Item 1.
Financial Statements
DEALERTRACK TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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March 31,
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December 31,
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2014
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2013
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(In thousands, except share
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and per share amounts)
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ASSETS
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Current assets
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Cash and cash equivalents
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$
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144,267
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$
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122,373
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Marketable securities
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5,147
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10,589
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Customer funds and customer funds receivable
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35,601
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25,901
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Accounts receivable, net of allowances of $7,410 and $6,924, as of March 31, 2014 and December 31, 2013, respectively
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97,529
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48,349
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Deferred tax assets, net
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22,938
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6,331
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Prepaid expenses and other current assets
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29,878
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21,314
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Total current assets
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335,360
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234,857
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Property and equipment, net
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77,043
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31,866
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Investments – cost and equity
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36,652
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119,318
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Software and website development costs, net
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70,648
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62,513
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Intangible assets, net
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580,545
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136,754
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Goodwill
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1,051,559
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316,130
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Deferred tax assets, net
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56,862
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40,421
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Other assets – long-term
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20,743
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14,616
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Total assets
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$
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2,229,412
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$
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956,475
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities
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Accounts payable
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$
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36,782
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$
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15,013
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Accrued compensation and benefits
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20,114
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20,645
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Accrued liabilities – other
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43,330
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21,284
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Customer funds payable
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35,601
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25,901
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Senior convertible notes, net
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172,399
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—
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Deferred revenue
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14,758
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9,958
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Deferred tax liabilities
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4,277
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4,278
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Notes payable
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2,577
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2,000
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Total current liabilities
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329,838
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99,079
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Deferred tax liabilities
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221,128
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73,193
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Deferred revenue
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6,931
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6,482
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Notes payable
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10,736
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2,000
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Long term debt, net
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564,175
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170,317
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Other liabilities
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19,493
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4,180
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Total long-term liabilities
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822,463
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256,172
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Total liabilities
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1,152,301
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355,251
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Commitments and contingencies (Note 17)
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Stockholders’ equity
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Preferred stock, $0.01 par value: 10,000,000 shares authorized and no shares issued and outstanding
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—
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—
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Common stock, $0.01 par value: 175,000,000 shares authorized; 56,768,763 shares issued and 53,523,870 shares outstanding as of March 31, 2014; and 47,154,300 shares issued and 43,995,893 shares outstanding as of December 31, 2013
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568
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472
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Treasury stock, at cost, 3,244,893 shares and 3,158,407 shares as of March 31, 2014 and December 31, 2013, respectively
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(57,820
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)
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(53,408
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)
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Additional paid-in capital
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1,066,037
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571,550
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Accumulated other comprehensive income
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394
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3,036
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Retained earnings
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67,932
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79,574
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Total stockholders’ equity
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1,077,111
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601,224
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Total liabilities and stockholders’ equity
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$
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2,229,412
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$
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956,475
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The accompanying notes are an integral part
of these consolidated financial statements.
DEALERTRACK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended March 31,
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2014
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2013
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(In thousands, except per share amounts)
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Revenue:
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Net revenue
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$
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158,808
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$
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109,059
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Operating expenses:
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Cost of revenue
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89,907
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48,210
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Research and development
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24,048
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17,630
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Selling, general and administrative
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67,486
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42,468
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Total operating expenses
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181,441
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108,308
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Income (loss) from operations
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(22,633
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)
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751
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Interest income
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100
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124
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Interest expense
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(5,910
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)
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(3,364
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)
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Other income, net
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709
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66
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Gain on sale of investment
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9,828
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—
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Earnings from equity method investment, net
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1,625
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1,219
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Loss before benefit from income taxes, net
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(16,281
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)
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(1,204
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)
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Benefit from income taxes, net
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4,639
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1,170
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Net loss
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$
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(11,642
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)
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$
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(34
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)
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Basic net loss per share
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$
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(0.25
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)
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$
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(0.00
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)
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Diluted net loss per share
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$
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(0.25
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)
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$
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(0.00
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)
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Weighted average common stock outstanding (basic)
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47,351
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43,173
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Weighted average common stock outstanding (diluted)
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47,351
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43,173
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The accompanying notes are an integral part
of these consolidated financial statements.
DEALERTRACK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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Three Months Ended March 31,
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2014
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2013
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(In thousands)
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Net loss
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$
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(11,642
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)
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$
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(34
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)
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Other comprehensive loss, net of tax
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Foreign currency translation adjustments
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(2,640
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)
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(1,320
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)
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Net change in unrealized (losses) gains on securities
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(2
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)
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112
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Other comprehensive loss, net of tax
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(2,642
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)
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(1,208
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)
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Total comprehensive loss
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$
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(14,284
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)
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$
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(1,242
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)
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The accompanying notes are an integral part
of these consolidated financial statements.
