Q3 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the CDK third quarter fiscal 2020 earnings conference call. At this time all participant lines are in a listen only mode. After the.
The speakers presentation, there will be a question and answer session. That's the question. During the session. You want me to press Star one on your telephone please be advised that today's conference is being recorded.
If you require any further suggest please press star zero.
I'd now like to hand, the conference over to your Speaker today, Julie Schleeter CDK Global Inc. director of Investor Relations. Thank you. Please go ahead ma'am.
Thank you and good afternoon.
I'd like to welcome you to CDK <unk> third quarter fiscal 2020 earnings call.
Joining me remotely on today's call, our CEO, Brian Christiana and CFO, Jim Couches.
Throughout today's call, we will be discussing are continuing operations only which do not include the digital marketing business, which during the third quarter was classified as held for sale and presented as discontinued operations, Joe will provide more details about the recent completion of the sale.
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 statements.
These statements involve risks and uncertainties, including the ongoing impact of the cobot 19 pandemic.
As 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.
Given the current circumstances, we are not planning any face to face investor outreach at this time, but we will continue to engage with investors by phone.
I'd like to remind everyone that we've provided in earnings presentation on our IR web site that we will be referencing occasionally during our remarks.
With that it is my pleasure to turn the call over to Brian.
Thank you Julie I.
I would like to start by expressing my hope that all of you families and colleagues are safe and healthy does this problem of unprecedented disruption.
I'd now like to get our call with the quarterly financial results.
Like to lead that the Joe this quarter and skip right to our update on to covert 19th situation.
I'm extremely proud of CDK efforts to help our customers and to do all part during this crisis.
He really stepped up and are doing the right things to support our dealers, many of whom or small and medium sized businesses.
We immediately launched our Koby task force.
In the first week of March to ensure the safety of our employees and customers. We then we meeting regularly to navigate the best course of action to assist our dealers during this time.
Not only how we offered discounted and free software, but we've provided products and support helped him to virtually sold vehicles to conduct remotely toward dms and to provide some more social distances and their service.
As you know our dealers pole critical role keeping the world's transportation system up and running safely during this crisis.
You got more software is integral to their operations, what about $500 billion automotive Congress flowing through our CDK system each year.
Yeah, we're keenly aware the important role we play.
I believe it is hard duty and responsibility to continuously support our customers see an effective manner.
While balancing the needs of our operations scared of our stakeholders.
How long coated 19, and the economic downturn will continue to impact our customers and in turn CDK is I know I know.
I would like to be as transparent as possible and to share with you what I'm thinking about and what data in triggers will you could make decisions about future action.
To understand it impacts the corporate 19 as had all the U.S. auto market.
It's really dig into how this impacts will affect our business I.
I spent a long time looking closely at our interim data ticket insight into what's happened in real time to our customers.
As a reminder, the automotive Congress transactions flowing through CDK is roughly equal to 2% of GDP.
Our data services group has developed aggregated datasets.
And analysis on trends across our installed base.
Well this does not represent the entire market.
It provides TDK with important insights, including daily updates around certain trends like auto sales and service department repair orders.
Posted in the earnings presentation. Today are two charts that we think you will find interesting and insightful to really understand the trends we're seeing.
When I look at the first chart on sales per dealer.
There was a quite significant drop off in sales in mid March as a threat at Cobiz 19 pandemic became impaired.
He didn't solves that.
What we are hopeful is a bottoming out in the first week or two of April.
As you can see in the past few weeks there has been a modest reversal.
Which may be a start.
On the path to recovery.
The second choice, we shared his data around the number of repair orders per service Department.
As a reminder, these shops get treated as essential services and most of it made opened during the shutdown.
Well they have faced declines dealer still have been able to complete.
Wait a few service workers.
Did you see a similar story as bottoming out and modest reversal.
We're following these trends very close.
And then finally, the data very useful in my decision making.
As we pivoted CDK to leverage the wealth of data that we have to help our customers and industry more broadly.
I look forward to publishing and sharing more of these insights with you in the future.
We want to support the industry as we see these trends evolve.
Through the crisis, we're committed to being proactive by partnering with our dealers to help them through this difficult period.
Over the past few months my executive team and I have worked tirelessly to trade and the best course of action to address the challenges our dealers are facing.
While balancing the needs of our employees.
And stakeholders.
In March we announced offers to discount several of our products.
In North America for the month of April. This included all of our layered applications for free.
Along with a 25% all the Gms.
We see opportunities during this time to focus on helping all dealers, including those that may not yet the CDK customers.
Extended our discounts and offers to all dealers and believe these actions will system using some of their financial burden during this difficult period.
As you can imagine the responses received from dealers had been tremendous.
Copy of the letter I sent to our customers is available on our website.
Also in this letter was my commitment to for go all but one dollar my salary and cash bonus for this year.
I'd also like to tell you about some of the other things we're doing to support our customers.
Several of our products has been instrumental to our dealers operations. During this time.
