we saw the number of users increased year over year.

We ended the quarter with revenue per se up 11% year over year through incremental installs of solutions to existing dealers and hired Dr. Glenn.

Now to earnings.

EBITDA of $191 million declined by 2% in the quarter with an EBITDA margin of 38.2%.

We saw solid underlying earnings from the business for the second quarter consistent with our stated outlook for high single digit club as expected.

Earnings growth was more than offset by the impacts from our investments the partner program transition.

FX and increases in certain general and administrative expenses.

Out of segment level, North America pre tax earnings were down 7% with a margin of 39.1%.

Down 400 basis points, principally due to our strategic investments and impacts from the partner program.

For international pre tax earnings were up 66%, but the margin of 19.8%.

Up 630 basis points, mainly because of earnings on higher revenues, partially offset by increased employee related costs.

For the total company, our effective tax rate was 25%.

Diluted earnings per share were 80 cents down 4% year over year.

The decline in Es was primarily driven by decreases in EBITDA as well as higher interest expense depreciation and amortization.

Partially offset by lower weighted average diluted shares outstanding.

Our cash balance on December 31 was $222 million of which 200 million was held outside the United States.

Free cash flow for the first half was $113 million, which was lower year over year, primarily driven by payments of legal settlements.

Absent those payments free cash flow grew by 11% demonstrate the powerful cash generation of our business model.

During the quarter, we paid out $18.3 million and cash dividends to shareholders and ended with a net debt to adjusted EBITDA ratio of 3.3 times down from 3.4 times last quarter.

We will continue to de lever over the next two quarters and expect to end the fiscal year approximately at the top end of our two and a half two three times net debt to adjusted EBITDA target range.

Moving on to guidance.

We are reaffirming our annual guidance range for revenue of $2 billion to $2.05 billion.

EPS of $3.30 to $3.50.

Effective tax rate of 24% to 25% and shareholder returns of $75 million to $150 million.

As we look under spending levels in the second quarter, particularly focused on areas of installations customer training and sales calls we are appropriately lowering our adjusted EBITDA guidance range to 780 $200 million for the full year.

Before taking your questions I would like to highlight an item regarding the digital marketing divestiture.

As we continue to refine our views of the business data sale process, we have reduced our assessment of the share value of the business and recorded a valuation allowance of 60 or $69 million and associated income tax valuation allowance against capital loss carry forwards.

$15 million in the quarter.

In terms of timing, we're making very good progress on finalizing the sale of the business and we'll update you when this occurs.

In closing were continued executing against our strategic plan, which has allowed us to strengthen the business and provide better value torn deals going forward, we will maintain a disciplined and balanced approach to our capital deployment strategy and well continue to successfully execute on our investment initiatives to do.

As long term growth for the benefit of their customers employees and shareholders.

I'll now turn it back to the operator, and we'll be happy to take your questions.

Thank you.

Asked a question we need to press star wanting a telephone.

And your question. Please press the pound key.

Please standby with Apollo too many roster.

Our first question comes from and the Pheno of Oppenheimer. Your line is open.

Hey, Good afternoon, guys. This is mark on for you and thanks for taking our questions.

So thanks for calling through all the guidance on details booking guys share, but more on the I guess incremental investment spend hours, just announced sort of where the spend will I guess like you won't be allocated toward maybe what types of additional initiatives.

I guess like when the majority of the spend will commence aside from I guess like you mentioned.

Coming quarter thing.

Sure. This is Brian I'll start the conversation and then I'll, let Joe gets you into more of the numbers and some of the other detail.

What we're seeing and hopefully you saw.

From our results for the quarter and continued growth in sites.

Just our overall customer satisfaction is that the investments, we're making and the roadmaps were out showing to our partners now.

Around the technology investments our data a lot of excitement and so we are seeing nothing but positives from us and we're really this is not an incremental in that we're going to spend more in the total.

Some of all these efforts we're still targeting the same numbers that gentlemen, I presented about a quarter ago.

What we are going to try and do we are trying to do is accelerate some of the spending because.

The good results were seeing from that spend those spends will go and really.

Three main areas.

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First is around what we call customer success, which is really.

Getting the install teams to be able to do more installs you saw the growth.

Sites, and so we need to be able to have more people able to do more installed.

