CDK Global, Inc.
Q3 2016 Earnings Call Transcript

Published: 5 May 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the CDK Global Third Quarter Fiscal 2016 Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the conference over to your host, Elena Rosellen, Senior Vice President of Investor Relations. You may begin.

[Elena Rosellen:]

Thank you and good morning. I am here today with Brian MacDonald, CDK's CEO and Al Nietzel, our CFO. Thank you for joining us for our third quarter fiscal 2016 earnings call and webcast. Brian will begin the call with some highlights for the quarter, and then provide an update on the execution of our business transformation plan. Al, will then take you through the details of the quarters results and comment on our forecast for fiscal 2016. A couple of reminders before we get started, our business segment results include the impact of foreign exchange rate fluctuations and we have provided fiscal 2015 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, 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 period. Throughout today's call, references to financial amounts are on an as adjusted basis. The 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. And 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 Brian.

[Brian MacDonald:]

Thank you, Elena. Good morning, everyone, and thank you for joining us this morning. Today, I'd like to briefly discuss our results for the third quarter and then provide you with a more detailed update regarding our business transformation program. I am very pleased with our third quarter results. Adjusted revenues grew 5% or 6% on a constant currency basis. Growth in adjusted pre-tax earnings was 12% or 15% on a constant currency basis and adjusted pre-tax margin expanded 130 basis points. Adjusted EBITDA margin increased 240 basis points to 25.6% for the quarter. Operating results were very strong despite CEO transition cost of $8.1 million recorded in the quarter, continued pressure from foreign exchange and additional interest expense from the term loan we entered into in the second quarter. Al, will provide more details in a few minutes. First, some thoughts on the US auto market. As we spoke about on our last call, expectations for US market for 2016 continue to be mixed, with indication that new car sales will start to flatten. April's start came in at a strong $17.4 million unit. This measure is a good indicator of the health of the industry. However, as an important reminder, only about 10% of CDK's revenues are from new product sales volume related products. So volume alone isn’t a direct indicator of CDK performance. Outside of North America, CDK has a strong presence serving dealers in the UK market which just posted the best ever car sales month - in the month of March. Overall the environment CDK operates in is very healthy, at current levels dealers are continuing to invest in their operations. In early April, I attended the NADA convention, and I wanted to share some of those highlights. Our dealers were very anxious to see how CDK could help them drive more business and improve the customer experience. As a result, we broke all of our previous demo and leads records. Additionally, we received many compliments on our connected store product. Dealers were impressed with our ability to seamlessly tie online personalization to the showroom experience. Overall, our dealers were upbeat and we feel very good about where we are. Next, I want to give you an update on our recent enterprise customer win. One of our key strategies is the partner with the top dealership groups and we are pleased to announce that we have won the Hendrick Automotive Group. Hendrick has almost a hundred stores which we'll be converting to our system over the next year. We are very happy to be partnering with the Hendrick team. As many of you know, in early March we completed the CEO transition that we announced in December. During this transition time, I traveled to meet our customers and to visit our field locations. I received good feedback on what we do well, and where we can improve. I heard clearly, that while CDK is a very good company, it needs to make changes to be better and we need to communicate more about what those changes are and why they will benefit all of our stakeholders. I also met with a number of investors over the past few months. We welcome shareholder feedback and ideas, including those publicly expressed yesterday and we will continue to maintain an active and open dialogue with our shareholders. We believe that our company has not yet realized its full potential and today I'd like to provide more information on our transformation plan, including more specificity around the work stream that are in process. The execution of this plan will create a more efficient company that will allow us to greatly enhance the customer experience and realize significant earnings growth and margin expansion over the three year plan period. Let me emphasize that efficiency improvements 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. At our Investor Day last June, we described the areas that we were focused on to achieve our target. Today you will find new disclosures in the deck provided for this earning call, and it is our intention to update our progress each quarter. As you can see on slide 4 of the earnings deck, we are sharing with you eight work streams to provide more transparency to what we are doing. Our transformation efforts involve multiple projects and we have hired world-class consultants to help us ensure we are running a best in class project office, led by recent hire Dan Flynn and to provide additional manpower for certain work streams. The first work stream, which we call Move Up is critical, as it is a enabler for what we will achieve in most of the other work stream. We currently have about 1500 versions of our software across 74 of our principal applications in North America. Our goal is get all of our customers on the most recent versions. Moving our customers to our latest product versions will help us to streamline