Attached files
file | filename |
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EX-32.1 - Dealertrack Technologies, Inc | v200509_ex32-1.htm |
EX-31.1 - Dealertrack Technologies, Inc | v200509_ex31-1.htm |
EX-31.2 - Dealertrack Technologies, Inc | v200509_ex31-2.htm |
EXCEL - IDEA: XBRL DOCUMENT - Dealertrack Technologies, Inc | Financial_Report.xls |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
þ
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2010
OR
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
DealerTrack
Holdings, Inc.
(Exact
name of Registrant as specified in its charter)
Delaware
|
52-2336218
|
|
(State
or other jurisdiction of incorporation or
|
(I.R.S.
Employer Identification Number)
|
|
organization)
|
1111
Marcus Ave., Suite M04
|
Lake
Success, NY, 11042
|
(Address
of principal executive offices, including zip
code)
|
(516)
734-3600
Registrant’s
telephone number, including area code
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes þ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
|
Accelerated filer ¨
|
Non-accelerated
filer ¨
|
Smaller reporting company ¨
|
|||
(Do
not check if a smaller
reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of
October 31, 2010, 40,604,738 shares of the registrant’s common stock were
outstanding.
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
TABLE
OF CONTENTS
Page
|
||
PART I. FINANCIAL
INFORMATION
|
3
|
|
|
||
Item 1. Financial
Statements
|
3
|
|
Consolidated Balance Sheets
(unaudited)
|
3
|
|
Consolidated Statements of
Operations (unaudited)
|
4
|
|
Consolidated Statements of
Cash Flows (unaudited)
|
|
5
|
Notes to Consolidated
Financial Statements (unaudited)
|
6
|
|
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
|
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
|
28
|
|
Item 4. Controls and
Procedures
|
28
|
|
|
||
PART II. OTHER
INFORMATION
|
28
|
|
|
||
Item 1. Legal
Proceedings
|
28
|
|
Item 1A. Risk
Factors
|
29
|
|
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds
|
29
|
|
Item 6.
Exhibits
|
30
|
|
|
||
Signature
|
30
|
|
EX-31.1:
CERTIFICATION
|
||
EX-31.2:
CERTIFICATION
|
||
EX-32.1:
CERTIFICATION
|
2
DEALERTRACK
HOLDINGS, INC.
(unaudited)
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(In thousands, except share
|
||||||||
and per share amounts)
|
||||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$
|
177,824
|
$
|
197,509
|
||||
Investments
|
1,563
|
1,484
|
||||||
Accounts
receivable, net of allowances of $2,814 and $2,677 as of September 30,
2010 and December 31, 2009, respectively
|
24,538
|
17,478
|
||||||
Prepaid
expenses and other current assets
|
17,789
|
9,620
|
||||||
Total
current assets
|
221,714
|
226,091
|
||||||
Investments
— long-term
|
2,458
|
3,971
|
||||||
Property
and equipment, net
|
19,615
|
13,514
|
||||||
Software
and website developments costs, net
|
28,613
|
21,158
|
||||||
Intangible
assets, net
|
27,911
|
41,604
|
||||||
Goodwill
|
135,314
|
134,747
|
||||||
Deferred
tax assets — long-term
|
31,715
|
29,699
|
||||||
Other
long-term assets
|
12,951
|
1,543
|
||||||
Total
assets
|
$
|
480,291
|
$
|
472,327
|
||||
Current
liabilities
|
||||||||
Accounts
payable
|
$
|
3,737
|
$
|
3,919
|
||||
Accrued
compensation and benefits
|
10,545
|
11,717
|
||||||
Accrued
liabilities — other
|
13,186
|
11,324
|
||||||
Deferred
revenues
|
5,114
|
4,992
|
||||||
Due
to acquirees
|
—
|
1,820
|
||||||
Capital
leases payable
|
391
|
425
|
||||||
Total
current liabilities
|
32,973
|
34,197
|
||||||
Capital
leases payable — long-term
|
216
|
281
|
||||||
Deferred
tax liabilities — long-term
|
11,517
|
11,083
|
||||||
Deferred
revenues — long-term
|
3,414
|
3,299
|
||||||
Other
liabilities — long-term
|
2,565
|
2,581
|
||||||
Total
liabilities
|
50,685
|
51,441
|
||||||
Commitments
and contingencies (Note 12)
|
||||||||
Stockholders’
equity
|
||||||||
Preferred
stock, $0.01 par value: 10,000,000 shares authorized and no shares issued
and outstanding as of September 30, 2010 and December 31,
2009
|
—
|
—
|
||||||
Common
stock, $0.01 par value: 175,000,000 shares authorized; 43,604,591 shares
issued and 40,531,093 shares outstanding as of September 30, 2010; and
175,000,000 shares authorized; 43,469,945 shares issued and 40,430,330
shares outstanding as of December 31, 2009
|
436
|
435
|
||||||
Treasury
stock, at cost, 3,073,498 shares and 3,039,615 shares as of September 30,
2010 and December 31, 2009, respectively
|
(51,052
|
)
|
(50,440
|
)
|
||||
Additional
paid-in capital
|
459,376
|
448,816
|
||||||
Accumulated
other comprehensive income
|
6,308
|
6,151
|
||||||
Retained
earnings
|
14,538
|
15,924
|
||||||
Total
stockholders’ equity
|
429,606
|
420,886
|
||||||
Total
liabilities and stockholders’ equity
|
$
|
480,291
|
$
|
472,327
|
The
accompanying notes are an integral part of these consolidated financial
statements.
3
(unaudited)
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(In thousands, except share and
|
(In thousands, except share and
|
|||||||||||||||
per share amounts)
|
per share amounts)
|
|||||||||||||||
Revenue:
|
||||||||||||||||
Net
revenue
|
$ | 63,128 | $ | 58,809 | $ | 181,820 | $ | 172,379 | ||||||||
Operating
expenses:
|
||||||||||||||||
Cost
of revenue (1)
|
31,684 | 28,665 | 93,666 | 86,638 | ||||||||||||
Product
development (1)
|
3,354 | 3,391 | 10,291 | 11,037 | ||||||||||||
Selling,
general and administrative (1)
|
25,679 | 25,471 | 80,347 | 83,069 | ||||||||||||
Total
operating expenses
|
60,717 | 57,527 | 184,304 | 180,744 | ||||||||||||
Income
(loss) from operations
|
2,411 | 1,282 | (2,484 | ) | (8,365 | ) | ||||||||||
Interest
income
|
132 | 194 | 381 | 937 | ||||||||||||
Interest
expense
|
(36 | ) | (27 | ) | (155 | ) | (153 | ) | ||||||||
Other
income
|
190 | 1 | 1,090 | 53 | ||||||||||||
Realized
gain on securities
|
— | — | 582 | 1,393 | ||||||||||||
Income
(loss) before (provision for) benefit from income taxes
|
2,697 | 1,450 | (586 | ) | (6,135 | ) | ||||||||||
(Provision
for) benefit from income taxes, net
|
(1,515 | ) | (1,665 | ) | (800 | ) | 2,482 | |||||||||
Net
income (loss)
|
$ | 1,182 | $ | (215 | ) | $ | (1,386 | ) | $ | (3,653 | ) | |||||
Basic
net income (loss) per share
|
$ | 0.03 | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.09 | ) | |||||
Diluted
net income (loss) per share
|
$ | 0.03 | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.09 | ) | |||||
Weighted
average common stock outstanding (basic)
|
40,404,126 | 39,705,553 | 40,246,374 | 39,435,766 | ||||||||||||
Weighted
average common stock outstanding (diluted)
|
41,354,680 | 39,705,553 | 40,246,374 | 39,435,766 |
(1) Stock-based
compensation expense recorded for the three and nine months ended September 30,
2010 and 2009 was classified as follows (in thousands):
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009 (2)
|
|||||||||||||
Cost
of revenue
|
$ | 438 | $ | 582 | $ | 1,279 | $ | 1,829 | ||||||||
Product
development
|
164 | 194 | 471 | 602 | ||||||||||||
Selling,
general and administrative
|
2,248 | 2,400 | 6,929 | 11,557 |
(2)
|
Included
in stock-based compensation expense for the nine months ended September
30, 2009 was $3.9 million of stock-based compensation expense related to
the realignment of our workforce and business on January 5, 2009, which
was primarily allocated to selling, general and administrative
expenses.
|
The
accompanying notes are an integral part of these consolidated financial
statements.
4
(unaudited)
Nine Months Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
(In thousands)
|
||||||||
Operating
Activities:
|
||||||||
Net
loss
|
$ | (1,386 | ) | $ | (3,653 | ) | ||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
27,475 | 26,288 | ||||||
Deferred
tax benefit
|
(2,650 | ) | (4,848 | ) | ||||
Stock-based
compensation expense
|
8,679 | 13,988 | ||||||
Provision
for doubtful accounts and sales credits
|
4,015 | 6,478 | ||||||
Loss
(gain) on sale of property and equipment
|
19 | (172 | ) | |||||
Amortization
of bond premium
|
— | 56 | ||||||
Amortization
of deferred interest
|
68 | 111 | ||||||
Deferred
compensation
|
— | 225 | ||||||
Stock-based
compensation windfall tax benefit
|
(1,398 | ) | (1,966 | ) | ||||
Realized
gain on securities
|
(582 | ) | (1,393 | ) | ||||
Changes
in operating assets and liabilities, net of effects of
acquisitions:
|
||||||||
Accounts
receivable
|
(10,938 | ) | (8,711 | ) | ||||
Prepaid
expenses and other current assets
|
(4,108 | ) | (1,230 | ) | ||||
Accounts
payable and accrued expenses
|
(5,121 | ) | 7,546 | |||||
Deferred
revenue
|
115 | (39 | ) | |||||
Other
liabilities — long-term
|
6 | (468 | ) | |||||
Deferred
rent
|
89 | 113 | ||||||
Other
assets — long-term
|
(11,408 | ) | (200 | ) | ||||
Net
cash provided by operating activities
|
2,875 | 32,125 | ||||||
Investing
Activities:
|
||||||||
Capital
expenditures
|
(9,669 | ) | (4,197 | ) | ||||
Restricted
cash
|
— | 142 | ||||||
Sale
of investments
|
1,419 | 44,569 | ||||||
Capitalized
software and website development costs
|
(13,369 | ) | (9,977 | ) | ||||
Proceeds
from sale of property and equipment
|
1 | 83 | ||||||
Payment
for acquisition of businesses and intangible assets, net of acquired
cash
|
(3,028 | ) | (34,680 | ) | ||||
Net
cash used in investing activities
|
(24,646 | ) | (4,060 | ) | ||||
Financing
Activities:
|
||||||||
Principal
payments on capital lease obligations
|
(388 | ) | (284 | ) | ||||
Proceeds
from the exercise of employee stock options
|
1,024 | 2,152 | ||||||
Proceeds
from employee stock purchase plan
|
556 | 700 | ||||||
Purchase
of treasury stock
|
(612 | ) | (352 | ) | ||||
Principal
payments on notes payable
|
— | (636 | ) | |||||
Stock-based
compensation windfall tax benefit
|
1,398 | 1,966 | ||||||
Net
cash provided by financing activities
|
1,978 | 3,546 | ||||||
Net
(decrease) increase in cash and cash equivalents
|
(19,793 | ) | 31,611 | |||||
Effect
of exchange rate changes on cash and cash equivalents
|
108 | 2,509 | ||||||
Cash
and cash equivalents, beginning of period
|
197,509 | 155,456 | ||||||
Cash
and cash equivalents, end of period
|
$ | 177,824 | $ | 189,576 | ||||
Supplemental
Disclosure:
|
||||||||
Cash
paid for:
|
||||||||
Income
taxes
|
$ | 5,421 | $ | 4,019 | ||||
Interest
|
47 | 41 | ||||||
Non-cash
investing and financing activities:
|
||||||||
Accrued
capitalized hardware, software and fixed assets
|
2,697 | 2,314 | ||||||
Assets
acquired under capital leases
|
289 | 94 | ||||||
Capitalized
stock-based compensation
|
46 | 115 | ||||||
Asset
sale through note receivable
|
— | 500 | ||||||
Deferred
compensation reversal to equity
|
— | 225 |
The
accompanying notes are an integral part of these consolidated financial
statements.
5
DEALERTRACK
HOLDINGS, INC.
(unaudited)
1.
Business Description and Basis of Presentation
DealerTrack’s
intuitive and high-value software solutions enhance efficiency and profitability
for all major segments of the automotive retail industry, including dealers,
lenders, OEM’s, agents and aftermarket providers. We believe our solution set
for dealers is the industry’s most comprehensive. DealerTrack operates the
industry’s largest online credit application network, connecting approximately
17,000 dealers with over 900 lenders. Our dealer management system (DMS)
provides dealers with easy-to-use tools and real-time data access that will
streamline any automotive business. Dealers using DealerTrack AAX get the
inventory management tools and services needed to accelerate turns and increase
profits. Our sales and F&I (finance & insurance) solution enables
dealers to streamline the entire sales process while structuring all types of
deals from a single integrated platform. DealerTrack’s compliance solution helps
dealers meet legal and regulatory requirements and protect their hard-earned
assets. DealerTrack’s family of companies also includes data and consulting
services providers, ALG and Chrome Systems.