Such as our CDK service product and customer remote Dms access.
We pivoted very quickly to make sure that dealers employees.
Immediate access to the Dms for critical operations like payroll or counting could do so remotely.
We recently announced enhancement to our connected store software.
That enables dealers to create and work mobile deals from anywhere and allows customers to pencil their first quote directly from their own devices.
On the CDK service side, we've added the heyler option to allow for touchless vehicle pickup and delivery to customers home.
Also our customer support tools guided.
In the use of our CDK port payroll cost software to gather that required monthly payroll notes needed to apply for the S. P. H T Chek protection program.
Which provides financial systems to help small businesses retain employees during this time.
These are just some of the mini products and services that we're offering to help dealers with several vehicles online running their critical service operation and supporting their employees.
To provide dealings with training support we refreshed our comprehensive customer training programs.
Including our online CDK University.
Which now features more than 600 free online training courses and virtual instructor led classes.
Our call center support teams quickly mobilized to move the entire operation over to working from home no disruption in service and in fact, our delivering service levels of 95% on call response times.
Up from 83% in January.
In addition to that or customer effort school, which OS did CDK make it easy to get your problem solved.
Is that 95%, which is our highest score today.
Our supply chain for networking equipment printers and telephony.
Secure your sufficient capacity to meet our requirements.
To meet the needs of our dealers for Rtms and leaving application products.
We've implemented many innovative installation procedures to ensure the safety of our customers and our employees.
We've done installed with our Gms and applications on a fully remote basis and have received positive feedback from several dealers are they experience.
We're being very sensitive to the needs of each dealer and putting them at the heart of the decision about whether to conduct the installation work on site or no.
[noise] understandably not all dealers are ready at this time and in some cases, we've been asked to push back installations will later date to me to dealers need.
However, we continue to see site growth overall, even given the current situation.
In Q3 other sites in North America were up like 12 sites on a year over year basis, a fifth quarter.
Oh.
During Q3, we announced a long term renewal, Berkshire Hathaway automotive and enterprise account dealerships across 10 states.
In addition, our success in gaining new key sales and earning back customers continued during the quarter within 18, plus site competitive win which includes additions of or document cloud CDK inspect and cloud connect applications.
We had a 25 plus site dealer scheduled to leave us in April we signed backup for over 60 months and added Hari you lead CRM to all of their sites.
We also had a 30 plus ideally customer.
Who returned after several months on a different product.
Worked hard over the past year to become more of a true partnering with our dealers.
Very proud of what we've accomplished.
Looking forward.
I'd like to talk about some of the impacts that totaled 19 may have on our business in the near future and the steps, we're taking to address them.
While a rapid recovery in their economy could produce a quick rebound in activity for dealers.
We could also see significant downside risk if the shutdown this protracted.
I sincerely hope that our actions and those of others, including the government support can provide some needed relief.
To help many dealers bridge this difficult period.
But we know that the length of the shutdown will ultimately get turned on the severity they face.
Given these unknowns weve prudently lowered our annual guidance.
Joe will provide more details about guidance in his remarks.
But I like to walk you through some of the ways that CDK is being very thoughtful about our spending and capital allocation. During this time.
The team is doing a great job at looking at every Penny we spend.
While managing our cash and have taken the right steps to improve our liquidity.
I'll, let Joe provide more details.
But we are tracking daily receipts to stay ahead of the curve and have reduced our discretionary spending.
We've also looked at our strategic investment spending.
Talk about these investments in the past I'd like to provide my thoughts on their importance.
Now covert 19 is the elephant in the room.
At the moment.
We cannot lose sight of our strategic goals and we expect to emerge from this disruption in a better position to achieve the improvements we promised our dealers employees and shareholders.
While still being prudent insensitive to the tragedies that surroundings.
I believe it's important to continue to invest in the business and I'd like to provide a quick update on some of the key focus areas.
As you know our business process modernization is a long term project includes implementing a new ERP system delivering less complex invoices for our customers.
Standardizing several practices to make CDK easier to work with.
During this time of working remotely with restrict your child.
We've been very busy at continuing in even accelerating many of these initiatives.
Our new simplified invoices continue to rollout as planned and are now available to over half our customers.
Delivering on the promise of drive flex our new modern Dms is now more important than ever in to the industry and we continue to invest in several enhancements.
As of Q3, we have a total of five OEM certified around two dozen installations with over 100 sales to date.
While working from home our team has been improving our installation.
Migration efficiency through increased automation and validation.
I'm happy to report that we've developed and completed our first fully virtual flux install I went live in mid April.
Other key improvements we've been working on include the integration of flex with our CDK you lead CRM.
Enhanced usability and new features for technician payroll and vehicle costing.
We're also continuing to make progress on developments of for tell US 38, A.P. eyes, and 7 million transactions today.
Not surprisingly the ramp in a number of transactions and our rollout of the new repair order with yeah.
Slowed somewhat during the cold shutdown.
But we have many new exciting things that we accomplished during the third quarter and they're currently in the works, but I'd like to share with you.