implementation and customer support, improve the customer experience and make our R&D spend more value-added to our customers. Additionally, our customers will benefit from being able to add on our newest layered applications, as they are only available on the latest core product version. We are very early in this process, so there is a great deal of work, as well as a great deal of opportunity here. The second work stream is focused on the implementation process. As we described during our Q1 earnings call, we launched our new best practices model to help ensure that our customers achieve a desirable return for their investments in CDK's dilution. I am pleased to tell you that we are seeing tangible results. The virtual versus on-site split for time spent to install is improving. We have reduced the number of go back days to the customers and reduce the number of contractors, as well as internal headcount required to complete an install. As a result, our initial goal to reduce implementation days by 30% has been achieved. We are now working to get to a 50% improvement. The third work stream is about improving customer service. Following conversations with our customers, I learned that our customer response times were not where they needed to be. So I challenged our team to take a hard look at our processes. We did and significantly improved our service levels without any significant additional cost or headcount. We've taken actions that have resulted in increased use of service connect. This is been very well received by our customers, as it has enabled us to reduce response times by over 80%. Currently over 90% of cases are being answered within our targeted goal time. These significant steps are very good first step. But we will continue to work to maintain quick response times. You have heard about us reorging the sales structure, which is part of the fourth work stream, optimizing our sales and product offerings. Additionally better management of discounting and standardization of pricing is part of this work stream. Historically we didn’t have a robust discounting process, but now we have a tightened – now we have tightened up this process, so quarter end measures or other factors don’t lead to sales decision that stretch the discounting bands beyond what is now in place. We have developed a more disciplined discounting strategy and have seen immediate results on the actions put in place. Work stream five, simplify the quote-to-cash process is in the early phase. This work stream is just getting underway; but now it’s important to for you to understand that we have more than a dozen systems, which means that our customers get multiple invoices from CDK each month. We are just too complex. We hear that from our customers and we are fixing this. We will simplify this process and we will go from multiple systems to just one and be able to deliver a simplified set of invoices to our customers, while lowering our internal cost to perform these functions. The sixth work stream is creating work force efficiencies and rationalizing our geographic footprint. We are reducing organizational layers and increasing manager spans and control. As we transform CDK, I am challenging our organization to find efficiencies each and every day. To that end, last month we reduced our global work force by 5%, inclusive of contractors and open positions. This is one step towards evolving to an organization that is less complex, more productive, and will allow us to invest in areas that will improve the CDK customer experience. We anticipate run rate savings from this action of over $25 million as we exit fiscal 2016. Additionally, we will gain favorable results through both labor arbitrage and lower cost facilities. There are currently 10 facility consolidations completed or underway. We've also reduced space at certain higher cost locations as we increased R&D capabilities in India, and continue to ramp up the Norwood Center of Excellence, which now has over 200 hires. Our goal is reduce the number of our North American facilities but at least 40% by the end of fiscal 2018. Strategic sourcing is the seventh work steam and you've heard from us on previous earnings calls about the good progress here. There is more to come as we continue to examine vendor relationships. Lastly, our international business is doing a number of similar things to achieve its fiscal 2018 25% margin target with a 19.7% margin this quarter. We updated you on this eight work stream last quarter, so I will defer a further update to a future earnings call. Now let's move to slide five, where we will show financial information. We have provided target ranges for the work streams, so you can see how each fits into our goal of generating an aggregate $250 million $275 million of additional EBITDA dollars through fiscal 2018 to achieve CDK's 35% target margin in fiscal 2018. We have updated our estimates for a total $50 million in savings this year. Year to date savings are approximately $25 million. We are currently in the operating plan cycle, so I cannot provide details for next year yet. But what we achieve in fiscal 2016 compounds as we move forward and will provide a very good step up for next year. You also see on this slide, descriptions of certain internal metrics that are among the ones we are tracking to measure our progress, some of which is been highlighted in my comments about the work stream. So I hope you see that we are well on our way and that this update provides some additional clarity. We are focused on limiting operational disruption and creating positive outcomes for our customers as we strive to significantly increase profitability and expand margins while we grow our revenue. These actions are all value added to both our customers and our shareholders and I couldn’t be more excited and confident about the opportunity we have to take CDK to another level. We are committed to deliver results, and meet the targets we laid out. With that, I'll now turn it over to Al to take you through our results for the quarter and our fiscal 2016 forecast.

