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DEALERTRACK TECHNOLOGIES, INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with our consolidated financial
statements. Certain statements in this Quarterly Report on Form 10-Q are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended (the Exchange Act). These statements involve a number of risks,
uncertainties and other factors that could cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements.
Factors that could materially affect such forward-looking statements include
those discussed in "Risk Factors" in Part II, Item 1A. in this Quarterly Report
on Form 10-Q, as well as Part I, Item 1A. in our Annual Report on Form 10-K for
the year ended December 31, 2011 filed with the SEC on February 22, 2012.
Investors are urged to consider these factors carefully in evaluating the
forward-looking statements and are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements made herein are only
made as of the date hereof and we undertake no obligation to publicly update
such forward-looking statements to reflect subsequent events or circumstances
except as required by law.
Overview
Dealertrack's web-based software solutions and services enhance efficiency and
profitability for all major segments of the automotive retail industry,
including dealers, lenders, OEMs, third party retailers, agents and aftermarket
providers. Dealertrack operates the largest online credit application networks
in the United States and Canada. Dealertrack's dealer management system (DMS)
solution provides dealers with easy-to-use tools and real-time data access to
enhance their efficiency. Dealertrack's Inventory solutions offerings provide
vehicle inventory management, merchandising, and transportation solutions to
help dealers drive higher in-store and online traffic with real-time listings
designed to accelerate used-vehicle turn rates and increase dealer profits. Dealertrack's Sales and Finance solutions allow dealers to streamline the
entire sales process as they structure deals from a single integrated platform.
Our Compliance offering helps dealers meet legal and regulatory requirements,
and protect their assets. Dealertrack also offers Processing solutions for the
automotive industry, including digital retailing, electronic motor vehicle
registration and titling applications, paper title storage, and digital document
services.
We monitor our business performance using a number of measures that are not
found in our consolidated financial statements. These measures include the
number of active dealers and lenders, active lender to dealer relationships in
the Dealertrack network, the number of subscribing dealers in the Dealertrack
network, the number of transactions processed, the average transaction price,
the average monthly subscription revenue per subscribing dealership and
transaction revenue per car sold. We believe that improvements in these metrics
will result in improvements in our financial performance over time.
The following is a table consisting of non-GAAP financial measures and certain
other business statistics that management is continually monitoring (amounts in
thousands are GAAP net (loss) income, adjusted EBITDA, adjusted net income,
capital expenditures and transactions processed):
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 2012 2011
GAAP net (loss) income: $ (2,931 ) $ 5,361 $ 19,955 $ 32,255
Non-GAAP Financial Measures and Other
Business Statistics:
Adjusted EBITDA - previous presentation
(non-GAAP) (1) $ 23,554 $ 23,041 $ 61,298 $ 56,989
Adjusted EBITDA (non-GAAP) (1)
$ 27,044 $ 25,786 $ 71,500 $ 65,584
Adjusted net income (non-GAAP) (1) $ 12,455 $ 14,654 $ 35,396 $ 33,194
Capital expenditures, software and
website development costs
$ 9,157 $ 7,222 $ 24,809 $ 23,555
Active dealers in our U.S. network as of
end of the period (2)
19,107 17,629 19,107 17,629
Active lenders in our U.S. network as of
end of the period (3) 1,237 1,103 1,237 1,103
Active lender to dealer relationships as
of end of the period (4) 178,809 161,400 178,809 161,400
Subscribing dealers in U.S. and Canada
as of end of the period (5) 16,421 15,860 16,421 15,860
Transactions processed (6) 22,738 19,772 67,051 55,681
Average transaction price (7) $ 2.63 $ 2.60 $ 2.59 $ 2.52
Average monthly subscription revenue per
subscribing dealership (8) $ 694 $ 834 $ 693 $ 813
Transaction revenue per car sold (9) $ 6.47 $ 6.20 $ 6.88 $ 6.16
(1) Adjusted EBITDA is a non-GAAP financial measure that represents GAAP net
(loss) income excluding interest, taxes, depreciation and amortization
expenses, stock-based compensation, contra-revenue and may exclude certain
items such as: impairment charges, restructuring charges, impact of
acquisition-related activity (including contingent consideration changes,
compensation expense, basis difference amortization, and professional service
fees), realized gains on sales of previously impaired securities, gains or
losses on sales or disposals of subsidiaries and other assets, rebranding and
certain other non-recurring items.
In response to requests, and in consideration of comparable peer companies,
stock-based compensation expense is now excluded from the calculation of the
Adjusted EBITDA non-GAAP measure. This reduces the comparability with prior
periods. This non-cash expense was included in presentations prior to the fourth
quarter of 2011 and is captioned above as "Adjusted EBITDA - previous
presentation (non-GAAP)."
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Adjusted net income is a non-GAAP financial measure that represents GAAP net
(loss) income excluding stock-based compensation expense, the amortization of
acquired identifiable intangibles, contra-revenue, and may also exclude certain
items such as: impairment charges, restructuring charges, impact of
acquisition-related activity (including contingent consideration changes,
compensation expense, basis difference amortization, and professional service
fees), realized gains on sales of previously impaired securities, gains or
losses on sales or disposals of subsidiaries and other assets, adjustments to
deferred tax asset valuation allowances, non-cash interest expense, rebranding
and certain other non-recurring items. These adjustments to net (loss) income,
which are shown before taxes, are adjusted for their tax impact at their
applicable statutory rates.
Adjusted EBITDA and adjusted net income are presented because management
believes that they provide additional information with respect to the
performance of our fundamental business activities and are also frequently used
by securities analysts, investors and other interested parties in the evaluation
of comparable companies. We rely on adjusted EBITDA and adjusted net income as
primary measures to review and assess the operating performance of our company
and management team in connection with our executive compensation plan incentive
payments.
Adjusted EBITDA and adjusted net income have limitations as an analytical tool
and you should not consider them in isolation from, or as a substitute for,
analysis of our results as reported under GAAP. Some of these limitations are:
• Adjusted EBITDA and adjusted net income do not reflect our cash expenditures or
future requirements for capital expenditures or contractual commitments;
• Adjusted EBITDA and adjusted net income do not reflect changes in, or cash
requirements for, our working capital needs;
• Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and
adjusted EBITDA and adjusted net income do not reflect any cash requirements
for such replacements;
• Non-cash compensation is and will remain a key element of our overall long-term
incentive compensation package, although we exclude it from adjusted net income
and adjusted EBITDA when evaluating our ongoing performance for a particular
period;
• Adjusted EBITDA and adjusted net income do not reflect the impact of certain
charges or gains resulting from matters we consider not to be indicative of our
ongoing operations; and
• Other companies may calculate adjusted EBITDA and adjusted net income
differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, adjusted EBITDA and adjusted net income should not
be considered as measures of discretionary cash available to us to invest in the
growth of our business. We compensate for these limitations by relying primarily
on our GAAP results and using adjusted EBITDA and adjusted net income only as
supplements to our GAAP results. Adjusted EBITDA and adjusted net income are
measures of our performance that are not required by, or presented in accordance
with, GAAP. Adjusted EBITDA and adjusted net income are not measurements of our
financial performance under GAAP and should not be considered as alternatives to
net (loss) income, operating income or any other performance measures derived in
accordance with GAAP or as alternatives to cash flow from operating activities
as a measure of our liquidity.
