CDK Global, Inc. (CDK) 2016 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the CDK Global fourth-quarter 2016 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to our host for today, Jennifer Gaumond. You may begin.

Thank you. I'm here today with Brian MacDonald, CDK's CEO, and Al Nietzel, our CFO. Thank you for joining us for our FY16 earnings call and webcast. Brian will begin the call with some highlights for the year and then provide an update on the execution of our business transformation plan. Al will then take you through the details of the full-year and fourth-quarter results, then provide our forecast for FY17 and our target for FY18 and FY19.

A couple of reminders before we get started. Our business segment results include the actual impact of foreign exchange rate fluctuations, and we have provided FY15 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. Additionally, reconciliations of the adjusted amounts to the most directly comparable GAAP amounts are included in this morning's press release and are available in the investor relations section of our website. Throughout today's call references to financial amounts are on an adjusted basis unless otherwise noted. And finally, we anticipate filing our form 10-K in the next few weeks.

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 the risks detailed in our filings with the SEC. With that, I will now turn the call over to Brian.

Thank you, Jennifer. Good morning everyone, and thank you for joining us on this call. Today I would like to discuss our results for the fourth quarter, which were very strong, along with the full year and then provide you with an update on our business transformation plan. We've now completed year one of the three-year transformation program we announced in June of 2015. We're changing the way we do business to make things easier for our customers and our employees. And we are significantly expanding margins, all while growing the business.

We had a very strong fourth quarter that capped off a solid year. And I'm very pleased with our results, which were ahead of our initial plans. CDK is stronger now than a year ago. And we are well positioned to execute on our forecast for FY17. Fourth-quarter revenues grew 9% or 10% on a constant currency basis. For the year revenue grew 5% or 7% on a constant currency basis. The benefits from the business transformation were $50 million of EBITDA for the year, with $25 million of that achieved in the fourth quarter.

We exited the year at an EBITDA margin of 28.4%, which reflected 630 basis points of expansion from the fourth quarter of a year ago. EBITDA margin for the year increased 370 basis points to 26.6%. And EBITDA dollars grew 22%. Operating results were strong despite CEO transition costs of $8.8 million recorded mostly in the third quarter, continued pressure from unfavorable foreign exchange rates, and additional interest expense from the term loan we entered into in the second quarter. Al will provide more details on these in a few minutes.

Next I would like to give you an update on our business transformation. Last quarter we provided more specificity around the key work streams that we are in process of executing. We have achieved very positive feedback from investors. And I'm committed to updating you on our progress each quarter. Additionally, I have provided greater transparency related to our financial targets for 2018 and 2019, which you can see in our press release and presentation. The execution of the transformation plan will create a more efficient organization that will allow us to greatly enhance the customer experience and realize significant earnings growth and margin expansion over the transformation plan period.

Let me emphasize that efficiency improvement and improved customer experience can and must go hand in hand. All of our efforts going forward are designed to make it easier for our customers to work with us while significantly reducing unnecessary expense. In May, we announced a comprehensive reorganization to better align the business to achieve our transformation targets, which will have a positive impact on all the work streams. Going forward we will have two main operating groups: North America and International. We have also integrated product management, created a single North America sales organization and a single global R&D organization. It is key that we operate as one CDK. We are already seeing the benefits of the reorg, which was effective July 1. We have eliminated inefficiencies and have better alignment across our teams.

Now I would like to highlight some of the wins we have had in four of our work streams. In the sales area, I challenged our North America sales team to secure renewals in fourth quarter. Not only did the sales team meet that goal, they exceeded it by a wide margin by renewing 670 customers, which is a record for CDK. This represents approximately 1 in 5 of our automotive DMS sites and roughly 1 in 10 of total rooftops in North America. I want to say that again so you have the right context. In the fourth quarter we renewed approximately, or roughly, 1 in 10 of the North American rooftops in all of North America.