We announced our partnership with Microsoft integrate get hub and power absent the Vertellus interconnect with Microsoft automotive community.
These integrations are focused on making it easier to build a T.I.s at apps on for tell us.
Leveraging microsoft's industry, leading developer utilities.
We also announced at Meda formation of our Advisory Council, you've made up of Representatives from technology.
Automotive Oems and dealers and dealer Association reps, all focused on helping us grow our industry's open and agnostic capabilities on for tops.
In the quarter, we continue to drive Apiay development and deployment is two notable examples with major Oems.
Incorporating a major Oems connected car information through for tell us to provide greater insights for dealers using CDK service improving the customer service experience.
We've also contracted with a major OEM to develop an inventory <unk> that allows the OEM to see in near real time changes to dealer inventories and to provide them with insights into their dealer inventory needs.
I'd like to in by talking about our employees.
We closed just about all of our offices worldwide and they've been working remotely to keep our operations going through this difficult time.
I'm extremely proud of the hard work and success. The team has achieved and on behalf of the entire management team.
And the CDK board I'd like to thank them all for their efforts and contributions.
Now more than ever I'm glad that our strategy of being easier to work with has allowed us to partner with our dealers to determine the best solutions for them and CDK.
The strong engagements, we have with our dealers has grown even more during this crisis, we have a solid foundation in place to emerge greater than ever.
We continue to monitor is situation in their markets, they're committed to staying nimble and supporting our dealers.
Our partners.
Shareholders.
Kuwait as we move through this crisis together.
And with that I'd like to turn the call over to Joe.
Thanks, Brian Good afternoon, everyone and thank you so much will join us today.
We know that these are very challenging times and we truly appreciate your ongoing interest and support.
We're pleased with our results for the quarter that Mitch this difficult global health crisis.
We've been very focused on supporting our customers and employees, while being very diligent in managing our cost structure and our liquidity.
Despite the building covert 19 headwinds in the back half of March we generated total revenues of $516 million in Q3.
Which was 3% growth on a reported basis and 4% growth on a constant currency basis.
Much of the momentum we saw building in the first half of the fiscal year continued into Q3.
While the auto industry has been very impacted by covert 19, we've seen the resiliency of our dealers as the rally their teams to perform the best they can't.
Our CDK software is critical and supporting our dealers to be successful I'd be performed very central service, that's keeping cars on the road and selling new vehicles.
To put it in perspective, the week of April 13th we feel that more than 15000 interactions from our dealers into our call center to help keep their dealerships money.
Before we get into the details of the corner.
In light of the current environment I wanted to take a step back and provide some perspective on a few areas.
First.
Let's discuss our customer base and the nature of our revenue streams.
From a north America standpoint, which is more than 80% of our revenues.
She the case customer base as always over indexed to the larger deals.
As of the end of our third quarter dealers, having three plus sites represented more than 75% of our customer site count base.
Also we have long term relationships with nearly all of our 30000 global deal wins in the form of multiyear recurring revenue streams.
As a result, when you look at our business mix about 80% of our annual revenue is in recurring subscription based business.
While we're not immune in this environment to the impact from lower transaction volume.
Due to lower auto sales or to lower onetime revenue and our international business are waiting towards larger dealers and subscription nature of our products provides us with some level of stability in our revenues profitability and our free cash flow.
We do play significant value on the long term relationships, we have with our dealers, which is why we are providing meaningful discounts to our customers and our fiscal Q4 I.
I will cover the impact of these discounts in my guidance section.
Second I wanted to cover the actions, we're taking to preserve our profitability cash flow and liquidity given the current environment.
The CDK leadership team took quick decisive action in early March as we saw the cobot 19 situation developing.
Roughly two thirds about costs are in labor related expenses.
Largely reduced all hiring to the few critical roles that need to be show.
We're also cutting contractor and other outside services spending where possible without reducing our service to customers.
As we look to capital expenditures, we've deferred all nonessential spending until we get better clarity on the comedy reopening.
We also focused on ensuring we have more than enough liquidity as we've managed through this crisis.
We recently renegotiated our bank credit agreements to allow for additional borrowing capacity under the revolving credit facility.
All in all we have a lot going on but the CDK team has risen to the challenge to keep a strong and the habits emerged from this in a better position.
With that as a backdrop, let me turn to the highlights of our third quarter.
Despite the impacts of Cobot 19, we were able to deliver solid results for Q3.
We ended our third quarter with consolidated revenues of 560 million up 3% year over year.
Driven by growth in North America, 4%.
Offset by a 1% drop in international.
For the quarter subscription revenue increased 3% year over year.
Looking deeper into subscription revenue by region North America revenue was up 2%, while international was up nearly 9%.
And our North America segment Q3 subscription performance was driven by gains from upgrades to dock cloud and elite CRM conversions from legacy products offset by the expected declines from the partner program transition.
North America auto side to up by 12 over Q3 last year.