DEALERTRACK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended March 31,
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2014
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2013
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(In thousands)
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Operating Activities:
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Net loss
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$
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(11,642
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)
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$
|
(34
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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31,291
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13,897
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Deferred tax benefit
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(34,603
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)
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(1,158
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)
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Stock-based compensation expense
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4,123
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3,271
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Provision for doubtful accounts and sales credits
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3,114
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1,682
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Earnings from equity method investment, net
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(1,625
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)
|
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|
(1,219
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)
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Deferred compensation
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|
50
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38
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Stock-based compensation windfall tax benefit
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(8,685
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)
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(3,587
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)
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Gain on sale of investment
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(9,828
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)
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—
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Realized gain on sale of securities
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—
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(11
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)
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Amortization of debt issuance costs and debt discount
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3,170
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2,302
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Change in contingent consideration
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(250
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)
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(500
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)
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Forfeited customer deposits
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(648
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)
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—
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Amortization of deferred interest
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|
53
|
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|
279
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|
Changes in operating assets and liabilities, net of effects of acquisitions:
|
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Accounts receivable
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(12,534
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)
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(6,339
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)
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Prepaid expenses and other current assets
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|
4,236
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|
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(2,186
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)
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Other assets – long-term
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(4,227
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)
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3,166
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Accounts payable and accrued expenses
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(68,213
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)
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|
(13,518
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)
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Deferred rent
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|
(6
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)
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|
51
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|
Deferred revenue
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1,714
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|
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(60
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)
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Other liabilities – long-term
|
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|
11,646
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|
(1,074
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)
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|
|
|
|
|
|
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Net cash used in operating activities
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|
(92,864
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)
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|
(5,000
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)
|
|
|
|
|
|
|
|
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Investing Activities:
|
|
|
|
|
|
|
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Capital expenditures
|
|
|
(5,108
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)
|
|
|
(2,027
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)
|
Capitalized software and website development costs
|
|
|
(10,645
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)
|
|
|
(5,296
|
)
|
Proceeds from sale of investment in TrueCar
|
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|
92,518
|
|
|
|
—
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Purchases of marketable securities
|
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|
(2,150
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)
|
|
|
(18,037
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)
|
Proceeds from sales and maturities of marketable securities
|
|
|
7,539
|
|
|
|
12,539
|
|
Payment for acquisition of businesses, net of acquired cash
|
|
|
(541,288
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)
|
|
|
—
|
|
|
|
|
|
|
|
|
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Net cash used in investing activities
|
|
|
(459,134
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)
|
|
|
(12,821
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Principal payments on capital lease obligations and financing arrangements
|
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|
(29
|
)
|
|
|
(38
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)
|
Proceeds from stock purchase plan and exercise of stock options
|
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|
10,729
|
|
|
|
3,109
|
|
Proceeds from issuance of term loan B credit facility
|
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|
575,000
|
|
|
|
—
|
|
Proceeds from note receivable
|
|
|
500
|
|
|
|
—
|
|
Payments for debt issuance costs
|
|
|
(15,501
|
)
|
|
|
—
|
|
Purchases of treasury stock
|
|
|
(4,412
|
)
|
|
|
(678
|
)
|
Stock-based compensation windfall tax benefit
|
|
|
8,685
|
|
|
|
3,587
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
574,972
|
|
|
|
5,980
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
22,974
|
|
|
|
(11,841
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,080
|
)
|
|
|
(393
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
122,373
|
|
|
|
143,811
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
144,267
|
|
|
$
|
131,577
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
2,210
|
|
|
$
|
702
|
|
Interest
|
|
|
3,424
|
|
|
|
1,646
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Accrued capitalized hardware, software and fixed assets
|
|
|
6,771
|
|
|
|
2,224
|
|
Assets acquired under capital leases and financing arrangements
|
|
|
35
|
|
|
|
34
|
|
Non-cash consideration issued for investment in Dealer.com
|
|
|
471,220
|
|
|
|
—
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
DEALERTRACK TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Business Description
Business Description
Dealertrack’s web-based software solutions
and services enhance efficiency and profitability for all major segments of the automotive retail industry, including dealers,
lenders, OEMs, third-party retailers, aftermarket providers, and other service providers. Dealertrack operates the largest online
credit application networks in the United States and Canada. We believe we deliver the industry’s most comprehensive solution
set for automotive retailers, including:
|
·
|
Digital Marketing solutions, which delivers websites, digital advertising products, and digital marketing offerings to assist
dealers in achieving higher lead conversion rates by helping to optimize the number of shoppers to their websites;
|
|
·
|
Dealer Management solutions, which provide independent and franchised dealers with a powerful dealer management system (DMS)
featuring easy-to-use tools and real-time data access to enhance their efficiency;
|
|
·
|
Sales and F&I solutions, which allow dealers to streamline the in-store and online sales processes as they structure deals
from a single integrated platform;
|
|
·
|
Inventory solutions, which deliver vehicle inventory management and transportation offerings to help dealers accelerate used-vehicle
turn rates and assist with the facilitation of vehicle delivery;
|
|
·
|
Registration & Titling solutions, which include online and cross-state vehicle registration services; and
|
|
·
|
Collateral Management solutions, which include electronic lien and titling applications and service, title and collateral administration,
as well as our digital contracting processing services.
|
References in this Form 10-Q to
“Dealertrack,” the “Company,” “our” or “we” are to Dealertrack Technologies, Inc.,
a Delaware corporation, and/or its subsidiaries.
On March 1, 2014, we completed our acquisition of Dealer Dot Com, Inc. (Dealer.com), a leading provider of comprehensive digital
marketing solutions and services for the automotive retail industry. Our Digital Marketing solutions consist of Dealer.com, as
well as our previous Interactive solutions. See Note 12 to our consolidated financial statements for further detail.
Basis of Presentation
The accompanying unaudited consolidated
financial statements for the three months ended March 31, 2014 and 2013 have been prepared in accordance with the instructions
to Form 10-Q and Article 10 of Regulation S-X and, therefore, they do not necessarily include all information and footnotes
required by accounting principles generally accepted in the United States (GAAP) for complete financial statements. The December
31, 2013 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 the statement of operations, financial position, other comprehensive income 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, 2013, filed with the Securities and Exchange Commission (SEC) on
February 21, 2014. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that
may be expected for the full year ending December 31, 2014.
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosures
of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those
estimates.
In previous periods, certain development,
engineering and quality assurance costs related to our research and development efforts were recorded within cost of revenue on
our consolidated statement of operations. In conjunction with the acquisition of Dealer.com, the categories of operating expenses
were reviewed and it was determined that presentation of these costs within their own caption, research and development, within
operating expenses was more useful to readers of our financial statements. Product development expenses, previously presented
on their own line within operating expenses, are now included as research and development expenses. In addition, certain technology
and development costs relating to our internal ERP and CRM applications, which were also previously recorded in cost of revenue,
are now being presented in selling, general and administrative expenses. The following table provides a reconciliation from the
prior presentation to the current presentation for the three months ended March 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2013
|
|
Operating Expenses:
|
|
Historic
|
|
|
Adjustment
|
|
|
Adjusted
|
|
Cost of revenue
|
|
$
|
63,188
|
|
|
$
|
(14,978
|
)
|
|
$
|
48,210
|
|
Product development
|
|
|
3,630
|
|
|
|
(3,630
|
)
|
|
|
—
|
|
Research and development
|
|
|
—
|
|
|
|
17,630
|
|
|
|
17,630
|
|
Selling, general and administrative
|
|
|
41,490
|
|
|
|
978
|
|
|
|
42,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
108,308
|
|
|
$
|
—
|
|
|
$
|
108,308
|
|
A reconciliation of operating expenses from
the prior presentation to the current presentation for the preceding two fiscal years is included in Note 19 to these financial
statements.
In addition, certain December 31, 2013 balances on our consolidated balance sheet have been updated to reflect purchase accounting
adjustments for the CFM and Vintek acquisitions.
2. Significant Accounting Policies
Our
significant accounting policies are those that we believe are both important to the portrayal of our financial condition and results
of operations. Management believes there have been no material changes to the significant accounting policies discussed in Note
2 of our Annual Report on Form 10-K for the year ended December 31, 2013, except as set forth below.