The
accompanying unaudited consolidated financial statements for the three and nine
months ended September 30, 2010 and 2009 have been prepared in accordance with
the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore,
do not necessarily include all information and footnotes necessary for a fair
presentation of its consolidated financial position, results of operations and
cash flows in accordance with accounting principles generally accepted in the
United States (GAAP). The December 31, 2009 balance sheet information has been
derived from the audited financial statements at that date but does not include
all disclosures required by GAAP.
In the
opinion of management, the unaudited financial information for the interim
periods presented reflects all adjustments, which are normal and recurring,
necessary for a fair presentation of a statement of results of operations,
financial position and cash flows. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2009, filed with the Securities and Exchange Commission (SEC) on
February 24, 2010. Operating results for the three and nine months ended
September 30, 2010 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2010.
The
preparation of financial statements in conformity with GAAP require management
to make estimates and assumptions that affect the reported amounts and the
disclosures of contingent amounts in our financial statements and the
accompanying notes. Actual results could differ from those
estimates.
2.
Recent Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board (FASB) issued guidance to
amend the disclosure requirements related to recurring and nonrecurring fair
value measurements. The guidance requires new disclosures for significant
transfers in and out of Level 1 and Level 2 fair value measurements and to
provide a gross presentation of the activities, including purchases, sales,
issuances, and settlements, within the Level 3 rollforward. The guidance also
clarifies existing fair value disclosures about the level of disaggregation and
about inputs and valuation techniques used to measure fair value. The new
disclosure requirements are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about the Level 3
rollforward, which are effective for fiscal years beginning after December 15,
2010. The adoption of the new disclosure requirements applicable for our first
quarter of 2010 did not have a material impact on our consolidated financial
statements. We do not expect the full adoption of the guidance to have a
material impact on our fair value measurement disclosures.
3. Fair Value
Measurements
Fair
value is defined as the exit price, or the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Inputs used to measure fair value
are prioritized into a three-level fair value hierarchy. This hierarchy requires
entities to maximize the use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used to measure fair value are
as follows:
|
•
|
Level 1 – Quoted prices
(unadjusted) in active markets that are accessible at the measurement
date for assets or liabilities. The fair value hierarchy gives the highest
priority to Level 1 inputs.
|
|
•
|
Level 2 – Observable prices that
are based on inputs not quoted on active markets, but corroborated by
market data.
|
|
•
|
Level 3 – Unobservable inputs are
used when little or no market data is available. The fair value hierarchy
gives the lowest priority to Level 3
inputs.
|
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 in the table
below.
6
Financial
assets measured at fair value on a recurring basis include the following as of
September 30, 2010 and December 31, 2009 (in thousands):
As of September 30, 2010
|
Quoted Prices in
Active Markets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
September 30,
2010
|
||||||||||||
Cash
equivalents (1)
|
$ | 137,806 | $ | — | $ | — | $ | 137,806 | ||||||||
Short-term
investments (3) (4)
|
13 | — | 1,550 | 1,563 | ||||||||||||
Long-term
investments (4)
|
— | — | 2,458 | 2,458 | ||||||||||||
Total
|
$ | 137,819 | $ | — | $ | 4,008 | $ | 141,827 |
As of December 31, 2009
|
Quoted Prices in
Active Markets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
December 31,
2009
|
||||||||||||
Cash
equivalents (1) (2)
|
$ | 163,615 | $ | — | $ | — | $ | 163,615 | ||||||||
Short-term
investments (3)
|
1,484 | — | — | 1,484 | ||||||||||||
Long-term
investments (4)
|
— | — | 3,971 | 3,971 | ||||||||||||
Total
|
$ | 165,099 | $ | — | $ | 3,971 | $ | 169,070 |
(1)
|
Cash equivalents consist
primarily of money market funds with original maturity dates of three
months or less, for which we determine fair value through quoted market
prices.
|
(2)
|
In our Quarterly Report on Form
10-Q for the three months ended March 31, 2010, Level 1 cash equivalents
of approximately $163.6 million as of December 31, 2009 was revised from
$127.6 million as previously disclosed in the fair value measurement
footnote in our Annual Report on Form 10-K for the year ended December 31,
2009 filed with the SEC on February 24, 2010 to reflect the inclusion of a
money market account held at December 31, 2009 that was incorrectly
omitted from our original footnote disclosure. Amounts classified as cash
and cash equivalents on our audited balance sheet at December 31, 2009
were correctly stated.
|
(3)
|
As of September 30, 2010 and
December 31, 2009, Level 1 short-term investments include investments in
tax-advantaged preferred securities, for which we determined fair value
based on the quoted market prices of the underlying securities. During the
nine months ended September 30, 2010, we sold a portion of our Level 1
investments in tax-advantaged preferred securities for approximately $1.4
million and recorded a gain in the statement of operations of
approximately $0.6 million.
|
(4)
|
Level 3
investments as of both September 30, 2010 and December 31, 2009 include a
$1.6 million, or 0.3% of total assets, auction rate security (ARS)
invested in a tax-exempt state government obligation that was valued at
par. Our intent is not to hold the ARS invested in tax-exempt state
government obligations to maturity, but rather to use the interest reset
feature to provide liquidity. However, should the marketplace auctions
continue to fail we may hold the security to maturity. As of December 31,
2009, we classified this as long-term due to the maturity date of the
security being September 2011, coupled with ongoing failed auctions in the
marketplace. As of September 30, 2010, this security was reclassified to
short-term due to the maturity date. In October 2010, approximately $1.1
million of this security was redeemed by the issuer at
par.
|
Level 3
long-term investments also include a tax-advantaged preferred stock of a
financial institution with a fair value of $2.5 million and $2.4 million, or
0.5% of total assets, as of September 30, 2010 and December 31, 2009,
respectively. It is uncertain whether we will be able to liquidate these
securities within the next twelve months; as such we have classified them as
long-term on our consolidated balance sheets. Due to the lack of observable
market quotes we utilized valuation models that rely exclusively on Level 3
inputs including those that are based on expected cash flow streams, including
assessments of counterparty credit quality, default risk underlying the
security, discount rates and overall capital market liquidity.
7
A reconciliation of the beginning and ending balances for Level 3
investments as of September 30, 2010 and December 31, 2009, is as follows (in
thousands):
Balance
as of January 1, 2009
|
$ | 1,550 | ||
Reclassification
from Level 2 investments to Level 3 investments (5)
|
1,360 | |||
Realized
gain on securities included in the statement of operations
(5)
|
716 | |||
Unrealized
gain on securities recorded in other comprehensive income
(5)
|
345 | |||
Balance
as of December 31, 2009
|
3,971 | |||
Unrealized
gain on securities recorded in other comprehensive income
(5)
|
37 | |||
Balance
as of September 30, 2010
|
$ | 4,008 |
(5)
|
Level
2 investments in certain tax-advantaged preferred stock trusts held as of
January 1, 2009 dissolved and the underlying preferred stock investments
were distributed during 2009. As a result of these dissolutions, we
measured the fair value of the Level 3 long-term tax-advantaged preferred
stock on the distribution date and determined that the value increased
from $1.4 million as of December 31, 2008 to $2.1 million on the
distribution date and as a result we recorded a realized gain in the
statement of operations of $0.7 million. Subsequent to the trust
dissolution, we re-measured the fair value on December 31, 2009 and
September 30, 2010 and determined that the value had increased and
recorded a gain in other comprehensive income of $0.4 million and
approximately $37,000, respectively. The total value of the tax-advantaged
preferred stock of a financial institution included in the $4.0 million of
Level 3 investments as of December 31, 2009 and September 30, 2010 is
approximately $2.4 million and $2.5 million,
respectively.
|
4.
Net Income (Loss) Per Share
We
compute net income (loss) per share in accordance with FASB ASC Topic 260,
“Earnings Per Share”
(ASC Topic 260). Under ASC Topic 260, basic earnings per share is calculated by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated by
dividing net income by the weighted average number of common shares outstanding,
assuming dilution, during the period. The diluted earnings per share calculation
assumes (i) all stock options which are in the money are exercised at the
beginning of the period and (ii) if applicable, unvested awards that are
considered to be contingently issuable shares because they contain either a
performance or market condition will be included in diluted earnings per share
if dilutive and if their conditions have (a) been satisfied at the reporting
date or (b) would have been satisfied if the reporting date was the end of the
contingency period.
The
following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except share and per share
amounts):
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Numerator:
|
||||||||||||||||
Net
income (loss)
|
$ | 1,182 | $ | (215 | ) | $ | (1,386 | ) | $ | (3,653 | ) | |||||
Denominator:
|
||||||||||||||||
Weighted
average common stock outstanding (basic)
|
40,404,126 | 39,705,553 | 40,246,374 | 39,435,766 | ||||||||||||
Common
equivalent shares from options to purchase common stock and restricted
common stock units
|
950,554 | — | — | — | ||||||||||||
Weighted
average common stock outstanding (diluted)
|
41,354,680 | 39,705,553 | 40,246,374 | 39,435,766 | ||||||||||||
Basic
net income (loss) per share
|
$ | 0.03 | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.09 | ) | |||||
Diluted
net income (loss) per share
|
$ | 0.03 | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.09 | ) |
8
The
following is a summary of the weighted shares outstanding during the respective
periods that have been excluded from the diluted net income (loss)
per share calculation because the effect would have been
antidilutive:
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Stock
options
|
2,671,746 | 4,228,178 | 4,855,370 | 4,257,675 | ||||||||||||
Restricted
stock units
|
11,445 | 680,704 | 786,541 | 612,466 | ||||||||||||
Performance
stock units
|
— | — | 29,887 | — | ||||||||||||
Total
antidilutive awards
|
2,683,191 | 4,908,882 | 5,671,798 | 4,870,141 |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income (loss)
|
$ | 1,182 | $ | (215 | ) | $ | (1,386 | ) | $ | (3,653 | ) | |||||
Foreign
currency translation adjustments
|
1,412 | 4,294 | 753 | 6,835 | ||||||||||||
Unrealized
(loss) gain on available for sale securities
|
(10 | ) | 321 | (7 | ) | 906 | ||||||||||
Reversal
of unrealized (gain) loss on available for sale securities
|
— | — | (589 | ) | (15 | ) | ||||||||||
Total
comprehensive income (loss)
|
$ | 2,584 | $ | 4,400 | $ | (1,229 | ) | $ | 4,073 |
For the
three and nine months ended September 30, 2010 and 2009, the foreign currency
translation adjustment primarily represents the effect on translating the
intangibles and goodwill related to an acquisition in Canada.
6.
Stock-Based Compensation Expense
We have
four types of stock-based compensation: stock options, restricted common stock,
restricted stock units, and performance stock units. For further information see
Notes 2 and 11 included in our Annual Report on Form 10-K for the year ended
December 31, 2009 filed with the SEC on February 24, 2010.
The
following summarizes stock-based compensation expense recognized for the three
and nine months ended September 30, 2010 and 2009 (in thousands):
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009 (2)
|
|||||||||||||
Stock
options
|
$ | 1,478 | $ | 1,731 | $ | 4,503 | $ | 8,981 | ||||||||
Restricted
common stock
|
300 | 972 | 1,414 | 3,656 | ||||||||||||
Restricted
stock units
|
938 | 473 | 2,411 | 1,351 | ||||||||||||
Performance
stock units (1)
|
134 | — | 351 | — | ||||||||||||
Total
stock-based compensation expense
|
$ | 2,850 | $ | 3,176 | $ | 8,679 | $ | 13,988 |
(1)
|
Expense
relates to 129,860 performance stock units (PSU’s) granted on March 9,
2010 to certain executives officers. The actual number of PSU’s to be
delivered is subject to adjustment ranging from 0% (threshold) to 137.5%
(maximum) based solely upon the achievement of certain performance targets
and other vesting conditions. Each individual’s award was allocated 50% to
achieving adjusted net income (ANI) targets for the year ended December
31, 2010 (ANI Performance Award) and 50% to the total shareholder return
(TSR) of our common stock as compared to other companies in the NASDAQ
Internet Index in the aggregate for the fiscal years 2010, 2011, and 2012
(TSR Award). The awards will be earned based upon our achievement of ANI
and TSR targets, but will not vest unless the grantee remains continuously
employed in active service until January 31, 2013. In addition, the PSU’s
are subject to forfeiture if the company’s performance goals are not
achieved. The awards are subject to acceleration in full if an executive
is terminated without cause, or resigns for good reason within twelve
months of a change in control. We have valued the ANI Performance Award
and the TSR Award using the Black-Scholes and Monte Carlo valuation
pricing models, respectively. The total fair value of the ANI Performance
Award, based on the number of awards expected to vest, was $0.7 million,
which we began expensing during the first quarter of 2010 as it was deemed
probable that we will achieve a portion of the ANI targets for 2010. The
total fair value of the TSR Award was $1.1 million, which is expensed on a
straight-line basis from the date of grant over the applicable service
period. As long as the service condition is satisfied, the expense is not
reversed, even in the event the TSR Award targets are not achieved. The
expense recorded for PSU’s includes expense related to the ANI Performance
Award and the TSR Award for the three and nine months ended September 30,
2010 as follows (in thousands):
|
9
Three Months Ended
|
Nine Months Ended
|
|||||||
September 30, 2010
|
September 30, 2010
|
|||||||
ANI
Performance Award
|
$ | 35 | $ | 130 | ||||
TSR
Award
|
99 | 221 | ||||||
Total
|
$ | 134 | $ | 351 |
(2)
|
Included
in stock-based compensation expense for the nine months ended September
30, 2009 was $3.9 million of stock-based compensation expense related to
the realignment of our workforce and business on January 5,
2009.
|
Estimated
|
||||||||||||
Useful Life
|
September 30,
|
December 31,
|
||||||||||
(Years)
|
2010
|
2009
|
||||||||||
Computer
equipment
|
3 – 5 | $ | 32,970 | $ | 22,662 | |||||||
Office
equipment
|
5 | 3,728 | 3,550 | |||||||||
Furniture
and fixtures
|
5 | 3,320 | 3,343 | |||||||||
Leasehold
improvements
|
3 – 11 | 3,340 | 3,188 | |||||||||
Total
property and equipment, gross
|
43,358 | 32,743 | ||||||||||
Less:
Accumulated depreciation and amortization
|
(23,743 | ) | (19,229 | ) | ||||||||
Total
property and equipment, net
|
$ | 19,615 | $ | 13,514 |
Depreciation
and amortization expense for the three and nine months ended September 30, 2010
and 2009 is as follows (in thousands):
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Depreciation
and amortization expense
|
$ | 1,890 | $ | 1,710 | $ | 5,805 | $ | 5,260 |
8.