Our focus on improving the experience is resonating with our customers. We are delighted that they have chosen to continue to partner with us. We had a major milestone in our MoveUp work stream in the fourth quarter. We upgraded approximately 2,700 dealers sites to the most current version of our Drive DMS software. We now have nearly 100% of our hosted base on the current version. This represents our biggest customer migration since Y2K 16 years ago. By being on our most current version, our customers can take advantage of our full product suite and we are able to reduce the number of software versions we support. Migrating this many customers was no small task. Our teams worked diligently to show that this was all done with minimal disruption to our customers. Another great win for the MoveUp work stream was the elimination of approximately 20% of our 1,500 software versions during the fourth quarter. We still have a long way to go, but we have had a great start.

In our Enhance the Customer Experience work stream we signed up over 3,300 dealerships on our ServiceConnect Anywhere product in the fourth quarter. This product allows customers to access our ServiceConnect chat product from any device. ServiceConnect is the fastest way to get in touch with our service teams to help resolve customer issues.

Lastly an update on the workforce efficiency and footprint work stream. In July we officially opened our customer experience center in Cincinnati. We now have over 500 employees there. And hiring will continue as we ramp up that facility. This new service model is designed to provide the fastest, most effective response to dealers' questions and critical issues.

Additionally, last quarter we discussed our goal to reduce the number of our North American facilities by at least 40% by the end of FY18. Yesterday we announced to our employees the North American offices that will be closing through FY18 that encompass this 40% reduction.

Through this transformation process we are keenly focusing on limiting operational disruption and creating positive customer outcomes as we strive to significantly increase profitability and expand margins while growing our revenues. These actions are all value-added to our customers and our shareholders. And we are taking CDK to another level. We're committed to delivering results and meeting the targets we laid out. We are anticipating $85 million to $95 million in savings from our transformation plan for FY17. That combined with the savings in FY16, which exceeded our initial plans, gives me confidence that we will achieve our targets.

Before I turn the call over to Al, I would also like to note that today we announced that we will be adding two new Directors to our Board as part of an agreement with Elliott Management. We will work with Elliott to select Board members who can value. And we are all looking forward to working with them as we continue our successful transformation.

With that, I will now turn it over to Al to take you through our results for the year and for the fourth quarter, our FY17 forecast, and our FY18 and FY19 targets.

Thanks Brian, and good morning everyone. We posted strong results for FY16. As I do on each of our calls, my comments for Q4, full year, FY17 forecast, and our FY18 and FY19 targets will largely be on an adjusted non-GAAP basis. As Jennifer mentioned, reconciliations between these adjusted results and the most directly comparable GAAP results can be found in the schedules accompanying our earnings release.

Now let's move onto the results for FY16. As Brian stated, total revenue growth was 5% and 7% on a constant currency basis. We continue to face headwinds from exchange rates, primarily against the Canadian dollar, pound sterling, and euro. The impact of FX this year was once again significant to the ARI business, although less of a drag in the fourth quarter. And framing my comments on revenues are the KPIs related to recurring revenues, excluding the impact of foreign exchange rates. These KPIs are also provided in the earnings release.

ARNA segment revenues grew 5%, and 6% on a constant currency basis. Increased site penetration of our DMS contributed 1 point of growth, increased average revenue per DMS contributed 4 points of growth, and increased transaction revenues contributed nearly 2 points. A decline in one-time revenues reduced growth by approximately 1 point.

For ARI revenues were down 2%, entirely due to unfavorable exchange rates. But grew 6% on a constant currency basis, primarily from increased revenue per DMS site brought on by additional users. Site counts increased on a year-over-year basis for the first time this year. We're seeing fewer bankruptcies and out of businesses in Europe, along with site growth in Asia and the UK regions.

For digital marketing revenues grew 9% driven by higher advertising spend. However the number of customer websites declined 6% as a result of changes to certain OEM programs that began in last year's third quarter. We continue to anticipate further declines in the first half of FY17.