Revenue
Recognition
Subscription Services Revenue
Subscription services revenue consists
of revenue earned from primarily our dealers and other customers (typically on a monthly basis) for use of our subscription products
and services. Our subscription services enable dealer customers to manage their dealership data and operations, compare various
financing and leasing options and programs, manage the allocation of advertising spend, sell insurance and other aftermarket products,
analyze, merchandise, advertise, and transport their inventory and execute financing contracts electronically. Revenue is recognized
from such contracts ratably over the contract period. Set-up fees, if applicable, are recognized ratably over the expected dealer
customer relationship period, which is generally 36 to 60 months. For contracts that contain two or more subscription products
and services, we recognize revenue in accordance with the above policy using relative selling price when the delivered products
have stand-alone value.
Advertising and Other Revenue
Advertising revenue consists of amounts
we charge customers for the third-party cost of online display advertisements and paid search campaigns related to our advertising
products. We recognize revenue as clicks are recorded on sponsored links on the various search engines for paid search or as impressions
are delivered for display advertisements. As we are the primary obligor in a majority of our arrangements, subject to the credit
risk and with discretion over price, we recognize the gross amount of such advertising spend as advertising revenue and the cost
of such advertising from online search providers as cost of revenue. In instances in which we are not the primary obligor, our
customers advertising spend and amounts paid to the online search providers do not impact our consolidated results of operations.
In both instance, we record as subscription services revenue the amounts we charge to manage the allocation of advertising spend.
Other revenue consists of revenue primarily
earned through forms programming, data conversion, hardware and equipment sales from our Dealer Management solutions, and shipping
fees and commissions earned from our digital contract business. Training fees are also included in other revenue. Other revenue
is recognized when the service is rendered.
State and other Incentive Credits
We participate in certain programs, primarily
sponsored by state governments, whereby we receive cash incentives based on achieving certain employment and capital expenditure
milestones and by participating in qualifying training activities. Credits relating to capital spend are recorded as a reduction
in capital expenditures. Credits relating to employment are recorded as a reduction of operating expenses.
Net Income (Loss) Per Share
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 (loss) 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, (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, (iii) if applicable, potential
common
shares which may be issued to satisfy the conversion spread value of our senior convertible notes, and (iv) if applicable, potential
common shares which may be issued to satisfy the warrants issued in conjunction with our senior convertible notes.
The
number of shares included in the denominator of diluted earnings per share relating to our senior convertible notes is calculated
by dividing the conversion spread value by the average share price of our common stock during the period. The conversion spread
value is the value that would be delivered to investors based on the terms of the notes, at the assumed conversion date.
The
number of shares included in the denominator of diluted earnings per share relating to the warrants issued in conjunction with
our senior convertible notes is calculated using the treasury stock method, with the dilution calculated by dividing the warrant
premium by the average share price of our common stock during the period. The warrant premium
is the value that would be
delivered to investors based on the terms of the warrants, at the assumed conversion date.
Concentration of Credit Risk
Our assets that are
exposed to concentrations of credit risk consist primarily of cash, cash equivalents, short-term and long-term marketable securities
and receivables from clients. We place our cash, cash equivalents, short-term and long-term marketable securities with financial
institutions. We regularly evaluate the creditworthiness of the issuers in which we invest. Our trade receivables are spread over
many customers. We maintain an allowance for uncollectible accounts receivable based on expected collectability and perform ongoing
credit evaluations of customers’ financial condition.
Our revenue is generated
from customers in the automotive retail industry. As of March 31, 2014, one customer accounted for 14% of our accounts receivable.
As of December 31, 2013, no customer accounted for more than 10% of our accounts receivable. For the three months ended March 31,
2014 and March 31, 2013, no customer accounted for more than 10% of our revenue.
Related Party Transactions
One of our stockholders,
who owns more than 5% of our outstanding common shares, also has an ownership interest in a third party that Dealer.com sells services
to in the normal course of business. Revenue for the one month period from the date of acquisition to March 31, 2014 from this
third party was $1.5 million and the accounts receivable from this third party as of March 31, 2014 was $2.9 million.
3. Recently Adopted Accounting Pronouncements
In July 2013, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update 2013-11,
Presentation of an Unrecognized
Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
. The guidance is
effective for interim and annual periods beginning after December 15, 2013, with early adoption permitted. We adopted this standard
effective beginning with the quarter ended March 31, 2014. The adoption did not have a material impact on our consolidated financial
statements.
In April 2014, the
FASB issued Accounting Standards Update 2014-08,
Reporting Discontinued Operations and Disclosures of Disposals of Components
of an Entity
. The guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures
of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is
effective for annual periods beginning on or after December 15, 2014. Early adoption is permitted but only for disposals that have
not been reported in financial statements previously issued. We do not expect the adoption to have a material impact on our consolidated
financial statements.
4. Fair Value Measurements
Fair value is defined as 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 values are as follows:
|
•
|
|
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
|
|
|
|
•
|
|
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
|
|
|
|
•
|
|
Level 3 – Unobservable inputs for the asset or liability. 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. There were no transfers
between levels of the fair value hierarchy during the periods presented below.
The fair value of our investments in marketable
securities, reported by the fund managers, are verified by management through the utilization of third party pricing services and
review of trades completed around the period end date. We consider market liquidity in determining the fair value for these securities.
After completing our validation procedures, we did not adjust any fair value measurements provided by the fund managers. These
investments in marketable securities are included in Level 2 of the fair value hierarchy below.
Financial
assets and liabilities measured at fair value on a recurring basis include the following as of March 31, 2014 and December 31,
2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014
|
|
Quoted Prices in Active Markets
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
March 31, 2014
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (1)
|
|
$
|
6,257
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,257
|
|
Marketable securities (2)
|
|
|
—
|
|
|
|
5,147
|
|
|
|
—
|
|
|
|
5,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,257
|
|
|
$
|
5,147
|
|
|
$
|
—
|
|
|
$
|
11,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (3)
|
|
|
—
|
|
|
|
—
|
|
|
|
(250
|
)
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(250
|
)
|
|
$
|
(250
|
)
|
As of December 31, 2013
|
|
Quoted Prices in Active Markets
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
December 31, 2013
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (1)
|
|
$
|
13,692
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,692
|
|
Marketable securities (2)
|
|
|
—
|
|
|
|
10,589
|
|
|
|
—
|
|
|
|
10,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,692
|
|
|
$
|
10,589
|
|
|
$
|
—
|
|
|
$
|
24,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (3)
|
|
|
—
|
|
|
|
—
|
|
|
|
(500
|
)
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(500
|
)
|
|
$
|
(500
|
)
|
|
|
|
(1)
|
|
Cash equivalents consist of highly liquid investments with original maturity dates of three months or less, for which we determine fair value through quoted market prices. As of March 31, 2014 and December 31, 2013, a majority of these investments were at least AA rated or were money market funds of reputable financial institutions.