This represents the fifth quarter in a row with year over year cycle and as reflective of our ongoing efforts to but dealers first and make it easier for them to work with CDK.
Turning to revenue per site North America auto revenue per site was up 4% year over year driven by gains in key applications like Dot cloud.
He lead CRM.
And service offset by the expected declines from the partner program transition.
As Brian mentioned, new sales one during the quarter continued to be strong with key gains in Dms and dark cloud parks.
Drilling down one more level two sides of dealer group within the three plus cycle.
We saw recurring revenue up mid single digits year over year.
With recurring revenue for the one to two cycling down low single digits.
Subscription revenue from our international segment for the quarter was up 9% year over year driven by increases in revenue per site.
International sites were down 1% year over year and for the next few quarters. We expect this number to be further pressured by additional site reductions primarily in China.
We ended the quarter with strong revenue per site up 8% year over year through incremental installs of solutions to existing dealers and higher Dms revenues.
Turning now to the other three cat revenue categories of transactions.
Onsite and other.
The transactions category contains products that are most directly tied to changes in vehicle sales activity as they consist primarily of fees for vehicle registrations and credit check services.
These are offered only or North America segment, and our about 7% of our Q3 revenue.
As you would expect the covert 19 shutdown that began in mid March caused a decrease and our transaction revenues with a 3% decline year over year.
Revenues within the on site category come primarily from BMS products that are installed on the dealers premises.
As opposed to hosted services and are more common in our international business.
The on site category represented 3% of our total revenues and for the quarter decreased 41% year over year, primarily due to lower license volume.
The final revenue category is out there, which is a mix of products such as consulting hardware as a service forms and our marketing call Center business.
Generally there are some seasonality in our third quarter in this category due to additional forms needed by dealers for tax filing purposes.
Well not directly tied to vehicle sales revenue from some products within the other category maybe impacted during periods of economic stress.
Other revenues represented 12% of total revenue for the quarter and were up 25%.
Primarily due to benefits from the change in accounting for hardware as a service under ASV 842.
Partially offset by lower volumes in the marketing Carlson.
Now turning to earnings.
Third quarter EBITDA of 202 million was essentially flat year over year, but the margin of 39.1%.
Earnings from revenue growth were offset by headwinds from our investment and the partner program transition.
And he segment level North America pre tax earnings were down, 2%, where the margin of 40.8% down 270 basis points, principally due to the same reasons.
For international pre tax earnings were down, 13%, but they margin of 27.1% down 360 basis points.
Mainly because of higher labor expenses and lower revenues.
In an effort to improve margins and generate appropriate returns we approve a restructuring plan in late April for international business.
We expect us to successfully reduce cost and improve margins within our CDK segment, beginning in fiscal year 2021.
The restructuring expenses related to this program are expected to be approximately $30 million.
These expenses will be included as an adjustment to our non-GAAP financial measures and has been considered in our fiscal 2020 guidance.
For the total company, our effective tax rate was 22% down from 26% in the same period last year did a $3.2 million of tax benefit related to execution of various tax planning items implemented in the quarter.
Diluted earnings per share were 92 cents up 6% year over year.
The increase in EPS was primarily driven by lower weighted average diluted shares outstanding.
Versus last year and lower tax rate.
I'd like to spend some time discussing our liquidity position.
Our cash balance on March 31 was $285 million of which 211 million was held outside the United States.
Most of the foreign cash is liquid and accessible to meet funding needs globally, given that we removed the assertion that foreign earnings are indefinitely reinvested as of March 31, 2020, making them available for repatriation.
We also maintained a $750 million revolving credit facility with our banks 100 million of which is drawn which together with our cash balance.
Provide ample liquidity.
We recently amended our revolving credit facility and term loans to increase the maximum allowable leverage ratio through the second quarter fiscal 2022 to provide access to additional borrowing capacity to protect against the impacts of coded 19.
Our balance sheet remains strong with net debt to adjusted EBITDA of 3.2 times.
This remains above our target range of 2.5 to three times, but is down from 3.3 times at the end of Q2.
As a reminder, our next debt maturity is in fiscal 2022.
During the quarter, we paid up $18.2 million cash dividends to shareholders.
Year to date free cash flow was $211 million.
She was lower year over year, primarily due to litigation settlement payments in prior quarters.
I'd like to pause here and talk about the current situation given the Kobe 19 pandemic.
As Brian mentioned due to the significant uncertainty within this environment.
We decided it was prudent to lower our annual guidance to provide for a wider range of possible outcomes.
Our new annual revenue guidance is now 1.91 side.
To $1.965 billion.
We expect EBITDA of 705 to 745 million.
And as of $2.85 to $3.20.
We are actively monitoring the situation closely and I'd like to share some insight about the factors that we took into consideration in determining this guy.
The way I think about the cobot impacts on our business are the following three buckets.
First.
The customer discounts that we offered or will offer during Q4 will result in lower Q4 revenue.
$20 million to $40 million, which represents about half of the total discount with the remaining impact recognized over the next two years as a result of AMC Pittsboro six.
