Q2 2022 CDK Global Inc Earnings Call

February 3, 2022

Today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

[music].

Ladies and gentlemen, thank you for standing by and welcome to CDK Global Q.

Q2, 2022 earnings conference call.

At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

I'll ask a question. During this session you will need to press Star then one on your telephone.

Please be advised that today's conference is being recorded.

If you require any further assistance. Please press Star then zero I would now like to turn the conference over to your speaker for today.

<unk> you may begin.

Thank you and good afternoon.

Like to welcome you to our second quarter fiscal 2022 earnings call joining.

Joining me on today's call, our CEO , Brian <unk>, Chief operating Officer, Joe <unk> our.

Our CFO , Eric Garen, and Mahesh Shaw, our chief product and Technology Officer.

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 investors Dot CDK global Dot com.

This call is being simultaneously webcast.

In addition, our web site includes an updated schedule of supplemental financial information.

And a copy of our results presentation that we will be referencing during our prepared remarks.

Throughout today's call, we will be discussing our continuing operations only which do not include the international business results.

Each are presented as discontinued operations.

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 afternoon's press release.

Please also note that are all growth percentages refer to the year over year change for that period unless otherwise specified.

I would 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 SEC, which could cause actual results to differ materially from those mentioned in the forward looking statements.

With that it's my pleasure to turn the call over to BK.

Thanks Reuben.

And thanks to everyone for joining the call today I.

I Hope you have all had a good start to the new year.

As we begin the new calendar year, and the halfway point for our fiscal year I'd like to thank our employees, our customers and partners for their contributions connect in Q2, another great quarter for CDK.

For the second quarter, CDK continued to execute to our expectations with revenue of $437 million.

EBITDA of $168 million.

And EPS of <unk> 74 per share, which is a remarkable result.

Our focused investments in strengthening our core products, including significant improvements to our customer service and technology solutions distinguishes us from the competition and resulted in the 12th consecutive quarter.

Up year over year site growth.

Before I get into some additional commentary on the industry.

Wondering if you mentioned that I am excited that youll have the opportunity to hear from our Hess Shah, our chief product and technology officer during today's call.

Many of you have asked for additional insight on our product roadmap engineering acquisition integration and the R&D investment required to execute our roadmap.

I'm excited about our progress in these areas felt this would be a great time to have your ash provide some comments and take a few questions at the end of the call.

I believe there has never been a more exciting time to be in the automotive industry.

Several trends are creating new opportunities for CDK to continue to drive innovations that elevate the consumer experience when buying and owning a vehicle.

The most significant trend is the demand by consumers to start the buying process online.

However, most people still want to finalize the deal in store.

In order to meet consumer expectations, Oems and dealers will need to collaborate and provide a seamless experience.

When that transition easily from digital.

Michael.

A great example of this is our collaboration Hyundai Motor America CDK roadster solution is being used to connect Hyundai USA dot com visitors with its dealer network digital retailing capabilities.

Leveraging our robust retail API from.

From roadster.

Under this new program further streamlines the car buying experience by helping consumers who start their shopping journey.

At Hyundai USA dot com to instantly discover local dealership pricing, while seamlessly transitioning them to a local dealership for the completion of the purchase.

Whether online or in store.

Another exciting trend that we are driving innovation around is the connected vehicle.

According to statistics, 80% of cars sold in the U S are now connected.

By 2025, this will grow to roughly 100%.

Yes in a recent study by CDK only 58% of shoppers are even aware of connected car technology.

This is an area, where OEM and dealer collaboration will be essential.

Customers are very excited about our work in leveraging artificial intelligence to drive insights at the intersection of connected car data and dealer systems.

And Oems and dealers are increasingly using data to provide customers with experiences that predict what a services needed and even proactively scheduled the appointment, creating a seamless car owning experience.

Lastly, I would be remiss, if I didnt mentioned, the implications of the growing adoption of electric vehicles.

First let's get grounded on the data.

While <unk> has an exciting future by 2030 research done by a global consulting firm estimates that only 32% of the new car sales will be EV and.

And Evs will make up less than 10% of the car Park.

Change is happening, but it's an evolution.

And our dealer customers will play a central role.

As the EV market scales traditional Oems will be the dominant distributor of UBS.

Again based on our research by 2030.

83% of all Evs will be distributed through the dealer network. So the incumbent Oems.

These Oems see the dealer as a strategic competitive differentiator against the direct to consumer EV players.

We'll be using their dealer networks to bolt assist with sales and provide a superior service experience.

In closing this is an exciting time to be in the automotive industry. The auto market is large and growing.

Bleed dealerships will remain the dominant channel for all coal car sales.

CDK is uniquely positioned at the heart of the automotive ecosystem to connect our industry.

And through our technology.

We unite dealerships software developers and Oems.

Through these connections that we share expertise and facilitate collaboration for the benefit of everyone.

So now I'm excited to turn the call over kind of hash.

Thanks, P J and good afternoon everybody.

I'm happy to join the call today and provide some highlights relating to the investments we've made in our product roadmap over the last couple of years.

I'll start by sharing an overview of the architecture, our innovation efforts and provide an update on the progress we have made with acquisition integration over the last 12 months.

Hopefully at the end of this you will have a better sense of how these efforts tie together as well as an appreciation for how they are already impacting customer response and contributing to our financials.

I look forward to providing regular updates on these efforts in future, earning calls and in meetings with you over the course of the year.

First off regarding our architectural footprint.

<unk> provided supplemental material this quarter, including a slide showing the architecture of our solutions.

What we've built over the last two years as a connected cloud platform architecture that is deployed in the cloud and utilize a common building blocks, which are developed by CDK to speed innovation integration and deployment of new functionality.

This concept is not new in software development and a similar model has also been used in the automotive industry with the concept of a common chassis with reusable components that are paired with unique styles engines and capability layered on top.

In our space components like document management and esignature can be utilized by any application using our apis without having to be built into each application separately.

This unlocks a tremendous amount of efficiency, we didn't have just two years ago.

Data, which was once fragmented is now connected allowing us to deliver insights into enabling trusted stream of data that is critical to the emerging connected car adoption.

