Q4 2020 CDK Global Inc Earnings Call
[music].
Good day, ladies and gentlemen, thank you for standing by welcome to the CDK Global incorporated.
First quarter 2020, <unk> earnings conference call at this time, all participants are gonna listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press Star then one on your telephone keypad.
At this time I would like to turn the conference over to Miss Julie Schleeter Director of Investor Relations Ma'am. Please begin.
Thank you and good afternoon I'd like to welcome you to our fourth quarter and year end fiscal 2020 earnings call.
Joining me remotely on todays call, our CEO, Brian, Chris Sanish, and CFO, Joe Couch it.
On the CDK Investor Relations website, we provided slide presentation that we will be referencing during our remarks today.
Unless otherwise noted all references to financial amount during our call or 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.
Please also note that all growth percentages refer to year over year change for that period unless otherwise specified.
I'd like to remind everyone that remarks made during this call may contain forward looking statements.
These statements involve risks and uncertainties as further detailed in our filings with the FCC, which could cause actual results to differ materially from those mentioned in the forward looking statements.
With that it is my pleasure to turn the call over to Brian.
Thank you Julie and thanks to everyone for joining us today.
Since our last call. So much has changed in the world and I'd like to start by acknowledging that with heartfelt sadness that we feel regarding the human tragedies at the helm endemic and the economic hardships that are being experienced by so many.
I'm incredibly proud of how well the CDK team has responded during these difficult times, we remain committed to helping our customers and employees not just to get through the crisis to emerge stronger and more resilient.
We see tremendous opportunities as dealers evolve and adjust to their normal and we will continue to deliver the innovation and technology for more digital environment.
Our breadth of solutions, our scale and our strength has never been more important.
Customers increasingly turning to us as a sound and trusted partner when they need to help the most.
I'm very proud of our performance during the quarter.
Which highlighted the strength and resilience of our business model, we exceeded our expectations, even given the challenges that we faced are our industry and the support we gave to our dealers.
We delivered $450 million of revenue.
Approximately 80% coming from subscription based recurring revenue.
We generated full year revenues and EPS at the top end of the guidance range at $1.9 billion and $3 in 17 cents.
Exceeded our guidance for EBITDA.
$751 million.
If you adjust for the coated related impacts we experienced in the last quarter.
Including the discounts in credits we provided our customers.
Our annual revenue growth would've been approximately 5%.
I'll, let Jim go into all of the details, but so far we've managed very well and I'm excited to share with you some of that amazing things, we've been working on and our longer term plans for continued growth.
So today I'll start the call with some insights based on what we're seeing in the industry.
As we shared previously we believe we have among the richest and most comprehensive sets of data on the auto retail industry.
We view it as a privilege to share the trends and insights we see in the data.
Second I'll highlight the strong sales and renewals that we accomplished in the quarter, which were better than expected considering the stressed conditions.
And the third I'll share the progress, we're making with our investment strategies as 2020 was a significant year for investments we wanted to provide an update on the and initiatives any advancements we've achieved.
I'll then turn the call 100, Joe for details on the financial results before opening up for QNX.
So let's start with a look at what's happening in the auto retail industry with North America auto sales per dealer on slide four in the presentation posted on our Investor Relations website.
As you May recall last quarter, we mentioned, what we thought was the start of a possible recovery in late April.
Data proved to be spot on seeing our latest data now confirms this with average monthly sales dropping almost 30% at April from the high in February.
Followed by strong recovery in both May and June sales for the entire quarter, averaging out at almost the same level as the previous caller.
While year over year performance across retail automotive remains down we're encouraged to see the sequential improvements in our data.
We believe there was a combination of factors driving the return and demand for auto ownership.
In addition to the normal auto replacement cycle and strong OEM incentives.
The preference for personal vehicles over public transportation or ride sharing options due to safety concerns appears to be rising.
However, this demand was tempered by the fact that onsite purchases in showrooms were limited during the various state shutdowns.
While many states have reopened the fear of a second wave of infections as kept some consumers away from dealerships as they look for alternatives.
More remote purchase methods.
One positive consequences of the Pandemics, there's a pressure to accelerate the digital buying experience.
While the transformation to full digital really telling.
Okay years under normal conditions.
That pandemic has quicken the timeline and we expect dealers to continue to shift towards more digital solutions.
A little later I'll talk about how CDK is leading the digital transformation effort and how we are bringing integrated an accurate digital solutions to our dealers.
Let's move to slide five of the presentation and the data on North American repair orders per service Department.
Following the April drop we saw strong recovery in the number of repair orders, while many auto showrooms had constrained on car sales service and repair side of most dealerships remained open.
However, the recovery in May and June has somewhat tempered by several factors, including less vehicle miles being driven various workforce in part shortages.
Resulting in the corner average down versus the previous quarter.
Going into the Koby crisis, we believe dealers were much better prepared financially than during the last industry downturn.
However, as we mentioned in the last call.
CDK stepped up into that help the impacted dealers during the month of April with various discounts because we believed it was the right thing to do.
Normal pricing resumed after that and Joe will talk about the financial impacts of the discounts.
But I wanted to mentioned the positive impact and goodwill balance generated.
We heard from many dealers that are actions have led to a deeper more strategic engagement with it.
And have I'd like to highlight a few accomplishments that our team was able to achieve and for which I'm extremely proud.
We leaned into this positive momentum and focused heavily on customer retention, which resulted in a wave of renewal activity.
Turning the corner, we successfully renewed over 1200 dealers.
You know the decision to switch or dealers Dms.
Which is their mission critical ERP system.
It's not something that dealers take lightly.