Because we're actually seeing incremental increase in our business growth there.

There are people out doing calls on customer satisfaction and make sure that software. They have bought as operating properly they've got the right people training things like that again not brings a lot of positives factor.

Then the other area that is in the technology modernization, we've talked about nuts everything from or tell us.

Through to our current drive and then our future drive flex products plus.

RM service many of the layered applications really modernizing those bringing lot of enhancements that has been being requested for some period of time and actually coming to market now and.

And bringing them up with a pie is at a more modern structure and then the last areas.

Around that other area that is.

Issue for our partners is.

ERP system in the ERP modernization and we're continuing to invest there.

Looking for opportunities to accelerate that whenever possible and that's really about simplified clearer.

More clear.

And simpler or smaller shorter billet right no. No 30, 40, 50 page bills, but very simplified billing that really shows people, what they're paying for and whats change month to month. So we're accelerating as much of that as we can because the benefits are there, but we don't think the total spend is going to change.

As much in that and that we're just really trying to go that faster and then.

I'll, let Joe talked beyond that yes, Mark I think Brian covered it quite well when we look at.

The approach, we're going through and investments, we're very focused on just continuing to.

Improved fundamentals and foundation of the business and.

We're really seeing good momentum out of it, particularly when you look at sites for this quarter growing 1%.

And when we look to the second half you see installations and the second half since the only more than 30% more in the second half than we did in the first half and we really want to.

Take advantage of momentum in some of the opportunity and we continue to build on that so I think that covers your question.

Okay. Okay. That's very helpful. Thanks, guys.

And then just a quick follow up good to see site count continues to grow up can you guess sure I know you guys mentioned small dealers for safari large deal or any more additional details of which saw more strength.

How has I guess I kept your initiatives like Dr. flex.

Helped small dealers and what sort of retention have you seen.

In each category. Thanks.

Sure, we don't break out the absolute numbers in those two categories, but I'll give you a general office, Brian I'll give you a general feeling and and Joe can jump in.

Let me kind of try and give you. The general picture you saw we continue to grow sites and in fact grew sites quite well and if you remember from last quarters earnings announcement. This was a quarter, where there are quite a few renewals coming due in this quarter. So we're quite pleased with.

The site growth that site growth means two things really occurred one we had better retention and second we did have additional new sites come on board.

Tell you that the strength continues to be.

A bit stronger in those larger sites the three at above let's call. It rooftops.

We continue to see quite a bit of strength and not area. We've seen very good improvement in our renewal process and retention of customers in the smaller dealerships those run into rooftop dealerships.

I think we still have to do some work to get to where we're actually.

Growing more in those smaller dealerships that work then drives you into dry flux.

Drives flex if you remember we slowed down a bit on really trying to grow much faster.

In this quarter, because we wanted to do some improvements in both the installation.

The simplification lowering the cost to making it easier to do.

And then there were some improvements that we saw the first couple of installs that we wanted to get in before we really grew the expansion of light.

Those things are being put in place now.

Those are really then targeted dry flexes towards those one into rooftop dealers and independence, we're seeing Carter to strengthen independent dealerships, which is an area market remember that we haven't really addressed in the past.

We are turning on again, our dry flex installs and starting to kick those in our goal is to exit the into this year.

The number of like 15 to 20 a month.

Installs of dry flux and that were should then lead into even more growth as we go into the fiscal 2021, right. So July and beyond the growing even far faster than that so that'll be where I think we can transition to growth in those smaller sites. So strengthen the high end.

Better retention in the lower smaller dealerships and positioning low for dry flex to get the growth of those lower.

While our dealerships.

Yes, and then this is Joe just add to some numbers with what Brian Sheridan I mean, you look at the dealership market and it's largely flat in terms of a site.

Perspective, and so we're happy with the 1% growth that we produce this quarter and theres not a lot of trash flux sites in there and so when you look at the opportunity going forward and with the new.

The updated software they came out in January in the progress and the confidence we have as we exit the year installing the numbers. Brian described we're focused on Investees scaling.

To be able to drive better performance as we head into next fiscal year.

Okay, great. Thank you guys very much.

Thank you.

Thank you. Our next question comes from Gary Prestopino Barrington Research Your line is open.

Good afternoon, everyone.

Hey, Brian that store you told about the dealership that.