Intangible Assets
The gross
book value, accumulated amortization and amortization periods of the intangible
assets were as follows (dollars in thousands):
September 30, 2010
|
December 31, 2009
|
|||||||||||||||||||
Gross
|
Gross
|
Estimated
|
||||||||||||||||||
Book
|
Accumulated
|
Book
|
Accumulated
|
Useful Life
|
||||||||||||||||
Value
|
Amortization
|
Value
|
Amortization
|
(Years)
|
||||||||||||||||
Customer
contracts
|
$ | 36,574 | $ | (27,465 | ) | $ | 40,352 | $ | (24,769 | ) | 2-7 | |||||||||
Database
|
13,292 | (11,934 | ) | 13,825 | (10,945 | ) | 3-6 | |||||||||||||
Trade
names
|
10,598 | (5,865 | ) | 12,510 | (6,924 | ) | 2-10 | |||||||||||||
Technology
|
27,529 | (15,436 | ) | 27,170 | (11,110 | ) | 1-5 | |||||||||||||
Non-compete
agreement
|
2,389 | (1,771 | ) | 6,585 | (5,090 | ) | 2-5 | |||||||||||||
Total
|
$ | 90,382 | $ | (62,471 | ) | $ | 100,442 | $ | (58,838 | ) |
10
Amortization
expense related to intangibles for the three and nine months ended September 30,
2010 and 2009 is as follows (in thousands):
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Intangible
amortization expense
|
$ | 4,661 | $ | 4,971 | $ | 14,824 | $ | 15,393 |
Amortization
expense that will be charged to income for the remaining period of 2010 and for
each of the subsequent five years is estimated, based on the September 30, 2010
book value, as follows (in thousands):
Remainder
of 2010
|
$ | 4,680 | ||
2011
|
10,917 | |||
2012
|
5,797 | |||
2013
|
3,739 | |||
2014
|
1,839 | |||
2015
|
939 | |||
Total
|
$ | 27,911 |
The
change in carrying amount of goodwill for the nine months ended September 30,
2010 is as follows (in thousands):
Balance
as of January 1, 2010
|
$ | 134,747 | ||
Impact
of change in Canadian dollar exchange rate
|
408 | |||
Other
|
159 | |||
Balance
as of September 30, 2010
|
$ | 135,314 |
10. Accrued Liabilities – Other
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Customer
deposits
|
$ | 2,366 | $ | 2,357 | ||||
Computer
equipment
|
1,626 | 21 | ||||||
Revenue
share
|
1,411 | 1,284 | ||||||
Professional
fees
|
1,802 | 2,280 | ||||||
Software
licenses
|
1,968 | 1,325 | ||||||
Sales
taxes
|
1,114 | 883 | ||||||
Other
|
2,899 | 3,174 | ||||||
Total
accrued liabilities – other
|
$ | 13,186 | $ | 11,324 |
11.
Income Taxes
We file a
consolidated U.S. income tax return and tax returns in various state and local
jurisdictions. Certain of our subsidiaries also file income tax returns in
Canada. The New York State Department of Finance is continuing its review of our
combined New York State income tax returns for the periods ended December 31,
2006 and December 31, 2007. No adjustments have been proposed which would
require us to book a reserve at this time. During 2009, the Internal Revenue
Service (IRS) concluded a review of our consolidated federal income tax returns
for the periods ended December 31, 2006 and December 31, 2007 with no income tax
adjustments. In 2009, the IRS also completed an examination of DealerTrack
Systems, Inc. (f/k/a Arkona, Inc.) for the period ended June 30, 2006
(pre-acquisition) period. The federal audit was concluded with no income tax
adjustments. All of our other significant taxing jurisdictions are closed for
years prior to 2006.
The total
liability for uncertain tax positions recorded in our balance sheet in accrued
other liabilities as of September 30, 2010 and December 31, 2009, was $1.0
million and $0.8 million, respectively.
Interest
and penalties, if any, related to tax positions taken in our tax returns are
recorded in interest expense and general and administrative expenses,
respectively, in our consolidated statement of operations. As of September 30,
2010 and December 31, 2009, accrued interest and penalties related to tax
positions taken on our tax returns is approximately $87,000 and $47,000,
respectively.
11
As of
September 30, 2010 we have recorded a U.S. net deferred tax asset (DTA) of $23.1
million comprised mainly of stock compensation expense, amortization expense,
deferred revenue and net operating losses. DTA’s are recognized
subject to management’s judgment that realization is more likely than
not. As a result of the downturn in the economy and its impact on
automotive and credit markets, we are in a three-year cumulative pretax loss
position in the U.S. at September 30, 2010. A cumulative loss
position is considered significant negative evidence in assessing the
realizability of a DTA. We have concluded that there is sufficient
positive evidence to overcome this negative evidence and therefore believe the
realization of the DTA is more likely than not. The positive evidence
includes three means by which we are able to fully realize our
DTA. First, as the result of improvements in the economy and positive
trends in automotive and credit markets we had positive U.S. earnings in the
third quarter of 2010. Second, we have forecasted that we will continue to have
positive U.S earnings for the fourth quarter, and we are forecasting sufficient
U.S. taxable income in the carryforward period, exclusive of tax planning
strategies. Our carryforward period for tax losses expire in 2026 and our
deferred tax assets that have not converted to taxable losses have a recoverable
period of at least twenty years. Lastly, we have a history of utilizing
available net operating losses and other deferred tax assets. In the
event that the future income streams that we currently project do not
materialize, we may be required to record a valuation allowance. Any increase in
a valuation allowance would result in a non-cash charge that may adversely
impact our results of operations.
On March
31, 2010, in connection with our DMS business, we entered into an equipment and
software purchase agreement with a vendor. Under the terms of the agreement, we
committed to purchasing certain equipment and software in 2011 totaling
approximately $2.7 million, excluding applicable taxes. This commitment is
non-cancellable. As of September 30, 2010, we have not accepted title or risk of
loss of the aforementioned equipment or software.
Contingencies
We are a
party to a variety of agreements pursuant to which we may be obligated to
indemnify the other party with respect to breach of contract, infringement and
other matters. Typically, these obligations arise in the context of agreements
entered into by us, under which we customarily agree to hold the other party
harmless against losses arising from breaches of representations, warranties
and/or covenants. In these circumstances, payment by us is generally conditioned
on the other party making a claim pursuant to the procedures specified in the
particular agreement, which procedures typically allow us to challenge the other
party’s claims. Further, our obligations under these agreements may be limited
to indemnification of third-party claims only and limited in terms of time
and/or amount. In some instances, we may have recourse against third parties for
certain payments made by us.
It is not
possible to predict the maximum potential amount of future payments under these
or similar agreements due to the conditional nature of our obligations and the
unique facts and circumstances involved in each particular agreement. To date,
we have not been required to make any material payments. We believe that if we
were to incur a loss in any of these matters, it is not probable that such loss
would have a material effect on our business or financial
condition.
Retail Sales
Tax
The
Ontario Ministry of Revenue (the Ministry) has conducted a retail sales tax
field audit on the financial records of our Canadian subsidiary, DealerTrack
Canada, Inc. (formerly known as DealerAccess Canada, Inc.), for the period from
March 1, 2001 through May 31, 2003 (“Audit Period”). We received a formal
assessment from the Ministry indicating unpaid Ontario retail sales tax totaling
approximately $0.2 million, plus interest. Although we are disputing the
Ministry’s findings, the assessment, including interest, has been paid in order
to avoid potential future interest and penalties.
As part
of the purchase agreement dated December 31, 2003 between us and Bank of
Montreal for the purchase of 100% of the issued and outstanding capital stock of
DealerAccess, Inc., Bank of Montreal agreed to indemnify us specifically for
this potential liability for all sales tax periods prior to January 1, 2004. The
potential sales tax liability for the period covered by this indemnification is
now closed due to the statutory expiration of the periods open for audit by the
Ministry. To date, all amounts paid to the Ministry by us for this assessment
have been reimbursed by the Bank of Montreal under this
indemnity.
We
undertook a comprehensive review of the audit findings of the Ministry using
external tax experts. Our position has been that our lender revenue transactions
are not subject to Ontario retail sales tax. We filed a formal Notice of
Objection with the Ministry on December 12, 2005. We received a letter dated
November 2, 2007 from an appeals officer of the Ministry stating that the
assessment was, in his opinion, properly raised and his intention was to
recommend his confirmation to senior management of the Ministry. The officer
agreed, however, to defer his recommendation for a period of thirty business
days to enable us to submit any additional information not yet provided. We
submitted additional information to the Ministry to support our position that
the services are not subject to sales tax.
We
received a letter dated December 21, 2007 from the Ministry stating that no
change should be made to the appeals officer’s opinion. The letter further
stated that we had ninety days from the date of the letter to file a Notice of
Appeal with the Superior Court of Justice. A Notice of Appeal was filed on our
behalf on March 18, 2008 to challenge the assessment because we did not believe
these services are subject to sales tax. On December 15, 2008, the Ministry
filed its response to our Notice of Appeal. The response reiterated the
Ministry’s position that the transactions were subject to Ontario retail sales
tax.
In
October 2010, the parties agreed to a settlement of this matter. The Minutes of
Settlement provide that the Ministry will reimburse us $0.1 million, plus
interest, for a total payment of $0.2 million, which was received on October 29,
2010. Under the terms of the indemnity agreement with The Bank of Montreal, we
will forward the settlement payment to The Bank of Montreal. This settlement
applies only to the Audit Period and does not cover any potential liability for
subsequent periods, which were not included in the audit. Additionally, this
settlement did not conclude on the taxability of our lender revenue
transactions. We have not accrued any related sales tax liability for the period
subsequent to May 31, 2003 for these lender revenue transactions. This appeal
was supported by the financial institutions whose source revenue transactions
were subject to the assessment. These financial institutions participated in the
cost of the litigation.
In the
event we are obligated to charge sales tax for this type of transaction, we
believe this Canadian subsidiary’s contractual arrangements with its lender
customers obligate these customers to pay all sales taxes that are levied or
imposed by any taxing authority by reason of the transactions contemplated under
the particular contractual arrangement. In the event of any failure to pay such
amounts by our customers, we would be required to pay the obligation, which
could range from $5.2 million (CAD) to $5.8 million (CAD), including penalties
and interest.
12
AAX Service Credit
Under the
terms of the purchase agreement with AAX ® the seller was granted the right to
service credits of $2.5 million, which may be applied against fees that are
charged in connection with their purchase of any future products or services of
DealerTrack. These service credits expire on January 23, 2013. The service
credits are being recorded as a reduction in revenue as they are utilized. As of
September 30, 2010, approximately $0.2 million of the service credits have been
utilized by the seller.
ASM Contingent Purchase Price
Under the
terms of the merger agreement with AutoStyleMart, Inc., we have a future
contingent payment obligation of up to $11.0 million based upon the achievement
of certain operational targets from February 2008 through February 2011. As of
December 31, 2009, we determined that certain operational conditions were
probable of being achieved and recorded a liability of $1.0 million. The $1.0
million was deemed compensation for services, as payment was also contingent on
certain former stockholders remaining employees or consultants of DealerTrack
for a certain period. The $1.0 million of additional consideration was paid in
the first quarter of 2010. As of September 30, 2010, it has been determined that
achievement of the operational targets related to the remaining $10.0 million in
contingent payment obligations is not yet probable. Any amounts deemed probable
in the future will also be recorded as compensation expense. We will assess the
probability of the achievement of the operational targets on a quarterly
basis.