During the last quarter, we did not expect many dealers to make this critical decision to in solid Dms system until more clarity around the covert was known.
However, we actually saw site counts in North America auto increased sequentially from last quarter by three and a year over year by five.
This is now six quarters in a row with old year over year growth and as evidenced that our strategic strategies are working.
The site counts were impacted by Covenant, we saw slight increase in dealer losses during the Q4 and the combination of site closures and bankruptcy.
While we're watching this number closely we believe dealers are weathering the crisis well.
Q4 site counts were also impacted by the rate of installations.
Given the strong backlog we had in Q4, we expect to have our installation teams fully utilized in Q1.
Because of our current sales momentum, we continue to add resources to increase installation capacity.
Sales during the quarter were slower in April but recovered along with the industry in June we achieved our highest sales month.
Over the last two years in North America.
We've had great success with our CDK Uli CRM application.
It's truly a superior product and one of the best acquisitions, we've made.
During the quarter against several key wins.
One of our largest enterprise dealers agreed to install our CDK elitist CRM application and all of their sites to allow for more work to be done remotely and provide a better or digitally connected customer experience.
We also secured a 15 plus site competitive win and a 20 plus site winback for our he lead CRM solution.
Couldn't be happier with the performance of this product.
In addition, our CDK service App is a strong focus for us at an area of differentiation that is gaining momentum.
We've been hard at work building, an attractive subscription base in backlog, we continue to win with our proven capabilities and during the quarter. We secured a 40 plus site win for our CDK service applications.
All these customers had many options to fill their product.
The fact that they chose CDK is a testament to the partnership approach, we take and that value, we bring to the dealers everyday.
Our installation and delivery teams did an outstanding job this quarter.
Not only weren't able to quickly pivot to allow for a remote installs.
But they successfully completed one of the largest installation projects in several years.
As I mentioned on our November call, we run a 40 plus site dealer from one of our competitors and began the phased installation process.
This was a very complicated installation.
And even before you layer on the coven difficulties.
Yes, we completed it with no schedule delays no system downtime and no negative impacts on the dealers business.
It was one of our most successful installations.
And the customers extremely complementary of CDK and our ability to deliver on our commitments.
In looking at our international business. The Covenant rendering has had a greater impact on our international dealers do to stricter shutdown requirements and longer delays in reopening in North America.
Site losses were greatest in the UK, Italy, and the Middle East.
I wanted to spend a few minutes touching on our adjacency business.
While the adjacency business is not often mentioned on our call. It's a great business that generate solid revenue and returns for the company.
It's made up of three main categories heavy equipment.
Recreation.
And trucking.
But heavy equipment and trucking sales and service were deemed as essential during the cold in 19 Chuck.
And provided some stable diversification diversification from some of the auto related industry risk.
Like our auto data, we also track data for the adjacent sees industries.
Included on slide six and seven of the presentation, our grasso demonstrate our North America dealership act activity, but the marine Powersports industry is during the first six months of the year.
Interestingly portions of the Recreation segment had a huge bounce back in the spring leisure activities, such as boating and off road.
Do you guys safer alternatives compared to air travel or hotel based vacation.
During the quarter, we were able to secure a long term renewal with one of the largest agricultural equipment dealerships in the world with over 100 site.
We also closed the key competitive win for our Dms with 15, plus site heavy equipment dealer.
Our adjacency teams continue to do a fabulous job.
I'd like to move on and provide an update on our longer term investment strategy.
The investments we've made in our core business over the last year are helping to lay up very solid foundation, that's providing a long runway for growth.
We've increased both our customer NPS scores and employee engagement scores and aren't a great position to continue leading the industry innovation and helping our dealers as they navigate this changing environment.
We continue to execute execute on the strategies that weve outlined on last year's call I remain confident that they will deliver significant value over the long term.
The capital we've allocated has been invested or tell us and drive flex in our business process modernization program.
And more recently in our efforts to support digital retailing.
So I'd like to provide an update on our progress for these key areas.
Starting with four tell us.
We are totally committed to bring a much needed platform ecosystem to the automotive industry.
For tell us has grown to become an established industry wide network, but exchange of modern integrations in an open architecture.
As evidenced by the over 12 million transactions it generated this year.
The team is aiming to drive that level in 2008 to 10 next higher volume in 2021.
We have confidence in accelerating growth because of the 70 plus active efforts, including 35 introduced this past quarter.
And our strategy to over 40, I SB partners.
The momentum is great to see.
Our new CDK repair order a pie is now live in generated over 100000 transactions with over two dozen software vendors signed up for the installations in more than 30 dealerships.
Our modernization efforts include completing the integration through for tell us of our CDK service out with a non CDK dms to extend our agnostic market reach.
We're very pleased with the progress we've achieved growing the foretells platform and firmly believe and its ability to benefit our dealers.
Oems and the industry for the new innovations and analytical insights that it will enable.
I spoke earlier about our data and the grass on our industry system.
While this data is currently very helpful to our management for looking at ongoing trend.
Our future strategy is to utilize this and other data for continuous development of our application.
Services.
And insights to artificial intelligence and sophisticated data analytics.
These data driven enhancements would allow for innovative solutions, such as predictive analysis for sales and service and actionable intelligence for our dealers and how to optimize our sales and profits.
Moving on to drive flex during the quarter, our dry flex Dms was installed it over 17 new sites.
And we now have nearly three doesn't live accounts.
We have eight Oems onboard and continue to refine the numerous workflows and integration.
Our business process modernization project is making great strides in.
And I'm happy to report that we completed the rollout of our new invoices to 100% of our North American customers.
In addition, we've substantially reduced our employees disputes counts and quote turnaround times.