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The following table sets forth the reconciliation of adjusted EBITDA, a non-GAAP
financial measure, from net (loss) income, our most directly comparable
financial measure in accordance with GAAP (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
GAAP net (loss) income $ (2,931 ) $ 5,361 $ 19,955 $ 32,255
Interest income (181 ) (71 ) (595 ) (270 )
Interest expense - cash 984 334 2,426 578Interest expense - non-cash (10) 2,230 - 5,153 -
Provision for (benefit from) income
taxes, net 488 1,492 13,320 (20,135 )
Depreciation of property and
equipment and amortization of
capitalized software and website
costs 5,780 5,338 17,175 15,509
Amortization of acquired identifiable
intangibles 6,952 7,543 20,484 22,111
EBITDA (non-GAAP) 13,322 19,997 77,918 50,048
Adjustments:
Gain on disposal of subsidiary and
sale of other assets - - (33,193 ) -
Acquisition-related and other
professional fees 1,385 1,390 2,122 2,606
Contra-revenue (11) 1,092 1,175 3,190 3,232
Integration and other related costs
(including amounts related to
stock-based compensation) 483 51 704 1,009
Acquisition-related contingent
consideration changes and
compensation expense, net (12) 445 428 403 503
Amortization of equity method
investment basis difference (13) 996 - 2,989 -
Rebranding expense 521 - 855 -
Change in fair value of warrant 5,310 - 6,310 -
Realized gain on securities - - - (409 )
Adjusted EBITDA - previous
presentation (non-GAAP) 23,554 23,041 61,298 56,989
Stock-based compensation (excluding
amounts included in integration and
other related costs) 3,490 2,745 10,202 8,595
Adjusted EBITDA (non-GAAP) $ 27,044 $ 25,786 $ 71,500 $ 65,584
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The following table sets forth the reconciliation of adjusted net income, a
non-GAAP financial measure, from net (loss) income, our most directly comparable
financial measure in accordance with GAAP (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
GAAP net (loss) income $ (2,931 ) $ 5,361 $ 19,955 $ 32,255
Adjustments:
Deferred tax asset valuation
allowance (non-taxable) (14) - 1,197 - (22,350 )
Amortization of acquired
identifiable intangibles 6,952 7,543 20,484 22,111 Stock-based compensation (excluding
integration and other related costs) 3,490 2,745 10,202 8,595
Gain on disposal of subsidiary and
sale of other assets - - (33,193 ) -
Contra-revenue(11) 1,092 1,175 3,190 3,232
Integration and other related costs
(including amounts related to
stock-based compensation) 536 51 757 1,009
Interest expense - non-cash (not
tax-impacted) (10) 2,230 - 5,153 -
Amortization of equity method
investment basis difference (13) 996 - 2,989 -
Acquisition-related and other
professional fees 1,385 1,390 2,122 2,606
Acquisition-related contingent
consideration changes and
compensation expense, net (12) 445 428 403 503
Rebranding expense 521 - 855 -
Realized gain on securities
(non-taxable) - - - (409 )
Accelerated depreciation of certain
technology assets (15) 75 - 1,004 -
Change in fair value of warrant 5,310 - 6,310 -
Amended state tax returns impact
(non-taxable) - (271 ) - (239 )
Tax impact of adjustments (16) (7,646 ) (4,965 ) (4,835 ) (14,119 )
Adjusted net income (non-GAAP) $ 12,455 $ 14,654 $ 35,396 $ 33,194
(2) We consider a dealer to be active in our U.S. network as of a date if the
dealer completed at least one revenue-generating credit application
processing transaction using the U.S. Dealertrack network during the most
recently ended calendar month. The number of active U.S. dealers is based on
the number of dealer accounts as communicated by lenders on the U.S.
Dealertrack network.
(3) We consider a lender to be active in our U.S. network as of a date if it is
accepting credit application data electronically from U.S. dealers in the
U.S. Dealertrack network.
(4) Each lender to dealer relationship represents a pair between an active U.S.
lender and an active U.S. dealer at the end of a given period.
(5) Represents the number of dealerships in the U.S. and Canada with one or more
active subscriptions at the end of a given period. Subscriptions to
Dealertrack CentralDispatch have been excluded as a majority of these
customers are not dealers.
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(6) Represents revenue-generating transactions processed in the U.S. Dealertrack,
Dealertrack Aftermarket Services, Dealertrack Processing Solutions and
Dealertrack Technologies Canada networks at the end of a given period.
(7) Represents the average revenue earned per transaction processed in the U.S.
Dealertrack, Dealertrack Aftermarket Services, Dealertrack Processing
Solutions and Dealertrack Technologies Canada networks during a given period.
Revenue used in the calculation adds back (excludes) transaction related
contra-revenue.
(8) Represents subscription services revenue divided by average subscribing
dealers for a given period in the U.S. and Canada. Revenue used in the
calculation adds back (excludes) subscription related contra-revenue. In
addition, subscribing dealers and subscription revenue from Dealertrack
CentralDispatch have been excluded from the calculation as a majority of
these customers are not dealers.
(9) Represents transaction revenue divided by our estimate of total new and used
car sales for the period in the U.S. and Canada. Revenue used in this
calculation adds back (excludes) transaction related contra-revenue.
(10) Represents interest expense relating to the amortization of deferred
financing costs and debt discount.
(11) For further information, please refer to Note 16 in the accompanying notes
to the consolidated financial statements included in this Quarterly Report
on Form 10-Q and Note 16 in the notes to the consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2011.
(12) Represents the change in the acquisition-related contingent consideration
from the eCarList acquisition and other additional acquisition related
compensation charges.
(13) Represents amortization of the basis difference between the book basis of
contributed Chrome assets and the fair value of the investment in Chrome
Data Solutions.
(14) As a result of the acquisition of Dealertrack Processing Solutions, on
January 31, 2011, we evaluated the combined enterprises past and expected
future results, including the impact of the future reversal of the acquired
deferred tax liabilities, and determined that the future reversal of the
acquired deferred tax liabilities would provide sufficient taxable income to
support realization of certain of Dealertrack's deferred tax assets and
thereby we reduced the valuation allowance by approximately $24.5 million
during the three months ended March 31, 2011.
(15) Represents the accelerated depreciation of certain technology assets due to
the discontinuation of those projects.
(16) The tax impact of adjustments for the three and nine months ended September
30, 2012 are based on a U.S. statutory tax rate of 38.2% applied to taxable
adjustments other than amortization of acquired identifiable intangibles and
stock-based compensation expense, which are based on a blended tax rate of
38.1% and 37.6%, respectively, for the three months ended September 30,
2012, and 38.1% and 37.6%, respectively, for the nine months ended September
30, 2012. The tax impact of adjustments for the three and nine months ended
September 30, 2011 were based on a U.S. statutory tax rate of 37.4% applied
to taxable adjustments other than amortization of acquired identifiable
intangibles and stock-based compensation expense, which are based on a
blended tax rate of 37.3% and 37.0%, respectively, for the three months
ended September 30, 2011, and 37.1% and 37.0%, respectively, for the nine
months ended September 30, 2011.
Revenue
Transaction Services Revenue.Transaction services revenue consists of revenue
earned from our lender customers for each credit application or contract that
dealers submit to them. In addition, we earn transaction services revenue from
lender customers for each financing contract executed via our electronic
contracting and digital contract processing solutions, as well as for any ALG
portfolio residual value analyses performed prior to disposal. In addition, we
earn transaction service revenue from lender customers for collateral management
transactions.
