CDK Global, Inc.
Q2 2020 Earnings Call Transcript

Published: 5 Feb 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the CDK Global Second Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen -only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference may be recorded. [Operator Instructions]I’d now like to hand the conference over to your speaker today, Ms. Julie Schlueter, Director of Investor Relations. Please go ahead, ma’am.

[Julie Schlueter:]

Thank you, and good afternoon. I’d like to welcome you to CDK’s second quarter fiscal 2020 earnings call. Joining me on today’s call are CDK’s CEO, Brian Krzanich; and our CFO, Joe Tautges.Throughout today’s call, I would like to remind everyone that we will be discussing our continuing operations only, which do not include the Digital Marketing Business that continues to be held for sale and presented as discontinued operations.Unless otherwise noted, all references to financial amounts 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 and are available in the Investor Relations section of our website.I would like to remind everyone that remarks made during this conference call will contain forward looking statements. These statements involve risks and uncertainties, including risks detailed in our filings with the SEC, which could cause actual results to differ materially from those set forth in the forward looking statements. And finally, we anticipate that our Form 10-Q will be available tomorrow.Next week we will be attending NADA, The National Automobile Dealers Association Show in Las Vegas and in March management will be at the Morgan Stanley Technology Media and Telecom Conference in San Francisco.With that, it is my pleasure to turn the call over to Brian.

[Brian Krzanich:]