Employment
Agreements
Pursuant
to employment or severance agreements with certain employees, we had a
commitment to pay severance of approximately $4.6 million as of September
30, 2010, in the event of termination without cause, as defined in the
agreements, as well as certain potential gross-up payments to the extent any
such severance payment would constitute an excess parachute payment under the
Internal Revenue Code. We also have a commitment to pay additional severance of
$1.9 million as of September 30, 2010, if there is a change in
control.
Legal
Proceedings
From time
to time, we are a party to litigation matters arising in connection with the
normal course of our business, none of which is expected to have a material
adverse effect on us. In addition to the litigation matters arising in
connection with the normal course of our business, we are party to the
litigation described below.
DealerTrack, Inc. v. Finance
Express et al., CV-06-2335; DealerTrack Inc. v. RouteOne and Finance Express et
al., CV-06-6864; and DealerTrack Inc. v. RouteOne and Finance Express et al.,
CV-07-215
On April
18, 2006, we filed a Complaint and Demand for Jury Trial against David Huber,
Finance Express LLC (Finance Express), and three of their unnamed dealer
customers in the United States District Court for the Central District of
California, Civil Action No. CV-06-2335 AG (FMOx). The complaint sought
declaratory and injunctive relief, as well as damages, against the defendants
for infringement of the U.S. Patent No. 5,878,403 (the ’403 Patent) Patent and
the 6,587,841 (the ’841 Patent). Finance Express denied infringement and
challenged the validity and enforceability of the
patents-in-suit.
On
October 27, 2006, we filed a Complaint and Demand for Jury Trial against
RouteOne, David Huber and Finance Express in the United States District Court
for the Central District of California, Civil Action No. CV-06-6864 (SJF). The
complaint sought declaratory and injunctive relief as well as damages against
the defendants for infringement of the ’403 Patent and the ’841 Patent. On
November 28, 2006 and December 4, 2006, respectively, defendants RouteOne, David
Huber and Finance Express filed their answers. The defendants denied
infringement and challenged the validity and enforceability of the
patents-in-suit.
On
February 20, 2007, we filed a Complaint and Demand for Jury Trial against
RouteOne LLC (RouteOne), David Huber and Finance Express in the United States
District Court for the Central District of California, Civil Action No.
CV-07-215 (CWx). The complaint sought declaratory and injunctive relief as well
as damages against the defendants for infringement of U.S. Patent No. 7,181,427
(the ’427 Patent). On April 13, 2007 and April 17, 2007, respectively,
defendants RouteOne, David Huber and Finance Express filed their answers. The
defendants denied infringement and challenged the validity and enforceability of
the ’427 Patent.
The
DealerTrack, Inc. v. Finance Express et al., CV-06-2335 action, the DealerTrack
Inc. v. RouteOne and Finance Express et al., CV-06-6864 action and the
DealerTrack v. RouteOne and Finance Express et al., CV-07-215 action, described
above, were consolidated by the court. A hearing on claims construction,
referred to as a “Markman ” hearing, was held
on September 25, 2007. Fact and expert discovery and motions for summary
judgment have substantially been completed.
On July
21, 2008 and September 30, 2008, the court issued summary judgment orders
disposing of certain issues and preserving other issues for
trial.
On July
8, 2009, the court held Claims 1-4 of DealerTrack’s patent 7,181,427 were
invalid for failure to comply with a standard required by the recently decided
case in the Court of Appeals of the Federal Circuit of In re Bilski. On August
11, 2009, the court entered into a judgment granting summary judgment. On
September 8, 2009, DealerTrack filed a notice of appeal in the United States
Court of Appeals for the Federal Circuit in regards to the finding of
non-infringement of patent 6,587,841, the invalidity of patent 7,181,427, and
the claim construction order to the extent that it was relied upon to find the
judgments of non-infringement and invalidity. In October 2010, the United State
Court of Appeals set a briefing schedule and DealerTrack filed its appellant’s
brief in the case on October 29, 2010.
13
We
believe that the potential liability from all current litigations will not have
a material effect on our financial position or results of operations when
resolved in a future period.
The
segment information provided in the table below is being reported consistent
with our method of internal reporting. Operating segments are defined as
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. The chief
operating decision maker reviews information at a consolidated level, as such we
have one reportable segment. For enterprise-wide disclosure, we are organized
primarily on the basis of service lines. Revenue earned outside of the United
States for the three and nine months ended September 30, 2010 is approximately
12% and 13%, of our total revenue, respectively. Revenue earned outside of the
United States for the three and nine months ended September 30, 2009 is
approximately 13% and 11%, of our total revenue,
respectively.
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Transaction
services revenue
|
$ | 27,188 | $ | 25,483 | $ | 76,909 | $ | 74,169 | ||||||||
Subscription
services revenue
|
31,273 | 28,978 | 91,342 | 85,949 | ||||||||||||
Other
|
4,667 | 4,348 | 13,569 | 12,261 | ||||||||||||
Total
net revenue
|
$ | 63,128 | $ | 58,809 | $ | 181,820 | $ | 172,379 |
14.
Strategic Agreement with Ally Financial (Ally)
On
February 10, 2010, DealerTrack entered into a strategic relationship with Ally.
Under the terms of the agreement, Ally will be listed as a financing option on
the DealerTrack credit application processing network and DealerTrack agreed to
make a one-time payment to Ally of $15.0 million payable upon Ally becoming
available to substantially all dealers that it does business with who are on the
DealerTrack U.S. network. Ally will be available to General Motors and Chrysler
dealers, as well as dealers of other manufacturers that Ally elects to do
business with. Ally will continue to accept credit applications through a
competitive system, RouteOne.
As of
June 30, 2010, Ally substantially completed the rollout of their dealerships on
our U.S. network and in accordance with the terms of the agreement we satisfied
the one-time $15.0 million payment obligation. The one-time $15.0 million
payment is being recorded as a reduction in revenue over the period of expected
benefit of approximately five years. For the three and nine months ended
September 30, 2010, we recorded contra revenue related to revenue from the Ally
strategic relationship of $0.6 million and $0.8 million, respectively. As of
September 30, 2010, we have classified $3.2 million in prepaid expenses and
other current assets and $11.0 million in other long-term assets.
15.
Settlement with Service Provider
During
the nine months ended September 30, 2010, we received a settlement of
approximately $0.4 million related to the cancellation of a services agreement
from our eDocs business, which has been recorded to other income in the
statement of operations.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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 (the
Securities Act), 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 can be
found in the sections entitled “Risk Factors” in Part II, Item 1A. in this
Quarterly Report on Form 10-Q and in Part I, Item 1A. in our
Annual Report on Form
10-K for the year ended
December 31, 2009 filed with the SEC on February 24, 2010 . 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 will undertake no obligation to publicly update such
forward-looking statements to reflect subsequent events or
circumstances.
14
Overview
DealerTrack’s
intuitive and high-value software solutions enhance efficiency and profitability
for all major segments of the automotive retail industry, including dealers,
lenders, OEM’s, agents and aftermarket providers. We believe our solution set
for dealers is the industry’s most comprehensive. DealerTrack operates the
industry’s largest online credit application network, connecting approximately
17,000 dealers with over 900 lenders. Our dealer management system (DMS)
provides dealers with easy-to-use tools and real-time data access that will
streamline any automotive business. Dealers using DealerTrack AAX get the
inventory management tools and services needed to accelerate turns and increase
profits. Our sales and F&I (finance & insurance) solution enables
dealers to streamline the entire sales process while structuring all types of
deals from a single integrated platform. DealerTrack’s compliance solution helps
dealers meet legal and regulatory requirements and protect their hard-earned
assets. DealerTrack’s family of companies also includes data and consulting
services providers, ALG and Chrome Systems.
We are a
Delaware corporation formed in August 2001. We are organized as a holding
company and conduct a substantial amount of our business through our
subsidiaries, including ALG, Inc., Chrome Systems, Inc., DealerTrack Aftermarket
Services, Inc., DealerTrack AAX, Inc., DealerTrack Canada, Inc., DealerTrack
Digital Services, Inc., DealerTrack, Inc. and DealerTrack Systems,
Inc.
We
monitor our performance as a business using a number of measures that are not
found in our consolidated financial statements. These measures include the
number of active dealers, lenders and active lender to dealership relationships
in the DealerTrack network, the number of subscribing dealers in the DealerTrack
network, the number of transactions processed, the average transaction price and
the average monthly subscription revenue per subscribing dealership. We believe
that improvements in these metrics will result in improvements in our financial
performance over time. We also view the acquisition and successful integration
of acquired companies as important milestones in the growth of our business as
these acquired companies bring new products to our customers and expand our
technological capabilities. We believe that successful acquisitions will also
lead to improvements in our financial performance over time. In the near term,
however, the purchase accounting treatment of acquisitions can have a negative
impact on our statement of operations as the depreciation and amortization
expenses associated with acquired assets, as well as particular intangibles
(which tend to have a relatively short useful life), can be substantial in the
first several years following an acquisition. As a result, we monitor our
non-GAAP financial measures and other business statistics as a measure of
operating performance in addition to net income (loss) and the other measures
included in our consolidated financial statements.
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 adjusted EBITDA, adjusted net income, capital expenditure data and
transactions processed):
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Non-GAAP
Financial Measures and Other Business Statistics:
|
||||||||||||||||
Adjusted
EBITDA (Non-GAAP) (1)
|
$ | 12,855 | $ | 10,760 | $ | 27,597 | $ | 26,261 | ||||||||
Adjusted
net income (Non-GAAP) (1)
|
$ | 6,631 | $ | 6,046 | $ | 13,703 | $ | 16,607 | ||||||||
Capital
expenditures, software and website development costs
|
$ | 6,482 | $ | 5,643 | $ | 26,070 | $ | 16,696 | ||||||||
Active
dealers in our network as of end of the period (2)
|
16,961 | 17,241 | 16,961 | 17,241 | ||||||||||||
Active
lenders in our network as of end of period (3)
|
921 | 790 | 921 | 790 | ||||||||||||
Active
lender to dealer relationships (4)
|
137,388 | 120,305 | 137,388 | 120,305 | ||||||||||||
Subscribing
dealers in our network as of end of the period (5)
|
13,856 | 13,959 | 13,856 | 13,959 | ||||||||||||
Transactions
processed (6)
|
13,296 | 13,804 | 37,376 | 41,288 | ||||||||||||
Average
transaction price (7)
|
$ | 2.09 | $ | 1.85 | $ | 2.08 | $ | 1.80 | ||||||||
Average
monthly subscription revenue per subscribing dealership
(8)
|
$ | 759 | $ | 692 | $ | 743 | $ | 670 |
(1)
|
Adjusted EBITDA is a non-GAAP
financial measure that represents GAAP net income (loss) excluding
interest, taxes, depreciation and amortization expenses, contra-revenue and may exclude certain items
such as: impairment charges, restructuring charges, acquisition-related
earn-out compensation expense and professional service fees, realized
gains or (losses) on securities and certain other non-recurring items.
Adjusted net income is a non-GAAP financial measure that represents GAAP
net income (loss) 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, acquisition-related earn-out compensation expense and
professional service fees, realized gains or (losses) on securities and
certain other non-recurring items. These adjustments, which are shown
before taxes, are adjusted for their tax impact. Adjusted EBITDA and
adjusted net income are presented because management believes they provide
additional information with respect to the performance of our fundamental
business activities and is 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 a primary
measure to review and assess the operating performance of our company and
management team in connection with our executive compensation plan
incentive payments.
|
15
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 as an expense 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 a measurement of our
financial performance under GAAP and should not be considered as an alternative
to net income, operating income or any other performance measures derived in
accordance with GAAP or as an alternative to cash flow from operating activities
as a measure of our liquidity.