|
|
|
(2)
|
|
As of March 31, 2014, Level 2 marketable securities were all short-term and included certificates of deposit and corporate debt securities. As of December 31, 2013, Level 2 marketable securities were all short-term and included corporate bonds, certificates of deposit, and non-U.S. government securities. Fair market value was determined based on the quoted market prices of the underlying securities.
|
|
|
(3)
|
|
In connection with our October 1, 2012 acquisition of ClickMotive, a portion of the purchase price included contingent consideration that is payable in 2014 based upon the achievement of certain performance targets in 2013. The fair value of the contingent consideration is primarily determined based upon probability-weighted revenue forecasts for the underlying period. The contingent consideration is revalued each reporting period, until settled, with the resulting gains and losses recorded in the consolidated statements of operations. We estimated the fair value of the contingent consideration as of March 31, 2014 to be $0.3 million. We recorded income of $0.3 million for the three months ended March 31, 2014 as a result of the decrease in the estimated settlement of the contingent consideration from the estimated amount of $0.5 million as of December 31, 2013.
|
|
|
|
A reconciliation of the beginning and ending
balances of the contingent consideration, a Level 3 liability, is as follows (in thousands):
Balance as of December 31, 2013
|
|
$
|
(500
|
)
|
Change in fair value of contingent consideration
|
|
|
250
|
|
|
|
|
|
|
Balance as of March 31, 2014
|
|
$
|
(250
|
)
|
Senior convertible notes
Our senior convertible notes are shown in
the accompanying consolidated balance sheets at their original issuance value, net of unamortized discount, and are not marked
to market. The approximate aggregate fair value of our senior convertible notes as of March 31, 2014 and December 31, 2013 was
$284.0 million and $277.5 million, respectively. The fair value of the senior convertible notes was estimated on the basis of quoted
market prices of similar securities, which, due to limited trading activity, would be considered Level 2 in the fair value hierarchy.
5. Marketable Securities
Our investments in marketable securities
are made within the guidelines of our investment policy, which has established guidelines relative to the diversification of our
investments and their maturities, with the principle objectives of capital preservation, maintaining liquidity, and avoiding concentrations.
The
following is a summary of available-for-sale securities as of March 31, 2014 and December 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014
|
|
Aggregate
Cost Basis
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Aggregate
Fair Value
|
|
Certificates of deposit
|
|
|
3,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,000
|
|
Corporate debt securities
|
|
|
2,150
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
2,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,150
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
5,147
|
|
As of December 31, 2013
|
|
Aggregate
Cost Basis
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Aggregate
Fair Value
|
|
Non-U.S. government securities
|
|
$
|
2,059
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
2,058
|
|
Certificates of deposit
|
|
|
3,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,000
|
|
Corporate debt securities
|
|
|
5,530
|
|
|
|
1
|
|
|
|
—
|
|
|
|
5,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,589
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
10,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014, $5.1 million of
marketable securities had scheduled maturities of less than one year and all securities had at least an A rating.
Investments in money market and similar
short-term investments are recorded on our consolidated balance sheets as cash and cash equivalents.
Realized
gains and losses are included as a component of other income, net, in our consolidated statements of operations. For the three
months ended March 31, 2014 realized gains and realized losses on available-for-sale securities reclassified out of accumulated
other comprehensive income were not material.
For the three months ended March 31, 2013, amounts reclassified out of accumulated other comprehensive income were not material.
6. Property and Equipment
Property
and equipment are recorded at cost and consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
(Years)
|
|
|
2014
|
|
|
2013
|
|
Building and improvements
|
|
|
35
|
|
|
$
|
21,488
|
|
|
$
|
—
|
|
Land
|
|
|
—
|
|
|
|
1,100
|
|
|
|
—
|
|
Computer equipment
|
|
|
3 – 5
|
|
|
|
68,979
|
|
|
|
53,085
|
|
Office equipment
|
|
|
5
|
|
|
|
5,690
|
|
|
|
4,946
|
|
Furniture and fixtures
|
|
|
5
|
|
|
|
7,972
|
|
|
|
6,038
|
|
Leasehold improvements
|
|
|
3 – 9
|
|
|
|
16,042
|
|
|
|
8,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, gross
|
|
|
|
|
|
|
121,271
|
|
|
|
72,792
|
|
Less: Accumulated depreciation and amortization
|
|
|
|
|
|
|
(44,228
|
)
|
|
|
(40,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
|
|
|
$
|
77,043
|
|
|
$
|
31,866
|
|
Depreciation expense related to property
and equipment for the three months ended March 31, 2014 and March 31, 2013 was $3.7 million and $2.6 million, respectively.
The increase in total property and equipment,
net from December 31, 2013 to March 31, 2014 primarily relates to the property and equipment acquired as part of the Dealer.com
acquisition, which were recorded at its estimated fair value of $41.5 million. For further information, see Note 12.
7. Software and website development costs, net
Software and website development costs
are recorded at
cost and consist of the following (dollars in thousands):
|
|
Estimated Useful
Life
|
|
March 31,
|
|
|
December 31,
|
|
|
|
(Years)
|
|
2014
|
|
|
2013
|
|
Software and website development costs
|
|
2 - 7
|
|
$
|
128,991
|
|
|
$
|
114,445
|
|
Less: Accumulated depreciation and amortization
|
|
|
|
|
(58,343
|
)
|
|
|
(51,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Software and website development costs, net
|
|
|
|
$
|
70,648
|
|
|
$
|
62,513
|
|
Amortization expense related to software
and website development costs for the three months ended March 31, 2014 and March 31, 2013 were $6.9 million and $3.9 million,
respectively.
8. Investments
Investments as of March 31, 2014 and December
31, 2013 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Cost method investment
|
|
$
|
—
|
|
|
$
|
82,690
|
|
|
|
|
|
|
|
|
|
|
Equity method investment
|
|
|
36,652
|
|
|
|
36,628
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
36,652
|
|
|
$
|
119,318
|
|
Cost method investment
In consideration for the sale of ALG in
2011, we received an equity interest in TrueCar, as well as a warrant that we subsequently exercised, both of which were included
within our cost method investment at December 31, 2013.
In February 2014, we signed agreements to
sell all of our equity interest in TrueCar. We received proceeds of $92.5 million from the sale of the shares, which had a carrying
value of $82.7 million. This resulted in a gain of $6.8 million, net of taxes. The tax liability of $22.3 million, before utilization
of tax attributes, on the taxable gain of approximately $58.8 million is included within income taxes payable of $16.0 million
presented within accrued liabilities – other as of March 31, 2014.