Thank you, Julie, and thanks to all of you for joining us on the call today. I am excited to share with you our second quarter results, as well as the significant progress we continue to make in further strengthening our business and building a strong subscription based software company for the long-term.I will start with comments on the quarterly results and then update you on our three key areas of focus for building a better business for today and the future. One, creating a differentiated customer experience. Second, making it easier to do business with CDK. And third, modernizing our technology to bring the best-in-class software to the auto industry.Let’s start with some of the financial results for the quarter. I am quite happy with what we have accomplished. Revenues came in ahead of expectations at $500 million, up 4% year-over-year. We are in $191 million of EBITDA and EPS up $0.80. This quarter we continued our investments and as I will our share in a minute they are having a big impact on improving the health of our long-term business.The key metric to focus on regarding the health of our core business is our site count and the CDK team performs strongly this quarter. Year-over-year auto site growth in North America was up 86 sites or about 1%. We have now seen four quarters in a row with year-over-year site growth and as set yet another record for total North American auto and adjacency sites.And Joe will provide more financial details in his section but I’d like to share more insights about the things we are doing to enhance the business starting with improving how we serve our customers and the early positive results we are seeing.How we serve our customers is critical, because it’s the foundation for customer satisfaction and for building the solid relationships that drive our customer retention, as well as new sales. As a reminder, the things we are doing to improve how we serve our customers our focus on increasing our installation quality, increasing the satisfaction with our customer call center support and investing in advocates and performance managers to make sure our customers are getting the maximum benefits from our software.Our message is resonating, a few quarters ago 10-plus site dealer cancelled our service for two reasons. Our business practices on contract terms and our support. The CDK sales team stayed close to this dealer and shared that many things we are doing to improve. This month the dealer decided to cancel their contract with the other provider and signed a new five-year contract with CDK and added six more incremental sites to our platform.When you look at this example, it’s been such a change from when I joined the company until now. This is just one example of many where customers are looking at how we are serving them and the quality of what we are doing and their confidence in us is growingOn our last earnings call, I mentioned that the 40-plus site dealership win for our sales team. I’d like to give you an update on the next steps with this important customer. This is critical proof point to the industry about our ability to accomplish such a large and complex install.I am happy to report that two weeks ago I was there on site to watch the first phase of the installation and we are live with high quality and a satisfied customer. CDK has been focusing heavily on our implementation quality to ensure a smooth conversion, install and training experience for our customers. We are very excited to move forward on the rest of the installation for this customer and many others.We are making very good progress on creating a differentiated experience and our customers and the entire industry are seeing the positive momentum. In addition to growing sites, North America auto DMS sales produced double-digit growth year-over-year.Losses and retention both improved. In fact our retention rate is at the highest level over the last nine quarters. This is especially impressive given the high number of renewals scheduled that came during this quarter. Our team has really turned the corner on implementing our customer focused strategies and I am very proud to see that their hard work is paying off.Our second area of focus is being easier to do business with. Starting with being more open and delivering more DMS agnostic solutions, I am quite excited about the breakthroughs our technology teams have had this quarter.The team has been busy converting more of our applications to be DMS agnostic, meaning that they can be sold to dealers that use a competitor’s DMS. I’d like to highlight two apps that we have recently converted.One is a service workflow product built in partnership with one of our major OEMs. The team overcame many technical hurdles and within eight weeks was able to re-engineer our application to be agnostic and available to integrate other DMS.The second application is CDK mobile service. Dealers are using our software in their fully equipped band, which come to a customer’s location or home to provide onsite service and repairs. This CDK mobile service app can now be integrated with non-CDK DMS dealers.Now these are just two examples and we are going full speed to make more and more of our product DMS agnostic, expanding our addressable market as a result. Being more open and easier to do business with includes better aligning our pricing to our value, our customers place on our solutions.As we have acknowledged before our partner program has been a source of friction with our customers. They appreciate the need to ensure data security and integrity, but they tell us that the value they place on the partner program activities is out of step with the cost.Through new approaches to packaging and pricing, we are allowing customers that participate in our rewards program to eliminate most partner program data access fees, better demonstrating value. While the transition is a headwind on the financial performance, we are being very thoughtful about our approach and believe it’s the right thing to do for the long-term.I would like to share with you our progress on one final customer facing initiative that addresses one of the biggest complaints I hear during my visits with dealers, which is about simplifying our quoting, contracting, configuration, installation and billing process.As we announced in August, our business process modernization initiative, is a fundamental re-architecture of our business practices. Over the next two years, dealers will experience a much simpler sales process, with tools that show the configurability of our products and result in a much better installation experience and simple easy to understand invoicing.Currently, one of our key focus areas has been on our return [ph] invoices and I am very happy to report that in December we started rolling out the new invoices, which deliver a streamlined content, better descriptions and improve transparency to help dealers understand what has changed at a glance.Customers will also have easy online access where they can opt for paperless statements. We have received very positive early feedback on this critically important initiative and our plan is to continue the invoice rollout throughout the rest of this fiscal year.In addition, we are looking closely at our contracting process to make it quicker and simpler to buy our software and service solutions. As we look forward enhancements to our go to market process will enable CDK to provide even greater results for our customers. Now all of these initiatives are helping to improve the customer experience and we are seeing the positive results.Now moving on to our third area of focus, we have been very busy behind the scenes modernizing our technology and infrastructure. We hired a new CTO in 2019 and have been staffing our technology group with Enterprise Class Software leadership. They are working on modernizing our core software, which will not only make it better for our customers and easier to use, but more cost effective for us to fix and enhance in the future.Our strategy centers on innovation and providing software and technology that our dealers will need for the future. We will do this by driving an open and agnostic software portfolio, with a world class DMS and applications that enhance our dealers’ ability to differentiate their sales and service experience, as well as efficiently operate their dealerships.As part of our push into an open ecosystem, we will continue to expand our Fortellis platform and data driven tools to enable our customers with decision making engines to drive innovation across the industry.So to start with an update on Drive Flex, we have made a lot of development progress this quarter. The Drive Flex team is focused on two key areas. First, enhancing Drive Flex’s functionality, usability and adding new capabilities. And second, getting more OEM certified as we approach a broad rollout of the product.On the first item, the team has delivered significantly increased capabilities, which improve existing user experience and allow us to add more dealerships. At the end of January, the team rolled out other changes that reduced our costs and amount of time to install by almost half.On the second item, we have now completed the certification process with the Big Three OEM and we are working on several other manufacturers currently. These improvements give me confidence that we will be adding more than a dozen Drive Flex customers a month by our fiscal year end.While our focus on expanding our DMS business establishes a strong operating system for our dealers, our Fortellis program is focused on building industry standard platform that enables a broad range of experiences that will benefit the entire auto ecosystem. I firmly believe that no other platform has the potential to transform the auto industry like Fortellis.We now have several APIs on Fortellis that can connect to our DMS including the Lyft Hailer API and we will be demonstrating some of our newest innovations at the upcoming data show next week.For Fortellis to be an industry-wide platform, you need three things. One, publishers to publish API to the platform, second, application developers to create new value added experience, and third, customers to consume those new capabilities or experiences.Our best example of a current use case is the Lyft API and the progress we have made with our Hailer API. CDK published the API to Fortellis. Lyft built an application in conjunction with CDK to integrate the ride haling service to dealers and dealers are consuming the service. As of the end of January, we had more than 600 dealers using the service with many more to come.When I think of the success of the Fortellis platform or any industry platform, one of the best measurements is how many transactions are going through that platform. As of this month, we expect to reach about 1 million transactions per month through Fortellis, with much more coming. Fortellis is the future of a better connected experience for the auto industry and you will see us continue to invest there.As you can tell, we are driving a lot of positive change in CDK and are also addressing many of the distractions that have hampered our growth, such as the digital marketing business and the transition of the partner program.The pace of our investments has been very thoughtful in terms of allocation of both our human and financial capital. The results coming in justify that we should continue to lean into our strategy, which is grounded in our conviction that the long-term outcomes for our customers, employees and shareholders are well-aligned.Thus we will continue to devote the resources necessary to move forward with our growth strategy and reaffirming our guidance numbers for revenues and EPS for the year, while lowering our EBITDA range, which Joe will describe in more detail in his remarks.As we look to the next few quarters, we will challenge ourselves to deliver beyond our expectations. We want every dealer to be able to say that they are getting a high-quality customer experience, getting better value for their dollar and seeing how technology can help them as they adapt to the future.On behalf of the entire management team, I’d like to thank all of our CDK employees for embracing our in values, which we launched in November and are the guide for how we should interact with our customers in one another every day.I am extremely proud of the team’s accomplishments and their shift to a growth culture. I am very pleased with the results we have achieved in the second quarter and the progress we have made on our strategic initiatives.With that, I will turn it over to for Joe for the financial results.