Moving from revenues to costs. Our cost to revenues declined $30 million, or 2% from last year's on a GAAP basis. Favorable year-over-year comps helped us in the quarter, including favorable impacts of foreign exchange of $21 million, the acceleration of the digital marketing trademark amortization, and the divestiture of the Internet leads business, both of which happened last fiscal year. We are also realizing lower labor-related costs due to reduced headcount and more favorable geographic labor mix as a result of our continued transformation efforts. Partially offsetting these benefits are costs related to growing the business and costs related to our transformation plan. Transformation costs total $19 million and are shown as pro forma adjustments on our non-GAAP tables. Research and development spend, which is included in cost to revenues, represents about 8% of CDK Global's overall revenue.

Moving onto SG&A, which on a GAAP basis increased $17 million, or 4%. Included in SG&A were costs related to the CEO transition of $8.8 million, costs related to the transformation plan of $21 million, and $17 million of incremental standalone public company costs. The latter two items are both shown as pro forma adjustments on our non-GAAP tables. Similar to cost to revenues, exchange rates in the second half of the year, and benefits achieved from our sales optimization work stream reduced SG&A.

You also saw in our P&L restructuring expenses of $20 million in the year. These primarily represents employee-related costs incurred in connection with our transformation plan. And are also reflected as adjustments on our non-GAAP tables. Interest expense was $40.2 million for the year compared to $28.8 million a year ago, primarily due to the following items. The full-year impact of the senior notes that were issued in FY15, the new term loan that was entered into in December 2015 in connection with our ASR, and LIBOR rates are also higher versus last year.

Moving on from costs. Earnings before income taxes grew 28%, or 31% on a constant currency basis. Our pretax margins expanded 370 basis points for the year The CEO transition costs of $8.8 million reduced pretax margin and EBITDA expansion 40 and 20 basis points respectively for the year. Each of our segments posted strong pretax margin expansion this year, with ARNA at 360 basis points, ARI at 470 basis points, and Digital at 330 basis points, fueled by the positive impacts of our transformation efforts as well as from strong operating performance.

Total CDK's EBITDA margin expanded 370 basis points for the year to 26.6% and EBITDA dollars grew 22% to $562.1 million. About one-third of the margin expansion came from strength and operating leverage in the business, with the remaining margin expansion due to benefits from the transformation plan. And as Brian said in his opening remarks, we achieved $50 million of incremental EBITDA from the transformation, which was ahead of our initial estimate of $45 million. Net earnings grew 30% and diluted EPS grew 34% to $1.74 per share.

Now briefly onto the fourth quarter, which exceeded our expectations. Total year-over-year revenue growth for the fourth quarter was 9%, or 10% on a constant currency basis. ARNA had a strong quarter with 5% revenue growth, driven primarily by increased revenue per DMS site and increased transaction revenue. ARI group revenues 8%, 11% on a constant currency basis. ARI's revenue growth benefited from one-time unfavorable items in 2015 that contributed approximately 5 points of revenue growth. Digital Marketing revenues increased 22% due to increased advertising.

Pretax margins for the fourth quarter increased 710 basis points to 21.7%. ARNA's pretax margins expanded 600 basis points to 36.1%, ARI expanded over 1000 basis points to 19.9%, and Digital expanded 500 basis points to 15.5%. Total Company EBITDA margin expanded 630 basis points to a strong exit rate of 18.4% (sic - see press release, "28.4%"). Net earnings grew 69%. And diluted EPS grew 75% to $0.49 a share. And our cash balance as of June 30 was $219.1 million. Clearly our fourth-quarter results were very strong, showing that our transformation efforts are taking hold. And these results provide strong momentum to FY17, which I will cover in a moment.