Equity method investment
We record in our consolidated statement
of operations fifty percent (50%) of the net income of Chrome Data Solutions. Cash distributions, which are recorded as a reduction
of our investment upon receipt, are based on a calculation considering results of operations and cash on hand. Distributions are
expected to be received quarterly.
Our earnings from the equity method investment
are reduced by amortization expense relating to the basis difference between the book basis of the contributed assets and the fair
value of the investment recorded. This basis difference, based upon a valuation of the fair value of contributed assets, is
being recorded over the lives of the underlying assets which gave rise to the basis difference, which range from 3 to 10 years.
The unrecorded basis difference as of March 31, 2014 is $8.2 million. The amortization of the basis difference to be recorded for
the remainder of 2014 is $1.6 million.
The
change in our equity method investment for the three months ended March 31, 2014 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Beginning balance
|
|
$
|
36,628
|
|
|
$
|
40,118
|
|
Share of net income
|
|
|
2,171
|
|
|
|
1,925
|
|
Amortization of basis difference
|
|
|
(547
|
)
|
|
|
(706
|
)
|
Cash distributions received
|
|
|
(1,700
|
)
|
|
|
(1,100
|
)
|
Payable to partner
|
|
|
100
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
36,652
|
|
|
$
|
40,237
|
|
There were no returns of investment in the
three months ended March 31, 2014 and 2013.
We incur an annual data license fee payable
to Chrome Data Solutions of $0.5 million, which is recorded as cost of revenue. For the three months ended March 31, 2014 and March
31, 2013, we accrued approximately $0.1 million of expense in connection with the annual data license.
Exclusive of the annual data license fee,
during the three months ended March 31, 2014 we incurred expenses of approximately $0.1 million for services received, and earned
income of approximately $0.1 million for services performed, related to agreements with Chrome Data Solutions. The amounts were
generally recorded as selling, general and administrative expenses and other income, respectively.
The
unaudited summarized financial information of Chrome Data Solutions is presented below (in thousands):
|
|
|
|
|
|
|
Condensed Balance Sheet
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Current assets
|
|
$
|
13,437
|
|
|
$
|
12,875
|
|
Non-current assets
|
|
|
32,179
|
|
|
|
31,871
|
|
Total assets
|
|
$
|
45,616
|
|
|
$
|
44,746
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
7,610
|
|
|
$
|
6,257
|
|
Non-current liabilities
|
|
|
—
|
|
|
|
1,401
|
|
Total liabilities
|
|
$
|
7,610
|
|
|
$
|
7,658
|
|
Condensed Results of Operations
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Revenue
|
|
$
|
11,577
|
|
|
$
|
11,287
|
|
Gross profit
|
|
|
7,836
|
|
|
|
7,523
|
|
Net income
|
|
|
4,344
|
|
|
|
3,850
|
|
9. Intangible Assets
Intangible
assets are recorded at estimated fair value and are amortized over their estimated useful lives. The gross book value, accumulated
amortization and estimated useful lives of the intangible assets were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
Gross Book Value
|
|
|
Accumulated Amortization
|
|
|
Gross Book Value
|
|
|
Accumulated Amortization
|
|
|
Estimated
Useful Life
(Years)
|
Customer relationships
|
|
$
|
320,219
|
|
|
$
|
(42,220
|
)
|
|
$
|
115,293
|
|
|
$
|
(37,099
|
)
|
|
4 - 16
|
Technology
|
|
|
270,720
|
|
|
|
(48,191
|
)
|
|
|
78,720
|
|
|
|
(35,793
|
)
|
|
4 - 8
|
Trade names
|
|
|
77,460
|
|
|
|
(6,550
|
)
|
|
|
12,560
|
|
|
|
(4,087
|
)
|
|
3 - 10
|
Non-compete agreements
|
|
|
10,830
|
|
|
|
(6,046
|
)
|
|
|
8,200
|
|
|
|
(5,671
|
)
|
|
3 - 6
|
State DMV relationships
|
|
|
7,790
|
|
|
|
(3,467
|
)
|
|
|
7,790
|
|
|
|
(3,159
|
)
|
|
6 - 8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
687,019
|
|
|
$
|
(106,474
|
)
|
|
$
|
222,563
|
|
|
$
|
(85,809
|
)
|
|
|
The increase in intangible assets from December
31, 2013 to March 31, 2014 primarily relates to the intangibles acquired as part of the Dealer.com acquisition, which were recorded
at their estimated fair value of $464.6 million.
Amortization expense related to intangibles
for the three months ended March 31, 2014 and 2013 was $20.7 million and $7.3 million, respectively. Amortization expense for the
three months ended March 31, 2014 includes the acceleration of $8.2 million relating to changes in the expected asset use as we
integrate solutions.
The
gross intangible assets balances as of December 31, 2013 have been updated to reflect purchase accounting adjustments for CFM
and Vintek acquisitions in the aggregate amount of $1.2 million.
Amortization expense that will be incurred for the remaining period
of 2014 and for each of the subsequent four years and thereafter is estimated as follows (in thousands):
|
|
|
|
|
Remainder of 2014
|
|
$
|
62,310
|
|
2015
|
|
|
82,604
|
|
2016
|
|
|
73,954
|
|
2017
|
|
|
69,178
|
|
2018
|
|
|
62,092
|
|
Thereafter
|
|
|
230,407
|
|
|
|
|
|
|
Total
|
|
$
|
580,545
|
|
10. Goodwill
The
change in carrying amount of goodwill for the three months ended March 31, 2014 was as follows (in thousands):
|
|
|
|
|
Goodwill, gross, as of December 31, 2013
|
|
$
|
316,130
|
|
Accumulated impairment losses as of December 31, 2013
|
|
|
—
|
|
Goodwill, net, as of December 31, 2013
|
|
$
|
316,130
|
|
|
|
|
|
|
Impact of change in Canadian dollar exchange rate
|
|
|
(1,011
|
)
|
Acquisition of Dealer.com
|
|
|
736,440
|
|
Goodwill, gross, as of March 31, 2014
|
|
$
|
1,051,559
|
|
|
|
|
|
|
Accumulated impairment losses as of March 31, 2014
|
|
|
—
|
|
Goodwill, net, as of March 31, 2014
|
|
$
|
1,051,559
|
|
The gross goodwill balance as of December
31, 2013 has been updated to reflect purchase accounting adjustments for CFM and Vintek acquisitions in the aggregate amount of
$1.1 million.