The
following table sets forth the reconciliation of adjusted EBITDA, a non-GAAP
financial measure, to net income (loss), our most directly comparable financial
measure in accordance with GAAP (in thousands):
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
GAAP
net income (loss)
|
$
|
1,182
|
$
|
(215
|
)
|
$
|
(1,386
|
)
|
$
|
(3,653
|
)
|
|||||
Interest
income
|
(132
|
)
|
(194
|
)
|
(381
|
)
|
(937
|
)
|
||||||||
Interest
expense
|
36
|
27
|
155
|
153
|
||||||||||||
Provision
for (benefit from) income taxes
|
1,515
|
1,665
|
|
800
|
(2,482
|
)
|
||||||||||
Depreciation
of property and equipment and amortization of capitalized software and
website costs
|
4,510
|
3,429
|
12,651
|
10,895
|
||||||||||||
Amortization
of acquired identifiable intangibles
|
4,661
|
4,971
|
14,824
|
15,393
|
||||||||||||
EBITDA
(Non-GAAP)
|
11,772
|
9,683
|
26,663
|
19,369
|
||||||||||||
Adjustments:
|
||||||||||||||||
Restructuring
costs (including amounts related to stock-based
compensation)
|
—
|
(17
|
)
|
—
|
6,692
|
|||||||||||
Acquisition
related professional fees
|
478
|
94
|
715
|
593
|
||||||||||||
Contra-revenue
(9)
|
605
|
—
|
801
|
—
|
||||||||||||
Realized
gain on securities
|
—
|
—
|
(582
|
)
|
(1,393
|
)
|
||||||||||
Acquisition
related earn-out compensation expense
|
—
|
1,000
|
—
|
1,000
|
||||||||||||
Adjusted
EBITDA (Non-GAAP)
|
$
|
12,855
|
$
|
10,760
|
$
|
27,597
|
$
|
26,261
|
16
The
following table sets forth the reconciliation of adjusted net income, a non-GAAP
financial measure, to net income (loss), our most directly comparable financial
measure in accordance with GAAP (in thousands):
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
GAAP
net income (loss)
|
$
|
1,182
|
$
|
(215
|
)
|
$
|
(1,386
|
)
|
$
|
(3,653
|
)
|
|||||
Adjustments:
|
||||||||||||||||
Amortization
of acquired identifiable intangibles
|
4,661
|
4,971
|
14,824
|
15,393
|
||||||||||||
Restructuring
costs (including amounts related to stock based
compensation)
|
—
|
(17
|
)
|
—
|
6,692
|
|||||||||||
Acquisition
related professional fees
|
478
|
94
|
715
|
593
|
||||||||||||
Contra-revenue
(9)
|
605
|
—
|
801
|
—
|
||||||||||||
Realized
gain on securities (non-taxable)
|
—
|
—
|
(582
|
)
|
(1,393
|
)
|
||||||||||
Acquisition
related earn-out compensation expense
|
—
|
1,000
|
—
|
1,000
|
||||||||||||
Amended
state tax returns impact (non-taxable)
|
101
|
—
|
101
|
(1,070
|
)
|
|||||||||||
Stock-based
compensation (excluding restructuring costs)
|
2,850
|
3,176
|
8,679
|
10,104
|
||||||||||||
Tax
impact of adjustments (10)
|
(3,246
|
)
|
(2,963
|
)
|
(9,449
|
)
|
(11,059
|
)
|
||||||||
Adjusted
net income (Non-GAAP)
|
$
|
6,631
|
$
|
6,046
|
$
|
13,703
|
$
|
16,607
|
(2)
|
We
consider a dealer to be active 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 DealerTrack
network.
|
||
(3)
|
We
consider a lender to be active in the DealerTrack network as of a date if
it is accepting credit application data electronically from U.S. dealers
in the DealerTrack network.
|
||
(4)
|
Each
lender to dealer relationship represents a pair between an active U.S.
lender and an active U.S. dealer.
|
||
(5)
|
Represents
the number of dealerships with one or more active subscriptions on the
DealerTrack or DealerTrack Canada networks at the end of a given
period.
|
||
(6)
|
Represents
revenue-generating transactions processed in the DealerTrack, DealerTrack
Digital Services and DealerTrack Canada networks at the end of a given
period.
|
||
(7)
|
Represents
the average revenue earned per transaction processed in the DealerTrack,
DealerTrack Digital Services and DealerTrack Canada networks during a
given period. Revenue used in the calculation adds back
contra-revenue.
|
||
(8)
|
Represents
net subscription revenue divided by average subscribing dealers for a
given period in the DealerTrack and DealerTrack Canada
networks.
|
||
(9)
|
For further
information please refer to Note 14 in the accompanying notes to
the consolidated financial statements included in this Quarterly Report on
Form 10-Q.
|
|
(10)
|
The
tax impact of adjustments for the three and nine months ended September
30, 2010 are based on a U.S. effective tax rate of 38.3% applied to
taxable adjustments other than amortization of acquired identifiable
intangibles and stock-based compensation expense, which are based on a
blended effective tax rate of 37.4% and 38.1%, respectively, for the three
months ended September 30, 2010, and 37.5% and 38.2%, respectively for the
nine months ended September 30, 2010. The tax impact of adjustments for
the three and nine months ended September 30, 2009 are based on a U.S.
effective tax rate of 32.9% applied to taxable adjustments other than
amortization of acquired identifiable intangibles and stock based
compensation expense, which are based on a blended effective tax rate of
33.1% and 32.9%,
respectively.
|
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.
We also 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 portfolio residual value analyses we
perform for them. 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.
17
Subscription Services
Revenue. Subscription services revenue consists of revenue earned from
our customers (typically on a monthly basis) for use of our subscription or
license-based products and services. Our subscription services enable dealer
customers to manage their dealership data and operations, compare various
financing and leasing options and programs, sell insurance and other aftermarket
products, analyze inventory and execute financing contracts
electronically.
Other Revenue. Other revenue
consists of revenue primarily earned through forms programming, data conversion
and training and start up fees from our DMS solution, shipping commissions
earned from our digital contract business, consulting and analytical revenue
earned from ALG, and training and start up fees earned from our inventory
management solution.
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 a portion of certain revenue is owed to those
third parties (revenue share), direct costs for data licenses and direct costs
(printing, binding and delivery) associated with our residual value guides. 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.
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, as well as enhance and maintain 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 our cost of revenue and each operating expense
category.
We
allocated the restructuring costs related to our January 5, 2009 realignment of
our workforce and business to the appropriate cost of revenue and operating
expense categories based on each of the terminated employees’ respective
functions.
Fair
Value Measurements
Fair
value is defined as the exit price, or the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Inputs used to measure fair value
are prioritized into a three-level fair value hierarchy. This hierarchy requires
entities to maximize the use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used to measure fair value are
as follows:
•
|
Level
1 – Quoted prices (unadjusted) in active markets that are accessible at
the measurement date for assets or liabilities. The fair value hierarchy
gives the highest priority to Level 1 inputs.
|
||
•
|
Level
2 – Observable prices that are based on inputs not quoted on active
markets, but corroborated by market data.
|
||
•
|
Level
3 – Unobservable inputs are used when little or no market data is
available. The fair value hierarchy gives the lowest priority to Level 3
inputs.
|
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 in the table
below.
Financial
assets measured at fair value on a recurring basis include the following as of
September 30, 2010 and December 31, 2009 (in thousands):
As of September 30, 2010
|
Quoted Prices in
Active Markets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
September 30,
2010
|
||||||||||||
Cash
equivalents (1)
|
$
|
137,806
|
$
|
—
|
$
|
—
|
$
|
137,806
|
||||||||
Short-term
investments (3) (4)
|
13
|
—
|
1,550
|
1,563
|
||||||||||||
Long-term
investments (4)
|
—
|
—
|
2,458
|
2,458
|
||||||||||||
Total
|
$
|
137,819
|
$
|
—
|
$
|
4,008
|
$
|
141,827
|
18
As of December 31, 2009
|
Quoted Prices in
Active Markets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
December 31,
2009
|
||||||||||||
Cash
equivalents (1) (2)
|
$
|
163,615
|
$
|
—
|
$
|
—
|
$
|
163,615
|
||||||||
Short-term
investments (3)
|
1,484
|
—
|
—
|
1,484
|
||||||||||||
Long-term
investments (4)
|
—
|
—
|
3,971
|
3,971
|
||||||||||||
Total
|
$
|
165,099
|
$
|
—
|
$
|
3,971
|
$
|
169,070
|
(1)
|
Cash
equivalents consist primarily of money market funds with original maturity
dates of three months or less, for which we determine fair value through
quoted market prices.
|
|
(2)
|
In
our Quarterly Report on Form 10-Q for the three months ended March 31,
2010, Level 1 cash equivalents of approximately $163.6 million as of
December 31, 2009 was revised from $127.6 million as previously disclosed
in the fair value measurement footnote in our Annual Report on Form 10-K
for the year ended December 31, 2009 filed with the SEC on February 24,
2010 to reflect the inclusion of a money market account held at December
31, 2009 that was incorrectly omitted from our original disclosure.
Amounts classified as cash and cash equivalents on our audited balance
sheet at December 31, 2009 were correctly stated.
|
|
(3)
|
As
of September 30, 2010 and December 31, 2009, Level 1 short-term
investments include investments in tax-advantaged preferred securities,
for which we determined fair value based on the quoted market prices of
the underlying securities. During the nine months ended September 30,
2010, we sold a portion of our Level 1 investments in tax-advantaged
preferred securities for approximately $1.4 million and recorded a gain in
the statement of operations of approximately $0.6
million.
|
|
(4)
|
Level 3
investments as of both September 30, 2010 and December 31, 2009 include a
$1.6 million, or 0.3% of total assets, auction rate security (ARS)
invested in a tax-exempt state government obligation that was valued at
par. Our intent is not to hold the ARS invested in tax-exempt state
government obligations to maturity, but rather to use the interest reset
feature to provide liquidity. However, should the marketplace auctions
continue to fail we may hold the security to maturity. As of December 31,
2009, we classified this as long-term due to the maturity date of the
security being September 2011, coupled with ongoing failed auctions in the
marketplace. As of September 30, 2010, this security was reclassified to
short-term due to the maturity date. In October 2010, approximately $1.1
million of this security was redeemed by the issuer at
par. Level
3 long-term investments also include a tax-advantaged preferred stock of a
financial institution with a fair value of $2.5 million and $2.4 million,
or 0.5% of total assets, as of September 30, 2010 and December 31, 2009,
respectively. It is uncertain whether we will be able to liquidate these
securities within the next twelve months; as such we have classified them
as long-term on our consolidated balance sheets. Due to the lack of
observable market quotes we utilized valuation models that rely
exclusively on Level 3 inputs including those that are based on expected
cash flow streams, including assessments of counterparty credit quality,
default risk underlying the security, discount rates and overall capital
market liquidity.
|
A
reconciliation of the beginning and ending balances for Level 3 investments as
of September 30, 2010 and December 31, 2009, is as follows (in
thousands):
Balance
as of January 1, 2009
|
$ | 1,550 | ||
Reclassification
from Level 2 investments to Level 3 investments (5)
|
1,360 | |||
Realized
gain on securities included in the statement of operations
(5)
|
716 | |||
Unrealized
gain on securities recorded in other comprehensive income
(5)
|
345 | |||
Balance
as of December 31, 2009
|
3,971 | |||
Unrealized
gain on securities recorded in other comprehensive income
(5)
|
37 | |||
Balance
as of September 30, 2010
|
$ | 4,008 |
(5)
|
Level
2 investments in certain tax-advantaged preferred stock trusts held as of
January 1, 2009 dissolved and the underlying preferred stock investments
were distributed during 2009. As a result of these dissolutions, we
measured the fair value of the Level 3 long-term tax-advantaged preferred
stock on the distribution date and determined that the value increased
from $1.4 million as of December 31, 2008 to $2.1 million on the
distribution date and as a result we recorded a realized gain in the
statement of operations of $0.7 million. Subsequent to the trust
dissolution, we re-measured the fair value on December 31, 2009 and
September 30, 2010 and determined that the value had increased and
recorded a gain in other comprehensive income of $0.4 million and
approximately $37,000, respectively. The total value of the tax-advantaged
preferred stock of a financial institution included in the $4.0 million of
Level 3 investments as of December 31, 2009 and September 30, 2010 is
approximately $2.4 million and $2.5 million,
respectively.
|
19
Critical
Accounting Policies and Estimates
Our
management’s discussion and analysis of our financial condition and results of
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, 2009, filed with the SEC on February 24, 2010.