[Joe Tautges:]

Thank you, Brian, and good afternoon, everyone. Before I cover our Q2 results, I wanted to share my perspective on the continuing transformation we are executing at CDK and add to some of the comments Brian made in his remarks.Our top priority at CDK is providing exceptional software and services to our customers, and we expect that focus will result in increasing all those sites, selling more applications, and ultimately, delivering sustained growth.We have been focused on executing on this path for the past year and the results we are seeing are exciting. We have increased revenues for the last five quarters at a pace of 4% or more. We have delivered sequential North America auto sales growth the last four quarters and ended this quarter with growing sites by 1%, ahead of the expectations, we have shared in the past.We strengthened our application portfolio with the acquisition of ELEAD and our investing in a wide range of solutions to be shared, we are well-positioned to provide value added technology to our customers as we go forward and meaningfully grow our layered application revenue.An important part of all of this for CDK is continue to execute on our key initiatives, which are critical to us for us to accelerate our level of performance. We have been able to make this progress as a result of disciplined investments in the areas that impact our customers and improve our technology.As we see progress in executing against our initiatives, we will continue to increase our investment and we will continue to push forward investments as we see opportunities to execute our transformation more quickly. Brian, the CDK leadership team and I are very focused that the CDK is sustainable, growing and attractive business for the long-term.Now moving on to our quarterly results. Q2 was another strong quarter of execution by the CDK team. The results of our investments are paying off and can be seen in our key performance metrics starting with revenue.Consolidated revenues of $500 million for the quarter were up 4% year-over-year on an organic basis, driven by growth in North America of 3% and international of 13%. Digging deeper into North America performance, subscription revenue was up 2%. The performance was driven by gains in key applications like that cloud, ELEAD CRM and service, plus an increase in application penetration offset by the expected declines from the partner program transition equal to 2 points of subscription revenue.Also driving revenues in North America was growth in other revenues, which benefited from the change in accounting for hardware as a service under ASC 842, partially offset by lower volumes in the call center.Now let’s double click into the drivers of subscription growth. North America auto sites were up 1% year-over-year. We have been working hard on improving our site performance across the Board and are seeing many improvements within our one to two, and three site group cycle metrics. This quarter gives us confidence that we will exit the year at greater than 1% site group.This quarter in the one to two site group, we are pleased to see continued positive results including double digit improvements in installs and the losses. While the overall site count was down low-single digits year over year, the retention rate increased and it was at the highest level over the last five quarters.Within the three plus site group, we saw ending sites up low-single digits year-over-year and improvements in installed and losses. Retention rates were also the highest in five quarters. Site growth in the adjacency market increased to 2% year-over-year, primarily due to strong growth in the heavy equipment sector from industry consolidations by existing CDK customers and expanding new locations.Turning to revenue per site, North America auto revenue per site was up slightly at 0.3% year-over-year. The performance was driven by gains in key applications like Doc Cloud, ELEAD CRM and service, offset by the expected declines in the partner programs transition. Adjacency revenue per sites saw year-over-year increases of over 3%, primarily from higher penetration of applications centers.Moving on to our international business, second quarter revenues were up 13% year-over-year or 15% on a constant currency basis, driven by strong subscription revenue growth, primarily from increases in revenue per site.International revenue growth was also benefited from the timing of certain point and time revenue that negatively impacted the prior year period. However, over the six-month period the impact was normalized.Looking at the site performance, International sites were down 2% year-over-year, primarily due to dealer consolidations. As a reminder, most of our International software is on a per user fee basis not site-based and we saw the number of users increase year-over-year. We ended the quarter with revenue per site up 11% year-over-year through incremental installs of solutions to existing dealers and higher drive revenues.Now to earnings. EBITDA of $191 million declined by 2% in the quarter, with an EBITDA margin of 38.2%. We saw solid underlying earnings from the business for the second quarter consistent with our stated outlook for high single-digit growth. As expected, earnings growth was more than offset by the impacts from our investments, the partner program transition, FX and increases in certain general and administrative expenses.At a segment level, North America pretax earnings were down 7% with a margin of 39.1%, down 400 basis points, principally due to our strategic investments and impacts from the partner program.For International, pretax earnings were up 66%, with a margin of 19.8%, up 630 basis points, mainly because of earnings on higher revenues, partially offset by increased employee-related costs.For the total company, our effective tax rate was 25% and diluted earnings per share were $0.80, down 4% year-over-year. The decline in EPS was primarily driven by decreases in EBITDA, as well as higher interest expense, and depreciation and amortization, partially offset by lower weighted average diluted shares outstanding.Our cash balance on December 31 was $222 million, of which $200 million was held outside of the United States. Free cash flow for the first half was $113 million, which was lower year-over-year, primarily driven by payments of legal settlements. Absent those payments, free cash flow grew by 11%, demonstrating the powerful cash generation of our business model.During the quarter, we paid out $18.3 million in cash dividends to shareholders and ended with a net debt to adjusted EBITDA ratio of 3.3 times, down from 3.4 times last quarter. We will continue to delever over the next two quarters and expect to end the fiscal year approximately at the top-end of our 2.5 times to 3 times net debt to adjusted EBITDA target range.Moving on to guidance. We are reaffirming our annual guidance range for revenue of $2 billion to $2.05 billion, EPS of $3.30 to $3.50, our effective tax rate of 24% to 25% and shareholder returns of $75 million to $150 million.As we look at our spending levels in the second quarter particularly focused on the areas of installations, customer training and sales costs, we are appropriately lowering our adjusted EBITDA guidance range to $780 million to $800 million for the full year.Before taking your questions, I would like to highlight an item regarding the Digital Marketing divestiture. As we continue to refine our views of the business through the sale process, we have reduced our assessment of the share value of the business and recorded a valuation allowance of $69 million and associated income tax valuation allowance against capital loss carry-forwards of $15 million in the quarter. In terms of timing, we are making very good progress on finalizing the sale of the business and we will update you when this occurs.In closing, we continued executing against our strategic plan, which has allowed us to strengthen the business and provides better value for dealers. Going forward, we will maintain a disciplined and balanced approach to our capital deployment strategy and we will continue to successfully execute on our investment initiatives to drive long-term growth for the benefit of our customers, employees and shareholders.I will now turn it back to the Operator and we will be happy to take your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Ian Zaffino of Oppenheimer. Your line is open.