Applications, which were one siloed with limited workflow capability are now integrated through shared services, making the sales process much simpler for dealers.

This is enabled by hundreds of modern Apis that facilitate integration and buy a cloud environment that you are the standard containers and product images, which improved deployment and management of our products, while running at scale across thousands of customer sites.

The structure I just described is like what other software peers, sometimes call a platform as a service.

And it's central to our efforts to simplify the development and deployment of cloud based applications.

Now turning to our innovation efforts using our cloud platform, we are updating our products and moving faster in developing and deploying new software while driving innovation.

Platforms are critical as they allow us to leverage reasonable components and deliver continuity of information across our products ultimately simplifying the experiences of our customers have with our software.

We are using this public cloud based platform to update our Dms software in areas that benefit our customers workflow. The most and we are driving a very regular quarterly cadence of workflow and interface improvements.

For example, we've now deployed several simplifications in our accounting workflows that enable customers to simply capturing voices by taking a picture with a mobile phone and loading them into the system for digital payment.

Our lightspeed product used by customers in power sports Marine and Arby's has just undergone a significant upgrades and will be migrated to a public cloud over time.

The refreshed platform now includes capabilities like embedded tax new signature and has led to revenue expansion opportunities in that customer set.

On the truck and agriculture side, we are now introducing additional solutions such as Ely CRM heavy equipment integrated rental and cyber security are helping drive growth.

Turning to acquisitions.

<unk> work, we've completed has allowed us to rapidly integrate our recent acquisitions and benefit our customers. We're excited to deploy these new solutions in their dealerships.

First off I am pleased to say, we've integrated roadster with our product portfolio and are now, enabling a simplified sales process for dealers.

Last quarter, we mentioned that the engineering teams of roadster newly merged under one leader to help create an efficient development team.

These teams have moved rapidly and we're happy with the progress and the resulting positive response from our customers.

When using our CDK modern retail product suite, we are now able to support a simple online experience where dealer customers can complete a full purchase online or through a seamless and synchronized combination of online and in store.

Through a combination of roadster and our cloud platform, we have now digitize the entire workflow.

Salty has been fully integrated into our portfolio, taking just 30 days to complete.

Workflow automation to initiate the insurance process for vehicle have been seamlessly integrated into the sales process and the product has already been deployed with a number of dealers.

This is remarkable given we just closed the deal in Q1.

Customer adoption has been brisk and we have seen a significant level of interest from our dealers to deploy in coming months.

Neuron has continued to grow and recently added a large U S. OEM as a customer our customers are using our data science capabilities and products. The performance suite and new real time data Apis that allow Oems and dealers to gain visibility to critical supply chain data such as inventory and vehicle information to support <unk>.

A new and used vehicles.

<unk> is also being leverage as a built in component of our core products, including within CDK service, where we have deployed the predictive service capability beginning with the top five OEM.

The pipeline is healthy for FY, 'twenty, two which will add to a healthy customer base of Oems dealers and automotive Isps.

So tell us is critical to executing our strategy to become the enabler of product innovation and <unk> capabilities are foundational to our modernization efforts providing.

Providing an efficient way for us to enable the benefits of our open architecture approach.

In addition to internally focus benefits, we continue to add new API and applications into our <unk> marketplace.

Both from CDK, and third parties and connect them into our customer workflows, enabling a faster pace of innovation for our customers.

We believe this will allow us to be much more agile in meeting our customers' needs.

Today, and tomorrow and will differentiate us as many Oems and dealers look to pair back the number of software providers. They use in order to lower the complexity and cost of their operation.

The traction we have seen has been remarkable and gives it gives us confidence. This platform is resonating with our customers and partners as a prime resource for software development and innovation for the automotive industry.

I am proud of what we have built over the last few years.

As I look into the next few quarters, we will continue to invest in innovation efforts, which allow us to execute our roadmap, while keeping R&D expense as a percent of revenue at current levels.

I think our healthy and sustainable.

I am excited about the ongoing innovation this will introduce for our customers in the coming year and I look forward to meeting with you again soon.

Now I'll turn the call over to Joe.

Thanks, Mahesh and welcome everyone to the call.

I want to start by adding some context around the strategy and technology updates that PK and the hash covered earlier with respect to our go to market activities.

We are proud of the performance we had this quarter with revenue growth of seven 5%.

Our growth is being driven through leveraging the deep customer relationships built by our sales organization.

Delivery of superior customer experience, but all of our customer facing teams.

And our market, leading solutions and technology.

The way, we think about growth.

Number one maintaining foundational building blocks.

As we grow our installed base of customers.

We have been doing this quarter after quarter, both in our foundational BMS as well as in our broader applications and youre seeing that come through in the financials.

Number to serve the market with innovative solutions that address key market trends, which you've seen in our investments around the success and adoption of digital retailing and modernizing the service experience.

You talked about the depth of the technology investment we have made in these areas and that is already making a meaningful contribution to our revenue per site growth.

If we continue to scale. These innovative solutions into the market, we are seeing unprecedented adoption and attribute this to our relationships with our customers and the trust we have built with them.

And lastly over the last couple of years, we have planted several seats for investment both organically and Inorganically that are additive and gives us confidence we can grow well into the future.

You touched upon several of these new investments, including salty neuron and propel us.

I am excited to share with you that yesterday, we officially announced car sourced.

Car source is an online wholesale marketplace that connects dealers to used vehicle inventory nationwide through a seamless integration with cdk's industry, leading dealership management system CDK drive.

The new solution is an added benefit to dealers using CDK drive that creates opportunities for time and money saving.

It enables automated inventory listing to the marketplace from a large trusted network of actively govern and screen sellers.

Why.

It also allows dealers, including those using other dealer management system to search or bid on vehicles at no cost and offers the most competitive wholesale transaction fees with discount for CDK customers.

This is another great example of how we are leveraging our unique position within the automotive ecosystem to create a seamless.

Integrated experience across all aspects of selling buying and owning a vehicle from sourcing to retail sale and beyond.

We're also very excited about how all these innovations are generating even more strategic conversations with Oems.

Over the last six months, we have had several significant planning meetings with Oems to engage with them on their most strategic projects.

