Q1 2021 CDK Global Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2021, CDK Global Inc. earnings Conference call. At this time all participants are in a listen only mode later people.
Just a question answer session to ask a question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, It's really Slater director of Investor Relations. Please go ahead ma'am.
Hi.
Thank you and good afternoon.
I'd like to welcome you to our first quarter fiscal 21 earnings call joining me today.
Our CEO, Brian Christianity, and CFO, Joe Couches following their prepared remarks, we'll be taking questions.
Our earnings press release was issued after the close of the market today and is posted on our Investor Relations website at Investor that CDK Global Dot Com, where this call is being simultaneously webcast.
In addition, our website also includes an updated ekso schedule and a copy of our results presentation that we will be referencing during our prepared remarks.
Unless otherwise noted all references to financial amounts during our call are on a non-GAAP adjusted basis.
Reconciliations of adjusted amounts to the most directly comparable GAAP amounts are included in this afternoons press release.
Please also note that all growth percentages refer to the 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.
Thanks, Julie and welcome everybody to our call.
This month marks my two year anniversary of the company.
What we've accomplished together in that time is literally outstanding shares.
CDK started on this journey with a goal of making the complex business of automotive retailing easier simpler and more connected.
We began with a massive shift in our relentless focus to the customer centric and to work in partnership with our dealers and Oems.
The solid core of our flagship business solutions the Dms.
The applications as.
That's proven to be a key building block to dealer workflow efficiency.
And profitability.
Combining our scale and our decades of automotive experience with our strong relationships with Oems third party vendors and dealers.
CDK in a unique position to lead the industry to its current transformation.
Which is to connect all the various fragmented pieces of the ecosystem.
Through a common platform.
The benefits of a connected ecosystem to this industry are huge and disruptive.
Just think about the increased value of your phone with Acs were added.
That's what we're doing.
We are transforming the way the entire industry connex.
These connections centering on our industry, leading portela platform together with a vast amounts of information that flows through them.
To enable a more seamless experience when buying or servicing of vehicle.
Which is what everyone wants.
Our platform will also be a powerful foundational tool for the development and distribution of data driven insights to help dealers Oems partners and the entire industry.
And what I'd like to share today is that this is just the beginning.
Well, we've already achieved the tremendous amount I envision so many amazing opportunities for CDK to continue this process on leverage what we've built into the future.
Those of you, who don't know me well I'm, a little bit of a data geeks. So pleasing doles my deep dive into how I see us rapidly innovating and using more of our data driven insights to provide what our customers need both now and in the future.
After touching on our Q1 financial results I'd like to provide some more details on our strategy for the continued strengthening of our core business.
And to offer a glimpse of where this journey of connecting the ecosystem and expanding our platform.
Integrations into insights can take our company and the industry.
So let's start with the Q1 results, which outperformed all of our expectations.
Revenue of $494 million came in at nearly the same level as the first quarter of last year.
This is an amazing accomplishment, especially since it included the ongoing accounting impact from the discounts we gave our dealers to support them during the height of the Covance shutdown.
On an underlying basis, we're very pleased with the healthy growth of the core business even.
Even more impressive as our bottom line reported earnings of $195 million, which increased 4% year over year and produced a 39.5% margin.
All this while continuing to invest in our business.
Sales were off the chart during the quarter. In fact, this was our strongest first quarter on record for both total sales and our Dms sales.
We've had seven quarters in a row of year over year growth in North America auto sites, which are up by nine and sequentially by 15, and we're making progress in the one to two site group with the lowest level of losses six quarters.
Adjacency sites were up 29 to their highest level on record.
I am extremely happy with these results as they underscore the intrinsic health of our core business and our dealer centric model will allow us to continue our journey to accelerate growth well into the future.
So how did we achieve these great results at the same time the industry has been dealing with coated.
Let's start to answer that by taking a look at the CDK auto market industry charts, and the presentation slides.
You'll see that we've added another chart this month.
This this one is on the volume of credit checks run through the system and.
And the change over last year.
Overall, the trends are showing that dealers are being very nimble about quickly evolving to a new way of operating and selling as they adjust to the impacts of coated.
The huge wave of digital transformation is about more than just being able to sell a car online.
It's much bigger and is centered around dealers changing their internal operations to improve the entire consumer experience.
Consumer behavior is shifting.
And the dealers are increasingly realizing that the true competitive advantage lies in providing meaningful consumer experiences that are personalized efficient and cohesive across all channels and interactions.
Whether online or in dealerships.
It's all of the touch points, a dealer has with their customers from marketing and sales to service and maintenance.
Creating a seamless and compelling customer experience.
Matters now more than ever.
Especially given the increase in auto purchases by younger people.
45%.
Our under 35 years old.
This doesn't necessarily mean everything must be online.
But it does mean that consumers don't want to spend three to four hours going through repetitive paperwork and inverse negotiations.
So dealers are using tools like our connected store and sign anywhere solutions to simplify the buying process.
What makes our full suite of digital retailing products. So powerful is that they help unify the end to end experience from online to showroom.
And manage all this information across multiple sources to deliver our 360 degree view of the sales.
And provide a streamlined buying experience.
But the digital transformation extends beyond just selling.
The dealers are looking across their entire enterprise and adjusting their operations to a more digital connected and remote everything environment.
From touchless payment systems to more cloud based workflows.
As one example sales of our dark cloud solution were up over 50% this quarter.
