CDK Global : Fourth Quarter 2021 Transcript

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EDITED TRANSCRIPT

CDK.OQ - Q4 2021 CDK Global Inc Earnings Call

EVENT DATE/TIME: AUGUST 17, 2021 / 9:00PM GMT

OVERVIEW:

CDK reported 4Q21 revenue of $420m and adjusted diluted EPS of $0.66. Expects FY22 revenue to be $1.78-1.82b and adjusted diluted EPS to be $2.70-2.90.

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AUGUST 17, 2021 / 9:00PM, CDK.OQ - Q4 2021 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 Guerin CDK Global, Inc. - Executive VP & CFO

Joseph A. Tautges CDK Global, Inc. - COO

Taze Rowe CDK Global, Inc. - Treasurer

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

Joshua Phillip Baer Morgan Stanley, Research Division - Equity Analyst

Mark Zhang Oppenheimer & Co. Inc., Research Division - Associate

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

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

Operator

Thank you for standing by, and welcome to the CDK Global, Inc. Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, today's program may be recorded.

And now I'd like to introduce your host for today's program, Taze Rowe, Treasurer. Please go ahead, sir.

Taze Rowe - CDK Global, Inc. - Treasurer

Thank you, and good afternoon. I'd like to welcome you to our fourth quarter fiscal 2021 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 will 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 investors.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'll be referencing during our prepared remarks today.

Throughout today's call, we'll 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 on the call are on a non-GAAP adjusted basis. Reconciliations of the adjusted amounts to the most directly comparable GAAP amount are included in this afternoon's press release. Please note that all growth percentages refer to the year-over-year change for the period unless otherwise specified.

I would like to remind everyone that remarks during the 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 materially differ from those mentioned in the forward-looking statement.

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

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

Thank you, Taze, and thanks to everyone for joining us today. Let me start by saying how pleased I am with the financial results we achieved in fiscal 2021. We closed out the year strong, with fourth quarter revenue of $420 million, up 12% from 2020, and EBITDA in the period was $161

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AUGUST 17, 2021 / 9:00PM, CDK.OQ - Q4 2021 CDK Global Inc Earnings Call

million and EPS was $0.66. And these results met our expectations, and along with the positive trends in our underlying business metrics, show that we continue to strengthen our position with our dealer and OEM customers, which in turn sets the stage for accelerating growth.

2021 was a pivotal year for CDK. And despite the challenges of the ongoing COVID pandemic, we continued the strategic transformation of the company with the sale of our International business. Combined with the digital marketing divestiture in late 2020, this transition leaves the company laser-focused on our core North American software markets, supporting our auto and adjacency customers. And the CDK International sale also significantly strengthened our balance sheet, allowing us to reduce debt and fund the highly strategic acquisition of Roadster in the fourth quarter.

We recorded auto site growth for the tenth straight quarter, with sites up more than 1% in auto and 3% in our adjacency markets. Revenue per site was again a record for both markets, rebounding strongly from the impact of the discounts we offered in Q4 2020 to support dealers at the height of the pandemic shutdowns, but also showing solid growth versus last quarter. Fueling this growth is our ongoing determination to wake up every day and help our customers sell more vehicles -- service more vehicles and run their businesses more efficiently, and ultimately, drive the transformation of the entire automotive retail industry.

CDK has the unique opportunity to improve today's fractured industry, offering partnership built on years of understanding. We are at the heart of the ecosystem, connecting our industry at every level and investing heavily in our vision to lead the industry into the future. We are connecting dealerships to consumers with the recent acquisition of Roadster. Over the coming months, we will complete the integration of Roadster's front end into CDK's existing platform, including the ELEAD CRM. Then we're connecting employees across departments within the dealership by providing a suite of solutions that work together seamlessly, allowing them access to the best-in-class solutions like Roadster and ELEAD regardless of their DMS. And we're leveraging integrations built on our Fortellis platform to extend our capabilities.

And Fortellis continued to gain traction over the year, with more than 155 million transactions, far exceeding our goal of 100 million. We're connecting OEMs and dealers with continued advancement in our DMS solution, while our DMS sales for the year set an all-time record. Most significantly, we are connecting the industry with intelligence, enabling the transformation of data into intelligent action. And a great example of this is the new predictive service application that is in preview as part of our CDK service solution. And dealers need to increase revenues, but lack the ability to get the right intelligence from their data. And with this predictive service, a technician will easily be able to recommend the right repairs at the right time, benefiting the consumer and increasing dealer profitability.

In 2022, we will continue to invest for our customers. Though some of the heavy lifting is now behind us and our investments are already generating benefits, including better customer satisfaction, a growing customer base and stronger financial results. As a result, I'm pleased that our earnings guidance for the coming year reflects accelerating growth in both the top and bottom line. And Eric will provide more details in just a few minutes.