Let me give you an example.

A few months ago, we were asked by a top three OEM partner with them on an opportunity to totally modernized the entire service experience.

This included building a mobile application that would leverage connected car data.

Connect the customer with their local dealership.

Managed service alerts warranty items and related highlights.

Then theres still take the service appointment.

The goal is to have a true digital first experience that gives the consumer the ability to engage with the vehicle and the dealers the share all relevant service information when the appointment as scheduled.

That way when a consumer arrives at the dealer it is seamless integrated and a wonderful guest experience and an opportunity for everybody to win.

This is what's resonating with our customers and what is driving CDK to their strategic center between dealers and Oems.

We have always played an important role in facilitating collaboration between dealers and Oems and we expect that to expand and accelerate.

Now I'll share a few highlights from the quarter.

Our teams performed well on both sales and installations this quarter.

We were able to surpass our expectations on both metrics. Despite a typically seasonally slower quarter that has fewer selling days and despite the abnormally low auto inventory environment.

As a result of the low auto sales due to the ongoing supply chain issues or transaction related revenue was down slightly compared to last year with credit check providing some resiliency in Q2, the offset lower vehicle registration revenue.

We expect these headwinds to persist into the third quarter.

Revenue per site for auto remains strong and we hit a new Rps record and our adjacency business.

Auto revenue per site grew 4% with contributions from the roadster acquisition, representing approximately 2% and the remainder from higher layered application penetration.

We have continued traction with our strategic applications with adoption of CDK service.

Doc cloud and cloud connect.

Additionally, the universal product sales team that we discussed last quarter continues to ramp and has gained traction with elite now.

Now includes a roadster focused sales team.

We are excited about their ability to establish relationships with new customers by leveraging exciting new products like roadster and salted.

Auto sites were up 2% the fastest growth we've seen since 2015, while adjacency sites grew over 4% and hit another all time high.

Within auto the strength of our product portfolio has led us to over 80 competitive win in Q2.

Additionally, we have had another quarter of significant year over year cycles of CDK service and <unk> CRM.

We are seeing an increase of roadster installation both at sites with our Dms.

And those were competitors Dms is installed.

And we see a significant pipeline of interest from dealers looking to add this product to their workflows in response to the modern retail trends Brian articulated earlier.

The adjacency business had another strong quarter with revenue per site growing 6%.

The improvements Mahesh mentioned earlier have generated interest from customers, who are looking to modernize their DNS to help improve their operations.

Our solutions in this space are very competitive and we expect to see continued slight growth in both recreational and heavy equipment parts of our business.

We can add unique value to both dealers and Oems with our end to end platform, which gives our customers and partners the greatest flexibility to adapt to their markets.

I am pleased with our competitive position at this point year.

Our teams have the right product.

And incentive to deliver market, leading value to our customers and continue to drive our growth in coming quarters.

I will now turn it over to Eric for the financial results and outlook.

Thanks, Joe and good afternoon, everyone.

I'll start by walking you through our second quarter results and related metrics.

Then conclude with commentary on our outlook for the remainder of fiscal 2022.

Second quarter revenue was $436 7 million up seven 5% versus last year.

Revenue growth, excluding the impact of the acquisitions was approximately 5%.

Subscription revenue was $349 million.

Up 6% from the same period in fiscal 2021.

This includes a our growth in core Dms and applications and from the impact of acquisitions, partially offset by the impact of ASC 842 lease accounting.

Which shifts a portion of the revenues for certain products out of our subscription revenue to other revenue and.

And modest headwinds from the partner program.

Transaction revenue was $38 million slightly down versus the same period in fiscal 'twenty, one due to lower vehicle registration revenue given lower auto sales stemming from ongoing supply chain disruptions.

Other revenue was $49 million up 26%, reflecting higher hardware sales.

Now turning to earnings.

Second quarter, EBITDA grew 8% to $168 million.

Higher EBITDA was driven by income on higher revenue and favorable software capitalization.

Partially offset by higher employee related costs and increased travel and entertainment expenses.

Our effective tax rate was 25 four in the quarter.

Earnings per share for the quarter Rose 25, 4% to 74.

Primarily due to lower interest expense and higher revenue.

Free cash flow was $125 million.

Up from $112 million last year.

We paid dividends of $18 million in the quarter, and we also repurchased $107 million of our common stock.

Bringing us to $208 million of repurchases since when we started the program late last year.

We continue to expect to repurchase between 202 hundred $50 million of stock by the end of fiscal 2022.

Our balance sheet remains strong with net debt to adjusted EBITDA of two six times.

In the range of our target of two five to three times.

Now turning to guidance.

I am narrowing the range for fiscal 2022 revenue and adjusted EBITDA and.

And raising the midpoint and range for adjusted EPS.

We expect full year revenue between $1 75 billion to $1 815 billion.

EBITDA between $660 million 680 million and.

And EPS between $2 85, and $2 95.

With an effective tax rate range between 25 and 26%.

In summary, we are on track to meet our financial targets for the year, while continuing to invest in innovation and customer success.

I'm proud of our employees' execution in Q2, and look forward to driving profitable growth as we move through the remainder of fiscal 2022 and beyond.

Thank you and we will now open the line for questions.

Operator.

If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.

To withdraw your question press the pound key.

Again that is star then one to ask a question.

Our first question comes from Josh Baer with Morgan Stanley .

Great. Thank you for the question.

I wanted to ask just on a couple of the key Kpis and metrics for you guys as far as Dms sites just the strength.

Cross autos and Adjacencies was it was great to see you again.

Could you just double click there and kind of touch on how we should think about the.

The sustainability of those site additions and then I have one on average revenue per site as well.

Hey, Josh this is Pete.

I mean, we're really proud of it I think if you take a look at it our focus is something like.

12 quarters in a row now that we've had.

Growth in our Dms sites.

And I think I always tell people you really want to look at the growth in Dms sites and the revenue.

Per site those two metrics how are you.

Are we growing and our people spending more with us.

And so we think this is absolutely sustainable that we can keep growing in that one 5% to 2% rate and Thats. If you look at the forecast that Eric just talked about for the year end guidance.

Projects are one 5% to 2% rate for the year.