All of our emissions initiatives are leading to greater efficiency and driving improved dealer satisfaction.
One way that we've played offsets during this downturn was by reallocating some capital investments to enhancing the technology needed for accelerated transformation.
Into digital retail.
That is currently happening within the automotive industry.
Dealers are looking for a solution that allows omnichannel purchase options for consumers from a digital remote buying experience to fully in store transaction or importantly, a seamless combination of anything in between.
We continue to lead in this space with our ability to connect all the various integration calculations and workflows needed to provide for penny perfect accurate.
Quoting a unified solution, regardless of the purchase option.
In May we announced that connected store, our digital online buying solution would be available to dealers for free until December 2021.
We recently launched sign anywhere our new electronic remote signing solution, which enables buyers to complete our transaction without having to physically visit the dealership.
And our deal builder showroom, App, which allows the dealer to be I'm tethered to our physical location, while still connected and able to completed deals.
We also enhanced our heyler application to integrate with our vehicle service product for the safe and remote delivery of parts and services.
Our services.
These are just a few examples of how we are able to pivot our investment allocation to capitalize on fast moving trends in the industry.
We will continue to focus on our proven investment strategy as we enter our next fiscal year and Joe will provide some.
Additional details on this comments.
However, the road ahead is difficult to predict given the ever changing path of the covered pandemic.
The wide range of possible outcomes is holding back our ability to confidently forecast long term out.
When we have a greater visibility on the macro environment will be in a better place to provide annual guidance.
Still we are in a great shape to continue our progress to achieve our goals of integrating and innovating across our portfolio and creating long term growth and value for all our stakeholders.
We're in a position of strength and have a unique opportunity to form differentially.
Even in today's challenging environment.
CDK is going through a strong execution phase of our development and how we perform in the deployment our capital will be critical.
In addition to as CFO responsibilities, Joe charges has played a pivotal role in driving new strategies in June we announced that Joe will be our new CFO position that we'll continue to leverage the strong execution skills to carry out coordinated and focused strategic growth plans.
Enjoy working with Joe and I'm confident is believed to build on our momentum.
And carrying forward into the future.
Now before I turn the call over to Joe.
I'd like to recognize the mini sacrifices our employees have made over the last six months.
Even to all of the disruption caused by the shutdown.
The dedication and our culture of innovation continued to spot.
There are great team and I'm very proud of their efforts and the value they've demonstrated through the crisis.
I sincerely hope that 2021 will be a year that will pave the way forward to a safer world and the return of economic prosperity for everyone.
The strength of our company.
Talent of our hardworking people and the response of our customers as they recognize our commitment to their success.
Gives me great confidence in the future of our business.
I look forward to continuing to deliver on our promises and updating you on a future costs.
So thank you now I'd like to turn the call over to Joe.
Thanks, Brian and Hello, everybody.
Before I jump into results I'd like to say that I'm really pleased with how the CDK team put together to deliver the fourth quarter results. We did in the midst the facing an unprecedented crisis.
In addition, as I reflect on this past year I couldn't be prouder of the job. We've all done to improve the foundational health of our relationships with our customers as well as with our employees while investing in the foundation that will allow us to grow both revenue and profit well into the future.
Before I share the financial results given the impact Colgate has had across the numbers I think it'd be really helpful. For me to share my insights around two items.
One what was the impact of that cold it had on the business in the quarter.
And to what did I see in the underlying business when you set aside all the noise.
As a reminder, any comments I make around the underlying business on a directional as it is very difficult to pull out the specific impacts of installations sales and such the truly strip out all the cobot impacts and get a view of the underlying business.
At the time of our last call we were in the heart of the broad based cobot shutdown cases were rising we were all working remotely many dealer showrooms were closed and there were no discussions about reopening.
We provided some details on what we thought would be that potential financial outcome. If these conditions persisted through the quarter and put them in three main buckets customer discounts.
Lots of transaction revenue.
And delays in work in installs.
We gave a range of outcomes for the impact from $60 million to $110 million.
The good news is we've been able to perform better than our forecast as a result of the CDK team managing the total impact to roughly the very low end of the range, we provided at around $60 million.
These impacts were strong across different revenue categories with reduced subscription revenue as a result of customer discounts and credits.
As well as lower installations during the shutdown.
We saw reduction in other revenue as well as onsite revenue streams, particularly related to the international business due to delays in project work.
Our transaction revenue was down about $10 million, which was much better than our original estimates and reflects the improvements in auto sales during may and June.
Now, let me discuss the second item about how our underlying business performed about the impacts three coding.
I'd like to provide a few highlights on the core fundamental drivers during the quarter.
When I look at the North America business I see healthy underlying revenue growth that is roughly consistent with previous quarters.
Core drivers continue to come from a combination of stabilizing site counts and growing revenue per site as a result of gains from key applications like ERP CRM CDK service and document management. In addition to the benefit from more upfront recognition of certain lease revenues.
As I look at the underlying international business. We also continued to see their revenue growth that's very much aligned with the year to date revenue growth of the business as a result of higher penetration of solutions and BMS upgrades tempered by continued pressure on site counts.
Overall, we came through the quarter relatively unscathed and our underlying business remains robust.
Our performance demonstrates the resilience of our subscription business model and we believe that our indefinitely strategy will continue to provide the solutions and capabilities necessary to achieve our long term goals.
So now to summarize our fourth quarter results.
Total revenues were 450 million barrels down, 8% with North America down, 8% and international down 9%.
Breaking down reported revenues into the main categories, starting with subscription revenue, we soft fourth quarter decline due to the impacts of coal good primarily driven by a 7% decline in North America.
North America Auto sites were 8951 up five over Q4 last year and up three over last quarter.