Now I will turn my comments to return of capital. You may recall in December 2015 we announced our plan to distribute $1 billion in capital by December 2017 through a combination of dividends and share repurchases. In June of this year we accelerated the pace of this $1 billion capital return by a full-year to December 2016. The initial $250 million ASR which we spoke about in our second-quarter call settled in June. We entered into another $300 million ASR in June, which is currently in the market and scheduled to settle in Q1 of FY17. These two ASRs, combined with the $63 million in dividends we have paid since the December return plan was announced, represents a total of $613 million returned to shareholders toward our $1 billion goal. We are committed to continuously evaluate our capital return strategy. At the conclusion of the current $1 billion return program, we will determine the appropriate next steps to best use our free cash flow, including share buybacks, dividends, and investing in the business.

Now moving to our forecast for FY17. For our FY17 forecast, the year-over-year comparisons are again on an as adjusted basis. We anticipate 4% to 5% revenue growth from the $2.1 billion in FY16. This includes a 1 point drag from unfavorable FX rates. We forecast 20% to 24% growth in pretax earnings from the adjusted $426.4 million in FY16. And 500 to 550 basis points of margin expansion from the 26.6% in FY16. We anticipate a FY17 exit EBITDA margin rate of approximately 33%, which puts us in a great position to achieve our FY18 target of a 35% EBITDA margin. Our forecast includes $85 million to $95 million of incremental EBITDA from our transformation plan. And these benefits will be achieved steadily over the fiscal year.

We anticipate $65 million to [$70] million of restructuring and other charges in the year. We expect these costs to be steadily incurred over the fiscal year as well. These charges will be presented on as adjusted basis, and are not included in our adjusted earnings forecast. And we will continue to evaluate the transformation costs as we execute against our targets.

The effective tax rate for FY17 is anticipated to be 33% to 33.5% compared to 33.8% in FY16. The FY17 anticipated ETR range is lower than the FY16 rate due to a forecasted tax benefit associated with the adoption of a new stock compensation accounting standard on July 1. Tax benefits and deficiencies related to the planned adoption of the standard are likely to affect our tax provision, resulting in increased volatility in our rate throughout the fiscal year.

We anticipate 22% growth to 26% growth in net earnings from the $274.6 million in FY16. And 31% to 35% growth in diluted earnings per share from the $1.74 in FY16. This results in an anticipated diluted EPS range of $2.28 to $2.35 per share for FY17. The forecast includes the impact of the final settlement of our June ASR and future repurchases as part of the $1 billion return program.

Next, I would like to provide some directional comments regarding the quarterly skewing. I already mentioned the expected FX headwind of approximately 1 point for the year for both revenue and pretax earnings. We anticipate the FX headwind to be relatively even throughout the year.

The remaining quarterly skewing items I will cover are anticipated to impact our pretax earnings. Our tax rate forecast anticipates excess tax benefits for the year. We estimate that nearly half of these excess tax benefits will occur in the first quarter, resulting in a lower tax rate. Beginning in the second quarter we anticipated incremental interest expense over FY16, which will create pressure on a year-over-year comparison. For the third quarter the CEO transition cost of $8.1 million in FY16 will not repeat, and therefore a benefit to year-over-year growth comparisons for Q3. On an EBITDA a basis, this benefit is $4.6 million.

We also anticipate additional stock-based compensation expense in Q4 FY17 associated with the incentive compensation related to our transformation plan. Our strong fourth-quarter FY16 results will also add additional pressures to year-over-year comparisons. As I mentioned earlier, the EBITDA dollars from our transformation plan are anticipated to be delivered evenly over the year.

In summary, the forecast represents progress toward our transformation targets to achieve the 35% margin in FY18. I also wanted to remind you the way we will report our FY17 segment results will change from what you have seen in the past due to the reorganization Brian announced in May. Our three reportable segments will be Retail Solutions North America, Advertising North America, and International. Our segment data will be restated for 2015 and 2016, and will be available when we report our Q1 fiscal results.