Joe anything.

Yes, no I, just think you see everything coming together, Josh when we look at it just on you heard <unk> talk about the technology.

Between our sales team our service team everything is coming together and we feel really good about where the teams performed them what we have ahead.

Got it and then on the revenue per site, we saw the growth on a year over year basis.

But was wondering why did that move lower on a sequential basis, what was causing that and how should that.

Average revenue per site trend.

Going forward.

Yes, Josh Thanks for the question. This is Eric one of the Big drivers. There is we did have some large enterprises actually.

Renew with us in the prior quarter. So we were a little bit higher in Q.

Q1, I would see that grow as we move forward in Q3 and Q4 on a sequential basis.

Okay.

Renewal in the prior quarter.

Could you just explain that how that impacted last quarter and then this quarter.

Yes, so in the prior quarter when we renewed it it's part of the 600 <unk> calculation it was.

Quite large.

Enterprise, so as that renewed it shifted some of the calculation in the quarter I would look at the year over year as you saw in Joe's comments, increasing year over year and what I would anticipate is that will normalize as we move forward and we would see sequential growth.

Moving forward in Q3 and Q4.

Yeah. Okay. That's helpful. Maybe just maybe just to add I mean, we've talked about before we've seen this in that mid single digit range and like Eric said I think as you as you look at what we have ahead and the second happened and the momentum we have we feel that it will return.

As we go forward Q3, Q4 and be at a level of increase that youre used to seeing.

Great. Thank you.

Our next question comes from Gary <unk> with Barrington.

Hey, good afternoon, everyone couple of questions here.

Are we getting to the point now BK that with this great set of products that you have that complements the dms.

Product overall are you getting more dms.

Interest from the fact that you have this great product line that is helping the dealers sell cars digitally helping on CRM.

Et cetera, et cetera could you maybe comment on that.

Sure I can I can start again.

Part of the reason why we wanted to have the harsh on the call and I think youll see him more and more now is.

We're really proud of the products, we're proud of where we're at right now and I think it's good for you to hear from the guys who are really doing the work, but absolutely. If you look at the.

The strength, we've seen already with roadster right. So we said we would integrate it within the first 100 days mashing team absolutely did that the roadster team has done a great job of integrating in salty.

Another Great example, fully integrated in.

All of these products are now really powering.

The dealerships have options have choices.

They really like the portfolio and what the even like more as we talk to them about our roadmap for the future of where we're headed with digital retail where we're headed with several other <unk>.

Efforts, you saw things, we announced yesterday yesterday or day before car source.

That's another Great example, where we're delivering products to them now.

Actually they don't have to pay us for.

From a software standpoint, we actually generate revenue or save them money.

And salty and car stores are two great examples of that so all of those things.

Our driving people to our business and Thats why we think we can keep this one 5% to 2% Gms growth.

Okay, and then that gets me into my second question was with car source that is a transactional revenue.

<unk> for CDK, you're not charging a subscription for the software anything right.

Yes.

Garry and good to talk with you know, we're really excited that as Brian said about the launch of our wholesale auction marketplace.

And integrates fully into the Dms and and really as soon as the dealer brings that used vehicle into the dealership.

Domestically it saves them time to post it to the marketplace and then you're right there'll be a transaction fee per car traded.

But it's an opportunity where we're going to come at a price.

Price point that allows the dealer to save meaningful amounts of money and fully integrates the posting of the transaction within the platform.

So do you have.

Oh I'm sorry go ahead, Brian .

I was just going to say good luck.

One of the things a lot of people don't realize is the number of cars per month dealers exchange between each other.

Yes.

So it's.

Large number of cars with many more than I think people typically think so we only have to even get a small percentage of that business and they say, it's just a ton of money.

With that work.

Okay.

Do you have the capability with car source to do an independent inspection.

Kind of gives us.

A degree of confidence from the dealer that's buying.

Or is this or are you not doing any kind of or is the inspection being done by the deal or how is that done because thats.

That's a real friction point with these online auction dealer to dealer platforms.

Yes.

I agree agreed and we've been very careful around how we restructure this.

Full service.

Opportunity or a full service offering and so we partner with a nationwide.

Inspection company could be able to make sure that inspections are performed and we spent a lot of time Gary piloting this in the Midwest over the last.

Several months and just the feedback from dealers has been positive.

We've traded vehicles.

And then we're ready to scale. It so for sure like you said really important part of their operation and something we think where they can trade cars more quickly. So they don't have the vehicle onto a lot longer as auto populates in and save them money on on executing the deal.

Okay. Thank you very much.

Yes.

Our next question comes from Ian Zaffino with Oppenheimer.

Alright, thank you.

May have missed this I don't know if you touched on this but congratulations.

Congratulation on the continued site count growth can you give us a little more color on that where are you seeing.

Most of those gains may have smaller side doing.

And then also.

Was it driven by let's say, one big contract or is it pretty diversified.

Hey, good to talk with you. So a couple of things going on first as Brian talked about our offer is really resonating and we're winning we're winning across the board whether it's smaller dealers bigger dealers. The other dynamic you are seeing come in is dealers are driving a significant amount of consolidation and its really these larger.

<unk> more complex dealers, which is well suited within our technology and what I would say is where we're starting to get a tailwind and.

That to continue as well from the consolidation because we over index to those larger.

To those larger dealers and so yes, I think that while we don't break out the segments the different portions of the portfolio.

We're doing better I think across the board.

And really our office resonating maybe Mahesh some comments around your view on the technology and the workflow integration that you have done a truly enabling dealers.

Yes, whats youre seeing across all of these questions is we're really trying to simplify some of these workflows across these dealers and as these dealers get larger and larger it gets even more complex.

So accounting as an example.

More dealers under the same dealer groups the more complex the accounting and that really plays to our product strengths.

As you look at all of these things and we're really just driving is simplifying these workloads as we bring it all together with the Dms.

Okay great.

And then on the subscription.

Revenue side was there any impact from lease accounting.

C 42.

Sure.

Which will be 6%.

Okay.

Yes. Thanks for the question in my prepared remarks, I highlight that there is ongoing movement with ASC 842, some geography movement, some moving from subscription to other revenue.