[Mark Zhang:]

Hey. Good afternoon, guys. This is Mark on for Ian. Thanks for taking our questions. So thanks for going through all the guidance details. But can you guys share a bit more on the, I guess, incremental investment spend that was just announced, so what the spend will, I guess, like be allocated towards maybe what types of additional initiatives, and I guess, like, when the majority of the spend will commence aside from, I guess, like you mentioned the upcoming quarter? Thanks.

[Brian Krzanich:]

Sure. This is Brian. I will start the conversation and then I will let Joe get you into more of the numbers and some of the other detail. What we are seeing and hopefully you saw from our results for the quarter and a continued growth in sites.And just our overall customer satisfaction is that the investments we are making and the roadmaps we are out showing to our partners now around the technology investments are gathering a lot of excitement.And so we are seeing nothing, but positives from this and we are really -- this is not an incremental in that. We are going to spend more in the total sum of all these efforts. We are still targeting the same numbers that Joe and I presented about a quarter ago.What we are going to try and do, we are try and do is accelerate some of the spending, because of the good results we are seeing from that spend. Those spends will go in really three main areas. First is around what we call customer success, which is really getting the install teams to be able to do more installs.You saw the growth in sites and so we need to be able to have more people able to do more installs, because we are actually seeing an incremental increase in our business growth there. There are people out doing calls on customer satisfaction and make sure the software they have bought is operating properly, they have got the right people trained, things like that, again that brings a lot of positives back to us.Then the other area is in the technology modernization we have talked about and that’s everything from Fortellis through to our current drive and then our future Drive Flex products, plus CRM service, many of the layered applications.We are really modernizing those bringing a lot of the enhancements that have been -- being requested for some period of time and are actually coming to market now, and bringing them up with APIs in a more modern structure.And then the last area is around that other area that is an issue for our partners is, the ERP system and the ERP modernization, and we are continuing to invest there and looking for opportunities to accelerate that whenever possible.And that’s really about simplified, clearer or more clear and simpler or smaller shorter billing, right? No 30, 40, 50 page bills, but very simplified billing that really shows people what they are paying for and what’s changed month-to-month.So we are accelerating as much of that as we can because the benefits are there, but we don’t think the total spend is going to change much in that and that we are just really trying to go a bit faster. And then I will let Joe talk beyond that.