We also earn transaction services revenue from dealers or other service and
information providers, such as aftermarket providers, accessory providers and
credit report providers, for each fee-bearing product accessed by dealers. This
includes transaction revenue for completion of on-line registrations with
department of motor vehicles, completion of inventory appraisals, and accessing
of credit reports.
Subscription Services Revenue.Subscription services revenue consists of revenue
earned from our dealers and other customers (typically on a monthly basis) for
use of our subscription or license-based products and services. Our subscription
services enable dealers and other customers to manage their dealership data and
operations, compare various financing and leasing options and programs, sell
insurance and other aftermarket products, analyze, merchandise, and transport
inventory and execute financing contracts electronically.
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Other Revenue. Other revenue consists of revenue primarily earned through forms
programming, data conversion, training and hardware and equipment sales from our
dealer management system (DMS) solution, shipping fees and commissions earned
from our digital contract business, consulting and analytical revenue earned
from ALG in periods prior to disposal, and training fees earned from our
inventory management solution. Other revenue is recognized when the serviceis
rendered.
Operating Expenses
Cost of Revenue. Cost of revenue primarily consists of expenses related to
running our network infrastructure (including Internet connectivity, hosting
expenses, and data storage), amortization expense on acquired intangible assets,
capitalized software and website development costs, compensation and related
benefits for network and technology development personnel, amounts paid to third
parties pursuant to contracts under which (i) a portion of certain revenue is
owed to those third parties (revenue share) or, (ii) fees are due on the number
of transactions processed and direct costs for data licenses. Cost of revenue
also includes hardware costs associated with our DMS product offering, and
compensation, related benefits and travel expenses associated with DMS
installation personnel, compensation and related benefits associated with
strategic inventory consulting personnel, compensation and related benefits, and
temporary labor associated with personnel who process transactions for our
digital contract, collateral management, and registration and titling solutions,
and advertising expenses associated with our search and media product offerings.
For those periods prior to the disposal of ALG, cost of revenue also included
direct costs (printing, binding and delivery) associated with residual value
guides.
Product Development Expenses.Product development expenses consist primarily of
compensation and related benefits, consulting fees and other operating expenses
associated with our product development departments. The product development
departments perform research and development, in addition to enhancing and
maintaining existing products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of compensation and related benefits,
facility costs and professional services fees for our sales, marketing, customer
service and administrative functions.
We allocate overhead such as occupancy and telecommunications charges, and
depreciation expense based on headcount, as we believe this to be the most
accurate measure. As a result, a portion of general overhead expenses is
reflected in each operating expense category.
Acquisitions
On August 1, 2012, Dealertrack, Inc. purchased all issued and outstanding shares
of capital stock of 1st Auto Transport Directory, Inc., now known as Dealertrack
CentralDispatch, for a purchase price of $73.7 million, which reflects
preliminary working capital adjustments. Dealertrack CentralDispatch delivers a
comprehensive suite of vehicle transportation related solutions for auto
dealers, brokers, shippers, and carriers within the U.S. and Canadian automotive
retail markets. Dealertrack CentralDispatch's offerings include
CentralDispatch.com, a leading business-to-business, subscription-based network
for facilitating vehicle transportation, with more than 13,000 network
subscribers; jTracker.com, a CRM and lead management tool for automotive
transportation brokers; and MoveCars.com, one of the premier online advertising
directories for the vehicle transportation industry. Dealertrack CentralDispatch
is now part of our Inventory solution. We expect this acquisition to increase
subscription revenue from dealerships while helping dealers improve their
overall efficiency and profitability. For further information, please refer to
Note 8 in the accompanying notes to the consolidated financial statements
included in this Quarterly Report on Form 10-Q.
On October 1, 2012, Dealertrack, Inc. completed the acquisition of ClickMotive
LP, a leading provider of interactive marketing solutions for the automotive
retailing industry, based in Plano, Texas. The consideration, which consists of
$48.9 million in cash, is subject to working capital adjustments subsequent to
closing. ClickMotive provides SaaS solutions exclusively to the automotive
industry by offering a leading comprehensive digital marketing platform that
combines the power of the web, mobile, social, search and video into one online
marketing platform. Currently, more than 3,000 U.S. automotive dealerships
leverage ClickMotive's platform. For further information, please refer to Note
20 in the accompanying notes to the consolidated financial statements included
in this Quarterly Report on Form 10-Q.
On November 1, 2012, Dealertrack Technologies Canada, Inc. acquired the assets
of Ford Motor Company of Canada, Limited's iCONNECT Direct DMS business for $6.9
million in cash. For further information, please refer to Note 20 in the
accompanying notes to the consolidated financial statements included in this
Quarterly Report on Form 10-Q.
Fair Value Measurements
We have segregated all financial assets that are measured at fair value on a
recurring basis into the most appropriate level within the fair value hierarchy
based on the inputs used to determine the fair value at the measurement date.
A reconciliation of the beginning and ending balances for the warrant, a Level 3
investment, is as follows (in thousands):
Balance as of December 31, 2011 $ 6,500
Change in fair value of warrant (6,310 )
Exercise of warrant (190 )
Balance as of September 30, 2012 $ -
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In connection with our October 1, 2011 disposal of ALG, we acquired a warrant to
purchase 6.3 million additional shares of TrueCar common stock and recorded the
warrant as a long-term investment. As a result of a net settlement feature, the
warrant was revalued each reporting period through its expiration date of
October 1, 2012, with the change in fair value recorded in the consolidated
statements of operations. Prior to its exercise, the fair value of the warrant
was estimated using a Black-Scholes option pricing model. The significant
unobservable inputs used in the pricing model were share price, expected
volatility, and expected term. An increase (decrease) in any of the individual
inputs would result in a significantly higher (lower) estimated fair value
measurement. During the three months ended September 30, 2012, we exercised the
warrant at a value of $0.2 million. The exercise value was based on an
independent valuation approved by the board of directors of TrueCar. For the
three and nine months ended September 30, 2012, the value decreased by $5.3
million and $6.3 million, respectively, as a result of a decrease in the
remaining expected term and a decrease in the estimated share price. The shares,
and related value of the shares received upon net exercise, became part of our
existing cost method investment in TrueCar.
A reconciliation of the beginning and ending balances of the contingent
consideration, a Level 3 liability, is as follows (in thousands):
Balance as of December 31, 2011 $ (900 )
Change in fair value of contingent consideration 900
Balance as of September 30, 2012 $ -
A portion of the purchase price of eCarList included contingent consideration
that is payable in the first quarter of 2013 based upon the achievement of
certain revenue targets in 2012. The fair value of the contingent consideration
is determined based upon probability-weighted revenue forecasts for the
underlying period. The contingent consideration is revalued each reporting
period, until settled, with the resulting gains and losses recorded in the
consolidated statements of operations. We do not expect to make any contingent
consideration payments for the achievement of revenue targets in 2012. We
recorded a fair value adjustment in the amount of $0.9 million of income for the
nine months ended September 30, 2012 as a result of the decrease in the
estimated settlement of the contingent consideration from the estimated amount
as of December 31, 2011. No amounts were recorded as income for the three months
ended September 30, 2012.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of our operations is based on our consolidated financial statements, which have
been prepared in accordance with GAAP. The preparation of these consolidated
financial statements requires management to make estimates and judgments that
affect the amounts reported for assets, liabilities, revenue, expenses and the
disclosure of contingent liabilities.