11. Long Term Debt
Credit Agreement - 2014
On February 28, 2014, Dealertrack and Dealertrack
Canada, Inc., a corporation organized under the laws of Ontario and a subsidiary of Dealertrack entered into a credit agreement
(the 2014 Credit Agreement) which provides credit facilities aggregating $800 million, including a $575.0 million term loan B credit
facility and a $225.0 million revolving credit facility. The $575.0 million proceeds of the term loan B credit facility were used
to pay the cash consideration for the acquisition of Dealer.com, to effectuate the payment in full of amounts due under our prior
Credit Agreement dated as of April 20, 2011 (2011 Credit Agreement), to pay the fees and expenses related to the acquisition of
Dealer.com and the refinancing of the 2011 Credit Agreement, and for general corporate purposes. The proceeds of the revolving
credit facility, under which no amounts have been borrowed, may be used for general corporate purposes of Dealertrack and its subsidiaries
(including certain acquisitions, capital expenditures and investments). Up to $25.0 million of the revolving credit facility may
be used to obtain letters of credit, up to $25.0 million of the revolving credit facility may be used to obtain swing line loans,
and up to $35.0 million of the revolving credit facility may be used to obtain revolving loans and letters of credit in Canadian
Dollars. The 2011 Credit Agreement was terminated upon the signing date of the 2014 Credit Agreement.
The 2014 Credit Agreement provides that,
subject to certain conditions, we may request, at any time and from time to time, the establishment of one or more additional term
loan facilities and/or the Borrowers may request increases to the revolving credit facility in an aggregate principal amount not
to exceed the sum of (i) $200 million plus (ii) an additional amount if, after giving effect to such additional amount on a pro
forma basis, our consolidated first lien leverage ratio (the calculation of which is subject to certain adjustments for purposes
of this test) does not exceed 4.0 to 1.0.
All our obligations under the 2014 Credit
Agreement are unconditionally guaranteed by substantially all of our U.S. subsidiaries. The obligations of Dealertrack and the
guarantors under the 2014 Credit Agreement and the related guaranties are secured by a first priority security interest in substantially
all of the assets of Dealertrack and the guarantors, subject to certain customary exceptions. All obligations of Dealertrack Canada
under the 2014 Credit Agreement are unconditionally guaranteed by substantially all of our Canadian subsidiaries and by Dealertrack
and the guarantors. The obligations of Dealertrack Canada under the 2014 Credit Agreement are, and the obligations of any Canadian
guarantor under the related guaranties will be, secured by a first priority security interest in substantially all of the assets
of Dealertrack Canada, the Canadian guarantors, Dealertrack and the guarantors, subject to certain customary exceptions.
The 2014 Credit Agreement contains certain
mandatory prepayments, representations and warranties, affirmative covenants, negative covenants and conditions that are customarily
required for similar financings. The 2014 Credit Agreement includes, for the benefit of the revolving credit facility only, a financial
covenant based on a maximum consolidated first lien leverage ratio. The 2014 Credit Agreement also contains customary events of
default including, but not limited to, the failure to make payments of interest or principal under the 2014 Credit Agreement, the
failure to comply with certain covenants and agreements specified in the 2014 Credit Agreement for a period of time after notice
has been provided, the failure to pay principal on certain other indebtedness, the acceleration of such other indebtedness and
certain events of insolvency. If any event of default occurs, the principal, interest and any other monetary obligations on all
the then outstanding amounts under the 2014 Credit Agreement may become due and payable immediately.
Term Loan B Credit
Facility
The $575 million term loan B credit facility has a maturity date of February 28, 2021. Interest on loans made
under the term loan B credit facility accrues, at our option, at a rate per annum equal to (1) the ABR (as defined below) plus
a margin ranging from 1.50% to 1.75% depending upon our consolidated first lien leverage ratio or (2) LIBOR for an interest period
to be selected by us plus a margin ranging from 2.50% to 2.75% depending upon our consolidated first lien leverage ratio.
On March 31, 2014, the entire $575 million
of the term loan B credit facility remained outstanding. The interest rate per annum on the term loan B credit facility loans as
of March 31, 2014 was 3.5%.
In conjunction with the issuance of the
term loan B credit facility loans, approximately $11.0 million of debt issuance costs were recorded as a debt discount and $0.5
million of debt issuance costs were incurred and recorded on our consolidated balance sheet as deferred financing costs.
The
net carrying amount of the liability component of the term loan B credit facility as of March 31, 2014 consisted of the following
(in thousands):
|
|
|
|
|
|
March 31, 2014
|
|
Principal amount
|
|
$
|
575,000
|
|
Less: Unamortized discount
|
|
|
10,825
|
|
|
|
|
|
|
Net carrying value
|
|
$
|
564,175
|
|
Total
interest expense associated with the term loan B credit facility consisted of the following for the three months ended March 31,
2014 (in thousands):
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
March 31, 2014
|
|
Cash interest expense
|
|
$
|
1,733
|
|
Amortization of debt issuance costs and debt discount
|
|
|
130
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
1,863
|
|
Revolving Credit Facility - 2014
Our $225 million revolving credit facility
that we entered into on February 28, 2014 has a maturity date of February 28, 2019. Interest on loans made in U.S. Dollars under
this 2014 revolving credit facility accrues, at our option, at a rate per annum equal to (1) the ABR plus a margin ranging from
0.50% to 1.25% depending upon our consolidated first lien leverage ratio or (2) LIBOR for an interest period to be selected by
us plus a margin ranging from 1.50% to 2.25% depending upon our consolidated first lien leverage ratio. Interest on loans made
in Canadian Dollars under this revolving credit facility accrues, at our option, at a rate per annum equal to (1) the ABR plus
a margin ranging from 0.50% to 1.25% depending upon our consolidated first lien leverage ratio or (2) the CDOR Rate (as defined
below) for an interest period to be selected by us plus a margin ranging from 1.50% to 2.25% depending upon our consolidated first
lien leverage ratio.
The “ABR” is equal to (i) for
loans denominated in U.S. Dollars, a fluctuating rate equal to the highest of (a) the prime rate, (b) ½ of 1% above the
federal funds effective rate and (c) one-month LIBOR plus 1.0% and (ii) for loans denominated in Canadian Dollars, equal to the
higher of (a) the Canadian prime rate and (b) the one-month CDOR Rate plus 1.0%. The “CDOR Rate” for any interest period
is the rate equal to the sum of (a) the annual rate of interest determined with reference to the arithmetic average of certain
discount rate quotations, plus (b) 0.10% per annum.
Commitment fees on the unused portion of
the revolving credit facility accrue at a rate per annum ranging from 0.25% to 0.375% depending upon our consolidated first lien
leverage ratio.