[Joe Tautges:]

Yeah. Hi, Mark. I think, Brian, covered it quite well. When we look at the approach we are going through on investments, we are very focused on just continuing to improve the fundamentals and foundation of the business and we are really seeing good momentum out of it, particularly when you look at sites for this quarter growing 1%.And when we look to the second half, you see installations in the second half us installing more than 30% more in the second half than we did in the first half and we really want to take advantage of the momentum in some of the opportunity and continue to build on that. So I think that covers your question.

[Mark Zhang:]

Okay. Okay. That’s very helpful. Thanks guys. And then just a quick follow-up, good to see site count continues to grow. Can you guys share, I know you guys mentioned small dealers versus large dealers, but anymore additional details of which saw more strength, how has, I guess, like your initiatives, like, Drive Flex helped small dealers and what sort of retention have you seen in each category? Thanks.

[Brian Krzanich:]

Sure. We don’t break out the absolute numbers in those two categories, but I will give you a general, this is Brian -- I will give you a general feeling and Joe can jump in. Let me kind of try and give you the general picture.You saw we continue to grow sites, I mean, in fact, grew sites quite well. And if you remember from last quarter’s earnings announcements, this was a quarter where there are quite a few renewals coming due in this quarter. So we are quite pleased with the site growth.That site growth means two things really occurred. One, we had better retention, and second, we did have additional new sites come on Board. I’d tell you that the strength continues to be a bit stronger in those larger sites, the three and above, let’s call it rooftops. We continue to see quite a bit of strength in that area.We are seeing very good improvements in our renewal process and retention of customers in the smaller dealerships, those one and two rooftop dealerships. But I think we still have to do some work to get to where we are actually growing more in those smaller dealerships, that work then drives you into Drive Flex.Drive Flex, if you remember we slowed down a bit on really out trying to grow much faster in this quarter, because we wanted to do some improvements in both installation, the simplification, lowering the cost, making it easier to do and then there were some improvements that we saw in the first couple of installs that we wanted to get in before we really grew the expansion of Drive Flex.Those things have been put in place now. Those are really then targeted Drive Flexes towards those one and two rooftop dealers and independents. We are seeing quite a bit of strength in independent dealerships, which is an area market remember that we haven’t really addressed in the past.We are turning on again our Drive Flex installs and starting to kick those in. And our goal is to exit at the end of this year at a number of like 15 to 20 a month installs of Drive Flex and that would -- should then lead into even more growth as we go into the fiscal 2021, right? So I think July and beyond are growing even faster than that.So that will be where I think we can transition to growth in those smaller sites. So, strength in the high end, better retention in the lower, smaller dealerships and positioning for Drive Flex to get the growth of those lower -- smaller dealerships.

[Joe Tautges:]

Yeah. And this is Joe. Just to add to some numbers with what Brian shared. I mean, you look at the dealership market and it’s largely flat in terms of a site perspective. And so we are happy with the 1% growth that we produced this quarter and there’s not a lot of Drive Flex sites in there.And so when you look at the opportunity going forward and with the new -- the updated software that came out in January and the progress and the confidence we have as we exit the year installing the numbers as Brian described, we are focused on investing scaling to be able to drive better performance as we head into next fiscal year.

[Mark Zhang:]

Okay. Great. Thank you guys very much.

[Joe Tautges:]

Thank you.

[Brian Krzanich:]

Thank you.

[Operator:]

Thank you. Our next question comes from Gary Prestopino of Barrington Research. Your line is open.

[Gary Prestopino:]

Good afternoon, everyone. Hey, Brian.

[Brian Krzanich:]

Good afternoon.

[Gary Prestopino:]

That story you told about the dealership that was going to replace you actually signed up for a new system if I recall your words correctly and then came back…

[Brian Krzanich:]

Yeah.

[Gary Prestopino:]

…six months later. It’s fairly interesting because considering the switching cost of doing that that’s just got to be an astronomical drain on the dealership. So maybe you could just dive into that a little bit more as to the extent you can as to what happened there and what made -- what actually led them to come back to you?

