First Quarter 2022 Transcript

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EDITED TRANSCRIPT

CDK.OQ - Q1 2022 CDK Global Inc Earnings Call

EVENT DATE/TIME: NOVEMBER 02, 2021 / 9:00PM GMT

OVERVIEW:

Co. reported 1Q22 revenue of $440m and non-GAAP adjusted EPS from continuing operations of $0.77. Expects FY22 revenue to be $1.78-1.82b and non-GAAP adjusted EPS from continuing operations to be $2.70-2.90.

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NOVEMBER 02, 2021 / 9:00PM, CDK.OQ - Q1 2022 CDK Global Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Brian Matthew Krzanich CDK Global, Inc. - President, CEO & Director

Eric J. Guerin CDK Global, Inc. - Executive VP & CFO

Joseph A. Tautges CDK Global, Inc. - EVP & COO

Reuben Gallegos CDK Global, Inc. - VP, Investor Relations

C O N F E R E N C E C A L L P A R T I C I P A N T S

Gary Frank Prestopino Barrington Research Associates, Inc., Research Division - MD

Ian Alton Zaffino Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

Jian Huang Morgan Stanley, Research Division - Research Associate

Matthew Charles Pfau William Blair & Company L.L.C., Research Division - Analyst

P R E S E N T A T I O N

Operator

Thank you for standing by, and welcome to the Q1 2022 CDK Global, Inc. Earnings Conference Call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the conference to your host, Mr. Reuben Diego, Vice President of Investor Relations. Please go ahead, sir.

Reuben Gallegos - CDK Global, Inc. - VP, Investor Relations

Thank you, and good afternoon. I'd like to welcome you to our first quarter fiscal '22 earnings call.

Joining me on today's call are CEO, Brian Krzanich; Chief Operating Officer, Joe Tautges; and our CFO, Eric Guerin. Following their prepared remarks, we'll be taking questions.

Our earnings press release was issued after the close of the market today and is posted on our Investor Relations website at investor.cdkglobal.com, where this call is being simultaneously webcast. In addition, our website includes an updated Excel schedule of supplemental financial information and a copy of our results presentation that we will be referencing during our prepared remarks. Throughout today's call, we will be discussing our continuing operations only, which do not include the international business results, which are presented as discontinued operations.

Unless otherwise noted, all references to financial amounts during our call are on a non-GAAP adjusted basis. Reconciliations of adjusted amounts to the most directly comparable GAAP amounts are included in this afternoon's press release. Please also note that our growth percentages refer to the year-over-year change for that period, unless otherwise specified.

I would like to remind everyone that remarks made during this call may contain forward-looking statements. These statements involve risks and uncertainties as further detailed in our filings with the SEC, which could cause actual results to differ materially from those mentioned in the forward-looking statements.

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

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NOVEMBER 02, 2021 / 9:00PM, CDK.OQ - Q1 2022 CDK Global Inc Earnings Call

Brian Matthew Krzanich - CDK Global, Inc. - President, CEO & Director

Thank you, Reuben, and thanks to everyone for joining the call today. CDK is off to a strong start to fiscal 2022 with revenue growth of 6%, EBITDA of $170 million and EPS of $0.77 per share, and I'm pleased with these results, which met our expectations despite a modest slowdown in the transactions business, driven by inventory shortages in the auto market. Joe and Eric will give more color on the customer environment and financial performance in a few minutes.

Our ability to excel in 2022 demonstrates that CDK has become a fundamentally different company than it was just a few years ago. We've been focused on making investments that strengthen our core business, including significant improvements to our customer service and technology. We've been steadily transforming ourselves into the market-leading strategic software partner for the automotive industry. And we're connecting the industry end-to-end and creating a digital, modern-retailing process that rivals with anyone else can bring to the market. And we're seeing the benefits of those investments, with strong Net Promoter Scores up 30 points since 2019 and 11 straight quarters of DMS site growth. And the improvement in these underlying metrics is now more visible in our financial results with notable growth in core business.

This improvement in the core business has given us an opportunity to collaborate with dealers and OEMs to drive the ongoing transformation of the automotive retail industry. Last month, we hosted CDK Connect, a customer-focused industry event that highlighted our recent technology wins. We are pleased to have the opportunity to bring together dealers, OEMs and software developers and share the latest technical advancements we've made at CDK. At the event, we demonstrated exciting new advancements in a variety of workflows, including service and back office functions.

And Joe will go into more detail, but I especially want to highlight that we've completed our 100-day plan to integrate Roadster into our core systems, including Elead CRM. And the result is an end-to-end digital workflow that drives high consumer satisfaction while also enabling improved efficiency in the dealership.