In conjunction with the closing of the 2014
revolving credit facility, approximately $4.7 million of debt issuance costs were incurred and recorded on our consolidated balance
sheet as deferred financing costs.
As a result of the change in some of the
financial institutions that participated in our 2011 revolving credit facility compared to our 2014 revolving credit facility,
a portion of debt issuance costs in the amount of approximately $0.5 million relating to the 2011 revolving credit facility were
written-off to interest expense. The remaining debt issuance costs as of March 31, 2014 from the 2011 revolving credit facility
were $0.8 million. The total remaining 2011 and 2014 revolving credit facility debt issuance costs of $5.5 million will be amortized
to interest expense over the 5 year term of the 2014 credit facility.
Total debt issuance costs amortized to interest
expense for the three months ended March 31, 2013 were $0.1 million.
For the three months ended March 31, 2014,
interest expense related to the commitment fee for the 2011 revolving credit facility and 2014 revolving credit facility was $0.1
million.
For the three months ended March 31, 2013,
interest expense related to the commitment fee for the 2011 revolving credit facility was $0.1 million.
As of March 31, 2014, we had no amounts
outstanding under our 2014 revolving credit facility and were in compliance with all covenants and financial ratios under the 2014
Credit Agreement.
Senior Convertible Notes
On March 5,
2012, we issued $200.0 million in aggregate principal amount of 1.50% senior convertible notes in a private placement. In connection
with the offering of the notes, we entered into privately negotiated convertible note hedge transactions with the initial purchasers
of the notes or their respective affiliates. The notes are senior unsecured obligations, subordinated in right of payment to existing
and future secured senior indebtedness. We do not have the right to redeem the notes prior to maturity. The notes will mature on
March 15, 2017, unless earlier repurchased or converted. For further information, see Note 11 included in our Annual Report on
Form 10-K for the year ended December 31, 2013.
The closing sale price of our common stock
exceeded $48.58 (130% of the conversion price of $37.37) for at least 20 of the last 30 trading days of the quarter ended March
31, 2014. As a result, the senior convertible notes may be surrendered for conversion during the following calendar quarter, which
is the quarter ending June 30, 2014. Due to this potential conversion ability, the net carrying value of the senior convertible
notes is presented as a short-term liability on the consolidated balance sheet as of March 31, 2014. The closing sale price of
our common stock did not exceed $48.58 for at least 20 of the last 30 trading days of the quarter ended December 31, 2013. As a
result, the net carrying value of the senior convertible notes is presented as a long-term liability on the consolidated balance
sheet as of December 31, 2013.
The
net carrying amount of the liability component of the notes as of March 31, 2014 and December 31, 2013 consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Principal amount
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
Less: Unamortized discount
|
|
|
27,601
|
|
|
|
29,683
|
|
|
|
|
|
|
|
|
|
|
Net carrying value
|
|
$
|
172,399
|
|
|
$
|
170,317
|
|
Total
interest expense associated with the notes consisted of the following for the three months ended March 31, 2014 and 2013 (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Cash interest expense (1.50% coupon rate)
|
|
$
|
750
|
|
|
$
|
750
|
|
Amortization of debt issuance costs and debt discount
|
|
|
2,340
|
|
|
|
2,190
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
3,090
|
|
|
$
|
2,940
|
|
As of March 31, 2014, total capitalized
debt issuance costs remaining to be amortized to interest expense was $3.4 million.
As of March 31, 2014, the "if-converted
value" of the notes exceeded the principal amount by $63.3 million.
It is our intent to settle the par value
of the notes in cash and we expect to have the liquidity to do so based upon cash on hand, net cash flows from operations, and
proceeds of our revolving credit facility. As a result, there is no potential impact to diluted earnings per share except when
the average share price of our common stock for the respective periods exceeds the conversion price of $37.37, with additional
dilution if the average share price exceeds the warrant strike price of $46.18.
For the three months ended March 31, 2014,
the average share price of our common stock exceeded the conversion price of $37.37, which would have resulted in additional dilution
of 1.4 million shares to our diluted earnings per share calculation for the three months ended March 31, 2014. Due to the net loss
for the period, these shares have been excluded from diluted earnings per share as they would be antidilutive. For the three months
ended March 31, 2013, the average share price of our common stock did not exceed the conversion price of $37.37, therefore there
was no impact to diluted earnings per share for the three months ended March 31, 2013.
For
the three months ended March 31, 2014, the average share price of our common stock exceeded the warrant strike price of $46.18,
which would have resulted in additional dilution of 0.4 million shares to our diluted earnings per share calculation for the three
months ended March 31, 2014. Due to the net loss for the period, these shares have been excluded from diluted earnings per share
as they would be antidilutive. For the three months ended March 31, 2013, the average share price of our common stock did not
exceed the warrant strike price of $46.18, therefore there was no impact to diluted earnings per share for the three months ended
March 31, 2013.
Notes Payable
In conjunction with the acquisition of Dealer.com,
we acquired three promissory notes for which the aggregate amount is $9.3 million at March 31, 2014.
In April 2007, Dealer.com entered into two
promissory notes in connection with construction financing. The first note had an original principal balance of $4.25 million.
This note was amended in May 2011 and February 2014. The amended note is payable in monthly principal payments plus interest at
4.0% through May 2017. Thereafter, through maturity in October 2028, the note is payable in monthly installments, including interest
at the average U.S. Treasury security rate (10 year constant maturity) plus 1.4%. The U.S. Treasury security rate was 2.73% as
of March 31, 2014. The agreement provides for a prepayment penalty of 3.0% if the first note payable is refinanced prior to the
maturity date in October 2028.
The second note had an original principal
balance of $1.36 million and provides for monthly principal payments plus interest at 6.875% through October 2015. The second note
was subsequently amended in May 2011 to reduce the interest rate to a fixed rate of 3.5%. A prepayment fee of 3.0% will be required
if the Company refinances the second note prior to maturity in October 2015.
In connection with building improvements
in August 2010, Dealer.com obtained additional financing with a $6.4 million industrial development revenue bond from the State
of Vermont, acting through the Vermont Economic Development Authority. The note is payable in monthly installments, including interest
at approximately 3.8%, with a final lump-sum payment of $3.8 million due at maturity in September 2020. We have the right to prepay
the outstanding balance at any time subject to a prepayment penalty. The prepayment penalty is a variable amount that is equal
to the difference in the interest rate on the note as compared to a market rate index, as defined (which is 2.77% as of March 31,
2014), over the remaining period of the note. Under the terms of the agreement, we are required to comply with certain financial
and reporting covenants. As of March 31, 2014, we were in compliance with these covenants.