[Brian Krzanich:]

Sure. I will go into this as much of it as we can and I can’t give you names, numbers and dates, but…

[Gary Prestopino:]

No. That’s fine.

[Brian Krzanich:]

…what are the things we do is we take every loss extremely seriously. But and I tell you that’s one of the things we have really done well over the last year or more is really get the organization focused on retention.So when a customer leaves us now or talks about leaving us, we go in and really trying to understand what the issues are, what’s the competition offering and really trying to understand are there gaps we can close.We are still I’d say kind of catching up. We are not proactive enough yet. In other words really talking about people who are going to renew six months, nine months from now and saying are, what can we do now to make sure you are there.But when somebody does leave, we don’t necessarily go in and rip everything out. We will actually leave it there for some period of time and we will continue to talk to them and let them know we are still interested in earning back their business and that was the case in this specific example and I think there are several examples over this quarter where we have done that.So if the customer comes back, and says, hey, I want to turn that layered application on or I want to turn that DMS back-on, it’s actually pretty easy for us to do it. We just have to go extract the data that we may be missing for that period of time where they have been working with the competition, but just the infrastructure and the system is all still there and clearly they are all trained up on it. So the switching costs as you describe it are actually fairly low from both sides because we are able to turn them back on literally within days typically.

[Gary Prestopino:]

Okay. That’s good. Thank you. And then just a couple of other quick ones, will you have all OEM certifications completed by the end of your fiscal year or the end of calendar year this year?

[Brian Krzanich:]

So I have always said in the prepared remarks once we had the big three done. We are now working on the other ones. I tell you we will have the majority of the -- I will call it the larger OEMs done probably by the end of this fiscal year, but we won’t have all of the OEMs done probably till the end of the calendar year.It just takes -- we have to get on their calendar. We are somewhat victims of their schedule and their timing and so some of them just take a bit longer. But the fact we have got the big three GM, Ford, SCA, that gives me a lot of confidence that the system is helping, we know how to do it and they are going to be the road block. So it’s just a matter of getting us all through the schedules now.

[Gary Prestopino:]

And then just two more quick ones.

[Brian Krzanich:]

Sure.

[Gary Prestopino:]

Did you say your DMS site sales, North America site sales were up double digits in the quarter.

[Joe Tautges:]

Yeah.

[Gary Prestopino:]

That wouldn’t be reflected in the in the number of installs, right?

[Joe Tautges:]

That’s right. I mean there’s some of that that some of that that comes in quarter and if there is a dealer that acquired a site and we can integrate it quickly, but the majority that is in backlog and will come online over the next two quarters.

[Brian Krzanich:]

And that is -- we talked about investing and try to grow even at a faster rate that is some of what we are pushing spending towards, right, is to be able to shorten the install duration and shorten the backlog timing of that growth from a sites perspective

[Gary Prestopino:]

That’s all good news. And then just, lastly, you said that Fortellis was doing about 1 million transactions a month, where there were 1 million transactions a month going through Fortellis, is that correct?

[Brian Krzanich:]

Yes, sir.

[Gary Prestopino:]

So are all -- I mean can you share maybe the revenue model there. I mean is there anything you can share on the average revenue per transaction. Just to give us an idea of what the early success is with the overall product?

[Brian Krzanich:]

Sure. So we really have to go back I don’t want to answer this on a -- on just a revenue perspective, because I think that really misses the point of Fortellis and the whole partner program that we are doing right, so…

[Gary Prestopino:]

Right

[Brian Krzanich:]

I see they were the old partner program was really a direct connection and it had costs related to any extraction of data or processing of data or encryption of data and all kinds of data. We have talked about how that’s been a major roadblock for our customers and call it retention.Fortellis is a very different system and that it’s really designed to be an open architecture from the standpoint of, it uses APIs and it’s modern. And but on top of that we have got a step structure for those APIs. So each one of those APIs now has a spec about how they operate.Those APIs can be anything from a relatively simple data extraction. If you are a dealer and you want to extract your sales data or inventory data or whatever, it’s a very complex extractions, like, the repair order, where you have encryption and calculations and data flowing in both directions. And so the revenue model in those is very, very different. For a simple data extraction that revenue model is virtually nonexistent. We are really setting that up that, that is the dealer’s data and that’s really where that the friction came from in the past.In something like a repair order, there is a fee, because it has a highly complex level of calculation and integration into the DMS and encryption and things like that. And so, right now, the different types of applications and the number of applications is such that it would be hard for me to give you an average revenue for these.We will start to give that kind of information probably in the future. Right now we are really focused on growing this ecosystem and getting more and more partners. So we talked about our partnerships that we have developed, we have talked over the last couple of quarters Cox during a repair order, we have got several other partnerships coming that we will talk about at NATA.And it’s really about getting partners, remember we said, first you have to build the platform, then you have to go get partners, then you have to go get applications. And that’s how you grow a platform like this.And so at NATA, we will make a bunch of announcements in this space, but it’s really way too early to talk about it at average revenue model. So that’s why I wanted to, like, that’s not an answer I am going to focus on over the next year or so.