There are also many dealers today, who still don't have the reliable high speed networking connectivity they need we.
We've seen nearly a 200% increase in sales of our cloud connect service, which provides modern software defined wide area network for fast continuous and dependable internet access.
And there is really so much more.
This is why we're continuing to invest today to capture more of this massive market.
Develop the solutions connections and data driven insights that dealers are demanding.
This multiyear journey began with strengthening our core business I'd like to spend some time discussing where we are in the process and what to expect going forward.
Ill then share how we are leveraging this core to expand into opportunities beyond just what CDK has done historically.
To provide a peek behind the curtain into my thoughts I'd like CDK will look like in 2022 and beyond.
As we continue to make meaningful progress on all fronts, but biggest focus. These last two years has been on strengthening the core of this business.
And that the value that we bring to our dealership industry.
We've made tremendous progress, we've enhanced and expanding our customer relationships. Our NPS scores are positive and growing and our focus on being a trusted advisor to dealers Oems and partners has led to numerous proof points that putting our customers first is the right strategy.
I'm also happy to report that we continue to make significant progress in our efforts to address customer concerns and transform our approach to the partner program.
Better allocating value across our solutions.
All while working hard to absorb any additional headwinds.
Our internal business process modernization program.
Hear me refer to as part of operational excellence excellent.
Has moved well beyond just providing dealers with new and better invoices.
It will be a complete redesign some dealer facing quotes and installs to our internal accounting and payment systems, all centralized and streamlined for efficiency and unified in a new cloud ERP.
Strengthening this part of the core has and will continue to improve dealer satisfaction.
And.
Our internal operating efficiency.
We've also nearly completed the restructuring of our international business and Joe will explain in more detail later.
But already our margins have begun to significantly improve in this area.
Strengthening the core also means leading the industry in key strategic products.
Let me share some highlights.
Our sales for Q1 were outstanding bolt on a product count and an annualized recurring revenue basis.
Part of our strengthening the core journeying includes improving disclosures of our SaaS metrics and we will be sharing more of this as we move forward.
Our strong sales were led by key products, such as CDK service, CRM Doc management and cloud connect.
We continue to win back customers.
Example, after our acquisition of E. Lee.
A large dealer group with 40, plus sites decided to switch their cm CRM into a competitive product.
If you're trying to work with the competitors desking tool functionality they decided in September to move back to CDK.
We successfully installed all sites within 30 days.
Our connected store product has seen tremendous growth and we recently won a 30 per site dealer.
Premium version of connected store plateau.
We've made great strides in our adjacent to the business.
The huge 70, plus site renewal of our second largest heavy equipment dealer.
And a major upgrade for our second largest power sports dealer.
Our truck sales were after the quarter end year completed a massive installation project for a new 40 plus site truck dealership.
Our journey to strengthen the core oscillators modernization of products.
And technology.
We've made a great progress on several fronts.
We've modernized our development by adopting a dev ops to increase our release velocity.
We're taking a apiay first approach when developing new integrations between CDK and third party applications and we are building cloud agnostic SaaS solutions with consistent architectural standards to improve security and resiliency.
We've increased the use of common components for a more unified user experience for.
We're also continuing to increase the number of products that we can sell to non CDK dms customers.
Our modernization journey is well underway and we believe that in addition to improving our products.
It will ultimately reduce the time and cost to build and support these products.
Our CDK drive Dms as part of our modernization efforts.
And a lot of work has gone into enhancing the product.
While much of the effort is behind the scenes and may not be obvious to user.
We're improving workflows and interfaces that will help increase productivity and efficiency at the dealership.
And for example, we're creating an embedded plug in app to promote an Oems reward program to.
The dealer can then enable the plug and directly from the foretell as marketplace and it will be embedded into the Dms will.
When a customer wants to use rewards points, an automatic prompt within the Dms provides the dealer with a modern user interface to log the transaction, which inflows seamlessly into the Dms and the customer war rooms count.
Using embedded apps, along with our modernization efforts make it possible for dealers of all sizes to benefit a modern user interfaces and improved workflows.
All within our flagship drive Dms.
We're also continuing advanced at the option of our dry flex Dms.
With all the momentum we're seeing across our business, including the success, we're having with dr. within a smaller dealer groups, we're being very diligent and patient and the rollout of flex, which now has around four dozen life sites, including several independent dealers. This.
This is a multiyear juniors and we're making great progress.
In summary, our core is healthy and will continue to strengthen it in order to remain true partners with our customers to achieve operational excellence and to lead the industry with best in class solutions.
Now that we have a solid base, we can shift further to the other critical focus of our journey.
Which is the leverage and expand our business.
Transforming the way the industry Connex fuels innovation and commerce through open technology. It allows us to build solutions based on data and insights.
This is one of the most exciting part for me personally.
The way, we and the industry can use data analytics and deploy artificial intelligence and machine learning will go well beyond what we've seen in the past.
And by connecting the industry, we're opening up a new avenues for incredible innovation and growth.
Because of our open approach our vast experience in the dealership industry and the breadth of our ecosystem and the vast amount of data flowing through it. These new addition initiatives will drive continued growth now and fuel the longer term vision, we have to sustain that growth for the next decade and beyond.
There are so many opportunities to provide dealers with enhanced solutions and to connect parties of intuitive in the ecosystem.
To enable the flow of commerce.
So let me give you just one example.
