CDK Global, Inc. (CDK) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CDK Global first-quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to turn the conference over to Elena Rosellen, Senior Vice President, Investor Relations. You may begin.

Thank you. I am here today with Steve Anenen, CDK's President and Chief Executive Officer; and Al Nietzel, CDK's Chief Financial Officer. Thank you for joining us for our first-quarter FY16 earnings call and webcast.

Steve will begin the call with the highlights for the quarter and then provide an update on the execution of our business transformation plan that we laid out at our Investor Day in June. Al will then take you through the details of the first-quarter results and comment on our forecast for FY16.

Regarding the quarter, our business segment results now include the impact of foreign exchange rate fluctuations. As a result, we have provided FY15 business segment results on the same basis. However the revenue KPIs are intended to be indicative of business performance excluding the impact of foreign exchange rate fluctuations.

I also want to point out that in this morning's press release and in our earnings deck we have shown both the GAAP results as well as the adjusted results for comparability of the reported periods. Throughout today's call when Steve and Al reference financial amounts, those are on an as-adjusted basis. A reconciliation of GAAP to non-GAAP financial measures is included in this morning's press release and is available on the investor relations section of our website. Finally, we anticipate filing our form 10-Q later today.

Before we get started, I would like to remind everyone that remarks made during this conference call will contain forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including those risks detailed in our filings with the SEC.

With that, I'll now turn the call over to Steve.

Thank you, Elena. Hi, everyone, and thank you for joining us this morning. I am pleased with our first-quarter results.

Adjusted revenues grew 2%, 5% on a constant-currency basis as anticipated. Growth in adjusted pretax earnings was stronger than anticipated at 23%, 27% on a constant-currency basis and adjusted pretax margin expanded 320 basis points. Adjusted EBITDA margin increased 310 basis points to 25% for the quarter. Some of this performance resulted from the strength in the business and the timing was also a contributing factor. Al will provide more details on this in a few minutes.

During the first quarter we continued to gain share in ARNA and revenue per client site increased from a year ago. For ARI, client site counts were down primarily due to auto businesses on the continent as expected. However, these losses appear to be flattening. It's too soon to call it a bottom but encouraging for now.

Revenue for client site in ARI continued to grow with increased users. Revenue growth for digital was dampened primarily by the lower website counts, as anticipated. We are continuing to expand our digital OEM relationships and are pleased to announce that we have signed an agreement with Infinity to provide website services to their dealerships.

CDK was selected in a very competitive environment. Ours is the industry-leading data-driven solution that provides what our dealership customers are actually looking for. We are excited to be working with the Infinity team. We will have more to report on this as the year unfolds.

Before Al provides details on our financial performance and what to expect for the year, I thought I would update you on our progress. We are continually improving our clients' experiences and becoming more efficient as we execute our business transformation plan to deliver significant earnings growth and margin expansion over the next three years. As you recall, in June, we announced our plan to transform CDK through balanced organic revenue growth and significantly increased earnings which we believe is the optimal business model for delivering long-term value to both our shareholders and our clients.

Successful execution against our transformation plan will result in CDK being more efficient and easier to do business with for our clients. CDK's transformation is centered on driving operational excellence which will, again, be the focus of my comments this morning. To remind you, driving operational excellence comprises three work streams: streamlining the organization, simplifying the business, and engaging with clients more efficiently.

Last quarter I spoke to you about what we are doing to optimize our sales process and our initiative for strategic sourcing and procurement which are expected to yield over $12 million in cost savings this fiscal year. This quarter, as we continue to execute, we have announced plans to open our new Client Services Center of Excellence and are well underway with the reengineering of our implementation process.

Now I will spend a few minutes on each of these two initiatives. We have spoken with you about launching a hub-and-spoke model in order to consolidate our facility footprint and better scale our operation in lower-cost geographies. To that end, we have taken a significant step in streamlining the organization with the September 28 announcement of our plan to open the new Center of Excellence for our clients across North America. The new hub will be located in Norwood, Ohio which is part of the greater Cincinnati area, and we will employ approximately 1,000 associates who will primarily focus on providing the highest quality service to our clients. Additionally, the facility will house other CDK internal shared services operations.

Our new services hub will be a best-in-class client service facility utilizing an improved model used by many global companies. Combined with recent announcements we've made about updates to our customer service technology and process, the new service center will stand out in our industry as revolutionizing the approach to service. The benefits we expect to gain include a stronger, more centrally focused organization with economy of scale benefits. In addition, CDK and our clients will benefit from increased knowledge sharing, communications, teamwork, improved career path opportunities for our associates, and ultimately an improved client experience.