Second we are experiencing some delays in our installation schedules as well as some lower onetime customization work and our international segment.
We expect the impact on the delays in short to be approximately $20 million to $30 million.
Lastly, as I mentioned earlier, the majority of our transaction revenues are impacted by changes in vehicle sales volumes.
We expect lower vehicle sales in Q4.
And as a result, lower revenues of approximately $20 million to $40 million.
As I mentioned earlier, we took immediate action to reduce expenses as we saw revenue declined materializing.
The benefits of the expense reductions will be partially offset by lower capitalization of our installation teams as a result of lower fourth quarter installations.
We expect to continue our normal quarterly dividend payments, but have suspended share buybacks for Q4.
Planning for these potential near term headwinds as part of our ongoing and thoughtful approach to financial decisions and capital allocation and we intend to remain focused on exercising prudent expense and investment discipline to ensure we meet the critical needs of our employees.
Customers and shareholders.
We believe we're well positioned to navigate through this crisis should the situation last for an extended period of time and that our strong recurring revenue model will continue to provide us with a stable foundation.
Before taking your questions I'd like to end with a brief comment on the sale of our digital marketing business, which was completed on April 20 Onest.
Given current market factors, including the impacts of coated 19, we reevaluated the fair value of the digital marketing business now recorded an allowance of $26 million in Q3.
We are happy that we could get this transaction done in the pipeline that we did so that we can continue to focus on our core software business.
We wish to think all of the employees of the digital marketing business for their hard work and education through this transition.
I'll now turn it back to the operator, and we'll be happy to take your questions.
As a reminder, tasker question you only the press star one on your telephone to withdraw your question press the pound King please standby well, we compile the culinary roster.
Our first question comes on the line of Ian Zaffino from Oppenheimer. Your line is now open.
I agree with that thank you very much.
Maybe just help us understand the.
Sorry, maybe there was I understand the path recovery here as far as.
The deals that have been taking or been given the free apps in the three are there.
I appreciate your dividend, how easy will be that may be migrate going back to becoming so paying customers and that you expect them to just maybe just drop off and down maybe not reopened as far as attrition of dealerships and experience.
[laughter]. This is Brian and I can I can start and Joe can add some color. They they all know it was in the customer letter and we've talked to many of them, but this was a temporary.
Solution to help them through this troubled time, you know for US I think for us the industry for for the U.S. and our international sites, it's important to keep as many of these dealers.
You know functional and then business as we can during these these times. So it we don't see a an issue of converting dr. just the normal pricing.
As different states seven and all open and that's why and when Joe and I forecasted we forecasted as best we could you know I'm, assuming a certain number of states opening and the rate at which Scott will happen.
And then I think the second part. Your question was are we seeing you know it declined in the number of dealerships and I'd say so far we haven't I think it's early you know a.
Most of that.
We are in the conserving cash stage and.
There you see from the data that the they're doing fairly well from a service appointment standpoint flowing through the system. So you know there is still cash flow coming in.
And so we haven't seen any dramatic change in the number of dealerships or.
The number going out of business or anything like that [noise].
Okay. Thank you very much.
Thank you Sir our next question comes from a line of Matt So from William Blair. Your line is now open.
Hey, guys. Thanks for taking my question wanted to ask on on the pipeline and maybe you can just give some more detail on how that has been impacted by by calls at 19, and I guess, what I'm wondering is.
Is there a different than impact in the pipeline in terms of new customers that are in there and then cross sell within the a into the existing base of customers.
Sure the sobriety, Jim I can start and and then Joe can add color if you watch.
No I'd tell you you heard from their prepared remarks that we really went out and focused as soon as this.
Hold a pandemic kicked in on doing two things one talking to any dealer hood left or sub they were going to leave in the near for future and offer them opportunities to come back and.
Stay with us and and and avoid a transition. So we we've been doing that you've seen we've been reasonably successful. The same time, we moves you know because deals done in some cases want us to come into their shops to do installations like we normally would.
So we've.
Implemented or a virtual installation capability on almost all of our products now so everything from layered applications like elite through the Dms use even top drive flex is now able to do a virtual implementation.
We do see though that there is a decrease in their ability to get in front of dealers and actually sit down and and have a discussion about conversion and sales.
And so we are still selling were selling pretty well you heard the pipeline, but it is a bit lower than what we would normally forecast for a quarter like Q4.
But we're encouraged because there's a lot of dealer say look these are great ideas. These are great opportunities.
Yes, I need to focus on my cash flow, Ed and keeping my business healthy and any other fixed operations I can do and so let's talk after the opening so we have a pretty good Q.
In the pipeline out into the future.
Yeah, I know the only thing or what are the there's there's some opportunities that come into the pipeline a as well just some meaningful size ones where.
Customers have looked at our focus of pardon me with dealers and and look for opportunities to build more integration and so there's no there's certainly.
Some positivity out there and I think Brian summarized it well that is.
So certainly is.