We're partnering with global payments to offer dealers, our CDK one pay solution.
It is currently in development this.
This will modernize and significantly enhance the entire payment experience are backed by providing dealers with more options.
As virtual payments and contact lists terminals all integrated into our Dms via portals.
By leveraging our scale integrations and open platform will be providing our dealers with new valuable benefits and believe it is a win win for the dealers their customers and CDK.
Several of our dealers, including one of our top 10 largest so all these benefits and signed up for the pilot program and we expect to see substantial demand acceleration. When we go forward to bring this to market early next calendar year.
We're continuing to expand by using the same leverage to bring other parties from different verticals into the ecosystem.
This really has so much untapped potential for our dealers their customers Oems and CDK. When you think about all the possibilities use cases for the future of security connected cars or fleet management.
For tell us as one of the key drivers to the strategy for expanded growth.
Like other platforms, our initial strategy for establishing the hotel as platform was to drive usage ahead of monetization, which we measured by tracking a number of transactions, which are exchanges or data.
As you can see on this slide we've been seeing tremendous growth.
You may recall that we reported total transactions for all of last year.
At around 12 million.
I'm thrilled to report that this quarter alone we did over 13.6 million transactions.
This is a clear signal signal that vertellus is taking our.
Is being viewed by the industry as the industry platform and our vertical.
Our goal is to reach over 100 million transactions this fiscal year.
So let's talk about data, we believe it's important for our industry to be able to move from data to decisions through the use of insights Howard.
Powered by machine machine learning algorithms.
Dealers have a high expectations about getting data driven insights and solutions to enhance their success.
And that's why we've taken an open approach and are committed to providing the strongest level data governance and security.
We truly feel this is the best way for our customers and partners to make smarter data driven decisions.
A part of our expansion strategies, leveraging our strong partnerships with Oems to provide even more data driven enhancements.
And for example, we take connected vehicle data from Oems to provide dealers will be insights on how to improve vehicle services.
And we recently added no am sponsored a pie that provides real time inventory updates and allows dealers to leverage insights build term data they get her to tell us.
We're also working on predictive insights using machine learning that will be embedded in CDK products.
For example, dealers will be able to use this information to Alere car owner tour needed repair before it becomes a problem.
The very heart of our business is the incredible technology team that we've put together.
And we continue to attract strong talent, including leading data scientists engineers and architects from some of the best companies in the world.
I have confidence that our entire team will enable our growth well into the future.
And we will continue to look at inorganic growth opportunities as well.
We're starting to see the return of bottom line earnings growth, which helps balance some of the investment spending.
While we don't expect growth will always be on a straight line up into the right I feel confident in providing annual guidance at this time.
That we can fund our investments and grow revenue and earnings in the mid single digit rage in fiscal year 2001, and you are 22.
Beyond that into 2023, and 24 excellent earnings growth to further accelerate as a momentum picks up.
I'm going to let Joe will provide some details for our 2021 guidance and long term outlook.
Let me close with saying that I'm very happy with what we've accomplished.
Our employees have really embraced the culture of growth and winning.
Firmly believe that great employees make a great company.
Want to personally thank them all for their passion and hard work during this quarter.
So I'll now turn it over to Joe for the results.
Thanks, Brian and good afternoon to everyone.
I'm happy to be able to share today with solid results, we achieved during our first quarter.
We navigated the crisis better than we thought and I'm pleased with the underlying health of our core business and the margin expansion, we achieved during the quarter.
I see excellent momentum in delivering on our mission to accelerate the business.
And I will be sharing details on our Q1 results our annual guidance and our latest thinking about why 22 and beyond for the buildings.
As I reflect on the first quarter, there are three key strategic and financial themes that stand out.
One the rebound of our business from last quarter and the residual Colgate impacts on revenue.
Two our investments and expense action and resulting earnings growth.
And three.
Our annual guidance and future outlook.
Let me take a few minutes to walk through each of these points.
First we've recovered faster than expected fueled by several actions we took during the last few quarters, including the progress we made in sales and installations together with a strong rebound transactions business, which grew faster than sorry during the quarter.
When coupled with our relentless focus on being dealer centric.
We've been able to improve customer sentiment, resulting in lower losses and growing sites.
Our balance sheet and liquidity are sound and we were able to generate substantial cash flows during the quarter.
Overall, we did quite well for the quarter and are in a good position to move forward with future growth opportunities.
You may recall last quarter, we provided some thoughts on potential Q1 kogut impacts.
Which included.
The amortization overtime of the discounts and concessions we provided our dealers during the height of the shutdown.
The reduced revenues due to delays in project work and installations.
And the potential for lower volumes in the transaction business.
As you can see our transaction business bounced back and was not a headwind.
This quarter, we booked the expected discount amortization and experienced the effects of previously delayed project work and installations due to colder.
Overall, when you add up and adjust for these impacts in Q1, we were able to produce solid underlying revenue growth within our targeted range and I'm pleased with how the core business perform.
Second regarding our investment in earnings as blind laid out we are seeing the benefits from the investments we are making in our products and services, which are creating real value for the dealers Oems and partners.
Weve profitably growing the business, while simultaneously prudently managing our spending and pace of investments our cost actions give us confidence that not only will we emerged from the crisis significantly more cost effective company.
But we'll be able to reinvest the cost savings to help fuel future investment that will ultimately drive growth and dropped the remainder to the bottom line.