[Al Nietzel:]

Thanks, Brian and good morning, everyone. We posted good results for the quarter. As I do each call, my comments for the third and the fiscal 2016 forecast will largely be on the as adjusted non-GAAP basis which is shown in the schedules accompanying our earnings release. As Brian stated, total revenue growth was 5% and 6% on a constant currency basis. Acquisitions contributed one point of growth. We continue to face some headwinds from foreign exchange rate fluctuations, primarily against the Canadian dollar, pound, sterling and the euro. The impact of FX this quarter was once again significant to the ARI business, though less of a drag than during the first of the fiscal year. 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 4% and 5% on a constant currency basis. Acquisitions contributed one point of growth. Increased site penetration of our Dealer Management System contributed a half point of growth. Increased average revenue per DMS customer site contributed approximately 4 points of growth and increased transaction revenue contributed nearly 3 points of growth. A decline in other one-time revenues reduced growth by approximately 2 points. For ARI, revenues were flat, entirely due to unfavorable exchange rates, but grew 6% on a constant currency basis, primarily from increase d revenues per DMS customer site due to additional users. Site counts within ARI were down slightly on a year-over-year basis. For Digital Marketing, revenues grew 10%, driven by higher advertising spend. However, the number of customer websites declined 9% as a result of changes to certain OEM programs that began in last years third quarter and at this time we are anticipating a further decline in customer website counts for the fourth quarter. Moving from revenues to cost, our cost of revenues declined $6 million or 2% from a year-ago on an as reported basis. Favorable year-over-year comps helped us in the quarter, including a favorable impact from foreign exchange rates of $4 million and last years fourth quarter divesture of the internet leads business. We are also realizing lower labor related costs due to reduced headcount and more favorable geographic mix, as a result of our continued transformation efforts. Partially offsetting these benefits, our cost related to our transformation plan totaling $5 million which are shown as pro forma adjustments in our non-GAAP table. Our research and development spend, which is included in cost of revenue, represents about 8% of CDK's overall revenues. I mention R&D because we are keenly focused on what we internally call top minded product and services prioritization and we understand that CDK must continue to innovate and enhance its products and services. Innovation is part of our DNA and plays a vital role for providing an outstanding customer experience which is CDK's number one priority. Moving on to SG&A, which on an as reported basis increase d $19.5 million or 18%. Included in SG&A were cost related to the CEO transition of $8.1 million, cost related to the transformation plan of $7 million and $3.1 million of incremental standalone public company costs as we were building the public company structure a year ago. The latter two items are both shown as pro forma adjustments in our non-GAAP tables. Similar to cost of revenues, favorable exchange rates in the quarter and last year's divestiture of the internet leads business reduced SG&A along with the benefits from our sales optimization work stream. You also saw in our P&L restructuring expense of $7.7 million in the quarter. This primarily represents employee-related cost incurred in connection with our transformation plan and is also reflected as an adjustment in our non-GAAP tables. Interest expense was $10.7 million for the quarter compared to $9.3 million a year ago, primarily due to the new term loan that was entered into in December 2015. Moving on from costs, adjusted earnings before income taxes grew 12% or 15% on a constant currency basis. Our adjusted pre-tax margin expanded 130 basis points for the quarter. The CEO transition cost of $8.1 million reduced pre-tax margin expansion 150 basis points for the quarter. Each of our segments posted strong pre-tax margin expansion this quarter with ARNA at 260 Bps, ARI at 400 basis points and Digital Marketing at 530 basis points, fueled by the positive impacts of our transformations efforts, as well as from strong underlying operational performance. ARNA included an increase in employee related cost of approximately $7 million, primarily related to incentive compensation which reduced the ARNA pre-tax margin by 200 basis points. Total CDK adjusted EBITDA margins expanded 240 basis points for the quarter to 25.6% and was negatively impacted by 90 basis points by the CEO transition cost. As you read in this morning’s press release, the effective rate, includes net tax benefit of $4.6 million, representing approximately $0.03 in EPS and 9 points of growth. Items totaling $4.1 million are attributable to ongoing rate reduction which you see in our reduced ETR forecast for the year. Adjusted net earnings increased 23% due to the factors I just discussed and growth in adjusted diluted earnings per share was 27% on lower shares outstanding. Our cash balance at March 31 was $464 million. Now, I'll turn my comments to return of capital plan. As you may recall, in December, we announced our plan to distribute $1 billion in capital to our shareholders through a combination of dividends and share repurchases. This plan included the authorization to purchase up to $1 billion of CDK shares. As discussed on last quarters call, in connection with the return of capital, CDK entered into an ASR to repurchase $250 million in CDK shares, which is underway and as a reminder, under this program, 4.3 million shares were delivered to CDK in December, which we expect to contribute $0.02 to earnings per share for the year. Final delivery of the remaining shares is due in our fourth quarter. As you can see on slide eight, through the nine months of fiscal 2016, CDK has returned $323 million to shareholders through dividends and share repos. It’s clearly our intent to continue repurchasing shares and we won't miss a beat once the ASR is completed. Moving on to the forecast for 2016. We're pleased to be increasing our earnings forecast for the fiscal year. We are ahead of our initial forecast for savings for the transformation plan. Additionally, as I just discussed the effective tax rate is expected to be lower. We do still expect negative impacts from certain items I will go through in a moment, but despite these items, we anticipate achieving stronger results than we originally plan. These items include approximately $9 million related to the CEO transition announced in December, pressure from the strengthening of the US dollar and additional interest expense on the new term loan entered into in December. We anticipate 4% to 5% revenue growth. We anticipate 26% to 27% growth in pre-tax earnings. We anticipate approximately 350 basis points of expansion in both pre-tax and EBITDA margins. We anticipate 27% to 28% growth in net earnings and approximately 30% growth in diluted earnings per share. It’s a strong financial forecast, considering the CEO transition cost are anticipated to reduce pre-tax and EBITDA margin expansion 40 basis points and 20 to 30 basis points respectively and reduce both pre-tax and net earning growth approximately 3 percentage points for the full year. This applies significant earnings growth and margin expansion for the fourth quarter which we expect and will provide a strong step up into fiscal 2107. And with that, I will turn it back to the operator; and Brian and I'll be happy to take your questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Rayna Kumar with Evercore ISI. Your line is now open.