Now I would like to provide a few comments on our FY18 targets. Our 2018 targets are in line with the initial targets we laid out during the launch of our transformation at Investor Day in June of last year. However, we wanted to provide some additional targets related to FY18 and provide more clarity. We anticipate 5% revenue growth from FY17, 35% EBITDA margin, and an EBITDA exit margin of 36% to 38%. Additionally, we anticipate EBITDA dollar growth from FY16 to FY18 of 44% to 48%.

Once we complete the transformation period we will be well-positioned to further improve our business. Therefore, we are providing FY19 target EBITDA exit margin of 40% or above. As we communicated at our Investor Day, once we've completed the transformation period we will continue to improve margins. And we believe this FY19 target demonstrates that commitment.

With that, I will turn it back to the operator and Brian and I will be happy to take questions.

(Operator Instructions)

Gary Prestopino, Barrington Research.

A couple of questions here. On the automotive retail DMS client sites, you have not put anything -- nothing has been signed up yet in regards to the Hendricks sites that you won, right? That is what you cited in your deck that you won a large deal, you were talking about Hendricks, right?

Yes, Gary. We're going through the installation process right now. It's at the early stages of it. We communicated that roll-up was going to take us about a year. There is a lot of planning and early execution of sites and so forth. So it has not materially impacted the site counts that we have right now.

Okay.

And then on this where you are combining sales forces, digital marketing and automotive retail North America, what exactly -- are you doing a lot of cross-training? I would assume you are, but how do you go about doing that? You have two different sales forces that were selling two different things entirely. So maybe if you could give us a little color on that?

Gary we actually had six or seven different sales forces, to be honest with you, reporting to different places in the organization. We now have all sales for North America reporting up to one organization. And then underneath that we have reorganized the sales teams a little bit, brought together all the sales operations. And we have some specialized sales focusing on certain parts of the business. And one of the things we are really trying to leverage is -- we obviously we have a very strong footprint in our DMS client base.

But within that we have not had the success, quite frankly, with our digital products that one would expect, given how strong we are with the DMS. So that is a focus area for us to cross-sell our other products into the DMS client better. Another focus area for us is selling our layered apps, getting better penetration of our layered apps into those DMS customers, as well.

Okay. And then just lastly, you had pretty good year-over-year growth in adjacencies, client sites. Was there any vertical that you are serving that really stood out in terms of adding new sites? Or was it just across the board?

We have -- there's three segments, or three business lines, in there. It's the motorcycle, marine, RV space that you are well aware of, Gary. We also have the heavy equipment space, as well as the heavy truck space. And we have seen good growth in frankly all three of those segments. We are quite pleased with the results that we are seeing out of the adjacency space right now.

Okay. Thanks.

Rayna Kumar, Evercore ISI.

Now that you Elliott Management will have two seats on your Board, what impact you have them on the future performance of CDK? And also what are the key terms of the standstill agreement with Elliott?

So I will start at the end. The standstill will be filed, or has already been filed. I would describe it as a fairly normative standstill, a one-year standstill. And our Board will work together with Elliott to choose two new Directors. And we will have some new insight from those Directors. And we will continue to work very constructively with Elliott.

We have had very open dialogue, candid dialogue with them along the way. I personally have good relationships with them. And we will continue to have those direct dialogues with Elliott. They are obviously a major shareholder. And we'll continue to talk openly and candidly with them, as we have been doing for the last 6 to 9 months. And then we will have some new Directors, which will bring some new insight.

Got it. What are your expectations for pricing trends for both the DMS and Digital Marketing businesses in 2017?

Yes, Rayna, we have not broken those out in specific details. But there's nothing overly unique or different from the trajectory that we've been on with respect to the pricing. I think I have covered on numerous calls before and through other sessions that the strategies that we've got are really centered around some different disciplines around discounting and other activities that we believe will yield some nice benefits for us, and secure value for the value adds that we bring to the market and so forth. There is not any specific pricing direction, other than the things that I've described previously.