And finally third the sharp acceleration from last quarter, which exceeded our internal plan gives us the level of confidence needed to provide annual guidance, our resilient financial results offer clear evidence of the stability of our business model with its high level of recurring revenue and expansion.
Opportunities.
While we remain mindful of the uncertainties about coding we feel great about our results for the quarter and are well positioned to achieve strong full year financial performance.
So let me take you through some of the financial details on the quarter starting with revenue.
I'm pleased to report total revenues of $494 million, including $414 million from North America and $80 million from international.
This represents a 10% increase over last quarter and an equal to revenue generated in Q1 of last year.
This was higher than we expected as I mentioned when adjusting for the impacts from Covance produced healthy underlying growth.
Looking at the drivers of growth by region, New business generation in North America came from nine new auto sites and 29, new adjacent Keysight over Q1 of last year.
This is now seven quarters in a row with year over year cycle in North America auto.
We saw further strengthening in total recurring revenue from the three plus site dealer group.
Offsetting a slight decline from the one to two site deal the group.
Auto revenue per site was up over 2% driven by gains from key layered applications with strong growth in CDK service.
CRM and document management.
The adjacency business generated robust cycle in the heavy equipment space as we continue to add new agricultural dealerships.
As you can see revenue per site was up nearly 4% for the quarter.
Overall, North American subscription revenue was down 3%.
With strong underlying growth more than offset by the impacts of coded as well as a onetime revenue adjustment in our adjacent fee business.
Transaction revenues of $44 million came in much better than we expected and were up 3% year over year, and almost 30% from last quarter much better than the 10% downturn and SAR.
Primary driver was increase in overall transaction volume.
North America other revenue was $44 million up 9% due to sizable gains in hardware, including our cloud connect networking services and document solutions.
Overall, we're pleased with North America revenue is a $414 million, which were up 10% over last quarter and down slightly by 1% year over year.
Our international revenues performed very well and were up 4% or 1% on a constant currency basis subs.
Subscription revenue grew 6% and continues to see healthy performance from increases in revenue per site of 4% ups.
Offset by continued site losses, primarily from the expected slight declines in China.
Now turning to earnings first quarter EBITDA of $195 million was up 4% year over year.
With a margin of 39.5%.
Our outperformance in the quarter was primarily driven by our tight management of operating and travel expenses.
Plus the benefits of restructuring efforts in your international.
Which are nearly complete and produced a better than expected margin gains offset by our strategic investments.
At a segment level North America pretax earnings were $161 million for the quarter with a margin of 38.9%.
International pre tax earnings were $26.2 million for the quarter with a margin of 32.8%, which was ahead of our targeted 30% plan.
Our effective tax rate was 26% for the quarter up from 25% in the same period last year.
Quarterly diluted earnings per share were 82 cents up 4%.
With respect to our balance sheet and liquidity position cash was $281 million of which 227 million was held outside of the United States.
Access to liquidity remains strong with more than $700 million available on our revolving credit facility.
Net debt to adjusted EBITDA was 3.2 pounds.
For the quarter, we delivered improved free cash flow of $80 million.
During the quarter, we paid out $18.2 million in cash dividends to shareholders. We.
We expect to continue our normal quarterly dividend payments.
I'm pleased to report that we reached a settlement and another of our antitrust lawsuits in October which now brings the total to four settled cases.
We expect the payment under the new settlement to be incurred during our fiscal second quarter.
We're happy to be able to put another lawsuit behind us and continue our focus on the future.
Moving on to guidance.
Given the resiliency, we've seen in our business model and the momentum this quarter were excited to share with you our fiscal 21 annual guidance.
We expect total revenues for fiscal year, 2021 could be $2 billion to $2.05 billion.
EBITDA to be $760 million to $800 million.
And EPS to be $3 and Pennsaid, two to $3 and 47.
While our performance in Q1 leaves us optimistic about the future we remain mindful of how the pandemic may impact our customers and our business going forward.
As a reminder, certainly covert related impacts are known such as the amortization of pack discounts, while others cannot be predicted at this time.
Overall, our guidance includes the impact for the full year of fiscal 2021 that are approximately equal to those recognized in late 2020.
Despite colvin our priorities are clear as we look out over the next year and beyond.
We are pleased that that guidance allows us to continue to invest in the business and are quite focused on prioritizing and sequencing our strategic investments to better position our company for continued revenue and earnings growth.
In addition, we remain committed to our efforts to transition away from certain fees as we transform the partner program and any timing mismatches has been factored into our forecast.
Well manage our business to deliver financial results that we will see a strong foundation for growth and profitability for this year and beyond.
Now.
We'd like to share some thoughts with you about our views of fiscal year 2002 and beyond.
Given the momentum we're seeing in our core business, we would expect a good level of revenue growth and productivity.
Which will help self fund the increased investments we make in the business.
As such we would expect as we head into fiscal year 20 to get our revenue and EBITDA growth will be in the mid single digit range.
Our longer term outlook for fiscal year 2003, and beyond remains as previously stated.
Mid single digit revenue growth.
And EBITDA growth in the high single digit low double digit range.
We're on a multiyear journey with lots of opportunities and we're not slowing down we're staying on the offline and extending our leadership position.
Im energized by our incredible potential and bright future.
Im very proud of our team's ability to successfully lead through change and would like to thank our employees our customers our partners and shareholders for their continued support.