[Gary Prestopino:]

Yeah. That’s fine.

[Brian Krzanich:]

And another thing…

[Gary Prestopino:]

Impressive.

[Brian Krzanich:]

Yeah. And that’s why what you will see us do is continue to up our disclosures, we will start to get more volumes of insights and data points, so we will be more focused on number of transactions and other relevant measures that give our investors in the outside world the view into the traction and success we are making with the platform. And Gary, unfortunately, we have got to move on to our next caller. Thank you for your time.

[Gary Prestopino:]

No. That’s fine. Thank you. Thank you.

[Operator:]

Thank you. Our next question comes from Josh Baer of Morgan Stanley. Your line is open.

[Josh Baer:]

Hi. Thanks for taking the question.

[Brian Krzanich:]

Hi.

[Josh Baer:]

One for Brian and a couple of for Joe. For Brian have you picked up any changes from your competition as far as a response to your initiatives around customer support and innovation, that’s leading to the higher retention and site growth?

[Brian Krzanich:]

I’d say it’s a competitive market. It may be getting a little bit more competitive. I think in some cases, we have talked about -- we have settled some of our lawsuits, we have talked about those on some of the other quarters. We showed you partnerships with quote some of our competitors like Cox, where I think we are really finding that there’s going to be spaces where we compete and there’s going to be spaces we can work together.So in general, I’d tell you, I don’t see the market any more or less competitive now than it was six months ago. I’d tell you the team here is probably getting a little bit more competitive, but I haven’t seen the marketplace really shift that much.

[Josh Baer:]

That’s helpful. And for Joe, I am wondering how Drive Flex will impact the financial model and maybe more so for next year, when you are at that 15 to 20 site a month install. And not asking for like the dollar impacts, but generally, is there a different gross margin profile for Drive Flex, where we see any benefit to site growth if it’s installs for new sites or if it’s primarily existing sites where we see any ARPU uplift or changes to the revenue recognition from Drive Flex? Thanks.

[Joe Tautges:]

Thanks for the question. When I look at -- I will start and Brian can add in, when I look at the model with Drive Flex in our experience that we have so far. We are focused on the package solution to sell to a dealer with Drive Flex and the other integrations and applications that we have as part of it.And so what I would point you to is the revenue recognition model and the pricing model is very similar to how we price our other products today in the portfolio in terms of the mechanism and so subscription revenue very much SaaS based which you would expect.But when you look at the pricing, we have seen an opportunity to be able to deliver more value and more upside for the customers that we have sold both saving them money as they drive better integration with the new Drive Flex platform and an opportunity for us to bring more of our solutions to market.

[Brian Krzanich:]

And the thing that I would add is the beauty of Drive Flex is it’s scalable and so you have heard us talk about that several of the early installations have actually gone into independents, and in those cases we scaled back the complexity and the needs and all aren’t nearly as high there necessarily.As a dealer group that may have multiple stores that it has a lot of layered apps attached to that DMS. So the beauty of this system is that it is modern architecture that is modularized and scalable.And so as a result, when you take a look at Drive Flex, our goal is to move into new areas like the independent dealers, that’s a new marketplace. So Joe will tell you that’s a revenue growth area that’s untapped right now.Then we will also go into the existing smaller dealerships, the two and below dealerships that we are currently supporting. But that’s really how we get back to growth in my opinion in that space. And then over time, we will get it into those larger dealerships as well. And so you will see the different levels of revenue and margin as a result across those, but we expect it to be very profitable and growing in all three of those segments.And so when we look at an average for Drive Flex, it may be kind of skewed by the fact that there are all three of those segments moving whereas if you look at Drive today, it doesn’t have those independents at all, a very small percentage of the smaller guys, but when if you look at it against any one segment, it should be equal.

[Josh Baer:]

Very helpful. Thanks.

[Operator:]

Thank you. Our next question comes from Matt Pfau of William Blair. Your line is open.

[David Robinson:]

Hi, guys. This is David Robinson on for Matt. I just had a question around ELEAD1ONE business. Were there any updates to how that’s progressing relative to your expectations?