We successfully cap or year over year site growth workers going for six quarters, interwell, even with a slight rise or dealer bankruptcies during the quarter.
Revenue per site in North America Auto was 8000 in $34 down 8% due to discounting with recurring revenue down in both the three plus and want to say groups.
The adjacency business continues to really be a bright spot.
Sites were up 33 year over year, primarily due to strengthen the heavy equipment space and industry consolidations.
Customer discounting in the recreation sector also impacted adjacent see revenue per site, which was down 3%.
Our international subscription business continues to see healthy performance on an underlying basis through incremental installs of solutions to existing dealers and higher Dms revenues through migrations to our auto line drive product.
Subscription revenue from our international segment for the quarter was driven by declines in both sites and revenue per site due to the impacts of coffee.
Turning now to the other three revenue categories of transactions onsite and other.
As expected transaction revenue was down in the quarter due to lower volumes of vehicle registrations and credit checks, especially during April.
As Brian mentioned, we saw recovery and sales activity during May and June which helped offset some of the earlier losses.
Overall transaction revenue was down 22% than accord.
Onsite revenues were impacted by declines in our international segment.
Revenue was down 5% due to delayed project revenues and lower call center business, partially offset by benefits from more upfront recognition of certain loose revenues.
To highlight some of our annual results. We ended the year with consolidated revenues of $1.96 billion up 2% year over year or 3% on a constant currency basis, driven by growth in North America of 3% and sweat revenues in international.
Without the fourth quarter impacts of coded there I mentioned earlier, we're quite pleased to see annual revenue would have grown around 5%.
Now turning to earnings.
Fourth quarter EBITDA of $170 million was down 12% year over year due to covert impacts and strategic investments, partially offset by expense savings and reductions in incentive compensation.
The team did a really good job of reducing discretionary spending and hiring and we ended the fourth quarter with a margin of 37.8%.
Full year, EBITDA was $751 million down, 3% and was impacted by Cobi as well as continued investments in the partner program transition.
EBITDA margin with 38.3% for the year.
At a segment level North America pre tax earnings were 142 million for the quarter in 647 million for the full year with margins of 37.6% and 39.5% respectively.
For international pre tax earnings were $17 million down 18% for the quarter with a margin of 23.7%.
For the year earnings were $73 million with a 22.8% margin.
Recall that we implemented a restructuring plan earlier in the quarter for the international business for which we incurred a charge of $14 million in Q4, as we completed over two thirds of our planned changes.
We expect to incur another $15 million a charges during the first half of 2021 as as we complete the final actions we laid out.
The purpose of the restructuring plan was to better align revenues and costs and we expect international to achieve close to 30% ABT margins exiting fiscal year 2021.
For the total company, our effective tax rate was 25.2% for the quarter up from 19.2% in the same period last year.
And 24.3% for the full year.
Quarterly diluted earnings per share were 67 cents down, 24% and $3 in 17 cents for the year down 5%.
With respect to our year end balance sheet and liquidity position cash was $216 million of which 175 million was held outside the United States.
Access to liquidity remained strong with more than $700 million available on our revolving credit facility.
Net debt to adjusted EBITDA was 3.3 times.
Which continues to be above our 2.5 to three times target.
As a result, we do not anticipate any material share repurchases in 2021.
Annual free cash flow was $282 million, which was lower year over year, primarily due to litigation settlement payments in prior quarters as long as the impact of co bid on earnings.
We feel very good about the level of free cash flow generated in the fourth quarter I just want to recognize the efforts that are sales and finance teams have done to collect our outstanding receivables during the quarter to generate strong level, our free cash flow in the midst of what was very difficult quarter.
Just continues to show the strength of the CDK business model in the value we delivered to our customers.
During the quarter, we paid out $18.3 million in cash dividends to shareholders.
We expect to continue our normal quarterly dividend paid.
Moving on now tore thoughts around 2021.
We worked really hard to minimize the impacts of Covidien Q4.
But the lower installs due to the shutdown in Q4, and the uncertainty across Europe, and North America around how dealers will open and remain open has made it difficult for us to confidently forecast the year, let alone even the first quarter.
Instead, well our general policy is not to talk about our quarterly views. We recognize that these are exceptional times. So I would like to give you. Some got guide rails. There are framing our thinking of Q1, which should help you understand what we're working to accomplish.
When I think about Q1, we would expect to see continued good underlying revenue growth in the business.
Reducing this growth however would be the impact from covert largely in the same three buckets that we previously discussed.
Number one amortization from Q4's customer discounts number to lower transaction revenues and three delays in project work in installs.
For the first bucket, we expect the amortization from the prior customer discounts will be lower by about $15 million. In Q1, then the amount recognized in Q4.
For the second bucket, it's difficult to predict the potential revenue impact on transactions given the current dynamics, we're seeing what the unknown progress of the koby pandemic and related economic uncertainty.
For example, some states could potentially shut down again limiting dealer show room activity or further although inventory shortages.
Should production not come back to meet demand.
However, as Brian mentioned, our CDK data on the auto and adjacency businesses show signs of improvement, which would help offset some of the downside risk.
For the third bucket, we expect some ongoing project work delays, particularly in the international markets, where our dealers continued to be impacted by a slower recovery.
Which will impact our on site and other revenues during Q1.
Also it is unknown, whether the delays in installations, we experienced during Q4 due to the shutdown will continue and what impact if may have on future subscription revenue.
With respect to fiscal 2021 or needs. We continued to be very thoughtful around our cost containment efforts to prudently mitigate the negative impacts the margins associated with coded as well as defined our ongoing investments similar to last year, we expect approximately $30 million of incremental investment in fiscal.