Thanks, and now we'll open it up for questions.
Thank you as a reminder to ask a question. Please press star one on your toss out. So it's all your question price of hockey.
Our first question comes from Josh There of Morgan Stanley. Your line is now open.
Great Congrats on a nice quarter and thanks for the question.
Good one on foretell it and one quick one on on capital.
On for Tom just wondering.
With with the target to reach over 100 million transactions, if you could just.
Dig in a little bit there, what's what's driving that.
Growth is it.
More use cases more dealer sites using using.
Using foretell us and any way to think about revenue potential.
From foretells.
Sure. This is but I can start and Joe's mother welcome too so.
Number four tell US is this whole platform that has internal uses external uses external uses by our partners and there are.
Our third party uses where it's.
Its third party direct to do.
Dealer.
And in some cases, where that doesn't necessarily involve a CDK pieces SaaS software.
So there are all of those the majority of the growth is a combination of.
Our own internal usage and.
External third parties.
The biggest one to date right now is around our repair order, which is supports the service.
Oh applications those are the two big growth areas, but we're starting to see.
Opportunities and growth almost across the board against every application so.
I think to get to the $100 million.
It's really going to have to be driven even more so by external.
Both third party direct to dealer and.
Our own collections out to third parties and then to dealers.
Great and if you could review your capital allocation strategy that would be great and I know you mentioned inorganic growth in your remarks, obviously the dividend also wondering about where potential reinstatement of share repurchase program might might fit in just given.
Your strong cash flow generation. Thank you.
Thanks for the question, Josh and that we're quite pleased with free cash flow in the first quarter and the momentum that we see right now our top priority continues to be to de lever.
And deploy capital there while maintaining the dividend you did hear us talk a bit about inorganic and from our perspective.
Where there is a very attractive opportunity, where we can look at an asset that can fit into our work flow or be very synergistic with our base, we won't be afraid to capitalize on those opportunities that said our key priority right now remains the de lever continue to generate the free cash.
Cash flow and then there's so many opportunities to accelerate growth in the business and really deploy capital where it makes sense around those inorganic opportunities, but we'll we'll be very thoughtful as we balance those priorities.
Awesome. Thanks.
Hi, guys. Thanks.
Thank you and our next question comes from and Jeff on of Oppenheimer. Your line is now open.
Yes.
Hi, great. Thank you very much very good quarter and thanks for all the guidance and color very helpful. Thank you.
I guess.
Question would be on the dealer count and maybe at the smaller end.
How are your discussions surrounding dry flex going.
I think there was a little concerned that maybe trifecta cannibalize. The core business have you seen that or are you seeing actually.
Higher revenues per per site.
As you sort of move to.
Try fraction any other type of color you could give there would be really helpful.
A follow up thanks.
Sure I can start.
And then and I'm sure Joe has some thoughts on this too.
To me Dr. flex is there.
The first step in a modernization of the.
Two things on our software structure architecture what is.
Around some of the architecture itself going to micro services updating the data base from a picks database.
More modern database and then updating the user interface so having worldwide.
We all come accustomed to in applications, where you have dropdown menus and auto sale and things like that.
And and that's really what flexes, it's a modernization of all of this.
And what we will.
Been really focused on as a couple of things over the last couple of quarters and that is one yeah. We have a dry flex its right now targeted more to the.
Smaller dealer groups.
Group, but would we really took a look at it we said gosh you know these same features and leasing.
Efforts, you really need to go into the the full suite of.
Dr and and what we May want to do is bring some of that core down into flux. So what you're going to see if I object out three or four years as you're going to see one let's call. It flux architecture.
It could have a common you why it's going to have a common set of model.
Methodology, the database and the.
How the software is written with micro services and structure at all.
And and you're going to have like a flux Super light that goes into independence and that one has a lot of the features removed and as they simplify their guidance that has one price point, you'll have a flex for a light for the smaller dealers and then you'll have a flux.
Enterprises for the.
The larger dealers and those come with different features different capability as what foretell us at all of the work were doing around data allows is to really help us differentiate and independent doesn't need much insight data doesn't need a lot of those.
Those analytics applied a smaller dealer may need some but not a lot of complex inventory management and the enterprise guys. They were a trade between their dealerships they want to trade dealer to dealer. They will have all kinds of insights about the overall markets in their area and we'll provide a lot of those capabilities and that will.
Allow that differentiated price and we.
We believe prevent any degradation of our various price points. It to answer your question more bluntly are we seeing a price.
Price erosion from our occurrence.
No.
It's really scaled to the application. So I know that we already can construct shirk lacks such that we de featured when we sell to the independents and they get a different price point, but it's got a much different feature set.
Say what.
What the larger dealerships are doing and we've done a mix of those to make sure that we really understand as well.
If I am right and then if I if I add to what Brian was a sharing I got to tell you. The other part you heard a lot.
Brian section around things that we're doing even in our core base drive product today and and the improvement in service in the investments that we've made and that is resonating and making a difference.
We as you start to look at site performance. This is I think the first quarter and a very long time, where we saw sequential improvement in the one to two number of sites and it's just a combination of of the focus in on a multi pronged approach the way blind just laid it out so we're in.
And you have heard in my prepared remarks, a slight decline in revenue in one to two.
The trend gets better each quarter and I think we're certainly on the right path and very thoughtful about the impacts as we go invest as well as drive the current business.