Was going to replace you actually signed up for a new.

System, if I recall that your words correctly and then came back six months later, it's fairly interesting cause considering the switching cost of doing that thats just got to be an astronomical drain on the on the dealerships. So maybe you could just dive into that a little bit more as to to the extent you can as to what happened there.

And what made what actually led them to come back to you.

Sure I'll go into as much of that as we can.

Thank you names numbers and days, but.

One of the things we do is.

We take every loss.

Extremely seriously and I'd tell you that's one other things, we've really done well over the last year or more is really get the organization focused on retention.

So when a customer leaves us now or talks about leaving us.

We go rated really trying to understand what the issues are what's their competition offering and really trying to understand our their gaps we can close.

Yeah, we are still I'd say kind of catching up we're not proactive enough yet in other words really talking about people, who are going to renew six nine months from now and and saying are what can we do now to make sure you're there.

But when somebody does LIBOR, we don't necessarily go in and Rip everything out.

We will actually leave it there for some period of time.

And we'll continue to talk to them, let them know, we're still interested in earning back their business and that was the case and this specific example, and I think there are several examples over this quarter, there where we've done that so if a customer comes back and says hey, I want to turn that layered on vacation on or I want to turn that Dms back on.

It's actually pretty easy for us to do it. We just have to go extract the data that were may be missing for that period of time, where they've been working with the competition, but this infrastructure and the system as AOS build there.

Finally, there all trained up on it so the switching costs as you describe it are actually fairly low from both sides because.

We are able to turn it back on literally within days typically.

Okay.

Thank you then then just a couple other quick ones will you have all OEM certifications completed by the end of your fiscal year to the end of calendar year. This year.

So I said the earnings in the.

Prepared remarks wise, we had big three done we're now working on the other ones I tell you will have the majority of the I'll call. It the larger Oems done probably by the end of this fiscal year, but we won't have all of the Oems done probably until the end of the calendar year, but it just takes.

I have to get on their calendar as we're somewhat victims of their schedule and their timing and so.

Some of them just pick a bit longer.

But the fact, we've got the big Dthree GM for FDA.

You know that gives me a lot of confidence that the system. This healthy we know how to do it and there aren't going to be road blocks. So it's just a matter of getting us all through the schedules, though and then just two more quick ones.

You say, you're Dms site.

Sales North America site sales were up double digits in the quarter of that wouldn't be reflected in the in the number of installs right.

That's right I mean, there's there's some of that that some of that that comes in quarter and if theres a dealer that acquired a site and we can integrate it quickly but the majority of that is in backlog and will come online over the next two quarters.

And that is.

Talked about investing and trying to grow even at a faster rate that is some of what were pushing that spending towards right is to be able to shorten the install duration and shorten the backlog trials.

That growth from a sites and respect.

That's all good news then just lastly, you said that for tell US was doing about a million transactions a month with over 1 billion transactions a month going through foretell. This is that correct.

Yes, Sir.

So our all let me can you share maybe.

Revenue model there I mean is there anything you can share on the average revenue per transaction.

Just to give us an idea of.

What the early success is with that with the overall product.

Sure. So you know we will have to go back I don't want to answer this on a.

Just a revenue perspective, because I think that really misses the point.

Yes, and as a whole partner program that we're doing right. So if you remember the old partner program was really a direct connection.

And it had cost related to any extraction of data or processing of data or scripture that data.

We've talked about how that's been a a major road block or our customers and.

Well its attention, but for tell us is a very different system in that.

It's really designed to be open architecture from from the standpoint of.

Uses AI is its modern.

And.

But on top of that we've got a step structure for those apiay. So each one of those guys now has.

Spec about how they operate those guys can be anything from a it's a relatively simple data extraction, you're a dealer and you want to extracts your sales data our inventory data or whatever to very complex extractions like their repair order, where you have encryption.

Calculations and data flowing in both directions.

And so the revenue model in those is very very different.

For a simple data extraction.

That revenue model is virtually non existent were as really setting that up that dot is.

The dealers data and that's really where the that.

Friction came from in the past.

In something like a repair order there is a fee because it has a highly complex level of calculation and integration into the Dms said.

Encryption and things like that and so right now.

The.

The the different types of applications and the number of applications. It such that it would be hard for me to give you an average revenue for these.