Your 2021 to support our technology innovation and customer focused strategy.
As I reflect on the current results and future opportunities I'm reminded that we are in very different company than when I joined.
We've put our customers and innovation front in center.
Well the environment has created many challenges I believe the combination of our CDK team, our software and our data and insights to position us well for the future.
I'll now turn it back to the operator, and we'll be happy to take your questions.
Ladies and gentlemen, if you ever question or comment at this time. Please press Star then one or your telephone keypad.
If your question has been answered or you wish to remove yourself into Q simply press the pound cake.
Again, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Our first question or comment comes from line and it's a pheno from Oppenheimer. Your line is open.
Hi, great. Thank you very much I'm very good job considering what's going on.
My question would be helpful like understand what the current environment, maybe some of the quarter or maybe what you anticipate in future quarters as it relates to may be dry flex and you're kind of ability to maybe implement that and grow that deeper is that becoming maybe a substitute.
Your cord Vms product at the dealer pressures or you get it may be smaller deals converting more aggressively in this environment, maybe just any other color you that give us.
Surrounding that that'd be really helpful. Thanks.
Sure I can start and then Joe can jump in so first thanks for the the recognition of a good quarter. It was it was a great quarter and we were constantly navigating through various issues that I think the team just adopted very well.
Got flex continues to to do very well we.
Oh, we'll go out of.
The quarter out about no 18, installs will average between 15 and 20 installs.
Per months as we go through the rest of this year.
Our goal is to exit the year at 20, plus installs per month, there's a backlog of about 100.
Or so somewhere around there right now of installs and it's a mix of one and two rooftop dealerships.
And independents and so what will focus on as we go through this year is to further do integrations, what what keeps us out of the bigger dealerships are is some more the application integration and then the multi site accounting features you have to be able to go across various over.
You can see we've increased the number of Oems that are certified on the on the platform now.
I will should be able to finish those out.
As we go through this year as well so continuing to do well.
And we'll continue to focus more on the water to rooftop and independents this year.
And start to migrate.
What we really doesn't know is like I don't want to have you.
Think differently and maybe one of these times will have my house, our CTO come on it and actually spend some time talking to you guys about our strategy, but we actually think the lot of the things that come from Dr. flex the CPI based structure the micro services.
Improve database.
You are you actually improvements can be brought into dry and the advantage of doing that is very very big enterprise class.
Dealerships.
80 to 100, plus those it take a long time before we could convert them to drive flux and instead, we think we can bring all of those features to drive over the next 18 to 24 months and do them in quarterly drops. So it's not a transition. So this is how we get dried flex.
Like application and usage into the drive database at a much much faster rate. So we'll continue to to utilize drive flex and eventually probably three to four years from now the two codes will actually merge into one product.
So you're going to see this kind of.
Think of it as two vectors coming together four or five years three four years from now whatever out there in time, we're still kind of pulling that down.
And they'll come together in kind of a mutual way, but they'll come together in a way that the people on dry who are the big users get a lot of those usages, along the way and quarterly drop. So we're really excited about the strategy we've put together.
Dr. flex is going great like I said 15 to 20 among friends.
We'll continue to increase as we go through the year.
Okay, great. Thanks for that.
Okay, no no not much lubrano. Thank.
I think it's overwhelming covered it well on on draft Watson in driving and you know and we look at the year end.
Particularly fourth quarter in so many moving pieces and just really very proud of what the team's been able to global.
Probably the other thing that I'd like to say it drive flex who gave us.
Intage It we're able to do that drive flex installed. It was the first one were able to do completely remote.
And so it's been quite nice, especially in independent.
Dealer smaller dealers, we couldn't do the whole thing remotely.
And then just send one person out to do some training.
Maybe to people at most so we can really do it in a low contract.
Mode, which in this kind of environment has worked quite well for some of our dealers.
Who aren't ready to pick a lot.
Vendors on site.
So it was the first one we've done a lot of the other ones now remotes as well you read and even our drive installations have been remote and in many cases so.
But it actually was one of the first ones were able to date, which is a real advantage.
Great Great. Thanks, and also you know.
Brian I think you mentioned, the 5% growth than I think Joe you made mention that too.
Is that something that we should expect maybe going forward.
I know, obviously, there's cobot issues and stuff like that but if you adjust all that out it's up 5% number.
The right growth number.
I'm going to be higher should it be lower level of the how are you actually thinking about that 5% number.
As far as you're certainly growth number.
So I could start and and Joe will have added indoor correctly, sometimes I I get ahead of myself I you know.
Coverage the hard part right. So if we factored out coated at the there's no coated in the world, Yeah, Joe and I feel more and more confident in our mid single digit forecast for the next few years of growth.
And I'd tell you we continue to see.
You know, how we're going to do it and just proof and things like you know the June sales being the best sales month in the last two years is just a great example, right that's where you get the growth.
Number of quarters of <unk>.
And all the this is where we get it and then and then our confidence in the technologies that we're going to be bringing right. The improvements we're doing in CRM in service and driving Tech flex all of those things continue to give us that insight into the next few years that we can continue to grow in those mid single digits coverage the big variables I want.
To that away and say look you know that's part of why we didn't do a forecasted.
Very hard to predict what's going to happen state by state country by country.
And now I'd tell you that Joe and I asked I mean.
Creasing amount for Carlin part of why we did the change in moving Joe to see our goal is to to really get have him and I spend more and more time, but what does it take that grow beyond that mid single digit how do we do either through other innovations expanding our market.
You know looking for all kinds of opportunities, we continue to see them and we want to go execute on those.
But the way to grow beyond that mid single digit is by expansion of the market and the products that we offer.