Okay, Great and then if I could just sneak in a one or two more in.
On the the outlook.
And you talk about the acceleration of EBITDA growth.
You said in the near term you're going to have offsets to the investment.
So does that mean, the acceleration of EBITDA in 2023 and beyond is that actually from the investments you are now making sure Lee So we're going to see like this nice ramp on because of all the investments you are making now.
That's the first question and then maybe I don't know if that you've got for Brian or Joe I'm on the international side remind us what the rationale of that businesses inside CDK as a broader entity because I know you got rid of digital marketing.
And I just wanted to make sure that as I'm looking at the portfolio.
The company.
It all sort of works together or what doesn't work together, how we should think about that thanks.
Sure.
So that was a.
A bit of a complex question or set of questions, but let me, let me try and start and I'm sure Joe can add.
Some additional color.
So when we think of the EBITDA growth and where where we're headed we think about yes, we're making investments and you remember there's two sets of investments. We're we're making right now actually three and they have varying whether it goes into our cash position or whether it's you know.
Capitalize and things like that but.
Not going to go to that.
But what we're really making investments in our customer support well.
We're making investments in our and that comes in the form of head count and an actual people to spend time more with our customers not just selling by really working with them to make sure they understand their software.
And are getting the right levels of support the next thing is around the modern.
Modernization of the ERP system, where we've talked about that we aren't you often hear called project Aurora, That's really critical and then it goes from top to bottom it literally goes from how we've part.
Part numbered our offerings to how we quote an offering to a customer all the way through to the accounting and it should streamline our whole system and streamline both external and internal.
So it was really.
Funded through by the way I am a firm believer in everything gets done through an MPV.
Add everything has to have positive NPV. So that project was done through a positive NPV analysis that has both external and internal.
Efficiency that will reduce the cost of producing either a quote a or a bill and that will result, once implemented it about a year or so.
The EBITDA improvement just from that and then you move in to the other side there or doing the work around around the technology itself. When you start to modernize this thing right now or it's not a CPI driven it's all direct connections it's not micro services. So every time we try.
Go fix something you have to find everywhere the connection is.
And the databases olden convoluted and oftentimes that things that should actually be outside of the database or in the database and you got to figure that out and and things break.
And so we believe that as we modernize that which has about two more years of work left.
You can get a large efficiency in our ability to sustain the products not only sustain them, but also improve what were delivering so so we could actually get additional.
Opportunities to up sell into the next levels of product those two things will drive additional EBITDA growth from those objects. So thats why jeopardize that book in the near term. We think we can continue to drive the the margins that we have and we can continue to grow our margins at this.
Right in the mid to low single digits, but in roughly two ish years, we think we can accelerate those because we finished our internal.
Work on the customer improvements and we'll have gotten to the next level of the technology improvements and those should allow us to accelerate.
And again all of this is Doug we do nothing without NPV I was trained on MTV and we do everything with an NPV.
And they say Oh your last question. Your last question was around international.
Joe do you want to comment on this first yes, if I could just if I could just add one thing to what you just said the other part just to give you and the.
The team some credit so Brian Scott Herbers ahead of our sales team and his leadership team.
We gave this guidance with the confidence with the sales quarter. We've had net revenue component. So critical here and when you look at the backlog whether its around Dms sites around the service application around our CRM application Havent.
Having them, having a strong sales that we did to finish our last fiscal year, having the record Q1 that weve had gives us enough backlog visibility Tulsa confidence around the revenue and the gross margin in that contributing I just want make sure we don't Miss the piece and some of the work that the team has done there as well sorry, Brian go ahead.
No. It is just to answer the second part of the question, which was around international and how does strategically it makes sense I mean no.
No.
First the Oems are roughly the same as you go from international to domestic.
Latin America, so our relationships our ability to integrate data to integrate the whole sales process within the dealer model is different and currently the software model is different.
In international but that doesn't the dealer model will always be there, but we believe there is a lot of synergy things like for tell us.
We are already looking at how do we model for tell us out into the international space as an example, so.
So so the OEM and the ability to share a common software as we move forward should allow us to do more and more efficient you saw us make the improvements this quarter.
As we've talked about last quarter on on the efficiencies that we saw the margins improve.
Those will continue as we move forward in this space.
So we think it's a profitable business a good business a growing business.
And one that we can share more and more of it.
As we become smarter.
All right. Thanks, very much for all the color really appreciate it.
Thank you and our next question comes from Gary Prestopino Barrington Research. Your line is now open.
Hi, good afternoon, everyone.
As of the end of the quarter I mean at the end of Q4 your backlog of dry flex was about 100 sites has that grown.
At all.
Yes, it continues to grow.
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We're.
Ill, just again I want to comment back from what we said before.
It actually slowed down our implementation of flex.
And it's not because there's issues or where we're struggling are worried about it.
Kind of of erosion on price, it's because what we've actually seen is this opportunity.
Build it out much broader and to bring a lot of the issues that drive in you're going to see.
One of the big projects. If you remember from the technology work. We are doing is around our service applications. So you're going to see a lot of the user interface.
Dataset all of that go into our service.
Application as well, so we've actually grown the complexity and the scope of flex.
And and so we don't want to go out and just start.
Massively deploying it versus say okay.
Let's continue the development, we've got the right number of people on it to continue testing. It we will continue to implement it out a nice comfortable rate, but more importantly, let's focus on how do we get this across our all of our products at a rapid pace.