We've included some data from our systems in our earnings presentation, which indicates the themes and trends of 2021, largely continued into the fourth quarter. OEMs continue to face production constraints due to supply chain issues, which are resulting in tighter dealer inventory. Despite supply issues, demand remains fairly strong. and auto sales and pricing have continued to be solid for both the new and used cars. As a result, dealers have been successful in maintaining profitability. And we continue to see our dealers interested in investing those profits into consolidation, which is a tailwind for CDK, given our strong position as a strategic partner to larger, more acquisitive dealers. And we expect consolidation will remain a theme that benefits us into 2022.

Consolidation, along with strong sales and installation efforts, helped us continue our strong site count growth. We continue to see strong growth in our most strategic applications like CRM and service. And we are excited to be rolling out OnePay and Roadster to the CDK sales force as we enter 2022. These products show that we continue to help dealers modernize and improve their operations.

The automotive retail landscape is evolving faster than ever, and CDK is at the forefront of investing in its future. We're creating the customer experience models others will follow and developing powerful platforms that lead the field. And as the industry moves forward, we're confident that it will be on the infrastructure we continue to build.

Now before I pass over to Joe, I'd just like to thank all of our stakeholders, our employees, our customers and our partners, for their support and efforts this year. Despite starting the year with significant uncertainty driven by the global pandemic and associated economic challenges, we

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AUGUST 17, 2021 / 9:00PM, CDK.OQ - Q4 2021 CDK Global Inc Earnings Call

worked together to develop and implement solutions for these challenges and continue to deliver innovation and technology improvements to support the industry. And I couldn't be prouder of what we achieved in 2021, and I really look forward to a promising 2022.

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

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

Thanks, Brian. As Brian said, we are pleased with the progress we made in the fourth quarter and the continued momentum we have with our customers. Brian talked about the significant investments we've made over the last 2 years, including new solutions like Roadster, enhancements to existing products and providing open integrations through the Fortellis platform. Our goal is to unify dealership departments, dealer groups, and OEMs and strengthen their connection with the consumers they serve. Our approach is resonating with our customers, and our sales team is finding dealers are receptive to increased partnership with CDK.

We also continue to focus on deeply understanding the satisfaction of our customers. Our recent Net Promoter Score results show continued positive sentiment. Our focus on being easy to do business with and investing in product support and technology has resulted in increases in NPS across all of our strategic products. The continued improvement in customer satisfaction resulted in increased retention even when compared to our strong results last quarter. When the industry thinks of dealer management systems, CDK Drive remained solidly at the forefront as the central hub that connects dealers, OEMs and consumers. Its success is evidenced by its consistent performance for existing customers and strong site growth, which drove auto sites up more than 1%.

In addition, we are excited to share that we had 6 competitive wins of dealer groups of 5-plus sites last quarter. This accomplishment can be traced to Drive's unmatched capabilities and integrations, offering the robust functionality dealers need and demand. We are also pleased that our adjacency site count continues to perform well, rising more than 3%. We saw solid revenue growth -- site growth in the quarter as well, which rebounded strongly from the fourth quarter of 2020. You'll recall, Q4 of 2020 was impacted by the onetime discounts we gave to support our dealer customers in the face of the COVID pandemic. Compared to Q3, annualized revenue per site growth of 4% in auto and 8% in adjacencies might be a better comparison to show the continued momentum we have in the business. Recurring revenue was down slightly from the third quarter among 1- to 2-site dealers, but rose nicely for 3-plus site dealers.

Beyond DMS, we continue to win in the market with key strategic applications. In addition to the strong growth in CDK Service, Doc Cloud and Cloud Connect, I am excited to say that ELEAD finished the year with more than 6,000 sites. Dealers continue to see the value of ELEAD in driving sales and service. Of course, the biggest news on the application front is our acquisition of Roadster. As Brian mentioned, dealers and OEMs are accelerating their adoption of a modern retailing experience for consumers, one that lets them start and in anywhere they choose, online or in store. Roadster brings the best user experience on the market for both the consumer-facing side online and in-store processes.

By combining our assets and capabilities, we are enabling an end-to-end omnichannel retail experience, from digital sales with Roadster, a leading CRM solution in ELEAD to the digital deal jacket, seamless document storage and signing with eSign. Our sales team is excited to have another strong asset in the portfolio and our technology team is on track with an aggressive 100-day plan to build further integrations for Roadster into the CDK core. Looking forward to 2022, I am confident our team will continue to build on 2021 and accelerate growth. The efforts we have made to drive a better customer experience and the corresponding increase in associated metrics set the table for continued growth in DMS sites and application penetration.