We don't break it out specifically in detail, but there'll be ongoing movement, just based on that accounting treatment.

Okay.

So so.

We don't know what direction per se.

Or the actual.

Impact.

Yes, I don't give a specific number what I would say is they will continue to be movement. It's not.

A significant number but we will have that ongoing movement as that lease accounting on hardware moves.

Some of that.

Subscription revenue to other revenue because you recognize it upfront for 842.

Okay perfect. Thank you so much.

No.

Okay.

I'm showing no further questions in queue at this time I will turn the call back over to Cdk's CEO , Brian <unk> for some concluding remarks.

Okay.

I really want to thank everybody for joining the call those were great questions I really appreciate it.

Just wanted to end with I'm really proud of what the team has accomplished I want to thank all of our partners and customers for.

Continuing to work with us and continuing to trust us to help them run their businesses.

Looking forward to the rest of fiscal 'twenty two and.

Really looking forward to bringing new next quarter's results.

So thank you very much for joining the call today, and we'll see you in a corner.

This concludes today's conference call. Thank you for participating.

You may now disconnect.

Okay.

[music].

Yes.

[music].

Ladies and gentlemen, thank you for standing by and welcome to CDK Global.

Q2, 2022 earnings conference call.

At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

I ask a question. During this session you will need to press Star then one on your telephone.

Please be advised that today's conference is being recorded.

If you require any further assistance. Please press Star then zero I would now like to turn the conference over to your speaker for today.

Ben gay or both you may begin.

Thank you and good afternoon.

Like to welcome you to our second quarter fiscal 2022 earnings call joining.

Joining me on today's call our CEO , Brian <unk>, Chief operating Officer, Joe tells Us where CFO Eric Garen.

Yes, sure, our chief product and Technology Officer.

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 investors Dot CDK global Dot com.

This call is being simultaneously webcast.

In addition, our website includes an updated excel schedule a supplemental financial information in.

A copy of our results presentation that we will be referencing during our prepared remarks.

Throughout today's call, we will be discussing our continuing operations only which do not include the international business results.

As you are presented as discontinued operations.

Unless otherwise noted all references to financial amounts during our call.

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 are all growth percentages refer to the year over year change for that period unless otherwise specified.

I would 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 SEC, which could cause actual results to differ materially from those mentioned in the forward looking statements.

And with that it's my pleasure to turn the call over to BK.

Thanks Robyn.

And thanks to everyone for joining the call today.

I Hope you have all had a good start to the new year.

For the second quarter, CDK continued to execute to our expectations with revenue of $437 million.

EBITDA of 168 million and EPS of <unk> 74 per share, which is a remarkable result.

Year over year site growth.

And before I get into some additional commentary on the industry.

Why did you mentioned that I am excited that youll have the opportunity to hear from our Hess Shah, our chief product and technology officer during today's call.

Many of you have asked for additional insight on our product roadmap engineering acquisition integration and the R&D investment required to execute our roadmap.

I'm excited about our progress in these areas helped this would be a great time to have no ash provide some comments and take a few questions at the end of the call.

I believe there has never been a more exciting time to be in the automotive industry.

Several trends are creating new opportunities for CDK to continue to drive innovations that elevate the consumer experience when buying and owning a vehicle.

The most significant trend is the demand by consumers to start the buying process online.

However, most people still want to finalize the deal in store.

In order to meet consumer expectations, Oems and dealers will need to collaborate and provide a seamless experience.

It wasn't that transition easily from digital.

Okay.

A great example of this is our collaboration with Hyundai Motor America, CDK Roadster solution is being used to connect Hyundai USA dot com visitors.

Dealer network digital retailing capabilities.

Leveraging our robust retail API from.

Roadster.

Under this new program further streamlines the car buying experience by helping consumers who start their shopping journey.

At Hyundai USA dot com to instantly discover local dealership pricing, while seamlessly transitioning them to a local dealership for the completion of the purchase.

Whether online or in store.

Another exciting trend that we are driving innovation around is the connected vehicle.

According to statistics, 80% of cars sold in the U S are now connected and.

By 2025, this will grow to roughly 100%.

Yes in a recent study by CDK only 58% of shoppers are even aware of connected car technology.

This is an area, where OEM and dealer collaboration will be essential.

Customers are very excited about our work in leveraging artificial intelligence to drive insights at the intersection of connected car data and dealer systems.

And Oems and dealers are increasingly using data to provide customers with experiences that predict when a service is needed and even proactively scheduled the appointment, creating a seamless car owning experience.

Lastly, I would be remiss, if I didnt mentioned, the implications of the growing adoption of electric vehicles.

First let's get grounded on the data.

While <unk> has an exciting future by 2030 research done by a global consulting firm estimates that only 32% of the new car sales will be EV and.

And Evs will make up less than 10% of the car Park.

Change is happening, but it's an evolution.

And our dealer customers will play a central role.

The EV market scales traditional Oems will be the dominant distributor <unk>.

Again based on our research by 2030.

83% of all Evs will be distributed through the dealer network. So the incumbent Oems.

These Oems see the dealer or the strategic competitive differentiator against the direct to consumer E V players.

We'll be using their dealer networks to both assist with sales and provide a superior service experience.

In closing this is an exciting time to be in the automotive industry. The auto market is large and growing.

Believe dealerships will remain the dominant channel for all coal car sales.

CDK is uniquely positioned at the heart of the automotive ecosystem to connect our industry.

And through our technology.

We unite dealerships software developers and Oh, yes.

It's through these connections that we share expertise and facilitate collaboration for the benefit of everyone.

So now I'm excited to turn the call over to Mahesh.

Thanks, P J and good afternoon everybody.

I'm happy to join the call today and provide some highlights relating to the investments we've made in our product roadmap over the last couple of years.

I'll start by sharing an overview of the architecture, our innovation efforts and provide an update on the progress we have made with acquisition integration over the last 12 months.

Hopefully at the end of this you will have a better sense of how these efforts tied together as well as an appreciation for how they are already impacting customer response and contributing to our financials.

I look forward to providing regular updates on these efforts in future, earning calls and in meetings with you over the course of the year.