Okay.
And then you know given.
Given.
What's happened with the pandemic and.
Your dealer base I mean, what what are some of the conversations you're having with them I guess, what what are what are some of their most requested profit.
Products that they may want to have now you know given that we're moving more into a digital selling mode.
Versus so high touch yeah, no effect there is an interesting piece of data on.
In our prepared remarks, where you know one of the fastest growing segments now.
Our people under 35 years of age.
That are buying cars right. So I think with the pandemic, we're seeing a couple of trends one yes, so it's a bit more than that so it's a lot more digital in process, we'll talk about that the second but also even the demographics are shifting right and so you've got a high.
A more though those people have grown up on I phones, a grown up in the internet.
Part of it and they need a different user interface a different ease of use.
And they want a lot of flexibility. So what we're seeing is you've got to have a digital application you've got to be able to be putting perfect and that's one of the real complexity services getting it such that you can get all of the OEM.
Incentives and you can get all of the local incentives or tax and everything else such that a person can go through the process and what dealers want is the flexibility.
And and the consumer wants a two to drop down at any point along the continuum of the purchasing some people are going to want to go all the way to the last thing you have to us with a wet signature or a pen.
The state has different laws.
Very familiar with California, they require two forms to be signed in person.
So the dealers lot for example, the ability of a person could drop down at any point along a purchasing journey.
And to be able to be penny perfect.
And and still execute that transaction. So some people want to go out price cars pick one select one go into the dealer to a test drive really quick and by some people don't want to ever touched the car want it delivered to the driveway and they just want a sign that you paid pieces of paper and have the Guy I believe.
And we need to be able to provide a solution. They can go all along that continuum.
And provide ideas and options for example, if they want to lease it or they want to finance it or they want to pay cash how does that change what are their options all of those things so.
Our our connected store product.
You saw us at the beginning of the pandemic actually give them roughly two years of the service has had a large we've made the basic one free but actually a number of people who have signed up for the platinum level has been quite high.
Less than one of our our good growing pieces of software during the last two quarters.
So we are continuing to grow in the digital space, but they want this flexibility to to be able to move along that continuum of the purchase.
Okay. Thank you.
Thank you and then.
Next question comes from Matt say of William Blair. Your line is now open.
Hey, guys. Thanks for taking my questions.
So first wanted to ask on the North America Dms site count nice sequential increase there, especially given the current environment maybe.
Maybe can you just give us a little bit more detail on what drove this was it more of a factor of improvement in churn in the one to two sites segment or are you also seeing.
Better new sales and and.
As Dr. flex overall in this at all.
Go ahead, Joe you can you can start have been talking to get enough. So I think its combination of factors.
Yeah, we saw a another good quarter of implementations and new business coming in.
Secondly, we saw.
Certainly a lower level of losses, as well and we've seen it across both portfolios both.
The one to two as well as three plus sites segments sequentially showed improvement and like we've been talking about throughout the call just the customer sentiment our customer centric model and and how approaching things is resonating began and performing well so I think.
We continue to see momentum there we continue to see it in our win rates.
And Thats really what has produced the benefits sequentially.
Got it.
If we look at the subscription revenue growth for for North America, obviously, the discounted that in the quarter, maybe I missed it but did you quantify those at all and what would that growth rate look like absent some of those discounts and back in the growth.
Yeah, you know we try to do our best we've had a lot of discussion about that in the past I would tell you is there's so many moving pieces with the discounts and and and water install rate was pre pandemic and and then there was some disruption in Q4 with the pandemic. So what I would tell you is everything we pull apart.
As we've shared before that the business.
You know should expect to growth between 4% to 6% and I would tell you what we see in the underlying performance of growth is very much in line with that so we pull apart all the piece parts. We see growth that is in line with that and we see after we come through our fourth quarter. This fiscal year and really enter into next fiscal.
A year the comps will be quite clean.
And you'll start to see much more of that easily but for sure.
It's a bit impacted at the moment.
Got it that's it for me. Thanks, a lot guys. Appreciate it thank you.
Thank you and our next question comes from China, Matt Hann of Wells Fargo. Your line is now open.
Hi, guys. Thank you I know, it's not a one to one correlation but I was wondering if you could talk about the factors that led to the outperformance of transaction revenue relative to Saar and how we should think about that relationship going forward.
Yes sure.
So lets a we were really pleased with how the transactional businesses performed in the quarter. When you look at it and just as a reminder, the the largest portions of transactions that we have is our.
CVR business, which is a vehicle registration business.
Business is and that's that's only in certain states. So that volume will be impacted based on how that state is performing and.
Credit check is our other.
Business as well with transactions and like I would say is we there are several factors at play around why we seen it outperform.
Some of it is our sites are growing.
So.
The sites grow and that will outperform.
Secondly, we over indexed to the larger deal or population and and we've seen a differentiation.
Of performance amongst the groups and we've seen good execution I think the teams have done a really nice job across those businesses and so I think there is a number of factors, where we've seen some positivity Brent.
Brian I don't know if there's anything you'd add.
No I think you captured it right there's a certain amount of this is just like.
Like you said indexing to large dealerships groups and the stage that we happened to play a large percentage of this is in California. For example of our CBR business and so and then the Western States. So I mean that that's just kind of where the business has been strong of late so.
It sounds like it.
My second question is on the sales momentum during the quarter and firstly I was wondering the degree to which.