We chose the greater Cincinnati area because of the access to a large and diverse talent pool and the strong surrounding university presence, along with the attractive cost of living environment and lower infrastructure costs. We also will leverage our current CDK service associates in nearby Florence, Kentucky. These associates will be the talent base for our new Center of Excellence which will help us accelerate our ramp-up time.

We have already begun recruiting and plan to be fully operational by mid calendar 2016. Advancing this hub model will result in rationalizing current facilities. This is a multi-year plan to ensure a smooth transition.

We've partnered closely with both the State of Ohio and the City of Norwood to make sure that the facility and jobs we are bringing to the local community will benefit everyone. We anticipate approximately $5 million of cost savings in FY16, however, the longer-term cost savings are expected to be significant. I will share more on this important work stream as it gains momentum.

Now let's focus on client implementation. We have also begun execution on reengineering our process which is part of the engaging clients more efficiently work stream. Our goals are to simplify installation and training and reduce the implementation time on site at the dealerships to get them up and running sooner while making the implementation experience far better for our clients.

In launching our new best-practices model, we will help ensure that our clients achieve a desirable return on their investment in CDK solutions. Our initial goal is to improve the client experience while reducing average implementation times by approximately 30%, with longer-term goals for further reductions.

As we reset our implementation strategy, we have looked at all components, the process, our people and the tools that we use. We have launched successful caissons on each area. We are focusing our goals on how we can automate, eliminate and combine back-office activities to reduce non-customer-facing time.

We are reorganizing the teams to align with the shared services model. This includes redefining our hiring profile and career progression to develop workflow experts to best serve our clients.

We will also further leverage virtual capabilities with the development of these new tools. These tools will include a new pre-installed training system for our clients and will be available on mobile devices to ensure better utilization of our services.

Again, we are enhancing our processes that will make it easier for our clients to do business with us. The reengineering of our implementation process has resulted in less required headcount and will provide more than $5 million of cost savings through this fiscal year and more than $15 million on an annualized basis.

I am pleased with our progress thus far and want to emphasize that the actions I discussed are an indication that our execution is thoughtful and deliberate. We are keenly focused on creating positive client outcomes as we strive to significantly increase profitability and expand margins while growing our revenues and extending our market leadership position.

These actions are all value added to our shareholders and our clients. Each quarter, I will provide you with more updates.

With that, I will now turn it over to Al to take you through our results for the quarter and then our FY16 forecast. Al?

Thanks so much, Steve, and good morning, everyone. We posted solid results for the first quarter of FY16. Before I continue with the results, I again want to remind you that we were not a public company during last year's first quarter so it is necessary to show the pro forma adjustments in order to make things comparable on a year-over-year basis when comparing FY16 to a year ago.

The reconciliation was shown both in our FY15 year-end earnings release as well in this morning's press release. Keeping that in mind, my comments for the first quarter as well as the FY16 forecast, will largely be on these as-adjusted non-GAAP basis.

Now let's move to the results for the quarter. As Steve stated, total revenue growth was 2%, 1% organic or 5% growth on a constant-currency basis. Like other international operations, we face some steep headwinds primarily against the euro, Canadian dollar, and pound Sterling. Particularly for ARI, the impact of FX this quarter was significant. Framing my comments on revenue are the KPIs related to recurring revenues, excluding the impact of foreign exchange rates that we provided in the earnings release.

ARNA Segment revenues grew 6%, 4% organically and 7% on a constant-currency basis. Increased site penetration of our dealer management system, or DMS, contributed nearly 2 points of growth, increased average revenue per DMS client site, contributed 4 points of growth, and increased transaction revenues for our credit services, and vehicle registration businesses contributed nearly 2 points growth.

For ARI, revenues declined 9% entirely due to unfavorable exchange rates, but grew 4% from increased revenue per DMS client site primarily from additional users. Site counts within ARI were down slightly on a year-over-year basis primarily in Continental Europe, while site counts in China grew during the quarter.

For digital marketing, revenues grew 1%. As we discussed last quarter, we expected a year-over-year growth challenge this quarter due to the anticipated decline in the number of client websites resulting from changes to certain OEM programs. There was also strength in last year's quarter from an increase in OEM budgets for advertising spend which made comps more challenging.

Moving from revenues down to cost, our cost of revenues declined slightly from a year ago on an as-reported basis. This was due to the divestiture of the internet leads business in last year's fourth quarter and the benefit from foreign exchange rates in the current quarter, partially offset by increased costs associated with the migration of hosting facilities that support ARNA and the digital segments.