First off regarding our architectural footprint, we've provided supplemental material this quarter, including a slide showing the architecture of our solutions.

We've built over the last two years as a connected cloud platform architecture that is deployed in the cloud and utilizing common building blocks, which are developed by CDK to speed innovation integration and deployment of new functionality.

This concept is not new in software development and a similar model has also been used in the automotive industry with the concept of a common chassis.

With renewable components that are paired with unique styles engines and capability layered on top.

In our space components like document management and esignature can be utilized by any application using our API without having to be built into each application separately.

This unlocks a tremendous amount of efficiency, we didn't have just two years ago.

Data, which was once fragmented is now connected allowing us to deliver insights and to enable a trusted stream of data that is critical to the emerging connected car adoption.

Applications, which were one siloed with limited workflow capability are now integrated through shared services, making the sales process much simpler for dealers.

This is enabled by hundreds of modern API that facilitated integration and buy a cloud environment that unit standard containers and product images, which improved deployment and management of our products, while running at scale across thousands of customer sites.

The structure I just described is like what other software peers, sometimes call a platform as a service.

And it's central to our efforts to simplify the development and deployment of cloud based applications.

Now turning to our innovation efforts using our cloud platform, we are updating our products and moving faster in developing and deploying new software while driving innovation.

That forms are critical as they allow us to leverage reasonable components and deliver continuity of information across our products ultimately simplifying the experiences of our customers have with our software.

For example, we've now deployed several simplifications and our accounting workflows that enable customers to simply capturing voices by taking a picture with a mobile phone and loading them into the system for digital payment.

Our lightspeed product used by customers in power sports Marine and RV has just undergone a significant upgrades and will be migrated to a public cloud over time.

The refreshed platform now includes capabilities like embedded tax new signature and as <unk>.

Led to revenue expansion opportunities in that customer set.

On the truck and agriculture side, we are now introducing additional solutions such as Ely CRM heavy equipment integrated rental and cyber security are helping drive growth.

Turning to acquisitions.

Architectural work, we've completed has allowed us to rapidly integrate our recent acquisitions and benefit our customers who are excited to deploy these new solutions in their dealerships.

First off I am pleased to say, we've integrated roadster with our product portfolio and are now, enabling a simplified sales process for dealers.

Last quarter, we mentioned that the engineering teams of roadster newly merged under one leader to help create an efficient development team.

These teams have moved rapidly and we're happy with the progress and the resulting positive response from our customers.

Through a combination of roadster and our cloud platform, we have now digitize the entire workflow.

Salty has been fully integrated into our portfolio, taking just 30 days to complete.

Workflow automation to initiate the insurance process for vehicle have been seamlessly integrated into the sales process and the product has already been deployed with a number of dealers.

This is remarkable given we just closed the deal in Q1.

Customer adoption has been brisk and we have seen a significant level of interest from our dealers to deploy in coming months.

A new and used vehicles.

Neuro and is also being leveraged as a built in component of our core products, including within CDK service, where we have deployed the predictive service capability beginning with the top five Oems.

The pipeline is healthy for FY, 'twenty, two which will add to a healthy customer base of Oems dealers and automotive Isps.

With Telus is critical to executing our strategy to become the enabler of product innovation and <unk> capabilities are foundational to our modernization efforts providing.

Providing an efficient way for us to enable the benefits of our open architecture approach.

In addition to internally focus benefits, we continue to add new API and applications into our <unk> marketplace.

Both from CDK, and third parties and connect them into our customer workflows, enabling a faster pace of innovation for our customers.

We believe this will allow us to be much more agile in meeting our customers' needs.

Today, and tomorrow and will differentiate us as many Oems and dealers look to pair back the number of software providers. They use in order to lower the complexity and cost of their operation.

The traction we have seen has been remarkable and gives them. It gives us confidence. This platform is resonating with our customers and partners as a prime resource for software development and innovation for the automotive industry.

I am proud of what we have built over the last few years.

As I look into the next few quarters, we will continue to invest in innovation efforts, which allow us to execute our roadmap, while keeping R&D expense as a percent of revenue at current levels.

I think our healthy and sustainable.

I am excited about the ongoing innovation this will introduce for our customers in the coming year and I look forward to meeting with you again soon.

Now I'll turn the call over to Joe.

Thanks, Mahesh and welcome everyone to the call.

I want to start by adding some context around the strategy and technology updates that PK and the hash covered earlier with respect to our go to market activities.

We are proud of the performance we had this quarter with revenue growth of seven 5%.

Our growth is being driven through leveraging the deep customer relationships built by our sales organization.

Delivery of superior customer experience, but all of our customer facing teams.

And our market, leading solutions and technology.

The way, we think about growth.

Number one maintaining foundational building blocks.

We grow our installed base of customers.

We have been doing this quarter after quarter, both in our foundational dms as well as in our broader applications and youre seeing that come through in the financials.

And how she talked about the depth of the technology investment we have made in these areas and thats already making a meaningful contribution to our revenue per site growth.

As we continue to scale. These innovative solutions into the market, we are seeing unprecedented adoption and attribute this to our relationships with our customers and the trust we have built with them.

And lastly over the last couple of years, we have planted several seat for investment both organically and Inorganically that are additive and gives us confidence we can grow well into the future <unk> touched upon several of these new investments, including salty neuron.

And for <unk>.

I am excited to share with you that yesterday, we officially announced car sourced <unk>.

The new solution is an added benefit to dealers using CDK drive that creates opportunities for time and money.

It enables automated inventory listing to the marketplace from a large trusted network of actively govern and screen sellers nationwide.

This is another great example of how we are leveraging our unique position within the automotive ecosystem to create a seamless integrated experience across all aspects of selling buying and owning a vehicle from sourcing to retail sale and beyond.

We're also very excited about how all these innovations are generating even more strategic conversations with Oems.

Over the last six months, we have had several significant planning meeting with Oems to engage with them on their most strategic projects.

Let me give you an example.

A few months ago, we were asked by a top three OEM partner with them on an opportunity to totally modernized the entire service experience.

This included building a mobile application that would leverage connected car data.

The customer with their local dealership.

Managed service alerts warranty items and related highlights.