The
following table sets forth, for the periods indicated, the consolidated
statements of operations:
Three Months September 30,
|
Nine Months September 30,
|
|||||||||||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||||||||||||
$ Amount
|
% of Net
Revenue
|
$ Amount
|
% of Net
Revenue
|
$ Amount
|
% of Net
Revenue
|
$ Amount
|
% of Net
Revenue
|
|||||||||||||||||||||||||
(In
thousands, except percentages)
|
(In
thousands, except percentages)
|
|||||||||||||||||||||||||||||||
Consolidated
Statements of Operations Data:
|
||||||||||||||||||||||||||||||||
Net
revenue
|
$
|
63,128
|
100.0
|
%
|
$
|
58,809
|
100.0
|
%
|
$
|
181,820
|
100.0
|
%
|
$
|
172,379
|
100.0
|
%
|
||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||||||||||
Cost
of revenue
|
31,684
|
50.2
|
28,665
|
48.7
|
93,666
|
51.5
|
86,638
|
50.3
|
||||||||||||||||||||||||
Product
development
|
3,354
|
5.3
|
3,391
|
5.8
|
10,291
|
5.7
|
11,037
|
6.4
|
||||||||||||||||||||||||
Selling,
general and administrative
|
25,679
|
40.7
|
25,471
|
43.4
|
80,347
|
44.2
|
83,069
|
48.1
|
||||||||||||||||||||||||
Total
operating expenses
|
60,717
|
96.2
|
57,527
|
97.9
|
184,304
|
101.4
|
180,744
|
104.8
|
||||||||||||||||||||||||
Income
(loss) from operations
|
2,411
|
3.8
|
1,282
|
2.1
|
(2,484
|
)
|
(1.4
|
)
|
(8,365
|
)
|
(4.8
|
)
|
||||||||||||||||||||
Interest
income
|
132
|
0.2
|
194
|
0.3
|
381
|
0.2
|
937
|
0.5
|
||||||||||||||||||||||||
Interest
expense
|
(36
|
)
|
—
|
(27
|
)
|
—
|
(155
|
)
|
—
|
(153
|
)
|
—
|
||||||||||||||||||||
Other
income
|
190
|
0.3
|
1
|
—
|
1,090
|
0.6
|
53
|
—
|
||||||||||||||||||||||||
Realized
gain on securities
|
—
|
—
|
—
|
—
|
582
|
0.3
|
1,393
|
0.8
|
||||||||||||||||||||||||
Income
(loss) before (provision for) benefit from income taxes
|
2,697
|
4.3
|
1,450
|
2.4
|
(586
|
)
|
(0.3
|
)
|
(6,135
|
)
|
(3.5
|
)
|
||||||||||||||||||||
(Provision
for) benefit from income taxes, net
|
(1,515
|
)
|
(2.4
|
)
|
(1,665
|
)
|
(2.8
|
)
|
(800
|
)
|
(0.5
|
)
|
2,482
|
1.4
|
||||||||||||||||||
Net
income (loss)
|
$
|
1,182
|
1.9
|
%
|
$
|
(215
|
)
|
(0.4
|
)%
|
$
|
(1,386
|
)
|
(0.8
|
)%
|
$
|
(3,653
|
)
|
(2.1
|
)%
|
20
Three
Months Ended September 30, 2010 and 2009
Revenue
Three Months Ended September 30,
|
Variance
|
|||||||||||||||
2010
|
2009
|
$ Amount
|
Percent
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Transaction
services revenue
|
$ | 27,188 | $ | 25,483 | $ | 1,705 | 7 | % | ||||||||
Subscription
services revenue
|
31,273 | 28,978 | 2,295 | 8 | % | |||||||||||
Other
|
4,667 | 4,348 | 319 | 7 | % | |||||||||||
Total
net revenue
|
$ | 63,128 | $ | 58,809 | $ | 4,319 | 7 | % |
Total net
revenue increased $4.3 million, or 7%, to $63.1 million for the three months
ended September 30, 2010 from $58.8 million for the three months ended September
30, 2009.
Transaction Services Revenue.
Transaction services revenue increased $1.7 million, or 7%, to $27.2 million for
the three months ended September 30, 2010 from $25.5 million for the three
months ended September 30, 2009. The increase in transaction revenue is due to
changes in our key business metrics for the three months ended September 30,
2010 as compared to the same period in 2009.
Three Months Ended September 30,
|
Variance
|
|||||||||||||||
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
Average
transaction price (excludes impact of contra-revenue)
|
$ | 2.09 | $ | 1.85 | $ | 0.24 | 13 | % | ||||||||
Active
lenders in our network as of end of period
|
921 | 790 | 131 | 17 | % | |||||||||||
Active
lender to dealer relationships (LDRs)
|
137,388 | 120,305 | 17,083 | 14 | % | |||||||||||
Transactions
processed
|
13,296 | 13,804 | (508 | ) | (4 | )% |
Our
average transaction price increased 13% which resulted in a $3.2 million
increase in revenue; this increase was partially offset by a $0.9 million
decrease due to a 4% decline in the volume of transactions processed through the
DealerTrack network, and $0.6 million in contra-revenue recorded during the
three months ended September 30, 2010. Contributing factors to the increase in
average transaction price and slight decrease in the number of transactions
processed were the significant decrease in revenue generating credit bureau
transactions which impacted the overall number of transactions, but did not
materially impact revenue due to their low price point; the decrease in
transactions processed through the DealerTrack network due to the cash for
clunkers program in the third quarter of 2009; a 17% increase in lender
customers active in our network who are generally lower transaction volume
customers with higher price per application tiers; and an 14% increase in our
number of LDRs. The increase in our number of LDRs was impacted, in part, by our
strategic relationship with Ally.
Subscription Services
Revenue. Subscription services revenue increased $2.3 million, or 8%, to
$31.3 million for the three months ended September 30, 2010 from $29.0 million
for the three months ended September 30, 2009. The increase in subscription
revenue is due to changes in our key business metrics for the three months ended
September 30, 2010 as compared to the same period in 2009.
Three Months Ended September 30,
|
Variance
|
|||||||||||||||
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
Average
monthly spend per subscribing dealer
|
$ | 759 | $ | 692 | $ | 67 | 10 | % | ||||||||
Subscribing
dealers in our network as of end of the period
|
13,856 | 13,959 | (103 | ) | (1 | )% |
The 10%
increase in average monthly spend per subscribing dealer contributed $2.8
million to subscription services revenue, offset by a decrease of $0.6 million
related to the decline in the number of subscribing dealers in our network. The
increase in average monthly spend per subscribing dealer is primarily
attributable to the continued success of selling DMS and inventory management
solutions, including our ability to cross sell those solutions to existing
customers and by the cancellation of a disproportionate number of lower priced
subscriptions as dealerships consolidate, go out of business or cut
costs.
Other Revenue. Other revenue
increased $0.3 million, or 7%, to $4.6 million for the three months ended
September 30, 2010 from $4.3 million for the three months ended September 30,
2009. The $0.3 million increase was primarily due to increased shipping revenue
from our eDocs business and increased installation and consulting revenue from
our DMS business.
21
Operating
Expenses
Three Months Ended September 30,
|
Variance
|
|||||||||||||||
2010
|
2009
|
$ Amount
|
Percent
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Cost
of revenue
|
$
|
31,684 |
$
|
28,665 | $ | 3,019 | 11 | % | ||||||||
Product
development
|
3,354 | 3,391 | (37 | ) | (1 | )% | ||||||||||
Selling,
general and administrative
|
25,679 | 25,471 | 208 | 1 | % | |||||||||||
Total
operating expenses
|
$
|
60,717 |
$
|
57,527 | $ | 3,190 | 6 | % |
Cost of Revenue. Cost of
revenue increased $3.0 million, or 11%, to $31.7 million for the three months
ended September 30, 2010 from $28.7 million for the three months ended September
30, 2009. The $3.0 million increase was primarily the result of an increase of
$1.1 million in technology expense, which includes hosting expenses, technology
support and other consulting expenses, an increase of $0.6 million in
amortization expense, an increase of $0.4 million from our eDocs solution
primarily due to increased temporary labor and shipping and an increase in
salary compensation and related benefit costs of $1.7 million primarily due to
headcount additions and an increase in payroll and other taxes. These changes
were partially offset by a decrease in stock-based and bonus compensation of
$1.0 million.
Product Development Expenses.
Product development expenses decreased $37,000, or 1%, to $3.4 million for the
three months ended September 30, 2010 from $3.4 million for the three months
ended September 30, 2009. The $37,000 decrease was primarily the result of
decreased bonus compensation offset by an increase in salary compensation and
related benefit costs due to headcount additions and an increase in payroll and
other taxes.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased $0.2
million, or 1%, to $25.7 million for the three months ended September 30, 2010
from $25.5 million for three months ended September 30, 2009. The $0.2 million
increase in selling, general and administrative expenses was primarily the
result of an increase of $1.5 million in salary compensation and related benefit
costs primarily due to headcount additions, severance, commissions and an
increase in payroll and other taxes, an increase of $0.4 million in travel
related expenses and an increase of $0.4 million in deal related costs. These
changes were partially offset by a decrease of $0.6 million of professional fees
related to litigation, a decrease in bonus compensation of $0.7 million and a
decrease of $1.0 million of additional consideration related to the acquisition
of AutoStyleMart, Inc. that was recorded during the three months ended September
30, 2009.
Provision
for Income Taxes, Net
Three Months Ended September 30,
|
Variance
|
|||||||||||||||
2010
|
2009
|
$ Amount
|
Percent
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Provision
for income taxes, net
|
$ | (1,515 | ) | $ | (1,665 | ) | $ | 150 | 9 | % |
The net
provision for income taxes for the three months ended September 30, 2010 of $1.5
million consisted primarily of $0.1 million of federal income tax expense, $0.7
million of state income tax expense and $0.7 million of tax expense for our
Canadian subsidiary. The net provision for income taxes for the three months
ended September 30, 2009 of $1.7 million consisted primarily of $0.1 million of
federal income tax benefit, offset by $0.4 million of state income tax expense
and $1.4 million of tax expense for our Canadian subsidiary. Included in tax
expense for our Canadian subsidiary for the three months ended September 30,
2010 and 2009 is $0.3 million and $0.2 million, respectively, for a permanent
item relating to intangible amortization. These amounts have a 9.7% and 16.6%
impact on the effective tax rate for the three months ended September 30, 2010
and 2009, respectively. Our effective tax rate for the three months ended
September 30, 2010 is 56.2% compared with 114.9% for the three months ended
September 30, 2009. The primary reason for the decrease in tax rate in 2010
compared to the 2009 rate is due to the change in earnings mix between the U.S.
and Canada.
As of
September 30, 2010 we have recorded a U.S. net deferred tax asset (DTA) of $23.1
million comprised mainly of stock compensation expense, amortization expense,
deferred revenue and net operating losses. DTA’s are recognized
subject to management’s judgment that realization is more likely than
not. As a result of the downturn in the economy and its impact on
automotive and credit markets, we are in a three-year cumulative pretax loss
position in the U.S. at September 30, 2010. A cumulative loss
position is considered significant negative evidence in assessing the
realizability of a DTA. We have concluded that there is sufficient
positive evidence to overcome this negative evidence and therefore believe the
realization of the DTA is more likely than not. The positive evidence
includes three means by which we are able to fully realize our
DTA. First, as the result of improvements in the economy and positive
trends in automotive and credit markets we had positive U.S. earnings in the
third quarter of 2010. Second, we have forecasted that we will continue to have
positive U.S earnings for the fourth quarter, and we are forecasting sufficient
U.S. taxable income in the carryforward period, exclusive of tax planning
strategies. Our carryforward period for tax losses expire in 2026 and our
deferred tax assets that have not converted to taxable losses have a recoverable
period of at least twenty years. Lastly, we have a history of utilizing
available net operating losses and other deferred tax assets. In the
event that the future income streams that we currently project do not
materialize, we may be required to record a valuation allowance. Any increase in
a valuation allowance would result in a non-cash charge that may adversely
impact our results of operations.
22
Nine
Months Ended September 30, 2010 and 2009
Revenue
Nine Months Ended September
30,
|
Variance
|
|||||||||||||||
2010
|
2009
|
$ Amount
|
Percent
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Transaction
services revenue
|
$ | 76,909 | $ | 74,169 | $ | 2,740 | 4 | % | ||||||||
Subscription
services revenue
|
91,342 | 85,949 | 5,393 | 6 | % | |||||||||||
Other
|
13,569 | 12,261 | 1,308 | 11 | % | |||||||||||
Total
net revenue
|
$ | 181,820 | $ | 172,379 | $ | 9,441 | 5 | % |
Total net
revenue increased $9.4 million, or 5%, to $181.8 million for the nine months
ended September 30, 2010 from $172.4 million for the nine months ended September
30, 2009.
Transaction Services Revenue.
Transaction services revenue increased $2.7 million, or 4%, to $76.9 million for
the nine months ended September 30, 2010 from $74.2 million for the nine months
ended September 30, 2009. The increase in transaction revenue is due to changes
in our key business metrics for the nine months ended September 30, 2010 as
compared to the same period in 2009.
Nine Months Ended September 30,
|
Variance
|
|||||||||||||||
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
Average
transaction price (excludes impact of contra-revenue)
|
$ | 2.08 | $ | 1.80 | $ | 0.28 | 16 | % | ||||||||
Active
lenders in our network as of end of period
|
921 | 790 | 131 | 17 | % | |||||||||||
Active
lender to dealer relationships (LDRs)
|
137,338 | 120,305 | 17,033 | 14 | % | |||||||||||
Transactions
processed
|
37,376 | 41,288 | (3,912 | ) | (9 | )% |
Our
average transaction price increased 16% which resulted in a $10.5 million
increase in revenue; this increase was partially offset by a $7.0 million
decrease due to a 9% decline in the volume of transactions processed through the
DealerTrack network, and $0.8 million in contra-revenue recorded during the nine
months ended September 30, 2010. Contributing factors to the increase in average
transaction price and decrease in the number of transactions processed were the
significant decrease in revenue generating credit bureau transactions which
impacted the number of transactions, but did not materially impact revenue due
to their low price point; the decrease in transactions processed through the
DealerTrack network due to the cash for clunkers program in the third quarter of
2009; a 17% increase in lender customers active in our network who are generally
lower transaction volume customers with higher price per application tiers; and
an 14% increase in our number of LDRs. The increase in our number of LDRs was
impacted, in part, by our strategic relationship with Ally.
Subscription Services
Revenue. Subscription services revenue increased $5.4 million, or 6%, to
$91.3 million for the nine months ended September 30, 2010 from $85.9 million
for the nine months ended September 30, 2009. The increase in subscription
revenue is due to changes in our key business metrics for the nine months ended
September 30, 2010 as compared to the same period in 2009.