Understood. Where do you think there can be upside to your numbers from your business transformation plan at this point, if any?

Yes, I think there are is in all of the things we are doing, I think there's upside. I mean, there is a lot -- I like to say there's a lot of wood to chop. We grew our margins 630 basis points versus a year ago, quarter to quarter. We have a 1,300 basis point improvement target, which is not trivial.

We've got 630 of that behind us. And so the map would say we have another 700 to go. And we are pretty confident that we're going to get there. We are working hard on a lot of areas. We have a lot of stuff to execute. And frankly I think there's upside in most of the work streams we have. And as we execute and get more comfortable with our execution, then we will communicate that to the Street accordingly.

That is helpful. And lastly, can you just call out your tax rate expectation for the first quarter?

Lower than the 33% is what I would say that you should be using, Rayna. I mean I'm not going to --

Got it. Thank you.

Thank you.

Brian Essex, Morgan Stanley.

This is Ira sitting in for Brian.

Regarding the Hendricks deal, you mentioned it could take about a year to roll up. Any update on the site counts adds this would contribute? And as the second part of that question, your 2018 guidance of 5% growth is at the top end of your typical 4% to 5% revenue guidance growth. How much is this due to the Hendricks signing versus growth in other segments?

The Hendricks is relatively de minimus in the first year, just because of the ramp that it will have. It really does not meaningfully contribute to the growth for the year over year. So I would not attribute a whole bunch of the 4% to 5% is that.

It is early in the year. I think as Brian likes to say, or as Brian said earlier, we have a lot to do over the course of the next year. We are comfortable with the range we provided based on the programs we have in place. And as we progress through the year adjustments will be made. And if we are feeling that it is more to the high end, I will let you know that it's the high end. I think right now you should just use and think about the goalpost that we set with 4% to 5%, which recall includes a drag of 1 point due to the strong dollar, year over year.

Great.

Thanks. And as a follow-up, it looks like Digital Marketing, it looks like counts declined sequentially, which you had previously alluded last quarter to being due to lacking those OEM changes. It sounds like that number should stabilize after the first half 2017 based on your prior comments. But is there way to back out what the OEM contribution was? What the drag was on organic site growth?

We've continued to -- we made some assumptions on the amount of the businesses that we would retain when those OEM relations moved from exclusivity to being open to more players. And the assumption that we made was a little bit high in terms of what we retain. That's why we are still seeing some of the reduction. We have not really quantified publicly for the delta between what is directly due to those. But I think what you should think about is that the losses are largely due to those OEM relationships that exclusivity has been lost, is the way I would say it.

Understood. Thank you.

Thank you.

Ian Zaffino, Oppenheimer.

This is Ian. Thank you very much.

The question would basically be, what are the incremental margins when you look at the 5% growth? Just as I'm looking at 35% target for 2018, you have a lot of costs coming down the line with 28.5% almost now. I'm trying to get a sense of what the operating leverage is on that 5% growth (technical difficulties) conservative. (technical difficulties) Thanks.

Ian (sic), I will try to answer that. With what we've described as our guidance of 5% growth in revenue and substantially higher overall gross in earnings, it implies because of the efforts through the transformation plan that the incremental earnings on those 5%, 4% to 5% revenues is greater than 100%. Which is what you are seeing because of the benefits associated with the $85 million to $95 million of efficiencies and benefits to this transformation program that we are realizing.

So you can do the math on X amount of revenue and X amount of earnings. And you will notice that incremental growth is coming in at more than 100%. And that is all part of the strategy that we've outlined in terms of getting that --

Okay.

Okay?

The second question -- yes. The second question would be, but this is just in general. I know when SAAR had a tough time back in (technical difficulties) collection for the sales they had about 5%. Has anything changed in the business or changed from kind of your mix that we would have maybe a greater sensitivity? Or should we really assume a similar sensitivity (technical difficulties) SAAR is at it peak when it comes down? Just trying to understand that. Thanks.