A bit of a delay on DM outside but all in all I think the teams are doing the best we can.
Got it and.
Last one from me.
A lot of dealers of has sort of scrambled here to try to sell more cars online and if we sort of assume that you know perhaps some of this sticks post a pandemic any impact there that you for CN on your business positively or negatively.
Yeah, So I actually agree with you about that I think [noise].
You know as we look across all industries, not just for automotive industry, but.
Many are there some of the things that are occurring around remote work and remote access and and all are going to stick with us right.
And also some of her.
Behaviors or communism.
Personal behavior. So I think yes, some of that lets stick actually it really good news today.
We are announcing that we will be offering for free.
Our full digital retail capability, which.
When you combine it with elite gives you any perfect pricing on remote deals.
Got you do the fulfilling the online for a purchase online Oh, you have to do depending on the state is you know the card be delivered to your your house there might be piece signatures or a few signatures that have to do.
By law in person you also saw we had adopted our killer app. So we can schedule tetlin retailer was.
Originally scheduled for lift.
To be able to pick people have to drop people off now it's.
The dealer will come pick up your car drop off your car.
But you know the fact that we're going to go deliver a free to the dealer full digital retail applications.
We believe it's going to stick and we want to be on as a market leader and really show our dealers that were therefore, I'm so by providing a free we think.
It really becomes an asset for them and I do think that will resolve remain after the pandemic or you know goes back to semi normal.
Great. Thanks for taking my questions guys.
Thank you. Our next question comes in a line of Charles Nat Penn from Wells Fargo. Your line is now then.
Hi, guys. Appreciate all the color on hope everyone is I'm doing safe are doing well I was hoping you could.
Give us some color around your underlying economic underlying assumptions for the year in terms of SAR as well as you know some sense your sensitivity the sensitivity of transaction revenue to fluctuations and Saar as well as well as any any movements of the M. Two years.
Vehicle market as well.
Sure Hey, Chuck good to hear from the start up and been committed we looked at transaction revenues. It's about 7% of our doesn't do have a this quarter and yeah. The posture. We've taken is you know we've had pretty good view into April a transaction and Brian talked about.
You can see some of the data we've published in our earnings presentation, and we're really looking at that and I'm not trying to.
And add more drug onto a more just looking at that if that continues into May June.
Yeah that that is sort of whats been contemplated in two or guidance range.
And so I'm not.
Not really a Saar prediction the more what did you see an april carry that forward the major.
Okay, Okay, and as a follow up I wanted to get a little color around the international business, specifically, you alluded to some restructuring activities as well as some pressure coming out of China. So.
Your five any color you could provide on those two areas specifically your exposure to China, and what you're seeing I'm any you know positives or negatives across across your markets internationally.
Sure I'll start and then maybe Brian can add in so buying them I'd spent some time over the last several months pre coping with the leadership team in the international I'm really diving deep into the the to the business. It's a very good business and and has a strong building subscription base and but when looked at the margin profile.
Well, we saw opportunity and whether what your heard from me in my remarks. Today is we have taken action to realize that opportunity really to we think the business can perform at a 30% type margin return profile and indefinitely, but then into the estimates as far as China.
There's a there's just yeah. We thought it was prudent as we go look at a user counts and site counts going forward, there will be a bit more pressure just given all that China as well as the world has gone through and those those visibility, though we have bad, but there's certainly would be a bit of reduction over the next.
Several quarters around sites on the international business really attributed more to change or anything of that right.
Yeah, I know there I would read that as us aligning the margin and less Jos mentioned was we were working this with the leader of.
That group, but well prior to really good corporate actions.
I've taken place and aligning to how do we get the margins to where we really wanted to be and then not you always have to align investments and you know where you've placed that certain so what you're seeing is just us realizing that we.
We think fairly quickly we can I make good margin improvement to not business. So.
That's really what this is targeted towards its.
Sorry.
Got it thanks, guys appreciate it.
Thank you.
Thank you all our next question comes from a line of Josh Bear from Morgan Stanley. Your line is now open.
Hi, Thanks for taking my question.
On on customer success and put our attention last quarter I think you talked about retention at a nine quarter high just wondering if you could comment on how retention has been trending recently and maybe in the first couple of months of of the quarter and then more recently into.
The end of March and April.
Sure I can I can start and Joe can jump in as Brian you know I tell you retention has actually strengthened as we've come into this Oh, you know there, but the whole covert pandemic, we were doing well in the beginning of the year as as we mentioned and as we've.
Got into the.
Domestic we've actually seen the actions, we took of giving dealer guest counts going and talking to even Telus with plan to lately.
Good luck for talked about.
Dealers, who are prepared plan to leave and we were able to pull them back large dealerships both on the Dms and.
GRM side, so we're continuing to improve farmer retention standpoint.
Joe anything else.
No nothing really bad I think when we look at retention rates continue to be.
Very strong and particularly the three plus sites segment, we did see the timing of some losses in the one to two segment time from December the January.