Our critical accounting policies are those that we believe are both important to
the portrayal of our financial condition and results of operations and that
involve difficult, subjective or complex judgments, often as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. The estimates are based on historical experience and on various
assumptions about the ultimate outcome of future events. Our actual results may
differ from these estimates if unforeseen events occur or should the assumptions
used in the estimation process differ from actual results. Management believes
there have been no material changes to the critical accounting policies
discussed in the section entitled "Management Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form 10-K
for the year ended December 31, 2011, except as set forth below.
Transaction Revenue
Collateral Management Services Transaction Revenue
Our collateral management solution provides vehicle title and administration
services for our customers, which are comprised mainly of lenders, financial
institutions, and credit unions. The solution facilitates communication between
our customers and the state department of motor vehicles by providing a solution
for our customers to monitor title perfection and expedite the processing of
liens with the state department of motor vehicles. We offer both paper-based and
electronic-based title services depending on state requirements. Customer
contracts for title services are principally comprised of two elements: (1)
title perfection confirmation and (2) title administration.
For paper-based titles, title perfection confirmation occurs upon the receipt of
title and lien documentation supporting title perfection from the department of
motor vehicles. For electronic-based titles, title perfection confirmation is
achieved upon electronic acknowledgement that department of motor vehicles'
records reflect the customer as the lien holder.
For paper-based titles, title administration services require us to physically
hold, store and manually release the title. For electronic-based titles, title
administration services require data storage. The release of the electronic
title can be accomplished by the lien holder and does not require manual action
by us.
Deliverables for paper and electronic title management arrangements are
separated into more than one unit of accounting when (i) the delivered
element(s) have value to the customer on a stand-alone basis, (ii) delivery of
the undelivered element(s) is probable and substantially in our control, and
(iii) relative selling price is determined.
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Based on the above criteria, paper and electronic-based collateral management
service revenue are separated into two units of accounting. We recognize a
portion of the paper-based transaction fee upon receipt of title and lien
documentation supporting title perfection from the department of motor vehicles.
For electronic-based titles, we recognize a portion of the fee upon electronic
acknowledgement that the department of motor vehicles' records reflect the
customer as the lien holder. For paper-based title services, amounts allocated
to each unit of accounting are based upon vendor-specific objective evidence.
For electronic-based title services, amounts allocated to each unit of
accounting are based upon estimated selling price, which is based upon an
adjustment to the selling price of our individual paper-based title services,
when sold separately. The adjustment to the selling price is due to the lower
selling price of electronic-based services compared to paper-based services.
For customers in which we bill the entire transaction fee in advance, the title
administration portion of the fee for both paper and electronic-based titles is
deferred and recognized over the title administration period, which is estimated
at 39 months. This estimate is based upon a historical analysis of the average
time period between the date of financing and the date of pay-off.
Collateral management services revenue also includes revenue earned from
converting a new lender's title portfolio to our collateral management solution,
which may include other ancillary services. Amounts earned from converting a new
lender's portfolio are recognized over the lender's estimated portfolio loan
life which varies depending on the lender. Amounts earned from other ancillary
services are recognized on a per transaction basis after services have beenrendered.
Marketable Securities
Marketable securities consist of U.S. treasury and agency securities, corporate
bonds, municipal bonds and a tax-advantaged preferred security. All of our
marketable securities are classified as available-for-sale securities and are
recorded at fair value. Unrealized gains and losses, net of the related tax
effect, are reported as a separate component of accumulated other comprehensive
income until realized. Realized gains and losses are included in the
consolidated statement of operations and are calculated based on the specific
identification method.
Senior Convertible Notes
In accordance with FASB ASC Topic 470-20, Debt with Conversion and Other Options
(ASC 470-20), we separately account for the liability and equity components of
our senior convertible notes. The estimated fair value of the liability
component is computed based on an assessment of the fair value of a similar debt
instrument that does not include a conversion feature. The equity component,
which is recognized as a debt discount and recorded in additional paid-in
capital, represents the difference between the gross proceeds from the issuance
of the notes and the estimated fair value of the liability component at the date
of issuance. The debt discount is amortized over the expected life of a similar
liability without the equity component. The effective interest rate used to
amortize the debt discount is based on our estimated non-convertible borrowing
rate of a similar liability without an equity component as of the date thenotes
were issued.
Equity Method Accounting
We apply the equity method of accounting to investments in entities in which we
own more than 20% of the equity of the entity and exercise significant
influence.
Stock-Based Compensation Expense and Assumptions
Expected Stock Price Volatility
As of January 1, 2012, we determine the expected volatility of any stock-based
awards we issue based on our historical volatility. Previously, due to our
limited public company history, the expected volatility for stock-based awards
was determined using a time-weighted average of our historical volatility and
the expected volatility of similar entities whose common shares are
publicly-traded. In recent years, our historical volatility did not vary
significantly from the expected volatility of similar entities. As such, we do
not expect this change to have a significant impact on future operating results.
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Results of Operations
The following table sets forth, for the periods indicated, the consolidated
statements of operations:
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 2012 2011
% of Net % of Net % of Net % of Net
$ Amount Revenue $ Amount Revenue $ Amount Revenue $ Amount Revenue
(In thousands, except percentages) (In thousands, except percentages)Consolidated
Statements of
Operations Data:
Net revenue $ 99,084 100.0 % $ 95,793 100.0 % $ 287,097 100.0 % $ 262,035 100.0 %
Operating
expenses:
Cost of revenue 55,475 56.0 52,129 54.4 162,337 56.5 145,121 55.4
Product
development 2,874 2.9 3,278 3.4 8,812 3.1 9,749 3.7
Selling, general
and
administrative 35,307 35.6 33,342 34.8 103,502 36.1 95,317 36.4
Total operating
expenses 93,656 94.5 88,749 92.6 274,651 95.7 250,187 95.5
Income from
operations 5,428 5.5 7,044 7.4 12,446 4.3 11,848 4.5
Interest income 181 0.1 71 0.1 595 0.2 270 0.1
Interest expense (3,214 ) (3.2 ) (334 ) (0.4 ) (7,579 ) (2.6 ) (578 ) (0.2 )
Other income
(expense), net (5,271 ) (5.3 ) 72 0.1 (6,121 ) (2.1 ) 171 0.1
Gain on disposal
of subsidiary and
sale of other
assets - - - - 33,193 11.5 - -
Earnings from
equity method
investment, net 429 0.4 - - 737 0.3 - -
Realized gain on
securities 4 0.0 - - 4 0.0 409 0.1
Income (loss)
before (provision
for) benefit from
income taxes (2,443 ) (2.5 ) 6,853 7.2 33,275 11.6 12,120 4.6
(Provision for)
benefit from
income
taxes, net (488 ) (0.5 ) (1,492 ) (1.6 ) (13,320 ) (4.6 ) 20,135 7.7
Net (loss) income $ (2,931 ) (3.0 )% $ 5,361 5.6 % $ 19,955 7.0 % $ 32,255 12.3 %
Three Months Ended September 30, 2012 and 2011
Revenue
Three Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
Transaction services revenue $ 58,729 $ 50,411 $ 8,318 17 %
Subscription services revenue 35,723 39,261 (3,538 ) (9 )%
Other 4,632 6,121 (1,489 ) (24 )%
Total net revenue $ 99,084 $ 95,793 $ 3,291 3 %
Transaction Services Revenue. The increase in transaction services revenue was
the result of an increase in automobile sales and improving credit availability,
application and other transaction-related activity. These industry trends had a
positive impact on the following changes in our key transaction-related business
metrics.