We will start to give that kind of information probably in the future right. Now we're really focused on growing this ecosystem and getting more and more partners. So we talked about you know our partnerships that we've developed we've talked over the last couple of quarters Cox, joining our apparel order we've got several other partnerships coming.

That will talk about it NEDA.

And it's really about getting partners number. We said first you have to you have to build the platform. Then you have to go get partners.

Then you have to go get applications.

How you grow up platforms like this and so it made I will make a bunch of announcements in the space, but it's really way too early to talk about an average revenue model.

So that's why I wanted to like that's not an answer I I'm focused on over the next year or so.

And trends there has been present.

Yeah, and that's why you know what you'll see US do is continue to up our disclosures, we start to get more volumes insights and data points. It will be more focused on number of transactions. Another relevant measures that give our investors and the outside world view into the traction and successful making with the platform yeah.

Very unfortunate we've got to move onto our next caller. Thank you for your.

Thank you. Thank you.

Thank you. Our next question comes from Josh Bear Morgan Stanley. Your line is open.

Hi, Thanks for taking my question.

One for Brian and a couple.

Joe for Brian have you picked up any changes from your competition as far as response to your initiatives around customer store support and innovation, that's leading to the higher retention and site growth.

I'd say, it's a competitive market.

It may be getting a little bit more competitive I think in some cases, we've talked about we settled some of our lawsuits we've talked about those on some of the other quarters. We showed your partnerships with.

Some of our competitors like Cox, where I think we're really fighting that there's going to be spaces, where we compete to there's going to be spaces. We can work together.

So in general I'd tell you I don't see the market any more or less competitive now than it was six months ago.

I'd tell you the team here is probably getting a little bit more competitive but.

I haven't seen the market price really shift that much.

That's helpful in for John I'm wondering how drive flex will impact the financial model and maybe more so for next year when you're at that 15 to 20 cite a month.

Install and not asking for like the dollar impacts, but generally is there a different gross margin profile for dry flex.

Well, we see any benefit to site growth if its installs for new sites or if it's primarily existing sites, where we see any ARPU uplift.

Changes to the revenue recognition from Dr. flex.

Thank you.

Thanks for the question when I look at your I'll start and Brian can add in when I look at the model with Dr. flux in our our experience that we have so far we're focused on the package solution to sell to a dealer would try flux and the other integrations and applications that we have as part of it.

And so what I would point you to is the revenue recognition model.

And the pricing model is very similar to how we price or other products today in the portfolio in terms of the mechanism.

And so subscription revenue very much sat SaaS based which is expected.

But when you look at the pricing we've seen.

An opportunity to be able to deliver more value and more upside for the customers that we've sold both saving them money as they drive better integration with the new drive flux platform and in an opportunity for us to bring more risk solutions to market.

And then the thinking I would add is the beauty of dry flexes, it's scalable and and so.

You heard us talk about that.

Several of the early.

Installations have actually gone into independence and in those cases, we scaled back.

The complexity that needs at all are nearly as high there necessarily as you know a dealer group that may have multiple stores.

And has a lot of layered apps attached to that CMS. So to the beauty of this system is that it is modern architecture that is scale modular modularized add scalable and so as a result.

When you take a look at drive flex our goal is to move into new areas like the independent dealers. That's a new marketplace. So Joe will tell you not to revenue growth area that untapped right. Now then will also go into the existing.

Smaller dealerships the too as below dealerships that we are currently.

Supporting.

That's really how we get back to growth in my opinion in that space and then over time, we'll get it into those larger dealerships as well.

And so you will see.

Different levels of revenue and margin as a result across those.

But we expect it to be very profitable and.

Our growing in all three of those segments and so when we look at an average for dry flex it may be kind of skewed by the fact that they're all three of those segments moving whereas if you look at drives today it doesn't have those independents, though.

At this very small percentage of the smaller guys.

But when we if you look at it against any one segment it should be equal.

Very helpful. Thanks.

Thank you.

Our next question comes from Matt One Blair Your line is open.

Hi, guys. This is David Robinson on for Matt I, just had a question around the you lead one business.

There any updates.

Thats progressing relative to your expectations.

Sure absolutely.

Elite continues to do well it continues to exceed our expectations, we continue to see site growth.