[Rayna Kumar:]

Good morning. Thanks for the update on the business transformation plan. I thought that was very helpful. Where do you think you could have up side to your target of $250 million to $275 million in savings, if any?

[Brian MacDonald:]

Yes, Rayna. Its Brian here. I think if you actually do the math, and you add up all the items on the table, you will see they all add up actually greater to a number than 275. So we've got a number of items to do. We're deep into execution and getting to the 250 to 275 is our – is really our first step in this. But there is a lot of opportunities at CDK to improve things that improve the bottom line and then improved the way we operate with our customers. So I think our focus is really getting the 250 to 275 done and then as we get closer to getting that done we'll have more to say about what the next phase of the company's evolution is.

[Rayna Kumar:]

Got it. Could you quantify any pricing changes in your DMS and Digital Marketing businesses in the quarter? And your expectations for the next 6 to 12 months?

[Al Nietzel:]

Sure. On the digital side, there really isn’t a tremendous amount of elasticity pricing wise that we see. There are clearly opportunities in that space, as we think about some of the more subscription base revenues within that portfolio. So don’t expect the whole bunch to change within digital from a pricing perspective. On the DMS side, we've talked about some of the changes we've made to some of the discount strategies and processes to Brian talk to in his opening remarks and so forth. Our historic model has been, you know, call it a percent of price increase and through the transformation we're expecting that to probably double to the 2% range as we get tighter with our discounting rules and so forth.

[Rayna Kumar:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Ian Zaffino with Oppenheimer. Your line is now open.

[Ian Zaffino:]

Okay, great. Thank you very much. When you guys mentioned on a digital marketing side the decline in website count, is that going to be sequentially next quarter versus this quarter or is that a year-over-year comparison? And then I have a follow up on that.

[Brian MacDonald:]

Yes, we're expecting Ian, some sequential decline from Q3 to Q4 as well, as we lap a couple of those OEM programs that we have been mentioning prior. So I'd expect to see a reduction again sequentially in Q4.

[Ian Zaffino:]

Okay. And then can you give us a understanding of maybe you know, those OEM contracts versus your remaining OEM contracts, how they differ? Meaning, did those websites go away or is there something in the new contracts or the contracts you have right now that are preventing maybe those websites from going away like they did with the previous OEM? Maybe give us, maybe a compare and contrast between that and you know, what you have now existing? And then the other question would be, if you could maybe just talk about the competitive environment a little bit, how your share is doing, as you're trying to implement this transformation? Thanks.