Our research and development spend, which is included in cost of revenue, represents about 8% of CDK's revenues. Let me pause for just a moment on R&D. Investment in product is an important part of the engaging clients more efficiently work stream and we have a robust road map of initiatives. We're continuing to invest in a number of products, including our service edge offering, our front-office suite of products, Autoline Drive and digital marketing in order for us to deliver the best solution to our clients.

Moving down, SG&A on an as-reported basis, declined 12%. There are several pluses and minuses here. Similar to cost of revenues, SG&A decreased due to last year's divestiture of the leads business and foreign favorable exchange rates in the current quarter.

Last year's first quarter included severance charges and trademark expense from our former parent company. And this year's first quarter benefited from certain items, all of which we do not anticipate to recur this year.

This quarter also benefited from the sales optimization work stream. These benefits were partially offset by $10.3 million of incremental stand-alone public company costs in this year's first quarter.

You also saw in the press release restructuring expenses of $1.9 million in the P&L for the quarter. This represents primarily employee-related costs incurred in connection with our business transformation plan. This and other first quarter costs of $1.7 million associated with the transformation program, are shown as pro forma adjustments in our non-GAAP tables. Interest expense was $9.3 million for the quarter compared to $1.1 million a year ago, related to the term loan that was secured during September of last year prior to the spend.

Moving on from costs, adjusted earnings before income taxes grew 23% or 27% on a constant-currency basis. Our adjusted pretax margin expanded 320 basis points for the quarter with all of the business segments contributing to the margin improvement. We enjoyed terrific operating scale in the business but about half of the total Company margin improvement was from timing and items that will not repeat. These included the true-up of the FY15 bonus accrual, release of a vendor-related obligation and severance charges from a year ago that gave us an easier comp. For the most part, these were contemplated in our full-year estimates but not all in the first quarter.

Adjusted EBITDA margin expanded 310 basis points to the quarter to 25%. Adjusted net earnings attributable to CDK increased 14% due to the factors I just discussed, partially offset by the higher anticipated adjusted effective tax rate of 36% in the quarter compared to 31.1% last year. The FY15 first-quarter ETR was lower due to evaluation allowance adjustment that provided an income tax benefit in that quarter. Finally, adjusted diluted earnings per share attributable to CDK increased 15%.

Overall, the quarter represents a good start to the fiscal year. Our cash balance at September 30 was nearly $360 million and we repurchased approximately 200,000 shares during the quarter for a cost of $10.3 million. This was lighter than anticipated, however, I want to assure you that we remain committed to returning cash to our shareholders with the goal of reducing our cash balance to $250 million by the end of the fiscal year, and share repurchases will be a significant part of getting us there. Return of capital is absolutely top of mind for us and we stand by the plan that we outlined at our June Investor Day, which is to return 70% to 80% of our free cash flow to our shareholders over the next three years.

Moving on to the forecast for FY16, our full-year forecast on an as-adjusted basis is unchanged from what we provided on July 29, so I'm not going to read through it, but will spend a few moments on impacts for quarterly skewing. For the full year, we expect a 1 to 2 point drag on revenue and about a 2 point drag on earnings growth from foreign exchange rate fluctuation. For the second quarter we expect a 2 point drag in revenue and a 2 to 3 point drag on earnings.

We continue to anticipate pressure on digital marketing revenues for Q2 due to the lower website counts. Additionally, last year's second quarter included certain items that will not repeat. And I want to be clear that while we are pleased with the first-quarter results, we do not anticipate achieving these level of earnings growth and margin expansion in the second quarter due to the nonrecurring nature of the items I discussed. Therefore we expect revenue and earnings growth in Q2 will be below the full-year forecast ranges.

In summary, the forecast represents the first stage of us delivering against our three-year transformation plan. I feel good about the start of our fiscal year and I think we are on the right track.

With that, I will turn it back to the operator and Steve and I will be happy to take any questions you have.

(Operator Instructions)

Rayna Kumar, Evercore ISI.

Good morning, this is Anthony Cyganovich on for Rayna Kumar. I was wondering if you could talk about quantifying your share gains in ARNA and what the underlying drivers are of that.

Steve will add in a moment, but the model that we've had is business as usual. We believe the solution set that we have in the marketplace is the best out there. And clients continue to come to CDK for a variety of reasons, including the partnerships that we enjoy with them for many years, and so forth.

We are pleased with the continued share gains that we enjoy. And as we outlined in Investor Day as well as other meetings is continuing to grow our business through share gains, and penetration of our layered applications is a key part of what we do.