[Brian Krzanich:]

Sure. Actually, ELEAD continues to do well. It continues to exceed our expectations. We continue to see site growth over this quarter. The business is going quite well. We have put it on, I -- to me that was a great technology that we acquired. And one of the things that I am trying to be very careful of is that we don’t acquire a great technology and then let it sit idle and then become stale and eventually not a great technology.So what you are going to see and this is some of those investments is, there were two layered applications that we are going to push the technology team to really do upgrades over this next 12 months to 18 months and those are going to be around our service application and ELEAD CRM. o we actually have plans to invest into that product, so that it continues to grow and we believe we can grow at even a faster rate out into the future as we make those investments.

[Operator:]

Thank you. Our next question comes from Charles Nabhan of Wells Fargo. Your line is open.

[Charles Nabhan:]

Hi. Thanks for taking my question. Just a two-part question about the auto market, I guess, firstly, I was wondering, if you could comment on what you are seeing from -- within the U.S. what you are seeing from a financial health standpoint among your customer base, maybe if you could speak to spending trends, what you are seeing from a consolidation standpoint? And as we think about the international market, I know you made some comments on that business. But I was wondering if you could provide some specifics around geography, where you are seeing strength and weak -- or weakness conversely and if there’s any new geographies then you have been kind of trading over the past couple of quarters?

[Joe Tautges:]

Sure. I will start and Brian can add. So first of all in the U.S. auto market, the NADA publishes a quite good report, the last one published was June and a new one will be coming out. But when you look at the statistics in there, while volumes in SAAR have been under pressure, the dealers have hung in there quite well.And so there is not a real -- really new to point out, we continue to see consolidation of dealerships in the bigger dealers seeing an opportunity to scale their operation and some of practices more. So we continue to see a push towards revenues in the service arena and that’s why Brian talked about how do we think about the service application and the accelerated growth opportunities there. There is a robust discussion around digital retailing and out-of-store research connected all the way through to the end. We think we have a unique opportunity to provide a great software solution for that as we go work it.So when you look at that lens of the auto market continues to be good and then you see the new franchise dealerships also selling more used cars. The used car market is robust and there is increases there.So on balance, I think, the -- when you look at the market in aggregate, I think, they are doing quite well weathering some of the declines in overall new vehicle sales and finding other ways to bring value to their customers and we are focused on bringing the solutions they need to make their dealerships successful.When I look at the International space, we are really happy with the performance in the quarter with the International team. As you look at the subscription growth and the overall business growth.I think you should look at the International through six months and see it’s growing mid single-digit. There is a number of things they are doing well as they look at their base and win new business and bring solutions to customers.They are also as you saw on the site count decline facing a number of dynamics. You see across many areas of Europe a lot of site consolidation and we have been fortunate that, that site consolidation has yielded increased users at existing customers of ours and have increased the rate for us as.As look at Asia, particularly China there continues to be a pressure on that business and we continue to watch it closely. And so I think the management team is doing a lot of the right things to look where there is pressure and find opportunities to grow the business and deliver the solid quarter for us.

[Charles Nabhan:]

Got it. And if I could sneak in a quick follow-up for Joe, I believe you mentioned there was a change in accounting that impacted the other line in RSNA. Could you possibly quantify that for us and just maybe give us a little more color around that?

[Joe Tautges:]

I am not familiar with the change in accounting. I think that what you are referring to is maybe lease accounting. We adopted ASC 842 this year.

[Charles Nabhan:]

That’s right. Yeah.

[Joe Tautges:]

That was in first quarter and second quarter and will be each quarter. And I don’t have the exact number -- there is a footnote in the 10-Q that you can go to that will publish the exact impact of the lease accounting.

[Charles Nabhan:]

Got it. Okay.

[Joe Tautges:]

And again when we look at the numbers of the revenue growth overall, we printed 4% organic revenue growth, if you look at it on a constant currency basis it’s 5%. And when you start to pull it apart I think what you will find is roughly the benefit from the lease accounting transition is largely netted by the partner program transition and that all nets out in the noise and you see the business continuing to improve on the topline.

[Charles Nabhan:]

Got it. Okay. Thanks for the color guys. Appreciate it.

[Brian Krzanich:]

Thank you.

[Operator:]

Thank you. I am showing no further questions at this time, I’d like to turn the call back over to Brian for closing remarks.

[Brian Krzanich:]

Okay. Thank you, Operator. So I just want to close with a statement saying that we are very pleased at how our strategies are proving successful. I would like to once again just really acknowledge the entire CDK team around the world for all their hard work and dedication. It’s really showing in the results and then I’d like to thank you all on the call today, great questions to close out a great quarter. So thank you very much.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you for participating. You may all disconnect.