I would say, and I think we have covered some of this in the past, our business sensitivity, direct sensitivity, to the SAAR volume is not a direct correlation. We've talked about that being an outstanding indicator of the health of the industry and the business and whatnot. But transactions for us represent in and around 10% of our total revenues. And ultimately if the number goes up or down by 3% to 5% or 10% it does not really impact the overall results for CDK. But it does clearly demonstrate the health of the industry and the dealers' propensity and the OEMs' propensity to spend and invest and so forth.

I don't see anything dramatically different in terms of our business mix or any of the macro factors that seem to be impacting our trajectory of 4% to 5%. To me, it's kind of business as usual. Yes, there is always activities going on. But we don't see anything overly significant that would impact the projections that we are making for the year.

Okay. That's great. (Technical difficulties) the business is really coming through. Thank you very much. I will turn it over to the next, whoever is in line.

Thanks, Ian.

Tim Willi, Wells Fargo.

I just had one question around capital allocation. Obviously you laid out the dividend and the buyback programs. I'm just curious how you think about tuck-in M&A acquisition opportunities relative to what you have already outlined. Number one, in terms of your appetite. Number two, in terms of the availability, or the target environment, if you will, that you are keeping an eye on? And third, just your ability (technical difficulties) on M&A program with all the internal efforts, or if that's been maybe sidetracked for a bit? Just any color that you can add there.

Tim, this is Brian. We have strong cash flow, that is pretty clear.

Our margins are increasing, our revenue is increasing, which will continue to drive that cash flow even stronger. We have balance sheet capacity, we have strong balance sheet. And so, I think suffice it to say, we have a lot of flexibility around capital return, as well as M& A opportunities. We do have, as you said rightly so, a lot going on internally. So our M&A activity has slowed down a little bit.

We've done a few tuck-in things, and will continue to look at that. We really want to make sure we fix -- we have a solid foundation to do M&A on top of. I think what you will see from us, you will continue to see us do some tuck-in acquisitions, perhaps a little bit slower paced than if you went back a few years. But we have done a few things in the recent quarters, we've got a couple of things in the pipeline we're looking at. And we will continue to add to our product portfolio to grow the business.

Thank you. Just one follow-up for good, if I could. And again, I apologize if you mentioned this. I jumped on a bit late. But just in terms of the overall -- your interactions with dealers and the dealer environment. there is a lot of debate where we're at in terms of vehicle sales and the cycles. Could you just -- any way to characterize the conversations or the tones of discussions that you have with dealers or your salesforce about where the dealers' heads are at around spending plans, et cetera relative to the debate around the auto cycle and where we are at right now?

Yes. I mean, I've been on the road, probably in the last month I've been on the road and met with a number of dealers in Canada and in the US. Look, I would say that people are feeling pretty good. The volume is good, new car grosses are down. I do not have to tell you that. You see that from the public.

But all in all, volume is pretty good. I think they are feeling good. And look, fundamentally what do we provide to the dealers? We provide them technology to help them run their operations more efficiently, sell more vehicles. And so, they are largely interested in the continuing to invest in the business and use that technology to make their operations more efficient or grab those incremental sales. So I think they are in active dialogues with us.

They are obviously very economically conscious in terms of how they spend their money and the value that they want to see for the money they spend. But I have not noticed anything different in my conversations with dealers in the last 30 days. I think everybody sees that if we are not at the peak of the market, we are pretty close to it. But no one seems to be feeling like there is a dramatic decline coming, or anything of that nature.

I would say, to net it all out, I think dealers are feeling pretty good. They're having a good year. Volume is still pretty good. And they are still looking to invest in their business. And they're having -- look, the fact that we got all of these renewals done shows that they are very willing to have conversations with us. We continue to win new dealers. So they are having conversations with us. They're interested in what we can bring to the table. And we've got good momentum with them in terms of service levels and product. And you can see it showing up in the P& L.