The sales momentum was was driven by some of the discounts you had offered back in the spring specifically around connected store aware.
Scott may have expired and.
Customer like the product and started paying and secondly on the sales momentum so wanted to get a sense for when we could see that revenue start impacting revenue.
Those sales starting impacting revenue the degree to which it's it's baked into the baked into the guidance for 21.
Sure So I'd tell you.
Very little if any of the sales momentum is driven to discounts as your number collective store. For example, we did for two years. So they've got through the end of next year.
The month of.
Software, we gave away was only for existing comfort with customers.
We probably see some.
You know.
People, who tried some of our layered applications and.
And decided to keep those even post the discount. So this I don't want to say zero, but it's it's minimal most of this growth is more focused you know I spend a lot of time I'm, even traveling now visiting customers.
And or spending a lot of time on zulily customers or phone calls.
It's more around Hey, I hear the Companys almost carloads are here as I hear the companies really changing I really like what here. So once those bought converted over during last year.
I think I'd like to have a discussion with you guys I spend a lot of time with I'm talking about the service levels.
Commitment, we will make as a company they usually get my personal cell phone number and they can call 24 seven.
Some of them do and and I think that gets out there. So it's much more around our service and our product. They also are hearing.
You know putting from a hash our CTO out there are lots of these guys. They're hearing the product roadmaps, they see where our products are going and they really like it because it aligns well with where they're taking the business. So.
So.
I'd tell you it's much more that not really the discounts.
There was a second part to your question, though as like Blake Dardanelles. So can you repeat yeah.
I think you actually.
Right I was trying to or want to get some color around the impact this quarter sales will have on revenue.
For.
Well take that.
Yes, it depends a bit on there, we'll let you know what their schedule is a lot of times they'll they'll contract with us. They may have so six months left with their current provider or they may have only six weeks left with their current provider provider. It's rare. It's rare it goes much beyond that so it's usually within one or two quarters that were in there to any install.
Yeah, and then Chuck what I would add to what Brian said is when the in year impact given that we're already four months at this point into the year is smaller the impact is and that is that that has been taken into consideration in our guidance. The bigger impact is as we look into next fiscal year and that's really the basis for.
Which we've offered a bit more color an indication and to next year's performance given what we see is a full year impact of those implementations going live.
Got it okay. Appreciate the color guys. Thank you.
Thank you. Thank you.
Thank you and our last question will come from Craig Kumar of Evercore. Your line is now open.
Hi, This is actually two vertical sweaters on behalf of Rayna Kumar I was wondering.
At the beginning of the calendar year Tech UN funded by General Motors launch on New Dms are you starting to run into them when bidding for new deals are you seeing any new competitive entrants at the high end of the market and then I have a follow up.
You know I mean, I'll just anytime we go in and then I guess.
Existing.
Existing dealership, we see competitors you see a touchdown occasionally I'll be honest not.
Offering Joe talking about how we tend.
Tend to.
The weighted more to the large enterprise costs dealers, but.
So we see them out there their competitor like several of the others.
Level nothing unique.
Let me take them all serious by the way I mean, I don't mean to be that in a way is that we don't we don't.
Consider everyone a threat and the way we work hard to win every single customer Okay. What size they are.
And we will we will beat our competition through our technology.
Our customer support.
Got it and then how our current trends in new and used car sales affecting the health of your you worth dealers and your revenue by extension.
Yeah.
You know we are part of why we show you all of those graphs as there are.
To give you some insight into what exactly what's going on in dealer group and and remember we have.
You know just under 50% of the franchise dealers.
That that were reported on and we added Additionally, but the financial transactions that are going through our software as well to try to give you guys insight into exactly how is the business looking.
I'd tell you that almost every deal right.
Got to write though.
We'll tell you sales are pretty good.
I could use more inventory, especially of the hot vehicles.
And if I had more of those than I could do even more.
And I think you heard that on the auto nation.
Earnings call they talked about that like most of the big enterprise guys have talked about this thing.
So we're seeing sales recovered pretty nicely in all of this.
And we're seeing the Oems pick up the inventory capability and and improving that as well and so I think everybody thinks that as we go through the remainder of this calendar year. The inventory issues will continue to improve and right now we feel sales will will continue to improve as well.
And what we're seeing and that's again, we tried to give you some more insight into this right. It you know the fastest where the fast growing segments is 35, an under and what you're seeing a lot of people.
I was talking to somebody today.
Yeah, you know I I used to do the.
The the Hoover's and listen and the kind of those you know transactional rides and I'm more comfortable than my Okada and you see that plus people moving out of the but concentrate.
Concentrated cities into the suburbs all of those demographic factors are at both a positive trends for this industry I think.
We will continue at least for some time at least another year or so those trends will continue to grow in my opinion.
Got it thanks for taking my question.
Thank you and ladies and gentlemen, this does conclude our question and answer session I would now like to turn the call back over to Frank advantage for any closing remarks.
Yeah, I just like to thank everybody for coming today, you know John I really spent a lot of time it with a team trying to provide more new insight and a forecast into the.
Mid and long term future for CDK, which I hope really helps you guys as analysts and then just thank the employees right. Great companies are built on great employees, not but anything else and so I think they've done a wonderful job with the quarter and I'd just like to thank them and.
Thank you all again and we'll see you next quarter bye.
Yep.
This concludes our call and you may now disconnect.
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