Three Months Ended September 30, Variance
2012 2011 Amount PercentAverage transaction price (1) $ 2.63 $ 2.60 $ 0.03 1 %
Active lenders in our U.S. network as
of end of the period 1,237 1,103 134 12 %
Active lender to dealer relationships
as of end of the period 178,809 161,400 17,409 11 %
Transactions processed (in thousands,
except percentages) 22,738 19,772 2,966 15 %
(1) - Revenue used in the calculation adds back (excludes) contra revenue.
31
Our average transaction price and the total number of transactions processed
increased 1% and 15%, respectively, which resulted in an increase in transaction
services revenue of $0.7 million and $7.7 million, respectively. These increases
were partially offset by an increase in contra-revenue of $0.1 million.
Contributing factors to the increase in average transaction price and the total
number of transactions processed included $2.5 million of additional revenue
from Processing Solutions; a 12% increase in lender customers active in our U.S.
Dealertrack network; and an 11% increase in our number of lender to dealer
relationships. The increase in our number of lender to dealer relationships was
attributable to more active dealers, more active lenders on our U.S. network,
and an increase in the average number of lenders that each dealer uses.
Subscription Services Revenue. The decrease in subscription services revenue is
primarily a result of the sale of ALG and the contribution of the net assets of
Chrome to the Chrome Data Solutions joint venture. The decrease was partially
offset by additional subscription services revenue from the acquisition of
eCarList on July 1, 2011, an increase in subscribers, and subscription services
revenue of $1.7 million from Dealertrack CentralDispatch which was acquired on
August 1, 2012. The net decrease in subscription services revenue was a result
of the following changes in our subscription-related key business metrics.
Three Months Ended September 30, Variance
2012 2011 Amount Percent
Average monthly subscription revenue
per subscribing dealership (1)(2) $ 694 $ 834 $ (140 ) (17 )%
Subscribing dealers in U.S. and
Canada as of end of the period (2) 16,421 15,860 561 4 %
(1) - Revenue used in the calculation adds back (excludes) contra revenue.
(2) - Subscribing dealers and subscription revenue from Dealertrack CentralDispatch have been excluded from the calculation as a
majority of these customers are not dealers.
The decrease in average monthly subscription revenue per subscribing dealer is
primarily due to the sale of ALG and the contribution of the net assets of
Chrome to the Chrome Data Solutions joint venture. The elimination of ALG and
Chrome revenue, which did not impact the subscribing dealer metric, contributed
$7.1 million to the decrease in subscription services revenue. This decrease was
partially offset by an increase in the average number of subscribing dealers in
our network, including additional subscription services revenue of $1.2 million
from eCarList, and the continued selling of our DMS, Inventory and Compliance
solutions, including our ability to cross sell those solutions to existingcustomers.
Other Revenue. The decrease in other revenue of $1.5 million was primarily due
to the elimination of other revenue from the ALG and Chrome businesses.
Operating Expenses
Three Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
Cost of revenue $ 55,475 $ 52,129 $ 3,346 6 %
Product development 2,874 3,278 (404 ) (12 )%
Selling, general and administrative 35,307 33,342 1,965 6 %
Total operating expenses $ 93,656 $ 88,749 $ 4,907 6 %
Cost of Revenue. The increase in cost of revenue was primarily the result of an
increase of $2.9 million in technology expenses, which includes technology
support and other consulting expenses, and an increase of $0.7 million in
Processing solution costs. In addition, there was a net increase of $0.2 million
in compensation and related benefit costs as a result of additional team
members, annual compensation and benefit cost increases, and two months of
compensation and related benefit costs related to the acquisition of Dealertrack
CentralDispatch on August 1, 2012, offset by the elimination of ALG and Chrome
team member costs. This was partially offset by the elimination of $0.4 million
of operating costs from the disposal of ALG and contribution of the net assets
of Chrome to the joint venture. The elimination of ALG and Chrome intangibles,
as well as certain intangibles becoming fully amortized, also contributed to a
$0.6 million decrease in amortization expense.
Product Development Expenses. The decrease in product development expenses was
primarily the result of an overall decrease in salary and related benefit costs
from the elimination of former ALG and Chrome team members.
Selling, General and Administrative Expenses. The increase in selling, general
and administrative expenses was primarily the result of a net increase of $0.5
million in compensation and related benefit costs as a result of additional team
members, annual compensation and benefit cost increases, offset by the
elimination of ALG and Chrome team member costs. Additionally, there were
increases of $0.6 million in stock-based compensation, $0.5 million in
rebranding expenses, $0.3 million in temporary labor costs and $0.3 million in
deal related costs, offset by a decrease of $0.4 million in recruiting andrelocation costs.
32
Interest Income
Three Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
Interest income $ 181 $ 71 $ 110 155 %
The increase in interest income is primarily related to interest income recorded
on our investments in marketable securities from the cash proceeds received from
the issuance of the senior convertible notes in March 2012.
Interest Expense
Three Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
Interest expense $ (3,214 ) $ (334 ) $ (2,880 ) 862 %
The increase in interest expense is primarily due to interest expense from the
senior convertible notes issued in March 2012. Interest expense related to the
notes for the three months ended September 30, 2012 consisted of coupon interest
of $0.8 million, amortization of debt discount of $1.9 million, and amortization
of debt issuance costs of $0.2 million. Interest expense related to our
revolving credit facility for the three months ended September 30, 2012
consisted of commitment fees of $0.1 million and amortization of debt issuance
costs of $0.1 million.
Other Income (Expense), net
Three Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
Other income (expense), net $ (5,271 ) $ 72 $ (5,343 ) (7,421 )%
The decrease in other income (expense), net is primarily due to a $5.3 million
decrease in the value of our warrant in TrueCar in the period prior to exercise.
For further information, please refer to Note 4 in the accompanying notes to the
consolidated financial statements included in this Quarterly Report on Form
10-Q.
Earnings from Equity Method Investment, Net
Three Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
Earnings from equity method
investment, net $ 429 $ - $ 429 100 %
During the three months ended September 30, 2012, we recorded net earnings from
the Chrome joint venture of $0.4 million. This consisted of our 50% share of the
joint venture net income in the amount of $1.4 million, which was reduced by
$1.0 million of amortization relating to the basis difference between the book
basis of the contributed assets and the fair value of the investment recorded.
Provision for Income Taxes, Net
Three Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands,except percentages)
Provision for income taxes, net $ (488 ) $ (1,492 ) $ 1,004
(67 )%
The net provision for income taxes for the three months ended September 30, 2012
of $0.5 million consisted primarily of $1.7 million of federal income tax
benefit, $1.2 million of state income tax expense and $1.0 million of tax
expense for our Canadian subsidiary. Tax expense for our U.S. subsidiaries for
the three months ended September 30, 2012 was reduced by a $2.0 million benefit
on the change in value of our warrant in TrueCar.
The net provision for income taxes for the three months ended September 30, 2011
of $1.5 million consisted primarily of $0.9 million of federal income tax
expense, $0.1 million of state income tax expense and $0.5 million of tax
expense for our Canadian subsidiary.
Our effective tax rate for the three months ended September 30, 2012 is (19.9)%
compared with 21.8% for the three months ended September 30, 2011.