Great. That's all I have. Thanks very much.

All right. Thank you.

Gary Prestopino, Barrington Research.

Just on the renewals that you did, are most of the renewals now still five-year deals, or has the industry gone to three-year deals?

Gary, it is Brian here.

Yes, there are some three-year renewals. There is some five years. We have six in some cases. But we have not really changed our practice, our mix. Some folks are only willing to do three. And so in those cases we will do three.

But we are generally focused on five. And I would say in this set of renewals that we just did, the big push we had put in place, our mix of annualization wasn't really different than our historic mix.

Okay. All right. Last question, is your fiscal Q4 usually a big quarter for renewals?

Not really, Gary. I think what Brian and the team were challenged to do, what Brian challenged the team to do, was to really make a move to renew the clients. And it was clearly bigger than anything that I've seen in the years I've been here. And I don't think anyone would dispute that.

It really goes to show in our view what can happen when you focus folks' efforts on it. And I think for us that bodes well for what we are trying to do to continue to penetrate our base with additional products and solutions. That for us is a key focal point. We had what we think is a good proof statement that our capable sales organization and client base are willing to do that. So we felt pretty good.

What I would say, Gary, is we had probably not put as much focus on these renewals over the last couple of quarters as arguably we should have. We had a little bit of -- we had more customers on kind of a month-to-month extension than I would like. And then obviously I wanted to get my -- really get my sales team ramped up and get some momentum in the market and get some momentum with my sales team. And so we really put a focus on this.

We had a sales campaign, which means some extra compensation for the sales people if they delivered the results, which they clearly did. And then we pulled in some renewals that we otherwise would've been working on this year, which frees up sales capacity, frees up my sales team to focus on other things. And so I have done this in other lives. And this is probably, if not the most successful sales campaign I have ever run, it is definitely the second, if it's not the first. I want to repeat it again.

The sheer magnitude of this in terms of rooftops, this is roughly 1 in 10 rooftops, auto franchise and heavy-duty franchise dealers in North America renewed with us. Take a drive around your town, look at 10 dealerships. The probability is one of them renewed with us in the fourth quarter alone. So it is a pretty big success and a pretty big proof point on the progress we have made on our service levels and the commitment and belief that dealers have in CDK and what we are doing.

Okay. That sounds really good. I mean, was this really the first time that your salesforce was presented with the opportunity to get extra compensation for spurring on renewals?

I think of this magnitude, I think the Company has done other sales spiffs before, focused campaign sales. But for people that have been in the Company a long time, this is the most successful sales campaign that the Company had ever. Certainly in the last recent history. And there is extra compensation in our P&L for the sales team this quarter for executing against this. And our sales team and our sales leaders are walking around with a pretty good bounce in their step.

We had a sales leadership meeting in Phoenix in early July. And the sales team is pretty buzzed up, pretty happy, and really motivated going into this year. And that was one of my objectives of doing this, is really to get the sales team jazzed up, get these renewals done and in place, and then create some sales capacity to go sell some other products.

It's great. You don't mind doing it if you get the results. So that's really great. Thank you.

All right.

Thank you. This does conclude our question-and-answer session. I would now like to turn the call back over to Brian MacDonald for any further remarks.

Thanks, everyone, for joining this morning.

As we said, we are very pleased with our fourth-quarter results. The fourth quarter was very strong and has given us momentum going into 2017. We have made tremendous improvements to our business, making things easier for our customers and our employees.

We achieved 370 basis points of EBITDA margin expansion in the year. And we look to increase EBITDA margins 500 to 550 basis points of expansion in FY17, putting us on track for 2000 (sic 2016. See press release.) EBITDA margin of 35%.

CDK has never been in a stronger position to achieve its targets. And I feel very good about where we are and where we are going. We are on the right path to deliver exceptional value to our customers, shareholders and employees.

I hope you share enthusiasm for what is to come. Thanks for listening, and have a great day.

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