Over this quarter.

The businesses.

Going quite well leave.

Put it on.

To me that was a great technology that we acquired.

One of the things that I'm trying to be very careful of is that we don't require a great technology and then let it sit idle and and then becomes sale and eventually not have great technology, So what you're going to see and this is some of those investments is.

There were two layered applications that we're going to push the technology team to really do upgrades over this next 12 to 18 months and those are going to be around our service application.

He leads CRM.

So we access funds to invest into that that product. So that it continues to grow we believe we can grow at even up faster rate out into the future as we make those investments.

Thank you.

Our next question comes in China Knob at Wells Fargo. Your line is open.

Hi, Thanks for taking my question just a two part question about the auto market I guess, firstly I was wondering if you could comment on what you're seeing from within the you asked what you're seeing from a financial help standpoint among your.

Your customer base, maybe if you could speak to spending trends, what you're seeing from a consolidation standpoint, and as we think about the international market. I know you made some comments on that business, but.

During if you could provide some specifics around geography, where you're seeing strength.

And weak or weakness, Conversely, and if the study.

Okay, then you've been penetrating over the past couple of quarters.

Sure I'll start and Brian can add so first of all on in the us auto market.

Any da published is quite good report the last one published was June in a new one will be coming up we when you look at the statistics in there.

Wow, while volumes and Saar have been under pressure.

The dealers have hung in there quite well.

And and so there is nothing real really knew the point out we continue to see consolidation of dealerships in the bigger deal we've seen an opportunity to scale their operation in some of their practices more so we continue to.

To see a push towards revenues in the service Arena and Thats why you Brian talked about how do we think about the service application in the accelerated growth opportunities. There. There is there's a robust discussion around digital retailing and and out of store research connected all the way through to the end we think we.

Have a unique opportunity to provide.

Great software solution for that as we go work if so so when you look at that runs of the auto market continues to be to be good and then you see the new.

New franchise dealerships also selling more used cars the used car market is robust and and there is increasing so on balance I think.

When you look at them in a market in aggregate I think they're doing quite well whether in some of the declines in overall, new vehicle sales and in finding other ways to bring value to their customers in and we're focused on bringing into solutions they need to make sure dealerships successful.

When I look at the international space, We're really happy with the performance in the quarter with international as you look at the subscription growth in the overall business growth I think you should look at the international through six months is the it's growing mid single digit Theres a number of things are doing well as they look at their basin and win new.

Business and bring solutions to customers. They are also as you saw in the site count decline.

Facing a number of dynamics you see across many areas of Europe, a lot of site consolidation and and we've been fortunate that site consolidation has yielded increased users and existing customers of ours and is increased.

Great for us.

As we look at Asia, particularly China continues to be.

Pressure on that business and and we continue to watch it closely and so I think the management team is.

Doing a lot of the right things to look at where where there is pressures and find opportunities to grow the business and delivered a solid quarter plus.

Got it and if I could just sneak in a quick follow up for Joe I believe you mentioned there with a change in accounting that impacted impacted the other line in risk.

Could you could you, possibly quantify that for us and maybe give us a little more color around that.

I'm not familiar with the change in accounting that I think you what you're referring to as maybe lease account, we adopted AOCI 842 this year.

First quarter second quarter will be each quarter.

And I don't have the exact number there is a footnote.

In the 10-Q that you can go to that will publish the exact impact of the lease accounting.

Got it okay and again when.

When we look at the numbers of the revenue growth overall, we printed 4% organic revenue growth. If you look at it on a constant currency basis, it's 5% and when you start to pulling apart I think what you'll find is roughly the benefit from the lease accounting transition is largely netted by the partner program transition.

And that all nets out and the noise you see the business continued to improve on the top line.

Got it okay. Thanks for the color guys appreciate it.

Thank you.

Thank you.

Showing no further questions Tom I'd like to turn the call back over to Brian for closing remarks.

Okay. Thank you operator, so I just want to close with statement, saying that we're very pleased at how our strategies are proving successful.

I'd like to once again, just really acknowledge the entire CDK team.

Around the world for all their hard work and dedication.

It's really showing in the results.

And then I'd like to thank you all on the call is a great questions.

To close out a great quarter. So thank you very much.

Okay.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you participating you may all disconnect.