Then they still take the service appointment.

The goal is to have a true digital first experience that gives the consumer the ability to engage with the vehicle and the dealer share all relevant service information when the appointment as scheduled.

That way when a consumer arrives at the dealer it is seamless integrated and a wonderful guest experience and an opportunity for everybody to win.

This is what's resonating with our customers and what is driving CDK to their strategic center between dealers and Oems.

We have always played an important role in facilitating collaboration between dealers and Oems and we expect that to expand and accelerate.

Now I'll share a few highlights from the quarter.

Our teams performed well on both sales and installations this quarter we.

We were able to surpass our expectations on both metrics. Despite a typically seasonally slower quarter that has fewer selling days and despite the abnormally low auto inventory environment.

We expect these headwinds to persist into the third quarter.

Revenue per site for auto remained strong and we hit a new Rps record in our GCC business.

Auto revenue per site grew 4% with contributions from the roadster acquisition, representing approximately 2% and the remainder from higher layered application penetration.

We have continued traction with our strategic application with adoption of CDK service.

<unk> cloud and cloud connect.

Additionally, the universal product sales team that we discussed last quarter continues to ramp and has gained traction with elite now.

Now includes a roadster focused sales team.

We are excited about their ability to establish relationships with new customers by leveraging exciting new products like roadster and salted.

Auto sites were up 2% the fastest growth we've seen since 2015, while adjacency sites grew over 4% and hit another all time high.

Within auto the strength of our product portfolio has led us to over 80 competitive wins in Q2.

Additionally, we have had another quarter of significant year over year site growth of CDK service and easy CRM.

We are seeing an increase of roadster installation both at sites with our Dms.

And those were our competitors Dms is installed.

And we see a significant pipeline of interest from dealers looking to add this product to their workflows in response to the modern retail trends Brian articulated earlier.

The adjacency business had another strong quarter with revenue per site growing 6%.

The improvement as Mahesh mentioned earlier had generated interest from customers, who are looking to modernize their DNS to help improve their operations.

Our solutions in this space are very competitive and we expect to see continued site growth in both recreational and heavy equipment parts of our business.

We can add unique value to both dealers and Oems with our end to end platform, which gives our customers and partners the greatest flexibility to adapt to their market.

I am pleased with our competitive position at this point year.

Our teams have the right product.

And incentives to deliver market, leading value to our customers and continue to drive our growth in coming quarters.

I'll now turn it over to Eric for the financial results and outlook.

Thanks, Joe and good afternoon, everyone.

I'll start by walking you through our second quarter results and related metrics.

And then conclude with commentary on our outlook for the remainder of fiscal 2022.

Second quarter revenue was $436 7 million up seven 5% versus last year.

Revenue growth, excluding the impact of the acquisitions was approximately 5%.

Subscription revenue was $349 million.

Up 6% from the same period in fiscal 2021.

This includes a our growth in core Dms and applications and from the impact of acquisitions, partially offset by the impact of ASC 842 lease accounting.

Which shifts a portion of the revenues for certain products out of our subscription revenue to other revenue and.

And modest headwinds from the partner program.

Other revenue was $49 million up 26%, reflecting higher hardware sales.

Now turning to earnings.

Second quarter, EBITDA grew 8% to $168 million.

Higher EBITDA was driven by income on higher revenue and favorable software capitalization.

Partially offset by higher employee related costs and increased travel and entertainment expenses.

Our effective tax rate was 25 four in the quarter.

Earnings per share for the quarter Rose 25, 4% to <unk> 74.

Primarily due to lower interest expense and higher revenue.

Free cash flow was $125 million.

Up from $112 million last year.

We paid dividends of $18 million in the quarter, and we also repurchased $107 million of our common stock.

Bringing us to $208 million of repurchases since when we started the program late last year.

We continue to expect to repurchase between 202 hundred $50 million of stock by the end of fiscal 2022.

Our balance sheet remains strong with net debt to adjusted EBITDA of two six times in.

In the range of our target of two five to three times.

Now turning to guidance.

I am narrowing the range for fiscal 2022 revenue and adjusted EBITDA and.

And raising the midpoint and range for adjusted EPS.

We expect full year revenue between $1 75 billion to $1 815 billion.

EBITDA between $660 million $680 million.

And EPS between $2 85, and $2 95.

With an effective tax rate range between 25 and 26%.

In summary, we are on track to meet our financial targets for the year, while continuing to invest in innovation and customer success.

I am proud of our employees' execution in Q2, and look forward to driving profitable growth as we move through the remainder of fiscal 2022 and beyond.

Thank you and we will now open the line for questions operator.

Operator.

If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.

To withdraw your question press the pound key.

Again that is star then one to ask a question.

Our first question comes from Josh Baer with Morgan Stanley .

Great. Thank you for the question.

I wanted to ask just on a couple of the key Kpis and metrics for you guys as far as Dms sites, just a strength.

Across autos and Adjacencies was it was great to see you again.

Could you just double click there and kind of touch on how we should think about.

The sustainability of those site additions and then I have one on average revenue per site as well.

Hey, Josh this is Pete.

You bet I mean, we're really proud of it I think if you take a look at it our focus is something like.

12 quarters in a row now that we've had.

Growth in our Dms sites.

And I think I always tell people you really want to look at the growth in Dms sites and the revenue.

Those two metrics how are you.

Are we growing and our people spending more with us.

And so we think this is absolutely sustainable that we can keep growing in that one 5% to 2% rate and Thats. If you look at the forecast that Eric just talked about for the year end guidance.

Projects are one 5% to 2% rate for the year.

Joe anything.

Yeah, No I, just think you see everything coming together Joshua when we look at it just on <unk> how.

How do you talk about the technology.

Between our sales team our service team everything is coming together and we feel really good about.

We're the teams performed and what we have ahead.

Got it and then on the revenue per site, we saw the growth on a year over year basis.

But was wondering why did that move lower on a sequential basis, what was causing that and how should that.

Average revenue per site trend.

Going forward.

Yes, Josh Thanks for the question. This is Eric one of the Big drivers. There is we did have some large enterprises actually.

Renew with us in the prior quarter. So we were a little bit higher in Q.