Market share has always been a cornerstone of our sales channel. So we are on it every day. I think we have a lot of valuable, if you will, solution sets that can help dealerships become more profitable. I think the insights that they get, whether it be because of our front-office suite. Or, if you will, our capabilities on the back office, I think is a differentiator for us in the marketplace. With that, we've been able to provide a high degree of value for our clients as evidenced by the retention rates that we are able to enjoy.

Okay, great. Thanks, guys.

Ian Zaffino, Oppenheimer.

Hi, thank you. I also want to follow up on that last question, maybe describe you're seeing now as the competitive environment, given some of the M&A in the space and new ownership in the space. Have you seen any reaction? I know you guys have a great product, but are you forced to emphasize that even more, given what's happening in the competitive environment? Or is there even anything going on in the competitive environment? Thanks.

There's always a lot going on in the competitive environment. I think the acquisition, the recent announcement with Cox and Dealertrack is still early. Nothing has really changed dramatically, although we're keeping an eye on it.

But we are playing our game. We have a great, if you will, assembly of terrific assets that really blankets from the digital space all the way through the back-end service drive, with a number of solutions that are very, very meaningful to the dealership groups. As a result of that, I think we benefit from being in this a long time and the proven, if you will, responsiveness that we have to our solution set.

We are trying to innovate as often as we can. So every one of our areas is under constant review to figure out ways we can make it better for our clientele. As a result of it, I think we stack up very well against our competitors. And whatever M&A activity they've got going on is really to look at the dynamics in the marketplace and figuring out how they can best, if you will, face off against them.

Okay. And then, the follow-up question would be also, when you think about the Company as a whole and thinking on what we've read or seen in the news recently, what are the benefits of the Company as a public entity versus a private entity, the way the rest of your competitors are? Give us the pros and cons and how you view it.

I'm actually not going to comment a whole bunch on it, other than we are who we are. We like where we are. We like the position we enjoy in the market and we're going to continue to operate the way we do. It doesn't really make a whole bunch of sense to comment on the pluses and minuses and so forth. We are where we are.

Okay. Thank you very much. Good quarter.

Thank you.

Brian Essex, Morgan Stanley.

Great, thank you for taking the question. I was wondering if you could talk a little bit about what you've done so far on improving the pricing bands and compliance under contracts with your customers. Any initial feedback from customers? Or any substantial changes so far since you've highlighted that you might go to market a little bit more efficiently and better control how customers adhere to pricing arrangements?

Yes, I think, Brian, a couple things. First off, we're trying to put a very disciplined model in place, relative to how we discount, in making sure that we garner the right kind of, if you will, price for the value that we provide. We really level set that going through the early signs of our transformation.

Secondly, we're looking at that value and saying, how do we become easier to do business with, especially from engaging with our customers or potential customers from a sales standpoint? As a result of that, we are looking at like kind of solutions that we can bundle together that makes a more compelling offering at the right price points to really drive home the value. So, we've been doing that.

And in some regards we take a look at the holistic work streams and figure out where it is that we ought to be more efficient in how we can, if you will, talk about a return on investment strategy for our dealers and why they can benefit and ultimately make more profits for their organization. All of that has been in a very disciplined and succinct way that our sales channel has been, if you will, realigned.

If I could follow up on your recently announced third-party access program. How long have you been pursuing this? And are there any key takeaways in what you internally expect for a lift in revenue due to that program, based on what your competitors have done in that space?

First off, we've been around the whole access piece for a while -- for a number of years. But I think, given all of the recent, if you will, concerns around cybersecurity and the way that you have to secure your data sharing, and making sure that you are very visible about what you're doing in order to make sure that our clients' data is protected, we wanted to step back and take a real holistic approach and say what it is that we can do to look at the numerous vendors that are accessing our clients' database and making sure that they are certified appropriately so that we and the dealers have line of sight on who is accessing that data.

As a result of it, we are investing heavily in this space to make sure that we've got the right kind of infrastructure to be able to monitor whether it is DDoS attacks or phishing instances or the like to make that we're as secured as possible. As a result, we looked at all the integration points that we have in order to do what we call our third-party access agreements and are trying to standardize on that program.

It's not so much about what it is that we're garnering in revenue. It's really about trying to make sure we're as secure as we can possibly be and as transparent with the dealers about who is accessing what information and when. That's how the program was built to begin with. So, hard to articulate what -- there will be some revenue lift out of that. Clearly the focus has all been around securing that data.

Was there any way to quantify how many SIs are out there? And as you require them to be certified, how much more is left to go?

Yes, Brian, we're looking through it. And as we get further down the path, we will know more, but it is certainly part of the analysis.

Okay, great. Thank you very much.