Let me tell you a bit about the initiatives that have me excited for the next year. On the technology side, 2022 is a year where we will focus on providing dealers the capabilities they need to improve the consumer experience. For example, we're in pilot to expand the back office functions that will enable the digital transformation of the dealers finance department. We are simplifying the navigation within the Drive sales workflow to make it easier to shepherd deals through the F&I process. And as Brian mentioned, we will be delivering the first of many built-in intelligence capabilities, beginning with predictive service. By combining advanced analytics, machine learning and historical data from thousands of repair records for vehicles, we will allow a service technician to quickly predict what components and systems have a high probability for failure. In turn, this creates increased revenue for the dealer and results in a better consumer experience.

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AUGUST 17, 2021 / 9:00PM, CDK.OQ - Q4 2021 CDK Global Inc Earnings Call

We will also continue to optimize our customer service efforts to make sure dealers have the resources they need to run their business. Throughout 2021, we made progress in reducing call center wait times by almost half, by focusing on process improvement and making sure our teams have the information they needed to take action to support dealers. We expect that momentum to continue in 2022 and are also adding aggressive goals on reducing resolution times to further improve responsiveness.

Beyond our existing core customer base, we are also taking additional steps to help dealers on non-CDK DMS platforms through the creation of a new universal product sales team. We are stepping up efforts to sell universal products like ELEAD, Dealer IT Solutions and Roadster that can drive productivity and improved customer experience for dealers regardless of the DMS choice.

Turning to Fortellis, we continue to see adoption of the Fortellis platform as a universal open ecosystem that connects dealers and developers. CDK and other developers have been actively publishing the APIs on Fortellis. Specifically, CDK's focus has been on providing APIs to developers that help them better integrate with our core systems. The market has responded and we enter 2022 with more than 50 third-party applications in our marketplace using these APIs. It's results like this that show the power of Fortellis as a scalable, self-service technology platform that is providing dealers with new and improved choices for workflows that fit their business needs and allows them to quickly adapt to an ever-changing market.

To conclude, I'm quite pleased with CDK's progress and position as we continue to execute on our customer-first strategy and build industry-leading connectivity. We've invested heavily to improve our service and technology, and we are at an exciting point in our journey. We'll continue to innovate with new offerings, product enhancements and a focus on being the best partner possible to ensure we help dealers drive their performance.

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

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

Thanks, Joe, and good afternoon, everyone. As Brian and Joe mentioned, we had a solid close to the year with financial performance that met our expectations and we are positioned for accelerated growth in 2022. Let me start by walking you through our fourth quarter and fiscal year results. 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.

Fourth quarter revenue was $420 million, up 12% versus last year. Subscription revenue was $330 million, up 8% from 2020. This reflects strong growth in sites and the impact of COVID on 2020 revenue, including the discounts we provided customers last year, partially offset by revenue recognition impacts, particularly the shift of accounting for hardware under ASC 842 and modest headwinds in the partner program. Transaction revenue was $49 million, rebounding 41% versus last year's COVID-impacted results, with strong growth in both vehicle registration and credit check volumes. If we compare 2021 transactions to 2019 to strip out COVID impacts, we still see solid growth in these businesses.

Other revenue was $37 million, up 10% from 2020, reflecting the timing of revenue recognition for hardware sales and some improvements in the call center business. Consulting revenue continues to be challenged as the impact of COVID linger. For the fiscal year, revenue of $1.673 billion grew 2% versus 2020, reflecting a rebound in transactions and other revenue that offset the impact of COVID on subscription revenues.

Now turning to earnings. Fourth quarter EBITDA grew 5% to $161 million. The positive impact of revenue growth was partially offset by the impact of higher headcount related to our strategic investments and by a $10 million increase in incentive compensation, driven by a bonus reversal in Q4 of 2020 due to the impact of COVID on financial performance. Travel and entertainment costs also accelerated as the impact of COVID waned in the quarter, allowing more in-person interactions. Full year EBITDA was $650 million and fell 4% due to higher employee costs, reflecting higher headcount related to our ongoing strategic investments and higher bonus attainment, partially offset by the impact of revenue growth and lower travel and entertainment costs driven by COVID.

Our effective tax rate was 26.1% in both the quarter and the full year. Earnings per share for the quarter rose 12% to $0.66, reflecting higher EBITDA and reduced interest expense driven by debt reduction. Full year EPS fell 7% to $2.57 due to lower EBITDA, higher depreciation and amortization expense and the higher effective tax rate, partially offset by lower interest expense. Free cash flow was solid at $242 million for the year.

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