We accomplished much of this by leveraging our investments in the Fortellis platform. The modern API architecture, Fortellis, accelerates interconnection within the industry ecosystem at a pace that isn't possible on legacy platforms. Without the new capabilities we've built, the Roadster integration would have taken 2x to 3x longer to complete. It's the key to providing more innovation to our customers or from CDK and from independent software vendors who continue to add applications to the platform. We now have more than 75 applications live on Fortellis and generated more than 100 million transactions in this quarter alone. Exciting applications like predictive service and CDK OnePay leverage this platform to introduce and innovate around new capabilities that are solving real problems for our customers. And we expect growth and innovation to continue in the quarters to come.

We're pleased to announce our acquisition of Salty in the quarter. And as I mentioned, we are bringing all the technology together to allow dealers to deliver a frictionless process for consumers in purchasing their vehicles, whether they want to complete the transaction from their living room or start research at home and then visit the dealership, truly delivering a seamless omnichannel experience. But we're not stopping there. Our vision is to create an integrated experience for all aspects of car buying and owning. This begins with our entrance into insurance space with the acquisition of Salty.

Our dealers deliver millions of new and used vehicles each year, and every one of those vehicles needs insurance. And Salty leverages data and innovated technology to integrate insurance offerings into a dealer's existing process, opening an entirely new TAM of approximately $1 billion for both dealers and CDK. The dealers are excited by the opportunity, and I'm pleased to welcome Salty's team to the CDK family.

While we're excited about our work for the dealer body, we continue to believe CDK is well positioned to serve as a bridge between the dealers and OEM. A massive amount of data passes through CDK systems daily. Our ability to help our customers unlock the power of this data using Neuron is enormously valuable to both OEMs and dealers as it provides critically important insights to help improve vehicle performance and quality of service. CDK's position of an intersection of data flow across the industry, allows us to develop solutions that benefit the broader ecosystem. And we're working on a number of initiatives on this front.

CDK is uniquely suited to safely and securely provide access to these solutions through branded and white label applications. In the last quarter, we worked with a select group of OEMs to ramp-upreal-time inventory reporting. We also signed a data sharing agreement with one major OEM,

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NOVEMBER 02, 2021 / 9:00PM, CDK.OQ - Q1 2022 CDK Global Inc Earnings Call

come and build data; and continue to grow access to connected vehicle data with a number of OEMs via Fortellis. And this data will help us offer new and improved products to our dealers to help them sell and service more vehicles.

To summarize, CDK has pivoted its business dramatically in recent years. We're uniquely positioned at the heart of the automotive ecosystem to connect our industry. And through our technology, we unite dealership employees, dealer locations, software developers and OEMs, improving their business efficiency while enhancing consumer experience. And through these connections that we can share expertise and facilitate collaboration for the benefit of everyone.

Now before I pass things over to Joe, I'd like to thank our employees, our customers and our partners for helping get our fiscal year off to such a great start. We're pleased with the accelerating growth in the core business and our positioning for the remainder of 2022.

And so now I'll turn it over to Joe for the business highlights.

Joseph A. Tautges - CDK Global, Inc. - EVP & COO

Thanks, Brian, and welcome, everyone, to the call. As Brian said, we are excited about CDK's outlook for 2022 and the strong start we have had versus the plan we set for the year. We were pleased with the uptick in customer adoption of Roadster that began following the completion of the technical integration into the platform in September. Our underlying metrics and financial results show that our focus on service and technology is working for our customers.

I'll go into some of the underlying customer metrics in a few minutes. But first, as we have for the last several quarters, we've included a few charts with data we are seeing in the automotive industry. We also provided a few slides that cover market trends, how we are positioned to lead the creation of a unified digital buying experience for dealerships and the platform architecture we have built in support of this vision.

Overall, the industry is holding up reasonably well, but auto inventories are at record lows. Our data reflects these conditions with a modest reduction in sales and credit transactions per dealership. As B.K. has mentioned, we saw associated headwinds in our transactions business driven by these inventory challenges, and believe the trend could continue throughout the remainder of the fiscal year. We will continue to monitor this space closely.

On the flip side, lower inventories have increased realized prices, so dealer profits has been resilient. Dealership consolidation continued last quarter with several very large deals announced in recent months. CDK has been a net beneficiary of this consolidation, which we expect to continue in coming quarters we believe that some of this consolidation is happening as a response to the challenges from the rapidly changing retail sales environment where automotive customers are seeking a smooth digital buying experience they found in other consumer retail models. Dealers will have to reach an economy of scale that allows them to make necessary investments to enable this type of digital experience for customers in all 50 states. We believe we are the only option available with an end-to-end solution that can enable this vision.