[Brian MacDonald:]

Hi, Ian. It’s Brian. So on the website side, what I would say is, is we have a variety of relationships with OEM. We've had some recent transitions with some OEMs where previously we had an exclusive arrangement of websites and they opened it up to a set of preferred providers of which we're one and we've had some attrition related to that. We've had some other programs that we were not in, that we're now in as a preferred provider and so we're able to grab some new websites there. So overall I would say that, we're transitioning. There is an impact of these transitions where we've gone from exclusive arrangements to preferred arrangements. I mean, quite frankly I am not happy with our website count declining and we've got to focus around that and some sales promos around that, some additional focus, and some more changes around that. So fundamentally, while we continue to decline sequentially, our goal is to reverse that pretty quickly and as I said, I am not very happy with our website decline rate and look to transform that. On the competitive side, I mean, this is competitive business. Our customers are car dealers. They are very focused economically and from a performance perspective, I would say it’s a very competitive market, every deal is competitive, there are consultants in this industry who are involved in those deals. We fight for every deal and we're very focused on customer service. I talked about our improvements in that area, which I think will help us and were very focused on simplifying our business, so that we're easier to work with. But again it’s some of the feedback that we get from dealers. So it’s a competitive market and we have to deliver value to these dealers for the money they pay us or they go some where else and we're very focused on giving them good product and good service.

[Ian Zaffino:]

Okay Thank you very much.

[Operator:]

Thank you. And our next question comes from the line of Gary Prestopino with Barrington Research. Your line is now open,\

[Gary Prestopino:]

Hey, good morning, everyone.

[Brian MacDonald:]

Good morning.

[Gary Prestopino:]

Several questions here. Number one, as you're migrating customers to your latest software versions, is there any additional cost to the dealership to do that and or say some disruption to their business processes, why you do this?

[Brian MacDonald:]

Well, it really – that’s a complicated question Gary, it really depends on what version they're on. And so in some cases if they're on very old hardware, that maybe a situation that’s a little different than a version where, they're on a version. I mean, our goal is to work with our customers and how we're doing this; we're working with our customers to take them through the journey. To bring them to the newer versions, which have better feature functionality, better performance, et cetera, and that’s part of the journey and ultimately getting the customers, just like all of us who use software are getting their customers on the newest version is good for them and fundamentally it’s good for us.

[Gary Prestopino:]

Okay. That’s fine. And then with this Hendrick deal, hundred stores which is a nice win. How - or when will that be totally rolled out in fiscal '16, first half of fiscal '17 or give us an idea how that plays out?

[Brian MacDonald:]

Yes. Fiscal '18 is really when it will be rolled out and we'll start to see the real impact of it and it’s a really fantastic win for us. We're really excited to work with Hendrick. So we'll be rolling it out in '17 and the real P&L impact will be in '18.

[Gary Prestopino:]

Okay. And then in terms of that deal, what do you think or what do you think is the attached rate for layered apps, you know sold the deal, now what do you have to do, go to each individual dealership and try and sell your layered applications to attach to the DMS?

[Brian MacDonald:]

No Gary, no. It’s actually more of a centralized model and they will decide and have decided based on a basket of goods and products that we offer, you know, to incorporate those for the stores. Clearly there will be lots of change for the organization and it’s our desire to make sure that we make that happen as smoothly as possible and they will get to know as much of our layered application portfolio, whether it be phones and other solutions that we have, that can make their enterprise more effective.

[Gary Prestopino:]

So as you roll this out, is it safe to assume that the average monthly revenue per site will at least stay stable or improve?

[Brian MacDonald:]

Yes, I don’t know Gary, if it’s really got – I mean, when you have 9200 sites, putting a few hundred more in isn’t going to change our total average. But they will be taking a basket of services that are good for CDK. And we will continue to work with them as we have all of our other enterprise accounts to ensure they are knowledgeable of what it is that we have in the offering that could be again used to help, make their organization more effective.

[Gary Prestopino:]

Okay. Great. Couple of more questions. Just showing a year-over-year increase in DMS client sites in North America, but I think sequentially it was down about 26 sites. What explains that, are those dealership that you've lost, gone out of business or you just decided that it’s not profitable enough to service that dealership?