But all in all I think we right now are performing quite welcome and thank them perspective.
Got it that's helpful and then I'm kinda like putting putting all these pieces together around the actions you've taken in.
Covet Task force.
The discounts the free software [noise].
And and Miss you know if customer focus like how how do you think you emerge from.
The the credit crisis from a competitive standpoint, I don't know if you can comment on how your response or your attraction may or may not differ from from your peers.
[laughter].
Yeah, I don't you know I'm not going to talk too much about my peers are currently I mean, there's probably work going on whether or not.
The observed two on their side.
So I wouldn't be fair I think from our side I think we believe will emerge stronger won the dealers really look at this we've been there to help.
Both in the discounts and pretty soft or we've given.
The the notification that's going out today that will do that full digital retail solutions, which we think is one of the best in class solutions in the industry.
Which will go in for free Yeah, Yeah, and be part of the Dms and the CRM solution.
Then equally as important to me is during this time and Joe mentioned in his remarks.
We've done a great job of conserving our spending and cash but the same time would have it stopped.
Investing in the technology. So the improvements we are doing and drive flex improvements, we're doing in our base dry products, our CRM, our service application and even the road map we have for the digital retailing solution to include more often I capability and more as a web site kicker.
Really all of those things we believe both technically from the products were producing.
Operationally I think we'll be more efficient than some of these things are going to stick with us or some of our spending we I think we'll or the reductions will stay there were actually emerge better.
And then from a customer standpoint I think.
We are doing better with them and.
You know as Joe mentioned, the majority of our our customers are the larger dealerships.
So they're going to emerge well from them and we're gonna merger I'll wrap them.
I think we're well positioned.
And relative to our competitors. It's it's just you guys probably not as much of a more insight as I did.
Great. Thank you.
Thank you Sir our next question comes from the line of Rayna Kumar from Evercore ISI. Your line is helping.
Good evening. Thanks for taking my question on people killed in more detail at what needs to happen to get to the high end of your guidance on versus your low end of your updated 2020 guidance.
If you have any early thoughts on how at by 21 with a lot that would be very helpful.
Sure. Thanks, Ryan I'll start out when you say high and.
So.
Let's let's call high and the lower performance. So if you were those describe it as lower end of revenue guidance them around to be but the guidance you would have to to get to that was a prospective you'd have to see the shutdowns continue to allow us very similar to the what was in.
In early April throughout May and June and they're really not see much improvement at all in transaction performing thing in terms of dealerships being able to sell vehicles and being able to service vehicles.
Yeah, I think it as long as we can continue to see.
Continued improvement and dealers reopening and economies reopening.
I feel comfortable or within the guidance rate within the midpoint to deliver on you know the fourth quarter.
As it relates to the next to 2021, just can't comment as you can appreciate right now so many uncertainties moving factors what I would tell you is we we feel really good about how we're managing the fourth quarter. We had a lot of momentum are coming into the pre pre co. Every time you know a lot.
The momentum in the pipeline with a good backlog.
I think now in coated we've done the right actions on the cost front.
We're doing the way things to partner with our customers and like Brian said on the last question I'm confident we'll remote emerged from this stronger along with her dealer partners.
Great. It's very helpful and she can help us better understand your investment Draghi during that time birth is.
Cost take out what didn't Messman do you plan on prioritizing in this environment and then separately. If you can go into little bit more detail on your cost structure, and then how much respect versus basketball sleep.
So maybe I can start with the investment Joe and then you get her to all the rest of that detail.
I'd tell you that our investments are really focused on.
A couple of areas one is on.
Our modernization of our ERP system, which really then goes back to billing and if you talk to our customers are billing the complexity of our billing.
The clarity of our billings, the accuracy or billings wasn't up to par and that was an area we committed to fix.
We've talked about the number of customers who are now receiving their new simplified billing system, we've got very positive feedback.
That is you know a program that's going to go on for a while still and so we're going to continue to invest and as Joe said the partners. We had been great actually continued to work with us, but Uh huh, a lowered fees and so we've actually been able to <unk>.
To do better for less in that space. The other place we're going to continue to invest during this time isn't the technology.
So we have slowed down some of the hiring of new people, but we absolutely continue to really build out our roadmap for the technology or you saw them go grossing for tell us we've gone from a million transactions, but no 7 million.
Our goal is to exit the year are very high clip of transactions going through Portales you saw the 38 A.T.I.s. So we're investing in for tell us where the best thing in dry flex, we're investing in our drive product, we're investing in each CRM to make those products better more capable build and data.
Structures build and artificial intelligence at the beginning of course or at least that capability. So that's the other area. We're going to really continue to invested and we're doing some other investments and things like our HR system internally at all but that's most of it and then I'll, let Joe talked about.
The cost reductions and how that fits in with our overall spending structure.
Sure. Thanks, Brian so listen when the when we look.
Brian talked about us or monitoring things, Dan. So we have daily dashboards on a cash receipts and cash disbursements on spending.