Q1, I would see that grow as we move forward in Q3 and Q4 on a sequential basis.

Okay.

Renewal in the prior quarter.

Could you just explain that how that impacted last quarter and then this quarter.

Yes, so in the prior quarter when we renewed it it's part of the 606 calculation it was quite.

Quite large.

Enterprise, so as that renewed its shifted some of the calculation in the quarter I would look at the year over year as you saw in Joe's comments, increasing year over year and what I would anticipate is there.

That will normalize as we move forward and we would see sequential growth.

Moving forward in Q3 and Q4.

Yes, Okay. That's helpful and maybe just maybe just to add I mean, we've talked about before we've seen this in that mid single digit range and like Eric said I think as you as you look at what we have ahead and the second happened and the momentum we have we feel that it will return.

As we go forward Q3, Q4 and be at a level of increase that youre using.

Great. Thank you.

Our next question comes from Gary <unk> with Barrington.

Hey, good afternoon, everyone a couple of questions here.

Are we getting to the point now BK that with this great set of products that you have that complements the BMS.

Product overall are you getting more dms.

Interest from the fact that you have this great product line that is helping the dealers sell cars digitally helping on CRM.

Et cetera, et cetera could you maybe comment on that.

Sure I can I can start and then.

Part of the reason why we wanted to have the harsh on the call and I think youll see more and more now is.

We're really proud of the products, we're proud of where we're at right now and I think it's good for you. This year from the guys who are really doing the work, but absolutely. If you look at the.

The strength, we've seen already with roadster right. So we said we would integrate it within the first hundred days mashing team absolutely did that the roadster team has done a great job integrating in salty.

Another Great example, fully integrated in.

All of these products are now really powering.

The dealerships have options have choices.

They really like the portfolio and what they even like more as we talk to them about our roadmap for the future of where we're headed with digital retail where we're headed with several other <unk>.

You saw things like we announced yesterday yesterday or day before car source.

That's another Great example, where we're delivering products to them now.

Actually they don't have to pay us for.

From a software standpoint, we actually generate revenue or save them money.

And salt and car stores are two great examples of that so all of those things.

We are driving people to our business and that's why we think we can keep this one 5% to 2% Gms growth.

Okay, and then that gets me into my second question would with car source that is a transactional revenue.

<unk> or CDK, you're not charging a subscription for the software or anything right.

Yes.

Gary Good to talk with you know, we're really excited that as Brian said about the launch of our wholesale auction marketplace.

And integrates fully into the Dms and and really as soon as the dealer brings that used vehicle into the dealership.

Domestically save them time to post it to the marketplace and then you're right there'll be a transaction fee per car traded.

But it's an opportunity where we're going to come out.

Price point that allows the dealer to save meaningful amounts of money and fully integrate sikorsky into the transaction within the platform.

So do you.

Oh I'm sorry go ahead, Brian .

I was just going to say good luck.

One of the things a lot of people don't realize is the number of cars per month dealers exchange between each other.

So.

It's a large number of cars with many more than I think people typically think so we only have to even get a small percentage of that business and they say, it's just a ton of money.

With us.

Do you have the capability with car source to do an independent inspection.

Ed.

Gives us.

A degree of confidence from the dealer thats buying or is this or are you not doing any kind of or is the inspection being done by the deal or how is that done because that's that's a real friction point with these online auction dealer to dealer platforms.

Agreed agreed and we've been very careful around how we restructure this.

As a full service.

Opportunity or a full service offering and so we partner with a nationwide.

Inspection company could be able to make sure that inspections are performed and you only spent a lot of time Gary piloting this in the Midwest over the last.

Several months and just the feedback from dealers has been positive we've traded vehicles.

Okay. Thank you very much.

Yeah.

Our next question comes from Ian Zaffino with Oppenheimer.

Alright, thank you.

I may have missed this I don't know if you touched on this but congratulations on the continued site count growth can you give us a little bit more color on that where are you seeing.

Most of these gains Manhattan has the smaller side doing.

And then also.

Was it driven by let's say, one big contract or is it pretty diversified.

As dealers are driving a significant amount of consolidation and its really these larger more complex dealers, which is well suited within our technology and what I would say is where we're starting to get a tailwind and.

Check that to continue as well from the consolidation because we over index to those larger.

So those larger dealers and so yes, I think the what.

We don't break out the segments or the.

Different portions of the portfolio.

We're doing better I think across the board.

And really our office resonating maybe mahesh some.

Some comments around your view on the technology and the.

Workflow integration that you've done that's really enabling dealers.

So accounting as an example.

More dealers under the same dealer groups the more complex the accounting and that really plays to our product strengths.

As you look at all of these things and we're really just driving is simplifying these workloads as we bring it all together with the Dms.

Okay great.

And then on the subscription revenue side was there any impact from lease accounting.

ASC 842.

Sure.

It will be 6%.

Okay.

Yes. Thanks for the question in my prepared remarks, I highlight that there is ongoing movement with ASC 842, some geography movement, some moving from subscription to other revenue.

We don't break it out specifically in detail, but they will there'll be ongoing movement, just based on that accounting treatment.

Okay.

So so.

No direction per se.

Or the actual.

Impact.

Yes, I don't give a specific number what I would say is they'll continue to be movement, it's not.

A significant number but we will have that ongoing movement as that lease accounting on hardware moves.

Some of that.

Subscription revenue to other revenue could you recognize it upfront for $8 42.

Okay perfect. Thank you so much no problem.

Okay.

I'm showing no further questions in queue at this time I will turn the call back over to Cdk's CEO , Brian <unk> for some concluding remarks.

Okay.

Really want to thank everybody for joining the call those were great questions I really appreciate it.

Just wanted to end with I'm really proud of what the team has.

Accomplished I want to thank all of our partners and customers for.

Continuing to work with us and continuing to trust us to help them run their businesses.

Looking forward to the rest of fiscal 'twenty two and.

Really looking forward to bringing new next quarter's results.

So thank you very much for joining the call today, and we'll see you in a corner.

This concludes today's conference call.

You for participating you may now disconnect.

Q2 2022 CDK Global Inc Earnings Call

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