33
Nine Months Ended September 30, 2012 and 2011
Revenue
Nine Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
Transaction services revenue $ 170,241 $ 137,351 $ 32,890 24 %
Subscription services revenue 102,886 107,842 (4,956 ) (5 )%
Other 13,970 16,842 (2,872 ) (17 )%
Total net revenue $ 287,097 $ 262,035 $ 25,062 10 %
Transaction Services Revenue. The increase in transaction services revenue was
the result of an increase in automobile sales and improving credit availability,
application and other transaction-related activity. These industry trends had a
positive impact on the following changes in our key transaction-related business
metrics.
Nine Months Ended September 30, Variance
2012 2011 Amount PercentAverage transaction price (1) $ 2.59 $ 2.52 $ 0.07 3 %
Active lenders in our U.S. network as
of end of the period 1,237 1,103 134 12 %
Active lender to dealer relationships
as of end of the period 178,809 161,400 17,409 11 %
Transactions processed (in thousands,
except percentages) 67,051 55,681 11,370 20 %
(1) - Revenue used in the calculation adds back (excludes) contra revenue.
Our average transaction price and the total number of transactions processed
increased 3% and 20%, respectively, which resulted in an increase in transaction
services revenue of $4.4 million and $28.7 million, respectively. These
increases were partially offset by an increase in contra-revenue of $0.2
million. Contributing factors to the increase in average transaction price and
the total number of transactions processed included $13.3 million of additional
revenue from Processing Solutions; a 12% increase in lender customers active in
our U.S. Dealertrack network; and an 11% increase in our number of lender to
dealer relationships. The increase in our number of lender to dealer
relationships was attributable to more active dealers, more active lenders on
our U.S. network, and an increase in the average number of lenders that each
dealer uses.
Subscription Services Revenue. The decrease in subscription services revenue is
primarily a result of the sale of ALG and the contribution of the net assets of
Chrome to the Chrome Data Solutions joint venture. The decrease was partially
offset by additional subscription services revenue from the acquisition of
eCarList on July 1, 2011, an increase in subscribers and subscription services
revenue of $1.7 million from Dealertrack CentralDispatch which was acquired on
August 1, 2012. The net decrease in subscription services revenue was a result
of the following changes in our key subscription-related business metrics.
Nine Months Ended September 30, Variance
2012 2011 Amount Percent
Average monthly subscription revenue
per subscribing dealership (1)(2) $ 693 $ 813 $ (120 ) (15 )%
Subscribing dealers in U.S. and
Canada as of end of the period (2) 16,421 15,860 561 4 %
(1) - Revenue used in the calculation adds back (excludes) contra revenue.
(2) - Subscribing dealers and subscription revenue from Dealertrack CentralDispatch have been excluded from the calculation as a
majority of these customers are not dealers.
The decrease in average monthly subscription revenue per subscribing dealer is
primarily due to the sale of ALG and the contribution of the net assets of
Chrome to the Chrome Data Solutions joint venture. The elimination of ALG and
Chrome revenue, which did not impact the subscribing dealer metric, contributed
$20.6 million to the decrease in subscription services revenue. This decrease
was partially offset by an increase in the average number of subscribing dealers
in our network, including additional subscription services revenue of $9.0
million from eCarList, and the continued selling of DMS, Inventory and
Compliance solutions, including our ability to cross sell those solutions to
existing customers.
34
Other Revenue. The decrease in other revenue of $2.9 million was primarily due
to the elimination of other revenue from the ALG and Chrome businesses.
Operating Expenses
Nine Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
Cost of revenue $ 162,337 $ 145,121 $ 17,216 12 %
Product development 8,812 9,749 (937 ) (10 )%
Selling, general and administrative 103,502 95,317 8,185 9 %
Total operating expenses $ 274,651 $ 250,187 $ 24,464 10 %
Cost of Revenue. The increase in cost of revenue was the result of a net
increase of $5.3 million in compensation and related benefit costs, primarily
due to an additional six months of compensation and related benefit costs
related to the acquisition of eCarList on July 1, 2011, the additional month of
compensation and related benefit costs related to the acquisition of Dealertrack
Processing Solutions on January 31, 2011, and two months of compensation and
related benefit costs related to the acquisition of Dealertrack CentralDispatch
on August 1, 2012. These were partially offset by the elimination of
compensation and related benefit costs from the disposal of ALG and contribution
of Chrome. Additionally, there was an increase of $7.5 million in technology
expenses, which includes technology support and other consulting expenses, an
increase of $3.5 million in Processing solutions costs, an increase of $2.1
million in Inventory solution costs, including search optimization and marketing
costs associated with our product offerings related to eCarList, and an increase
of $0.5 million in stock-based compensation. These costs were partially offset
by the elimination of $1.3 million of operating costs from the disposal of ALG
and contribution of the net assets of Chrome to the joint venture and a $1.6
million decrease in amortization expense for both fully amortized intangibles
and the elimination of amortization expense from the sale of ALG and the
contribution of Chrome.
Product Development Expenses. The decrease in product development expenses was
primarily the result of an overall decrease in salary and related benefit costs
from the elimination of former ALG and Chrome team members.
Selling, General and Administrative Expenses. The increase in selling, general
and administrative expenses was the result of a net increase of $3.5 million in
compensation and related benefit costs, primarily due to an additional six
months of compensation and related benefit costs related to the acquisition of
eCarList on July 1, 2011 and the additional month of compensation and related
benefit costs related to the acquisition of Dealertrack Processing Solutions on
January 31, 2011. These were partially offset by the elimination of compensation
and related costs from the disposal of ALG and contribution of Chrome.
Additionally, there were increases of $1.0 million of expense related to
accelerated depreciation for discontinued technology projects, $0.9 million in
stock-based compensation, $0.9 million in rebranding expenses, $0.8 million in
travel and related costs, $0.7 million in deal related costs, $0.5 million in
temporary labor costs, $0.4 million in recruiting and relocation costs, and $0.3
million in bad debt expense, offset by a decrease of $0.9 million in the
eCarList contingent consideration liability.
Interest Income
Nine Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
Interest income $ 595 $ 270 $ 325 120 %
The increase in interest income is primarily related to interest income recorded
on our investments in marketable securities from the cash proceeds received from
the issuance of the senior convertible notes in March 2012.
Interest Expense
Nine Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
Interest expense $ (7,579 ) $ (578 ) $ (7,001 ) 1,211 %
The increase in interest expense is primarily due to interest expense from the
senior convertible notes issued in March 2012. Interest expense related to the
notes for the nine months ended September 30, 2012 consisted of coupon interest
of $1.7 million, amortization of debt discount of $4.3 million, and amortization
of debt issuance costs of $0.5 million. Interest expense related to our
revolving credit facility for the nine months ended September 30, 2012 consisted
of commitment fees of $0.3 million and amortization of debt issuance costsof
$0.3 million.
35
Other Income (Expense), Net
Nine Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
Other income (expense), net $ (6,121 ) $ 171 $ (6,292 ) (3,680 )%
The decrease in other income (expense), net is primarily due to a $6.3 million
decrease in the value of our warrant in TrueCar in the period prior to exercise.
For further information, please refer to Note 4 in the accompanying notes to the
consolidated financial statements included in this Quarterly Report on Form10-Q.