The teams done a fantastic job of really are staying a very instrumented into managing the strength of of our balance sheet in their liquidity. So.
Brian I'll always or watch that closely and be prepared to two just course, if we needed to.
I think you asked also how much is fixed or when you look at our cost structure two thirds of our cost is labor.
And it's really important news, we're pivoting to the new CDK with we shared with the employees you know we haven't reduce store.
Our furloughed employees and it's it's the employee team is really rallied around us and then very appreciative and well continue to work on the programs buying just described or cleanup backlog of outstanding customer questions and we just continue to do everything we can to come out of this strong.
And so two thirds is labor one third is non labor and and really the deal what gives US comfort is we're really pleased with the new bank deal we negotiated.
We have strong very strong liquidity position and [noise] and think we can successfully [laughter].
The only thing I would add to what Joe said.
[noise] just to give you a little bit more as you know we ask you are commented earlier, what will stick even after coated I think this you know daily looking at our receipts at our spending can or no look you're going to all the different ways, we're spending money being more efficient I think that will stick, we will be a better company.
As a result for this.
The other thing it's been interesting is you know the teams.
Partly just the way they the work and then partly I think our commitment to the team or you know, we're going to try and work through this at least through the into may with no layoffs or furloughs.
The team has been very committed and saying, okay. We've got to kick a lot Doug we're actually seeing.
Perhaps even more efficiency.
And productivity out of the team.
Or even though the majority of the team is working from home. So it's been quite interesting that the.
The culture has really come and and risen above the petrochemical and we're doing quite well.
Standpoint.
Thank you that's very helpful detail.
Thank you Sir our next question comes on the line of Gary Prestopino from Barrington Research. Your line is now open.
Good afternoon, everyone, Hey, Brian on some of these charts that you gave on the data trend through April 20, Onest is that the latest data you have April 21st from your system I'd just be interested to see what your thoughts are for the two weeks. After the 20 Onest of April.
Yeah, we get a data pretty regularly we just.
We get actually data feed every day.
Similar to the way the data gets.
Into our system is depending on the data source. Some of it has to go through the already some of the has to go through.
To some other third parties. So it tends to get a little bit lumpy, you could actually see it or a bit in not data. So we took two week old data because we knew that data had most of it flows through.
If you take a look at what's happened in the last two weeks, we've continued to see that upward trend.
At the same rate so.
We're continuing to see things get better it's not a spike up or as you know exponential curve, but it is getting better and you see exposed better in the repair orders, which is the service appointments and the actual sales through the system and you can see that a space.
To start to open up I know many states allow now car sales [noise].
Not in the store you have to a.
You know do it out in the lot limit the number of people and things like that so Ah you know, we're starting to see that I'm not plus the OEM deals that are out there. It's really not about trying to buy cars you are in the market.
Sure and then just going through some of the things you talked about you would now have five OEM certified for drive flux right.
Correct, yes, or no Sir it and then you also said I think you said you had 100 sales are conversions in the quarter is that correct.
We have 100 sales in backlog, so they're sitting there okay waiting for install.
If you remember from last quarter, we took some time off on the installs to make some improvements we wanted to make it more efficient or do some things that lowered the cost of both the installation of support.
And it gets better integration.
We're working through those and the installations are we still part of the trying to exit the year.
Something on the order of 15, plus some up.
Okay, and then beyond the the though the discount programs that you I guess, you announced last month and then you're talking about the digital retailing, there's nothing else out there currently public that you guys have announced what.
Are you contemplating further discounts.
For some of your dealer base.
No nothing not a widespread I mean every every time, we going to.
We do a a contractor or try and when a new deal there's always a certain level of negotiation and sometimes it some discounts or additional services and things like that but there is no light spreads.
Additional ones that were doing.
And instead, what we're really focusing on just how do we work with the dealers to grow out into the future. That's why this [laughter] digital retail like why do we think is very important. This this is one of things that's going to stick right people are going to want to do more online and this really let you do.
Okay, perfect, especially if it's true easily.
And the CRM you can do very accurate.
Everything done you're you're.
Financing everything quoted for you.
And so the deals done.
Yeah I just wanted to ask me the about that because there's a lot of players in that market doing this I mean youre working in conjunction with the dealers website capabilities, correct, and and funneling data and sustainability there, but when you sold your yes, your advertising business, you'll have web sites anymore right.
Yeah, and so it and that's where the advantage of.
Pulling it through the deal last and then easily CRM really gives us a beverage no no. One person is gonna have all of the pieces to put together. There every one is going to have to have it as a partnership so you're right. We have to have partnerships with multiple web sites right. Some of them OEM web sites some of them.
Party web sites some of them dealer web sites.
You have to have a variety of F and I partners you have to have all of those partners lined up and that's one of things were really focused on is growing the number of those partners.
But yes, no nobody is going to be able to do this solely on their own you have to have a partnership.
Thank you.
Thank you as there are no more questions I would like to thank you for your participation. This concludes our call you may now disconnect.
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