Yes.
Yeah, I didn't I like the way, Brian put it and that's what we're focused on the and I think now that we're pretty far into the transformation and we're seeing a lot or the health signs of the business improved and accelerate I think there with the three tranches. We think about it is sort of the core in in the course performing.
Well one thing growing and then there's so many organic opportunities now that are coming from the teams. When you look across the portfolio and it's just a matter of us prioritizing, how we allocate capital against those and really going into those opportunities.
Well, notwithstanding the pine thinking about inorganic opportunities.
But are nice attachments into our into our business and others like Brian said really focused on expanding the Tam.
With the confidence we have so feel good about the even with the quite a good position to really go deliver and we'll manage through well do certainly a fiscal 2001 boast of some cobot impact, but beyond that I think we're well positioned for the long term.
Thank you. Our next question or comment comes from a line of Dave It to got from Evercore ISI. Your line is open.
Thank you.
Can you talk about the trends you're seeing separately at the low end in the high end of the court Dms business and.
You know specifically are you seeing any further client attrition at the low end to the market.
Sure So I can start.
And once again, Joe can can jump in.
Yes. It means there's certainly a difference between the high end at the low end, we saw the high end.
Bigger guys, maybe they we knew of acquisitions they were thinking of doing pre co bid or.
Other strategic moves we saw those slowed down.
We saw them exit from some low performing.
Sites.
Either through sales or closure.
And so you saw then kind of hold their strategy.
And I think they are getting stronger.
Definitely in some of the smaller sites, we that's where we saw more of the closures.
But like I said, if you if you took the overall perspective, though that the amount of that a number of impacted sites so far at least.
It's it's actually better than prior downturns that we've seen.
So overall I'd say, it's performing better than the power, but definitely you're seeing more of the closures coming from smaller side and more about call. It the strategic decisions being done by the big guys either through slowing down some acquisitions that were maybe deemed risky at the time or you know a writing.
Their stores to the higher performing stores.
Joe anything else.
No nothing additional.
Got it and then just as a follow on to that you called out.
You know some reduction in price breaks.
You know over the last couple of months can you, perhaps sort of drill down into underlying pricing trends expected an AFE why 21 as a whole for the core damaso business.
So I'll jump into that I'll take the lead so when I know us I think there's also as Brian said, a lot of uncertainty with with how things play through.
With coated whether its into the fall and winter you know and so right now I think it yeah, we're certainly planning for and approaching things as normal course of business as we drive the team folded into business forward.
That said, we'll continue to update you as we get more experience with that how things unfold with recovery, whether it's in North America or international.
And just finally, if you could give an update on capital allocation priorities.
Sure.
Well, but go ahead, Joe you could start this one.
Yeah, unless I think from a capital allocation priority. We're very you know where we're really pleased with what happened in Q3, right. We had been paying down debt throughout the year and and we were well positioned to refinance.
Our debt structure, and we have $700 million of borrowing capacity availability and you know right now again, what we're continuing to it to be very thoughtful around how we.
Plan capital allocation and on our posture is there were 3.3 times not that we adjusted EBITDA Levered.
Continue to look at buying down debt, then and focus on preserving and growing free cash flow as we work through a little bit Workday 2021, we're not calling in any material share repurchases at this point and well continue to maintain the dividends and again, it's one of those areas, where I think as we get more clarity around.
And the certainty and the other side of coal goodwill will provide updated viewpoints from there and I think that puts us in a nice position really have flexibility should we issued to see puking inorganic opportunities or else anything a friend unit.
No I think you said it really well Joe I think you know we have a real focus on free cash flow right now and I think like a lot of companies.
We learned during coated how to save money right.
In a variety of ways.
Doing without things that you didnt need and a lot less travel.
Or all of those we've taken to the bottom line.
And we're going to continue to do that so we're not going back to quote normal from that perspective, we're trying to capture as many of those savings as we can't carry them into our plans for 21.
And then and then the only other thing I'd add on pricing is right now I. Just if you look at everything whether its pricing or whether its installs and all of our operations, we're assuming that.
On a day to day basis that coated remains.
In shock and that there are further closures that impact or our customers and things like that.
With a looked out we'll constantly adopters that comes through if it does come through so we're not planning any further.
Price reductions were planning for a normal year.
But we're ready for whatever comes around the quarter.
Understood. Thank you very much.
Thank you. Thank you. Our next question or comment comes from the line of Matt fruit from William Blair. Your line is open.
Hey, guys. Thanks for taking my questions. It wanted to first start off with the comments about the the sales strength that you saw in June and maybe you can just provide some some more details on that sort of curious to know if what performance what products were performing well and then you know is this.
Coming from demand from new customers or wherever you're also seeing good demand selling back into your existing customer base.
Okay.
So I can start.
In the future this will be more and more Joe as he takes over COO role dog. So this will be hard.
You know I tell you that the sales were across a broad spectrum of products.
The Dms was strong CRM had a great quarter service continues to do quite well sorry, all of our fixed operations.
Products continue to do well.
Some of our Ethernet products, so there's really across the board for the most part.
And I'd tell you that it was a mix a lot of the app layered applications, so CRM and such who are more into existing customers. So we told you one of our large enterprise customers did a very large CRM.
Purchase an agreement with us.
The Dms is mostly through either acquisition or.
New customers that are coming from our competition.
Yeah, the only thing I would say listen I think we've set ourselves up good for Q1 around our backlog rightly is something that momentum we have a very good backlog grew up as the Dms, whether it's a service application or CRM application I think the sales team. So proud of the work that they did in in June.
To really get back at it even with some of the travel restrictions and shutdowns and and just the relationships that we continue to build a bear with their customers and that's a nice blend of new and existing.