Gain on Disposal of Subsidiary and Sale of Other Assets
Nine Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
Gain on disposal of subsidiary and
sale of other assets $ 33,193 $ - $ 33,193 100 %
During the nine months ended September 30, 2012, we recorded a gain on the
contribution of the net assets of Chrome to the Chrome Data Solutions joint
venture in the amount of $27.7 million and a gain of $5.5 million related to the
sale of a Chrome-branded asset, which was not contributed to the joint venture.
Earnings from Equity Method Investment, Net
Nine Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
Earnings from equity method
investment, net $ 737 $ - $ 737 100 %
During the nine months ended September 30, 2012, we recorded net earnings from
the Chrome joint venture of $0.7 million. This consisted of our 50% share of the
joint venture net income in the amount of $3.7 million, which was reduced by
approximately $3.0 million of amortization relating to the basis difference
between the book basis of the contributed assets and the fair value of the
investment recorded.
Realized Gain on Securities
Nine Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
Realized gain on securities $ 4 $ 409 $ (405 ) (99 )%
During the nine months ended September 30, 2011, we sold a portion of our
investments in tax-advantaged preferred securities for approximately $2.5
million and recorded a gain of approximately $0.4 million.
(Provision for) Benefit from Income Taxes, net
Nine Months Ended September 30, Variance
2012 2011 $ Amount Percent
(In thousands, except percentages)
(Provision for) benefit from income
taxes, net $ (13,320 ) $ 20,135 $ (33,455 ) (166 )%
The net provision for income taxes for the nine months ended September 30, 2012
of $13.3 million primarily consisted of $9.2 million of federal income tax
expense, $1.7 million of state income tax expense and $2.4 million of tax
expense for our Canadian subsidiary.
The benefit for income taxes for the nine months ended September 30, 2011 of
$20.1 million consisted primarily of $22.3 million of federal income tax
benefit, offset by $0.8 million of state income tax expense and $1.4 million of
tax expense for our Canadian subsidiary.
Our effective tax rate for the nine months ended September 30, 2012 was 40.0%
compared with 163.2% for the nine months ended September 30, 2011.
Included in our tax expense for our U.S. and Canadian subsidiaries for the nine
months ended September 30, 2012 was $2.8 million of income tax provision as well
as discrete items including $10.5 million on the gain recorded in conjunction
with the contribution of the net assets of Chrome for the investment in Chrome
Data Solutions, $1.3 million of expense from the elimination of the Chrome
deferred tax assets and goodwill, income tax provision of $1.9 million on the
gain recorded from the sale of a Chrome-branded asset net of a reduction in
valuation allowance resulting from the asset sale, and $2.4 million of benefit
on the change in value of our warrant in TrueCar. Excluding these items, our
effective tax rate for the nine months ended September 30, 2012 would havebeen
32.5%.
36
Liquidity and Capital Resources
We expect that our liquidity requirements will continue to be primarily for
working capital, acquisitions, capital expenditures and general corporate
purposes. Our capital expenditures, software and website development costs for
the nine months ended September 30, 2012 were $24.8 million, of which $21.4
million was paid in cash.
As of September 30, 2012, we had $163.7 million of cash and cash equivalents,
$45.4 million in short-term marketable securities, $8.2 million in long-term
marketable securities and $227.9 million in working capital, as compared to
$78.7 million of cash and cash equivalents, $46 thousand in short-term
marketable securities and $94.5 million in working capital as of December 31,
2011. The change in the balance of our cash and cash equivalents and marketable
securities from December 31, 2011 is primarily due to the proceeds from our
offering of senior convertible notes, which were issued on March 5, 2012, and
the payment of approximately $74 million to acquire Dealertrack CentralDispatch
on August 1, 2012.
On February 27 and February 29, 2012, we entered into the first and second
amendments, respectively, to our credit agreement. Under the amended credit
agreement, the interest rate on the revolving credit facility is determined
quarterly and is equal to LIBOR or Prime, as applicable, plus a margin of (a)
between 150 basis points and 225 basis points in the case of Eurodollar/CDOR
loans and (b) between 50 basis points and 125 basis points in the case of ABR
loans. The rate, in each case, is based on a consolidated leverage ratio for us
and our restricted subsidiaries (the ratio of consolidated total debt of us and
our restricted subsidiaries to consolidated EBITDA of us and our restricted
subsidiaries). Additionally, under the credit facility we are required to make
quarterly commitment fee payments on any available unused revolving amounts at a
rate between 25 basis points and 40 basis points based on our consolidated
leverage ratio. For further information, please refer to Note 19 in the
accompanying notes to the consolidated financial statements included in this
Quarterly Report on Form 10-Q.
On March 5, 2012, we issued $200.0 million aggregate principal amount of 1.50%
senior convertible notes in a private placement. The net proceeds from the
offering were $193.0 million after deducting the initial purchaser's fees and
offering expenses. The notes bear interest at a rate of 1.50% per year, payable
semi-annually in cash on March 15 and September 15 of each year, beginning on
September 15, 2012. In connection with the private offering of the notes, we
entered into convertible note hedge transactions with the hedge counterparties
for $43.9 million. We also entered into issuer warrant transactions with the
hedge counterparties for aggregate proceeds to Dealertrack of approximately
$29.7 million. The net cost of these call spread hedge transactions amounted to
$14.2 million. We capitalized approximately $7.0 million of debt issuance costs
associated with the notes, all of which has been paid. For further information,
please refer to Note 18 in the accompanying notes to the consolidated financial
statements included in this Quarterly Report on Form 10-Q.
On August 1, 2012, Dealertrack, Inc. purchased all issued and outstanding shares
of capital stock of 1st Auto Transport Directory, Inc., now known as Dealertrack
CentralDispatch, for a purchase price of $73.7 million in cash, which reflects
preliminary working capital adjustments. For further information, please refer
to Note 8 in the accompanying notes to the consolidated financial statements
included in this Quarterly Report on Form 10-Q.
On October 1, 2012, Dealertrack, Inc. completed the acquisition of ClickMotive
LP, a leading provider of interactive marketing solutions for the automotive
retailing industry, based in Plano, Texas. The consideration, which consists of
$48.9 million in cash, is subject to working capital adjustments subsequent to
closing. For further information, please refer to Note 20 in the accompanying
notes to the consolidated financial statements included in this Quarterly Report
on Form 10-Q.
On November 1, 2012, Dealertrack Technologies Canada, Inc. acquired the assets
of Ford Motor Company of Canada, Limited's iCONNECT Direct DMS business for $6.9
million in cash. For further information, please refer to Note 20 in the
accompanying notes to the consolidated financial statements included in this
Quarterly Report on Form 10-Q.
We expect to have sufficient liquidity to meet our short-term liquidity
requirements (including capital expenditures and acquisitions) through working
capital and net cash flows from operations, cash on hand, investments in
marketable securities and our credit facility.
The following table sets forth the cash flow components for the following
periods (in thousands):
Nine Months Ended September 30,
2012 2011Net cash provided by operating activities $ 42,796 $
38,755
Net cash used in investing activities $ (145,747 ) $ (170,694 )
Net cash provided by financing activities $ 187,115 $
5,199
Operating Activities
The increase in net cash provided by operations of $4.0 million during the nine
months ended September 30, 2012 includes operating assets and liabilities
increases in prepaid and others assets of $4.5 million, an increase in other
assets - long term of $7.0 million and a decrease in other liabilities -
long-term of $3.2 million. The increase in other assets - long term includes
$3.3 million from the receipt of cash distributions from an equity method
investment.