Nine Months Ended September 30,
|
Variance
|
|||||||||||||||
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
Average
monthly spend per subscribing dealer
|
$ | 743 | $ | 670 | $ | 73 | 11 | % | ||||||||
Subscribing
dealers in our network as of end of the period
|
13,856 | 13,959 | (103 | ) | (1 | )% |
The 11%
increase in average monthly spend per subscribing dealer contributed $9.0
million to subscription services revenue, offset by a decrease of $3.6 million
related to the decline in the number of subscribing dealers in our network. The
increase in average monthly spend per subscribing dealer is primarily
attributable to the continued success of selling DMS and inventory management
solutions, including our ability to cross sell those solutions to existing
customers and by the cancellation of a disproportionate number of lower priced
subscriptions as dealerships consolidate, go out of business, or
cut-costs.
Other Revenue.
Other revenue increased $1.3 million, or 11%, to
$13.6 million for the nine months ended September 30, 2010 from
$12.3 million for the nine months ended September 30, 2009. The
$1.3 million increase was primarily due to an increase in consulting revenue and
hardware sales from our DMS business.
23
Operating
Expenses
Nine Months Ended September 30,
|
Variance
|
|||||||||||||||
2010
|
2009
|
$ Amount
|
Percent
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Cost
of revenue
|
$ | 93,666 | $ | 86,638 | $ | 7,028 | 8 | % | ||||||||
Product
development
|
10,291 | 11,037 | (746 | ) | (7 | )% | ||||||||||
Selling,
general and administrative
|
80,347 | 83,069 | (2,722 | ) | (3 | )% | ||||||||||
Total
operating expenses
|
$ | 184,304 | $ | 180,744 | $ | 3,560 | 2 | % |
Cost of Revenue. Cost of
revenue increased $7.0 million, or 8%, to $93.6 million for the nine months
ended September 30, 2010 from $86.6 million for the nine months ended September
30, 2009. The $7.0 million increase was primarily the result of a $2.5 million
increase in technology expense, which includes hosting expenses, technology
support and other consulting expenses, $1.4 million in third party costs related
to our compliance and inventory management solutions, $1.1 million in increased
hardware costs on equipment sales and maintenance costs associated with our DMS
solution, $0.9 million in costs from our eDocs solution primarily due to
increased temporary labor and shipping costs, an increase of $0.6 million in
amortization expense and an increase of $3.6 million in salary compensation and
related benefit costs primarily due to headcount additions and an increase in
payroll and other taxes. These changes were partially offset by a decrease of
$1.7 million in bonus compensation, a decrease of $0.4 million primarily due to
severance and related benefit costs paid in the first quarter of 2009 resulting
from the realignment of our workforce and business, a decrease of $0.5 million
in revenue share and a decrease of $0.6 million in stock-based compensation
expense.
Product Development Expenses.
Product development expenses decreased $0.7 million, or 7%, to $10.3 million for
the nine months ended September 30, 2010 from $11.0 million for the nine months
ended September 30, 2009. The $0.7 million decrease was primarily the result of
decreased bonus compensation and severance and related benefit costs paid in the
first quarter of 2009 resulting from the realignment of our workforce and
business.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses decreased $2.7
million, or 3%, to $80.3 million for the nine months ended September 30, 2010
from $83.1 million for nine months ended September 30, 2009. The $2.7 million
decrease in selling, general and administrative expenses was primarily the
result of a $6.1 million severance and stock-based compensation charge recorded
during the first quarter of 2009 resulting from the realignment of our workforce
and business. Additionally, there were decreases of $1.2 million in bad debt
expense, $1.0 million in bonus compensation expense, $0.6 million in selling
expenses due to continued cost containment efforts, $0.7 million in stock-based
compensation expense, $1.0 million of professional fees related to litigation
and a decrease due to $1.0 million of additional consideration related to the
acquisition of AutoStyleMart, Inc. that was recorded during the three months
ended September 30, 2009. These changes were partially offset by $6.1 million of
increased salary compensation and related benefit costs primarily due to general
and acquired headcount additions, severance, commission and an increase in
payroll and other taxes, $1.3 million in travel related expenses, $0.5 million
in office and computer related supplies and materials resulting from headcount
additions and increased replacement supplies and equipment needs, $0.3 million
in depreciation expense, $0.2 million in recruiting and relocation fees and an
increase of $0.2 million in temporary labor costs associated with our DMS
business.
Interest
Income
Nine Months Ended September 30,
|
Variance
|
|||||||||||||||
2010
|
2009
|
$ Amount
|
Percent
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Interest
income
|
$ | 381 | $ | 937 | $ | (556 | ) | 59 | % |
Interest
income decreased $0.6 million to $0.4 million for the nine months ended
September 30, 2010 from $0.9 million for the nine months ended September 30,
2009. The $0.6 million decrease is primarily related to the decline in our
weighted average interest rate to approximately 0.2% for the nine months ended
September 30, 2010 from approximately 0.6% for the nine months ended September
30, 2009.
24
Other
Income
Nine Months Ended September 30,
|
Variance
|
|||||||||||||||
2010
|
2009
|
$ Amount
|
Percent
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Other
income
|
$ | 1,090 | $ | 53 | $ | 1,037 | 1957 |
%
|
Other
income increased $1.0 million to $1.1 million for the nine months ended
September 30, 2010 from approximately $53,000 for the nine months ended
September 30, 2009. The $1.0 million increase is primarily due to $0.7 million
of income earned from our sales solution resulting from non-recurring activities
outside its ordinary operations and a settlement of $0.4 million received during
the first quarter of 2010 related to the cancellation of a services agreement
for our eDocs business.
Realized
Gain on Securities
Nine Months Ended September 30,
|
Variance
|
|||||||||||||||
2010
|
2009
|
$
Amount
|
Percent
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
Realized
gain on securities
|
$ | 582 | $ | 1,393 | $ | (811 | ) | (58 | )% |
During
the nine months ended September 30, 2010, we sold a portion of our investments
in tax-advantaged preferred securities for approximately $1.4 million and
recorded a gain in the statement of operations of approximately $0.6 million.
For the nine months ended September 30, 2009, the gain on securities of $1.4
million is primarily due to the sale of a portion of our investments in
tax-advantaged preferred securities for approximately $2.1 million which
resulted in a gain recorded in the statement of operations of approximately $0.9
million. For further
information please refer to Note 3 in the accompanying notes to the
consolidated financial statements included in this Quarterly Report on Form
10-Q.
(Provision for) benefit from income
taxes, net
Nine Months Ended September 30,
|
Variance
|
|||||||||||||||
2010
|
2009
|
$ Amount
|
Percent
|
|||||||||||||
(In
thousands, except percentages)
|
||||||||||||||||
(Provision
for) benefit from income taxes, net
|
$ | (800 | ) | $ | 2,482 | $ | (3,282 | ) | (132 | )% |
The net
provision for income taxes for the nine months ended September 30, 2010 of $0.8
million consisted primarily of $2.4 million of federal income tax benefit,
offset by $0.8 million of state income tax expense and $2.4 million of tax
expense for our Canadian subsidiary. The net benefit for income taxes for the
nine months ended September 30, 2009 of $2.5 million consisted primarily of $4.7
million of federal income tax benefit and $0.9 million of state income tax
benefit, offset by $3.1 million of tax expense for our Canadian subsidiary.
Included in our state income tax benefit for the nine months ended September 30,
2009 is $1.1 million, net of reserves of $0.3 million, for refunds receivable
due to the filing of amended tax returns for certain states. This has a 17.4%
impact on the effective tax rate for the nine months ended September 30, 2009.
Included in tax expense for our Canadian subsidiary for the nine months ended
September 30, 2010 and 2009 is $0.9 million and $0.6 million, respectively, for
a permanent item relating to intangible amortization. These amounts have a
155.0% and 9.2% impact on the effective tax rate for the nine months ended
September 30, 2010, and 2009, respectively. Our effective tax rate for the nine
months ended September 30, 2010 is 136.5% compared with 40.5% for the nine
months ended September 30, 2009. The primary reason for the increase in the tax
rate in 2010 compared to the 2009 rate is due to the change in earnings mix
between the U.S. and Canada.
In the
event that the future income streams that we currently project do not
materialize, we may be required to record a valuation allowance. Any increase in
a valuation allowance would result in a non-cash charge that may adversely
impact our results of operations.
Liquidity
and Capital Resources
Our
liquidity requirements will continue to be 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,
2010 were $26.1 million, of which $23.0 million was paid in cash. We expect to
finance our future liquidity needs through working capital and cash flows from
operations, however future acquisitions or other strategic initiatives may
require us to incur or seek additional financing.
As of
September 30, 2010, we had $177.8 million of cash and cash equivalents, $1.6 in
short-term investments, $2.5 million in non-current investments and $188.7
million in working capital, as compared to $197.5 million of cash and cash
equivalents, $1.5 million in short-term investments, $4.0 million in non-current
investments and $191.9 million in working capital as of December 31,
2009.
Reductions
in interest rates and changes in investments could materially impact our
interest income and may impact future reported operating results. An interest
rate fluctuation of 1% would have an effect of approximately $0.9 million, or
$0.02 per share, on future reported operating results.
25
Under the
terms of the merger agreement with AutoStyleMart, Inc., we have a future
contingent payment obligation of up to $11.0 million based upon the
achievement of certain operational targets from February 2008 through February
2011. As of December 31, 2009, we determined that certain operational conditions
were probable of being achieved and recorded a liability of $1.0 million. The
$1.0 million was deemed compensation for services, as payment was also
contingent on certain former stockholders remaining employees or consultants of
DealerTrack for a certain period. The $1.0 million of additional consideration
was paid in the first quarter of 2010. As of September 30, 2010, it has been
determined that achievement of the operational targets related to the remaining
$10.0 million in contingent payment obligations is not yet probable. Any amounts
deemed probable in the future will also be recorded as compensation expense. We
will assess the probability of the achievement of the operational targets on a
quarterly basis.
On
February 10, 2010, DealerTrack entered into a strategic relationship with Ally.
Under the terms of the agreement, Ally will be listed as a financing option on
the DealerTrack credit application processing network and DealerTrack agreed to
make a one-time payment to Ally of $15.0 million payable upon Ally becoming
available to substantially all dealers that it does business with who are on the
DealerTrack U.S. network. As of June 30, 2010, Ally substantially completed the
rollout of their dealerships on our U.S. network and in accordance with the
terms of the agreement we satisfied the one-time $15.0 million payment
obligation.
On March
31, 2010, we entered into an equipment and software purchase agreement with a
vendor. Under the terms of the agreement, we committed to purchasing certain
equipment and software totaling approximately $5.4 million in 2010 and an
additional $2.7 million in 2011, excluding applicable taxes. During the three
months ended June 30, 2010, we accepted title and risk of loss of the $5.4
million equipment and software purchase, of which we have paid for approximately
$4.0 million and the remaining balance, has been recorded to other accrued
liabilities in our consolidated financial statements and is expected to be paid
in the first quarter of 2011.
During
2010, we began a project to implement an ERP system. In connection with the ERP
project, in April 2010, we entered into an agreement with an ERP provider to
purchase certain software licenses and implementation consulting services. The
estimated external capital expenditures in 2010 related to the ERP project are
expected to be approximately $4.5 million, of which, we have incurred
approximately $3.4 million as of September 30, 2010.
The following table sets forth the cash flow components for the following
periods (in thousands):
|
Nine Months Ended September 30,
|
|||||||
2010
|
2009
|
|||||||
Net
cash provided by operating activities
|
$
|
2,875
|
$
|
32,125
|
||||
Net
cash used in investing activities
|
$
|
(24,646
|
)
|
$
|
(4,060
|
)
|
||
Net
cash provided by financing activities
|
$
|
1,978
|
$
|
3,546
|
Operating
Activities
Net cash
used in operating activities of $2.9 million for the nine months ended September
30, 2010 was primarily attributable to a net loss of $1.4 million, which
includes depreciation and amortization of $27.5 million, stock-based
compensation expense of $8.7 million and an increase to the provision for
doubtful accounts and sales credits of $4.0 million, partially offset by a
deferred tax benefit of $2.7 million, a decrease in accounts payable and accrued
expenses of $5.1 million, an increase in accounts receivable of $10.9 million
due to an increase in transaction and subscription revenues, a gain of $0.6
million realized on the sale of securities, a stock-based compensation windfall
tax benefit of $1.4 million and an increase in prepaid expenses and other assets
of $4.1 million and an increase in other assets of $11.4 million, both primarily
due to the $15.0 million payment to Ally during the three months ended June 30,
2010. Net cash provided by operating activities of $32.1 million for the nine
months ended September 30, 2009 was primarily attributable to a net loss of $3.7
million, which includes depreciation and amortization of $26.3 million,
stock-based compensation expense of $14.0 million, an increase to the provision
for doubtful accounts and sales credits of $6.5 million, an increase in accounts
payable and accrued expenses of $7.5 million, partially offset by a deferred tax
benefit of $4.8 million, a gain of $1.4 million realized on the sale or
conversion of securities, a stock-based compensation windfall tax benefit of
$2.0 million, an increase in prepaid expenses and other current assets of $1.2
million and an increase in accounts receivable of $8.7 million due to an
increase in subscription revenues and the acquisition of AAX.