[Brian MacDonald:]

Yes, and I think – read into that, that we had a number of clients that were building a relatively small amount and what we really wound up doing was they took certain OEM services and chose to – those services weren’t needed anymore. So it was in the 28 to 30 range in terms of client sites. We don’t expect that to – that trend in terms of decrease and ARNA sites to be continuing.

[Al Nietzel:]

Yes, what I would add to that, Gary, so I would say it’s a data point, it’s not the beginning of a trend, it’s an anomaly.

[Gary Prestopino:]

Okay. And then two more questions, I promise I'll stop. Website were down, obviously you lost that OEM relationship last year. But what about – if you factor that out, you've got two new relationships that you've announced, how is that going in terms of adding new websites from these two new relationships?

[Al Nietzel:]

We're adding them Gary, but it’s just happening at a slower rate than we had anticipated. So we will continue to see growth with infinity and so forth and Mazda. But it is just a slower churn than we had anticipated. So it’s earlier on in the cycle – than those ones, and you know, we do expect to gain our fair share of those as we get into the balance of both this year and into next year.

[Brian MacDonald:]

And Gary, I would add to that, I mean, we have a little more wood behind adding websites than maybe we had in some of the recent past and little more focused on it. In the last couple of months we have added more website than we have in a while. As Al said it’s not enough to offset the ones that are falling off the table. But this is clearly an area of focus for us and we're focused on turning the website count around to go the other way and I am not happy with the fact that our website count continues to decline.

[Al Nietzel:]

Its really Gary, as we talk when we've met, is that balance between driving the subscription base recurring revenue that has an attach to that website and some of the other digital advertising efforts that we have and strategically we're going to do both clearly, but we're trying to emphasize the website activities on the recurring subscription base more.

[Gary Prestopino:]

Okay. And then just lastly, I promise I'll get off, can you remind us of what the relative percentage of revenues that come from the – that are related to the euro, pound and Canadian dollar?

[Al Nietzel:]

We don’t really – actually that’s not something I have right in front of me Gary…

[Gary Prestopino:]

Okay…

[Al Nietzel:]

I mean, our international business is around - and with Canada about 20% of the total and you and I know the rates particularly for the Canadian dollar stabilize a little bit, but euro and pound not as much, but you know how that works.

[Gary Prestopino:]

Okay. Thanks a lot.

[Operator:]

Thank you. And our next question comes from the line of Brian Essex with Morgan Stanley. Your line is now open.

[Brian Essex:]

Great. Good morning and thank you for taking the question. Maybe if I could follow up on one of Gary's questions to start. On the move up initiative, as you look to migrate customers to more unified base of a software applications, maybe help me understand or help us understand where would that focus be within your customer base, and by that I mean, are they primarily with larger customers or do you have maybe a smaller long tail of customers that’s on a different application solutions that you need to work to migrate and maybe a part B to that, is how long do you expect that initiative to take?

[Brian MacDonald:]

Yes, Brian, its Brian MacDonald here. The dispersion is pretty wide in terms of when you have 1500 versions, it’s a pretty wide dispersion across our customer set. So I wouldn’t pin it on any one subset of customers. The effort itself its relatively complicated, as I mean, we didn’t get here over night, having 1500 versions of the software in the market, we didn’t get there overnight. It’s going to take us a little bit of time to get out of that. Our goal is to complete that and be where we want to be. And in fiscal year '18 as we go through this journey together we'll update you quarterly on where we are. I think we have a lot of good work underway in it and ultimately at the end of the day we think we'll bring our customers to a better place, those who are not on the most late version. And it will also position us better to sell layered apps because as we get people on the more updated versions, it’s a much easier layered app sale for us and delivery for us.

[Brian Essex:]

That’s very helpful. So thank you Brian. And maybe its kind of follow up to that, certainly nice increase in average revenue per site. And as you look at that metric, how are the attached rates, obviously attached rates was higher. But where are the sweet points in terms of layered applications that you are able to more efficiently attach with core DMS or where do find greater challenges or head or where you have to maybe work a little bit more to get a better attach?