Now I'll turn to some of our highlights for the quarter. The combination of consolidation, strong sales efforts driving competitive wins and continued healthy retention have resulted in notable site growth in Q1. Auto sites were up 1.6% and reached the highest level since 2017, while adjacency sites grew 4% and hit another all-time high. We had continued strength in winning business with auto sites that have more than 5 to 10 locations with 3 competitive wins in the quarter.

Revenue per site grew to record levels for both auto and adjacencies. Auto revenue per site grew 7%, with 2 points of growth contributed by the Roadster acquisition. Revenue per site benefited from higher application penetration. Revenue from 3-plus site dealers was up double digits, with 2 points growth attributable to Roadster, while revenue from 1 to 2 site dealers fell slightly. Adjacencies revenue per site was strong, growing 7%. We had notable sales wins across our strategic applications with particular adoption of Elead, CDK Service, Doc Cloud and Cloud Connect. Highlights include wins in 25-plus site groups for both Roadster and CDK Service. And the new universal product team that we discussed last quarter is gaining traction with Elead and now Roadster in non-CDK DMS sites.

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NOVEMBER 02, 2021 / 9:00PM, CDK.OQ - Q1 2022 CDK Global Inc Earnings Call

Earlier, Brian mentioned our CDK Connect event last month, where we were able to layout our vision and share key initiatives to our customers and partners. We touch every part of the automotive retail ecosystem, and we work with all stakeholders. Our software is used in some fashion across more than 12,000 dealerships. This level of engagement is a tremendous asset. At this event, we highlighted the Roadster integrations that now allow for the total digitization of the sales process. This provides a modern, flexible buying experience that meets the needs of a wide variety of consumers. It also improves the efficiency in the dealership by capturing and sharing data across a variety of tools used to optimize the selling process. We have also merged our Roadster Elead engineering teams, which will enable us to build a continuous purchasing workflow, which will allow our customers to target transaction times below 1 hour. Our customers are excited by this seamless solution and the potential for significant efficiency improvements in their sales process.

CDK Connect also highlighted new tools that target specific revenue and cost opportunities using the power of data and improved workflows. Predictive service, leveraging the Neuron platform, can drive increased service revenue opportunities by helping technicians efficiently analyze the vehicles' service needs. And our new accounting workflow can simplify back-office functions within the dealership to enhance productivity. We will continue to rollout new capabilities in the coming quarters that will make a difference for our customers.

And our acquisition of Salty opens a new opportunity for the CDK and dealers and shows how the new CDK is helping dealers navigate a changing marketplace and build new profit pools. By rethinking the consumer journey altogether, we can help consumers accomplish more through dealers, significantly deepening the relationship and increasing customer lifetime value. Insurance is one of the most obvious parts of the car buying process that is ripe for disruption, and we're helping dealers become the disruptor for change.

As Brian mentioned, Salty opens a large new total addressable market for both dealers and CDK. Salty combines data, technology and process integration to streamline the insurance quote process that fits seamlessly into the vehicle sales process. An integrated process and a strong panel of insurance partners maximizes the chance that customers will accept the quote and ultimately buy new insurance. Commissions on insurance originations and renewals will over time, while a strong recurring revenue stream for both CDK and dealers.

To conclude, I'm proud of the progress we've made over my years at CDK and how we are positioned for 2022. Investments in technology and service have strengthened our core business and allowed us to pivot the opportunities to add more value to dealers and OEMs.

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

Eric J. Guerin - CDK Global, Inc. - Executive VP & CFO

Thanks, Joe, and good afternoon, everyone. As Brian and Joe mentioned, we had a nice start in 2022 that puts us on track for the year.

Let me start by walking you through our first quarter results before discussing the outlook for the remainder of 2022. I'd like to remind everyone that results are for continuing operations only and do not include the International business, which is presented as discontinued operations.

First quarter revenue was $440 million, up 6% versus last year. Revenue includes $10 million from acquisitions. Core revenue growth, excluding the impact of the acquisitions, was 4%. Subscription revenue was $345 million, up 7% from 2021. This reflects growth in core DMS and applications and the impact of acquisitions, partially offset by the impact of ASC 842 lease accounting, which shifts a portion of revenues from certain products out of subscription revenue to other revenue.

Transaction revenue was $43 million, down 3% versus 2021, driven by lower vehicle registrations revenue as vehicle sales were impacted by supply chain disruptions. Other revenue was $52 million, up 14%, reflecting higher hardware sales and revenue timing under ASC 842 lease accounting standards.

Now turning to earnings. First quarter EBITDA grew 2% to $170 million. Higher EBITDA was driven by income on higher revenue, partially offset by higher employee costs for investment-related headcount increases and the impact of annual merit compensation increases, which took effect in the quarter. Travel and entertainment expenses were also higher.

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