Got it and also wanted to dig in to the site count for North America dealerships being up sequentially it pretty impressive given the.
Headwinds of bankruptcies and continued.
Implementation delays, so maybe just give us some more details there how does that.
Gross adds maybe normalized for some of those impacts versus where you would have.
Expected or want to be.
Yes, Matt maybe I'll start and then blended thats. Okay. So you can either.
When I look at the site count first of all on installs, it's actually interesting in fourth quarter installation team did more installs than they did it another third quarter and that he just did a great job adapted and and like Brian said doing virtual installations as well as what customers will.
Actable onsite installations and the we finished our most complex.
Customer implementation virtually.
And got just incredible marks.
Remarks about the quality of our virtual installation. So it could certainly presented an opportunity for how we think about our installation model and continue to improve the customer experience and deliver a more efficient high quality outcome.
And then I would say the second part like you said, we had a lot of momentum coming out of Q3 in Q4 pre coakley that we saw in the pipeline, we expected a much higher level of installations, so that dampened a a bit the quarter site count and then as Brian mentioned to you brought up there was a bit of an uptick.
And what we classify as out of business and that was really more and the one to two dealers and that had a big enough effect, where it could have been a really positive quarter from a site count perspective, we're pleased with the with the positive sequential improvement and we're just focused on delivering and coming out of the gate a strong in the first quarter.
Great that's helpful and that's it for me thanks, guys.
Thank you. Our next question or comment comes from the line of Charles Maiden from Wells Fargo. Your line is open.
Hi, guys. Thanks for taking my question I wanted to dive into the earlier question about large versus small dealers in a slightly different way, it's pretty clear listening to commentary from the large public dealers that there's an emphasis on digital investment, but my question is how my question is how ready or.
Mall to medium sized dealers as the market moves more towards omni channel and digital sales and I was just wondering if you could comment on the opportunity the penetration levels you see there as well as you know maybe some specifics around the independent dealer market, which you've mentioned the pass as an opportunity.
Sure I can start.
[music].
I tell you that the smaller dealers, it's it's a real.
You know kind of a bipolar situation. There are some of those smaller dealers who are quite sophisticated.
Hi, I know some of them who you are owned by guys just come out a private equity in a variety of of you know really well run two three rooftop even one roof top operations.
Bare actually quite prepared to move to the digital platform and they're they're excited and they're moving relatively quickly they actually can be sometimes more nimble than the big guys.
And then you have the other side of the small guys that are not ready at all this is well beyond them. What we're trying to do is continue to simplify our tool set so that it's simpler and it's easier for them to make this transition. So I think are the onus on us to to help them get through this.
And be able to do that in a simplified way.
And the independence or are not anywhere near that space yet.
And so we have to get that into dry flex and get that as well easier for them to do.
And so that's kind of how I look at it is it's kind of up bipolar world, where there's a group that are not ready and we've got to help them and then a group that is actually quite sophisticated and very capable.
Got it and as a follow up could you comment on whether some of the discounting on apps such as connected store has driven demand for complimentary products such as you leave for example, and if so.
When we get potentially see revenue some of that revenue materializing from demand.
It has and in fact, we gave away the or there are couple versions of our connected store for example, even there's the basic version of the there's like a patent version.
We get whether the basic version, which is quite capable.
And what we saw was actually a significant number of customers, even just upselling or upgrading to the ER.
Putnam version, so we see some of that going on and then yes. We are seeing as people look at us they're looking at Oh look I can I can use that I can connect that to your lead CRM like a connected to your service more easily.
And so we are seeing some cross selling its probably we don't really track that as well right rich, it's a little bit harder for us to always make those connections because oftentimes there are aligned at the same time, but you definitely see the relationship getting deeper and deeper and then you know just remember the connected store the whole idea this digital retail.
Our experience is to have a continuum. So we don't think that every buyer is going to come in and say, okay. What everything to be online until the last two signatures and even Dod I want to try.
It was remote as I can we think people are going to want to come due to the store all along that continuum and our product is designed and we're trying to continually improve it such that you can drop out at any point from the online experience into the store and have everything carry through and everything the ping perfect from that.
Sandpoint right. So you don't get a different price, but when you are looking at your car Abi and then you go Keller walk into the store down to a quick test drive the and take it that pricing stays constant through there. That's what are the most important things because that's all about trust trust on the consumer side Trustco the dealer and then the dealer.
Trusting us.
Got it appreciate the color. Thank you.
Thank you. Our next question or comment comes from the line of Gary Prestopino from Barrington Research. Your line is open.
Hi, Good morning, everyone. Good afternoon, I mean, they in terms of digital retailing, you mentioned <unk> connected store, but you also mentioned a couple other products that we're selling you sold this quarter could you maybe just give us.
Idea of what kind of products that you have for digital retailing and if not having a web site business now puts you at somewhat of a competitive disadvantage afford for assisting deals with digital resale.
<unk>.
Sure.
Let's just talk about digital retailers so.
First let me answer the last question first that's probably the most simple clear it not having a digital marketing portion of our business is not a negative at all in fact, if anything it's a slight positive.
It makes it because what you really want to do no nobody's going to come in through one path right. So people are going to come in through JD power dot com or KBB dot com or a dealer website or an OEM website, and you really want to be agnostic to that entry point and so not having our own web site business.
Actually makes it easier for us to partner with third parties and we'll do that true portela. So you want to ingest from every source.
Not not have a competitive position necessarily from those omni channel sources, so that that that's the answer to that portion of the question.
From a digital retailing standpoint.
Main product is the connected store there are other products people are going to want to have that are tied to the financing an insurance poor should.