[Brian MacDonald:]

Yes, I think overall I think our attached rate is an opportunity for us. We have some very good layered apps. I mean, we really have a strategic position that strength with our DMS penetration in the market. And as you know from the past, I mean, we've been very focused on selling DMSs and if you probably look at the market share I think it’s hard to argue that CDK didn’t win that war. Now that we have that position of strength in the DMS market from a market share perspective, part of my strategic focus is how do we better sell layered apps and increase our penetration rates around layered apps. And we have some great new products. We just did an acquisition last quarter in the inventory space and we're partnering with Bruce Thompson and we'll have some good products there and we just continue to evolve and build out our own product set. So I think that’s an opportunity for us quite frankly to increase our penetration rates and perhaps at some point in the future we'll talk more broadly about that.

[Brian Essex:]

Okay…

[Al Nietzel:]

And Brian, maybe just Brian, maybe one more add which will be service. I mean, that areas that we're kind of under penetrated on in terms of our position as Brian said inventory and service is just another great area where dealers are just so acutely focused on it as areas of opportunity for us. So those are probably the two that we're very acutely focused on in terms of deeper penetration within the base.

[Brian Essex:]

Great. That’s makes a lot of sense. And maybe just – maybe one more on the move up, just kind of follow on to the comments that you've already made, is there a way that we can think about you know, the way that just generally speaking dealerships may think about this opportunity to migrate to a better class of software. Any sense of I don’t know, hey, we have ex percent of our installed base and on-premise or old legacy applications and when we step in the door its easy to illustrate them, you don’t need a server in the closet, that we can more efficiently do this with a better more seamlessly maintain the application. What is the conversation like in - is there some low hanging fruit here that you can take when you walk into door?

[Brian MacDonald:]

Yes, I think, lot of the conversations is around access to layered apps and our potential there, different conversations around disaster recovery, focused on being on the latest versions and the latest access to apps. And it’s really no different than all of us – it’s a conversation we all have with our own personal software and corporate software, right. So it’s really taking folks to that discussion around the upside of being on the most recent versions.

[Al Nietzel:]

And the newer versions have improved work-flows that allow for better efficiencies within the dealership. And reporting capabilities and what not that enable them to have their handles on perhaps the dealership better than they did previous. So it’s never easy, but that’s clearly something that we believe with our latest and greatest versions can help the dealers become more effective that what they do day in day out.

[Brian Essex:]

Great. Very helpful. I appreciate your color. So thank you.

[Al Nietzel:]

Thank you.

[Operator:]

Thank you. And we have time for one more question, from the line of Stephanie Davis with JPMorgan. Your line is now open.

[Stephanie Davis:]

Hey, guys. Congrats on the Hendrick win, that’s solid headline client.

[Brian MacDonald:]

Thank you.

[Stephanie Davis:]

Got a question on, given the size of the client, could you discuss how much customization was the part of the win and any sort of margin impact we could see from that?

[Brian MacDonald:]

Yes, I don’t Stephanie believe that there is tremendous amounts of customization, that’s kind of going against what we referencing with the move up strategy, ultimately their win and win that’s going to take a fair amount of shoulder on both companies side to get installed and so forth. So we will be working that transaction over the course of the next year. It really isn’t going to have a meaningful impact in terms of revenue until '18 or in terms of margin and its not – we're not putting it in a corner and saying that our goals and our objectives are going to be impacted one way or the other by the Hendrick transaction. So its part of the overall implementation mix that we have and we'll continue to execute against that as the installs happen.

[Stephanie Davis:]

Good to hear. And one follow up on the VW Hyundai website count. Now that you anniversaried it mostly, could you give color on the retention rates you are seeing for these VW Hyundai website client?

[Brian MacDonald:]

I don’t have it in front of me, Stephanie, I mean, we typically were retaining in the 30% to 40% range, I just don’t – I don’t have this one top of head, so I don’t have the answer to that unfortunately.

[Stephanie Davis:]

Okay. Thanks for taking my questions.

[Operator:]

Thank you. And I am showing no further questions. I would now like to turn the call back over to Brian MacDonald for any further remarks.

[Brian MacDonald:]

Thanks everyone for joining. As I said earlier, we're very pleased with our third quarter results. We exceeded our expectations and we have increased our full year forecast. We still have lots to do in the year, but we're definitely positioned for the long-term. We have listened and understand your desire for more specific on our transformation and we provided you with a lot of that information and insights today. I am very confident about our potential and I hope you share our enthusiasm for what's to come and thanks for listening and have a great day.

[Operator:]

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