37
Other changes during the period, primarily non-cash, included an increase of
$32.1 million in our deferred tax provision, an increase of $5.0 million of debt
issuance cost and debt discount amortization, an increase of $6.3 million from
the change in fair value of the warrant, a $27.7 million gain from the
contribution of the net assets of Chrome to the Chrome Data Solutions joint
venture and a $5.5 million gain from the sale of a Chrome-branded asset. In
addition, there was a decrease of $12.3 million from the reduction in net income
and an increase of $2.0 million in windfall tax benefits.
The increase of $32.1 million in deferred tax provision was a result of the
$22.8 million deferred tax benefit for the nine months ending September 30, 2011
as compared to a deferred tax provision of $9.3 million for the nine months
ending September 30, 2012. The 2011 deferred tax benefit included the reversal
of $24.5 million of valuation allowance on our deferred tax assets. The 2012
deferred tax provision of $9.3 million includes $10.4 million of deferred tax
expense on the gain from the contribution of the net assets of Chrome and $1.2
million of deferred tax expense from the elimination of Chrome net deferredtax
assets.
Investing Activities
The decrease in net cash used in investing activities of $24.9 million is
primarily due to the payment of $152.0 million during the nine months ended
September 30, 2011 for the acquisition of Dealertrack Processing Solutions,
Automotive Information Center and eCarList, net of acquired cash, compared to a
payment of $74.0 million for the acquisition of Dealertrack CentralDispatch
during the nine months ended September 30, 2012. This decrease in net cash used
in investing activities was partially offset by uses of cash including $1.8
million of cash included in the contribution of the net assets of Chrome to the
Chrome Data Solutions joint venture and the purchase of marketable securities of
$70.2 million during the nine months ended September 30, 2012. In addition,
increases in cash provided by investing activities include $5.5 million received
from the sale of a Chrome-branded asset as well as additional sales and
maturities of marketable securities of $13.2 million.
Financing Activities
The increase in net cash provided by financing activities of $181.9 million is
primarily due to the issuance of senior convertible notes in the amount of
$200.0 million, offset by the net payment for a call spread overlay of $14.2
million related to the senior convertible notes, and an increase of $5.8 million
of debt issuance costs resulting from the senior convertible notes and the
amended credit facility, and an increase of $2.0 million in additional windfall
tax benefits.
Contractual Obligations
As of September 30, 2012, there were no material changes in our contractual
obligations as disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2011, except as set forth below.
On February 16, 2012, we entered into a lease agreement for additional office
space in Dallas, Texas. The initial term of the lease is 130 months, over which
base rents are expected to be approximately $13 million.
On February 27, 2012, we entered into a first amendment on the credit agreement,
which amended the credit agreement to, among other things: (i) permits us to
make mandatory interest and principal payments and settle conversions in respect
of the senior convertible notes in cash, shares of our common stock, or a
combination thereof; and (ii) permits us to enter into the convertible note
hedge and warrant transactions in connection with the private offering of the
notes.
On February 29, 2012, we entered into a second amendment to the credit
agreement, which, among other things: (i) reduces the commitment fee payable
under and the interest rate margins applicable to extensions of credit pursuant
to the amended credit agreement; (ii) extends the termination date of the
revolving commitments under the amended credit agreement to five years from the
date of the second amendment; (iii) increases the maximum aggregate incremental
term loans and revolving commitments that may be made available to us under the
amended credit agreement; and (iv) revises the financial maintenance covenants
in the amended credit Agreement to increase the maximum leverage ratio and
decrease the minimum interest coverage ratio, and to add a maximum secured
leverage ratio.
As of September 30, 2012, we had no amounts outstanding under this revolving
credit facility. For further information, please refer to Note 19 in the
accompanying notes to the consolidated financial statements included in this
Quarterly Report on Form 10-Q.
On March 5, 2012, we issued $200.0 million aggregate principal amount of 1.50%
senior convertible notes in a private placement. The notes bear interest at a
rate of 1.50% per year, payable semi-annually in cash on March 15 and September
15 of each year, beginning on September 15, 2012. The notes will mature on March
15, 2017, unless earlier repurchased or converted. In connection with the
private offering of the notes, we entered into convertible note hedge
transactions with the initial counterparties for $43.9 million. We also entered
into issuer warrant transactions with the initial counterparties for aggregate
proceeds of approximately $29.7 million. For further information, please refer
to Note 18 in the accompanying notes to the consolidated financial statements
included in this Quarterly Report on Form 10-Q.
38
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which are
typically established for the purpose of facilitating off-balance sheet
arrangements or for other contractually narrow or limited purposes.
Industry Trends
We are impacted by trends in both the automotive industry and the credit finance
markets. Our financial results are impacted by trends in the number of dealers
serviced and the level of indirect financing and leasing by our participating
lender customers, special promotions by automobile manufacturers and the level
of indirect financing and leasing by captive finance companies not available in
our network. In March 2011, the earthquake and subsequent tsunami in Japan
resulted in supply disruptions of both parts and Japanese imports, which caused
a notable slowdown in the new car seasonally adjusted annual rate in the second
quarter and part of the third quarter. The supply disruption has recovered since
the fourth quarter, with the seasonally adjusted annual sales rate exceeding the
market levels during these events. The number of lending relationships between
the various lenders and dealers available through our network continues to
increase as the number of dealers has stabilized and lenders are deploying more
capital to auto finance. Purchases of new automobiles are typically
discretionary for consumers and have been, and may continue to be, affected by
negative trends in the economy, including the cost of energy and gasoline, the
availability and cost of credit, the declining residential and commercial real
estate markets, reductions in business and consumer confidence, stock market
volatility and increased unemployment. 2008 and 2009 were the worst years for
selling vehicles since 1982 and while automobile sales increased each year since
2009, overall sales remain below historical levels. As a result of reduced car
sales and the general economic environment, two major automobile manufacturers,
Chrysler and General Motors, filed and then emerged from bankruptcy. This and
historic lows in new car sales has had a significant impact on franchised
dealers as 3,230 dealers closed between the beginning of 2008 and 2012. The
remaining dealers have generally realized increased profits in 2011 and 2012 as
many cut costs and consolidation has led to higher sales per dealer despite
lower total sales. Together, these factors have meaningfully impacted our
transaction volume and subscription trends as compared to historical levels
prior to 2008.
The economic downturn resulted in automotive dealer consolidation and the number
of franchised automotive dealers declined significantly in 2009 and 2010. Based
on data from the National Automobile Dealers Association, the number of
franchised dealers declined, by approximately 3,500, or 17%, since the beginning
of 2007 to the end of 2011. A reduction in the number of automotive dealers
reduces the number of opportunities we have to sell our subscription products.
Volatility in our stock price, declines in our market capitalization and
material declines in revenue and profitability could result in impairments to
the carrying value of our goodwill, deferred tax assets and other long-lived
assets. Additionally, we may be required to impair some of our goodwill or
long-lived assets if these conditions worsen for a period of time.
Effects of Inflation
Our monetary assets, consisting primarily of cash and cash equivalents,
marketable securities, receivables and long-term investments, and our
non-monetary assets, consisting primarily of intangible assets and goodwill, are
not affected significantly by inflation. We believe that replacement costs of
equipment, furniture and leasehold improvements will not materially affect our
operations. However, the rate of inflation affects our expenses, which may not
be readily recoverable in the prices of products and services we offer.
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