Investing
Activities
Net cash
used in investing activities of $24.7 million for the nine months ended
September 30, 2010 was primarily attributable to the payment for the acquisition
of intangible assets of $3.0 million, capital expenditures of $9.7 million and
capitalized software and website development costs of $13.4 million, partially
offset by the net sale of short-term investments of $1.4 million. Net cash used
in investing activities of $4.1 million for the nine months ended September 30,
2009 was primarily attributable to the net sale of short-term investments of
$44.6 million offset by the payment for the acquisition of AAX business and
intangible assets of $30.9 million, the payment of the Curomax additional
purchase consideration of $1.8 million, the payment of the ALG additional
purchase consideration of $1.9 million, capital expenditures of $4.2 million and
capitalized software and website development costs of $10.0
million.
26
Financing
Activities
Net cash
provided by financing activities of $2.0 million for the nine months ended
September 30, 2010 was primarily attributable to net proceeds received from the
exercise of employee stock options of $1.0 million, employee stock purchases
under our employee stock purchase plan of $0.6 million and a stock-based
compensation windfall tax benefit of $1.4 million, partially offset by payment
for shares surrendered for taxes of $0.6 million related to restricted common
stock and restricted stock units vesting, and principal payments on capital
lease obligations of $0.4 million. Net cash provided by financing activities of
$3.5 million for the nine months ended September 30, 2009 was primarily
attributable to net proceeds received from employee stock purchases under our
employee stock purchase plan of $0.7 million, the exercise of employee stock
options of $2.2 million and stock-based compensation windfall tax benefit of
$2.0 million, partially offset by payment for shares surrendered for taxes of
$0.4 million related to restricted stock vesting, and principal payments on
notes payable of $0.6 million.
Contractual
Obligations
As of
September 30, 2010, 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, 2009 filed with the SEC on February 24, 2010, except as set forth
below.
On March
31, 2010, we entered into an equipment and software purchase agreement with a
vendor. Under the terms of the agreement, we committed to purchasing certain
equipment and software totaling approximately $5.4 million in 2010 and an
additional $2.7 million in 2011, excluding applicable taxes. Both commitments
are non-cancellable. During the three months ended June 30, 2010, we accepted
title and risk of loss of the $5.4 million equipment and software purchase, of
which we have paid for approximately $4.0 million and the remaining balance, has
been recorded to other accrued liabilities in our consolidated financial
statements. We have not accepted title or risk of loss of any of the $2.7
million 2011 equipment or software as of September 30, 2010.
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 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. The United States and global economies are currently undergoing a
period of economic uncertainty, and the financing environment, automobile
industry and stock markets are experiencing high levels of volatility. The
relative tightening of the credit markets has caused a significant decline in
the number of lending relationships between the various lenders and dealers
available through our network as dealers and lenders have exited the market, as
well as reduced the total number of vehicles financed. 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 have been the worst years for selling vehicles since 1982 and while
automobile sales has increased in 2010, overall they remain low as compared to
historical levels. As a result of reduced car sales and the general economic
environment, two major automobile manufacturers, Chrysler and General Motors
(GM) filed and then emerged from bankruptcy in 2009. This has had a significant
impact on their franchised dealers both in terms of dealer closing and the
financial viability of their remaining dealers. Toyota suffered significant
recalls that limited its ability to sell new vehicles for a period of time and
potentially decreased the value of Toyota used vehicles, whose long-term impact
on its dealer base remains to be seen. Together, these factors have meaningfully
impacted our transaction volume and subscription cancellations compared to
historical levels.
Due to
the economic downturn, there has been continued automotive dealer consolidation
and the number of franchised automotive dealers declined in both 2008 and 2009
with further declines expected in 2010. GM and Chrysler stated that they
notified approximately 1,124 and 789 dealers, respectively, that one or more of
their franchise licenses would be terminated. Recent federal legislation has led
GM and Chrysler to agree to reinstatement of some of these dealers. Ford Motor
Company announced in October 2010, plans to close 35%, or about 175 of their 500
Lincoln dealerships. As a result of these factors, we cannot predict the timing
and impact these dealership reductions will have on our subscription revenue.
The elimination by GM, Ford, and Chrysler dealers with subscription products has
led to an increase in cancellations and will most likely result in additional
cancellations of those subscriptions and corresponding loss of revenue. Further,
a reduction in the number of automotive dealers reduces the number of
opportunities we have to sell our subscription products. Additionally, dealers
who close their businesses may not pay the amounts owed to us, resulting in an
increase in our bad debt expense.
We expect
to continue to experience challenges due to the ongoing adverse outlook for the
credit markets and automobile sales. Volatility in our stock price, declines in
our market capitalization and material declines in revenue and profitability
could impair the carrying value of our goodwill, deferred tax assets and other
long-lived assets. As a result, we may be required to write off some of our
goodwill or long-lived assets or be required to record a valuation allowance on
our deferred tax assets if these conditions worsen for a period of
time.
27
Effects
of Inflation
Our
monetary assets, consisting primarily of cash and cash equivalents, 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.
Foreign
Currency Exposure
We only
have operations located in, and provide services to, customers in the United
States and Canada. Our earnings are affected by fluctuations in the value of the
U.S. dollar as compared with the Canadian dollar. Our exposure is mitigated, in
part, by the fact that we incur certain operating costs in the same foreign
currency in which revenue is denominated. The foreign currency exposure that
does exist is limited by the fact that the majority of transactions are paid
according to our standard payment terms, which are generally short-term in
nature.
Interest
Rate Exposure
As of
September 30, 2010, we had cash, cash equivalents, short-term investments and
long-term investments of $181.8 million invested in money market instruments,
tax-exempt state government obligations and tax advantaged preferred securities.
Such investments are subject to interest rate and credit risk. Our general
policy of investing in securities with original maturities of three months or
less minimizes our interest and credit risk.
Reductions
in interest rates and changes in investments could materially impact our
interest income and may impact future reported operating results. An interest
rate fluctuation of 1% would have an effect of approximately $0.9 million, or
$0.02 per share, on future reported operating results.
Disclosure
Controls and Procedures
We
carried out an evaluation under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act. In designing and evaluating our disclosure
controls and procedures, we and our management recognize that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. Based upon that evaluation, our
chief executive officer and chief financial officer have concluded that, as of
the end of the period covered by this Quarterly Report on Form 10-Q, our
disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is (i) recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms; and (ii) accumulated and communicated
to our management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting during the
quarter ended September 30, 2010, which were identified in connection with
management’s evaluation required by paragraph (d) of Rule 13a-15 and 15d-15
under the Exchange Act, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
From time
to time, we are a party to litigation matters arising in connection with the
normal course of our business, none of which is expected to have a material
adverse effect on us. In addition to the litigation matters arising in
connection with the normal course of our business, we are party to the
litigation described below.
DealerTrack, Inc. v. Finance
Express et al., CV-06-2335; DealerTrack Inc. v. RouteOne and Finance Express et
al., CV-06-6864; and DealerTrack Inc. v. RouteOne and Finance Express et al.,
CV-07-215
On April
18, 2006, we filed a Complaint and Demand for Jury Trial against David Huber,
Finance Express LLC (Finance Express), and three of their unnamed dealer
customers in the United States District Court for the Central District of
California, Civil Action No. CV-06-2335 AG (FMOx). The complaint sought
declaratory and injunctive relief, as well as damages, against the defendants
for infringement of the U.S. Patent No. 5,878,403 (the ’403 Patent) Patent and
the 6,587,841 (the ’841 Patent). Finance Express denied infringement and
challenged the validity and enforceability of the
patents-in-suit.
28
On
October 27, 2006, we filed a Complaint and Demand for Jury Trial against
RouteOne, David Huber and Finance Express in the United States District Court
for the Central District of California, Civil Action No. CV-06-6864 (SJF). The
complaint sought declaratory and injunctive relief as well as damages against
the defendants for infringement of the ’403 Patent and the ’841 Patent. On
November 28, 2006 and December 4, 2006, respectively, defendants RouteOne, David
Huber and Finance Express filed their answers. The defendants denied
infringement and challenged the validity and enforceability of the
patents-in-suit.
On
February 20, 2007, we filed a Complaint and Demand for Jury Trial against
RouteOne LLC (RouteOne), David Huber and Finance Express in the United States
District Court for the Central District of California, Civil Action No.
CV-07-215 (CWx). The complaint sought declaratory and injunctive relief as well
as damages against the defendants for infringement of U.S. Patent No. 7,181,427
(the ’427 Patent). On April 13, 2007 and April 17, 2007, respectively,
defendants RouteOne, David Huber and Finance Express filed their answers. The
defendants denied infringement and challenged the validity and enforceability of
the ’427 Patent.
The
DealerTrack, Inc. v. Finance Express et al., CV-06-2335 action, the DealerTrack
Inc. v. RouteOne and Finance Express et al., CV-06-6864 action and the
DealerTrack v. RouteOne and Finance Express et al., CV-07-215 action, described
above, were consolidated by the court. A hearing on claims construction,
referred to as a “Markman ” hearing, was held
on September 25, 2007. Fact and expert discovery and motions for summary
judgment have substantially been completed.
On July
21, 2008 and September 30, 2008, the court issued summary judgment orders
disposing of certain issues and preserving other issues for
trial.
On July
8, 2009, the court held Claims 1-4 of DealerTrack’s patent 7,181,427 were
invalid for failure to comply with a standard required by the recently decided
case in the Court of Appeals of the Federal Circuit of In re Bilski. On August
11, 2009, the court entered into a judgment granting summary judgment. On
September 8 , 2009, DealerTrack filed a notice of appeal in the United States
Court of Appeals for the Federal Circuit in regards to the finding of
non-infringement of patent 6,587,841, the invalidity of patent 7,181,427, and
the claim construction order to the extent that it was relied upon to find the
judgments of non-infringement and invalidity. In October 2010, the United States
Court of Appeals set a briefing schedule and DealerTrack filed its appellant’s
brief in the case on October 29, 2010.
Item 1A. Risk Factors
In
addition to the other information set forth in this Quarterly Report on Form
10-Q, you should carefully consider the factors discussed in the section
entitled “Risk Factors” in Part I, Item 1A. of our Annual
Report on Form 10-K for the year ended December 31, 2009, which was filed
with the SEC on February 24, 2010, that could materially affect our
business, financial condition or results of operations. There has been no
material changes in our risk factors from those disclosed in our Annual Report
on Form 10-K for the year ended December 31, 2009 filed with the SEC on
February 24, 2010.
Purchases
of Equity Securities by the Issuer
From time
to time, in connection with the vesting of restricted common stock under our
incentive award plans, we may receive shares of our common stock from certain
restricted common stockholders in consideration of the tax withholdings due upon
the vesting of restricted common stock.
The
following table sets forth the repurchases for the three months ended September
30, 2010:
Total
|
Maximum
|
|||||||||||||||
Number of
|
Number
|
|||||||||||||||
Shares
|
of Shares
|
|||||||||||||||
Purchased
|
That
|
|||||||||||||||
Total
|
Average
|
as Part of
|
May Yet be
|
|||||||||||||
Number
|
Price
|
Publicly
|
Purchased
|
|||||||||||||
of Shares
|
Paid per
|
Announced
|
Under the
|
|||||||||||||
Period
|
Purchased
|
Share
|
Program
|
Program
|
||||||||||||
July
2010
|
787
|
$
|
15.19
|
n/a
|
n/a
|
|||||||||||
August
2010
|
272
|
$
|
16.29
|
n/a
|
n/a
|
|||||||||||
September
2010
|
—
|
$
|
—
|
n/a
|
n/a
|
|||||||||||
Total
|
1,059
|
29
Exhibit
|
||
Number
|
Description
of Document
|
|
31.1
|
Certification
of Mark F. O’Neil, Chairman, President and Chief Executive Officer,
pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of Eric D. Jacobs, Senior Vice President, Chief Financial and
Administrative Officer, pursuant to Rule 13a-14(a)and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certifications
of Mark F. O’Neil, Chairman, President and Chief Executive Officer, and
Eric D. Jacobs, Senior Vice President, Chief Financial and Administrative
Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
DealerTrack
Holdings, Inc.
(Registrant)
|
||
Date:
November 3, 2010
|
/s/
Eric D. Jacobs
|
|
Eric
D. Jacobs
|
||
Senior
Vice President, Chief Financial and Administrative Officer
(Duly
Authorized Officer and Principal Financial Officer)
|
Exhibit
|
||
Number
|
Description
of Document
|
|
31.1
|
Certification
of Mark F. O’Neil, Chairman, President and Chief Executive Officer,
pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of Eric D. Jacobs, Senior Vice President, Chief Financial and
Administrative Officer, pursuant to Rule 13a-14(a)and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certifications
of Mark F. O’Neil, Chairman, President and Chief Executive Officer, and
Eric D. Jacobs, Senior Vice President, Chief Financial and Administrative
Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|