We supply some of those are we supplied connections to third parties for those as well there may be ties into service again that tie a you know, let's say you want to do some upgrades to your car and that needs to get booked into service those all need to happen as well and then youve heard us talk about heyler.
Integration, so we care whether your car what are your buying a car or whether you're servicing the car. We took our Hitler application, which was designed towards lift.
And picking your often dropping you off into.
Dropping off your car or picking up your car.
For either maintenance or purchase.
And so that whole process now can occur through that application and that is being done by the dealer typically they may still use a lift or something to go through that but it's not necessarily that's more scheduling the dealer resources. So all of those are put together into a continue right you've got to you've got to bring the customer in.
Through those ueps.
Then.
So the Dms connect them into the CRM and that's what connected store is doing is really doing all that through that and then allowing the various finance and insurance options for pricing.
This call it the yet whether you want to do lease or purchase all of that is got to connect to serve it has the connection to all of those other application.
Okay. Thank you.
Thank you. Our next question or comment comes from the line or Josh Bear from Morgan Stanley. Your line is open.
Thanks for the question I just had a clarification on me investments for for a 21 of the 30 million is that above and beyond.
What was spent and for Tony or you're just highlighting that.
There would be another 30 million for innovation and customer facing strategies.
Sure. So I'll take that go ahead.
That's what no no no Doug.
Yeah.
At this though we've shared in the past we've got a really good roadmap or four would allow and modernizing the technology and that's that's a lot around dry flex around our legacy applications around building out for tablets and beyond that there are opportunities around the business process.
Limitation program that we continue to invest in sort of $30 million as incremental that we are funding as part of our underlying business performance in incremental to the number that we incurred in 2020 and consistent with what we've shared the in the past Brian anything else you there.
No I think thats the important thing is.
We wouldn't we originally gave you that twentytwenty forecast, we told you what the total product project would be another would occur over roughly three years.
And this.
21 number is right in line with that and most of the spending is in headcount.
It engineering to.
Really support the modernization and or some.
Software consulting fees, if it's going towards the ERP and some of that work. So it's you know really in resource based products.
Got it if I could sneak in I was just wondering if you had a quick update on the CFO search maybe what and what.
Kind of background, nor experience you you're looking for and then it was also wondering for Joe and the new role on you mentioned some of the high level growth opportunities that that you'd be looking at I'm wondering if any more detail or.
It's on on the cost side for North America.
Let me start and then Joe can add it looks pretty difficult to replace somebody like Joe So.
Saudi to search, though we've we've got a consulting company to help us go through that search.
We're looking for somebody.
Automotive experience would be nice, but not critical versus software SAS.
Technology experience.
And you know we're looking for people who are.
You know used to a high growth environment and understanding how to help prioritize investment.
Across.
The enterprise because that's really for me I really look at the CFO is helping me to a couple of thick manage the cost understand our revenue.
And how the.
Subscription process is really playing out and then helping really prioritize based on a net present value and return on invested capital.
Are there, where we want to make investments in how to prioritize those because as an engineer I can come up with a million ideas I look for the CFO to really help me say, okay, well at least one is it really cool idea, but you know that was going to never pay back to the level you really want to this one over here. Brian is really you know, it's what has a great.
Payback and here's how we're going to track it I look for the CFO to really help me with those things. So those are the kinds of experience we're looking at.
It's really just started where a couple of weeks and we started interviewing some people the board's engaged.
And that's kind of where we were right now and then and mid but in the meantime in Joe is just you know he is still the CFO as what it really mine people. So we announced that we made it varies.
Clear.
So that you know you as an analyst and Investor don't worry that the wheel hub in good hands, Bill with Joe and I Love It.
Yeah, and then maybe I'll just add to your second question then of course, though.
Brian I really appreciate your comments and Brian has done a very good mentor to me and how we've really repositioned the company and improve the health of the and think about to how we innovate and create such a broader opportunity for the company and it's fun.
And it and it really is exciting for me to get a chance to work with our teams to better understand what they face day in and they out and really lean into accelerating growth bind and I talked about the little bit earlier on the call you're going to hear us continue to drill down and give more details as we go forward around the first bucket the industry.
Strengthening the core and I think we're doing very good there, but I think the best is ahead of us around site counts and and continued penetration in our applications and our core business.
The second are you asked for a little bit more details.
I don't want to get ahead of ourselves, but you know we yeah, we're thinking of different innovative ways to bring different solutions to better through propel US one partnership we've signed in the in the last quarter, So as a partnership with global payments.
And how we think about modernizing the payment process for the dealer and just make it so simple, particularly when you think about payment processing in this more virtual environment and that there is such an opportunity to continue to help solve dealership pain points in accrue.
The customer experience and you're going to see I think a lot of these things now available as we've improved the relationship with the dealer and they're looking to us to bring ideas around improving their business and then the last piece that will be in very thoughtful about very careful about but there is a number of inorganic opportunities that we look at whether a can bolster our.
Digital retailing position or whether it's different the market that would make sense to bring in to the core business that are synergistic yeah, we couldn't be happier with the performance of the easy to acquisition and what's that done to customer satisfaction of completing our portfolio of products and also to accelerate in our core organic growth.
So I think we're well positioned like Brian said, I'm very very focused on the CFO and hoping Brian and the board at the CFO search and I'm excited to get a strong partner to what is a strong leadership team.
To really drive the next phase of this opportunities we see ahead of us.
Thank you.
Thank you.
As there are no more questions in the queue, ladies and gentlemen, I would like to thank you for your participation. This concludes our call and you may now disconnect everyone have a wonderful day.
[music].
[music].
[music].
[music].