Gary Prestopino, Barrington Research.

Hi, good morning, everyone. A couple of questions here, I don't know if you called this out because I was writing down so quickly, but, first of all, how much did -- on the average revenue per site, can you quantify what additional layered apps sold added to that revenue? Is it 1 point, 2 points, 0.5 point?

Gary, what we do is we called out 4 points of growth in ARNA for increased revenue. It's a combination of pricing that is incorporated into it, plus additional lift that we get because of application penetration and so forth. And numbers of users that are added to client sites and so forth. That's all blended in that stat that we provide of 4% growth. That is in the tables that we have in the release as well.

We don't granularly break out how much is -- what is exactly pricing, how much is this app. But that's really how we quantify it, no X amount of revenue growth, new clients in X month, due to application penetration and pricing.

Okay, that's fine. Maybe you could share with us in terms of some of these layered apps that you're out there selling. What are some of the key ones that the dealers seem to have a significant appetite for?

The first one is really automation at the next level of service, which I've talked to many of you about -- we call it our service edge platform. It's about appointment setting; it's about lane write-up; it's about inspect when you put it up on the lift; and be able to access things from a tablet to actual cashing out without having to go to the cashier -- you can do it electronically with your digital wallet; and e-payment is an application. That's all bundled together or you can buy it a la carte.

It has got tremendous legs and growth for the back end of the dealerships. Very profitable, very good for them if they engage their consumers. Most importantly for us, it has been getting a lot of good positive traction.

There are other applications, particularly around inventory and, the way we call it, lot manager. Or things that we're doing with our exchange product on the equity calculations. Those are all generating some lift for us through our application set. Al?

And then the other is telephony. We continue to enjoy good success with the integrated telephony solution that adds to the application suite.

You are still about 30% to 40% penetrated on the dealer space throughout all of your applications?

Not that high, Gary, actually. On a lot of the apps that Steve was just referring to it's much lower than that. We view that as fairly considerable upside for us in terms of opportunities.

Great. A couple of other questions. You talked about growth and installations in China. Are you doing anything with the domestic OEMs there? What we are hearing is that the transplants are really the companies that are getting hit with the slowdown in car sales. And the domestic Chinese manufacturers are doing better simply because they are producing a lower-priced car.

What I would say, Gary, is heretofore we've been really aligned with most of the imports, not as much on the local mix in China. However, we have had some success with some larger dealer groups there, but it is really early and just starting. The focus has really been on the European OEMs primarily.

The luxury vans.

Yes.

The luxury vans, okay. And any comments on the Volkswagen situation that you want to share with us?

No, they've been a great partner for us. We have a great relationship, and nothing that's going to impact us for the foreseeable future. So we are okay.

Thanks a lot, guys.

Stephanie Davis, JPMorgan.

Good morning, guys, congrats on the quarter. Can you give us an update on your legacy platform transition and how to think about that, timing-wise, and its impact to ARI?

We continue to excel in our Autoline Drive solution into key markets. Both the UK as well as the Asia-Pac market, coupled with what we're doing in the Middle East and others, have actually helped quite a bit. Just as it is domestically, it's a long process because it involves change and conversion of existing clients to the new platform.

When we talked about the transformation plan in June, the platform rationalization in getting clients on less versions is a key part of the transformation plan, both for here, domestically, as well as the international team. We are continuing to make progress in that regard, Stephanie.

Thank you. And one follow-up to that. ARI came in a bit stronger in our organic basis than we modeled. Could you touch on the sequential acceleration there and how much of it was driven by one-time items versus potential improvements in the macro-environment?

As Steve talked about earlier, we believe that we are hitting a little bit of a trough there, which for us is good. It's a slower build for the international arena, but the sequential progression of the revenues has actually been pretty good. At the end of it, we feel pretty good about what is going on there. Andrew and his team have done a great job with the international arena. We are seeing some stability there, which is really pretty good, particularly in Continental Europe.

All right, thanks for taking my questions.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back to Steven Anenen for closing remarks.

Wonderful, thank you. We are pleased with our results for the first quarter of FY16. I think we are well positioned to deliver against our full-year expectations and we're doing a lot of great work, innovative work for our clients.

It's worth repeating that our entire Management Team is engaged and committed to executing against our transformation plan that will result in CDK being more efficient and easier to do business with for our clients. There's a lot of heavy lifting ahead of us and we're up for the challenge. But, keep in mind, we will deliver significant earnings growth and margin expansion while growing the business, which we believe is the optimal business model for delivering long-term value. I hope you share our enthusiasm for what is to come. Thanks for listening, everyone, and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.