The fair value of the acquired notes payable
were assessed and it was determined that fair value approximated carrying value. As a result, no adjustment was recorded to carrying
value in purchase accounting.
12. Business Combinations
Dealer.com Acquisition
On March 1, 2014, we completed the acquisition
of the outstanding equity of Dealer.com for $617.9 million in cash and 8.715 million shares of our common stock for a total cost
of $1,089 million, subject to working capital and other adjustments.
Dealer.com is a leading provider of comprehensive
digital marketing solutions and services for the automotive retail industry. Dealer.com is included within our Digital Marketing
solutions.
We expensed approximately $6.9 million of
professional fees associated with the acquisition for the three months ended March 31, 2014.
The issuance of the approximately 8.7 million
shares was recorded to common stock and additional paid in capital at the closing price of our stock immediately prior to the close
of the transaction. The increase in additional paid in capital was approximately $471.1 million.
This
business combination was accounted for under the acquisition method of accounting, resulting in the total preliminary purchase
price being allocated to the assets acquired and liabilities assumed according to their fair values at the date of acquisition
as follows (in thousands):
|
|
|
|
Current assets
|
|
$
|
141,891
|
|
Property and equipment
|
|
|
41,494
|
|
Non-current assets
|
|
|
416
|
|
Intangible assets
|
|
|
464,630
|
|
Goodwill
|
|
|
736,440
|
|
|
|
|
|
|
Total assets acquired
|
|
|
1,384,871
|
|
|
|
|
|
|
Liabilities assumed - current
|
|
|
(117,567
|
)
|
Liabilities assumed - non-current
|
|
|
(178,230
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,089,074
|
|
Current assets includes $76.6 million of
cash and $40.0 million of accounts receivable. Assumed long term liabilities includes deferred tax liabilities of $173 million
that relates to the future amortization of certain acquired intangibles.
Goodwill represents the excess of the purchase
price over the fair values of the acquired net tangible and intangible assets. In accordance with the provisions of FASB ASC 350,
goodwill is not amortized but will be tested for impairment at least annually. The allocated value of goodwill primarily relates
to the acquired workforce, as well as the anticipated synergies resulting from combining Dealer.com with our current products and
processes. The acquired goodwill and intangible assets are not deductible for tax purposes.
The
amounts allocated to acquired intangible assets, and their associated weighted-average useful lives which were determined based
on the period which the assets are expected to contribute directly or indirectly to our future cash flows, consisted of the following:
|
|
|
|
|
Weighted-Average
|
|
|
|
Amount
|
|
|
Useful Life
|
|
|
|
(In thousands)
|
|
|
(Years)
|
|
Customer relationships
|
|
$
|
205,100
|
|
|
|
13.4
|
|
Technology
|
|
|
192,000
|
|
|
|
8.0
|
|
Trade names
|
|
|
64,900
|
|
|
|
8.0
|
|
Non-compete agreements
|
|
|
2,630
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
464,630
|
|
|
|
|
|
The results of Dealer.com were included
in our consolidated statement of operations from the date of acquisition, March 1, 2014. Dealer.com revenue, which is primarily
subscription-based and advertising-based, was $25.1 million from the date of acquisition through March 31, 2014. We are unable
to provide Dealer.com earnings since the date of acquisition as we do not have stand-alone earnings reporting for that business.
Unaudited Pro Forma Summary of Operations
The accompanying unaudited pro forma summary
represents our consolidated results of operations as if the 2013 acquisitions of Casey & Casey, CFM, and Vintek had been completed
as of January 1, 2012, and the 2014 acquisition of Dealer.com had been completed as of January 1, 2013. The unaudited pro forma
financial results for 2014 reflect the results for the three months ended March 31, 2014, as well as the effects of the pro forma
adjustments for the stated transactions in 2014. The unaudited pro forma financial results for 2013 reflect the results for the
three months ended March 31, 2013, as well as the effects of the pro forma adjustments for the stated transactions in both 2014
and 2013. Pro forma results of operations for the November 1, 2013 acquisition of the assets of Nexteppe have not been presented
because they are not material to the consolidated statements of operations.
The unaudited pro forma
financial information includes the accounting effects of the business combinations, including adjustments to the amortization
of intangible assets, professional fees associated with the transactions, interest related to our term loan B credit
facility, shares issued as part of acquisitions, and compensation expense related to amounts to be paid for continued
employment. The unaudited pro forma information does not necessarily reflect the actual results that would have been
achieved, nor is it necessarily indicative of our future consolidated results.
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands, except per share data)
|
|
Net revenue
|
|
$
|
207,639
|
|
|
$
|
170,932
|
|
Net income (loss)
|
|
|
(13,052
|
)
|
|
|
(5,853
|
)
|
Basic net income (loss) per share
|
|
|
(0.25
|
)
|
|
|
(0.11
|
)
|
Diluted net income (loss) per share
|
|
|
(0.25
|
)
|
|
|
(0.11
|
)
|
13. Accrued Liabilities – Other
A summary of the components of accrued
liabilities – other as of March 31, 2014 and December 31, 2013 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Income taxes payable
|
|
$
|
15,983
|
|
|
$
|
—
|
|
Professional fees
|
|
|
6,113
|
|
|
|
5,432
|
|
Customer deposits
|
|
|
3,038
|
|
|
|
2,368
|
|
Digital marketing - advertising and direct service costs
|
|
|
3,232
|
|
|
|
385
|
|
Sales taxes
|
|
|
2,720
|
|
|
|
2,111
|
|
Computer and office equipment, furniture and fixtures
|
|
|
1,165
|
|
|
|
1,495
|
|
Revenue share
|
|
|
1,589
|
|
|
|
1,510
|
|
State DMV transaction fees
|
|
|
752
|
|
|
|
695
|
|
Interest payable
|
|
|
284
|
|
|
|
981
|
|
Software licenses and maintenance contracts
|
|
|
856
|
|
|
|
281
|
|
Utilities and occupancy
|
|
|
595
|
|
|
|
589
|
|
Other
|
|
|
7,003
|
|
|
|
5,437
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities – other
|
|
$
|
43,330
|
|
|
$
|
21,284
|
|
14. Net Income (Loss) Per Share
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 (loss) 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, (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, (iii) if applicable, potential
common shares which may be issued
to satisfy the conversion spread value of our senior convertible notes,
and
(iv)
if applicable, potential common shares which may be issued to satisfy the warrants issued in conjunction with our senior convertible
notes.
The
number of shares included in the denominator of diluted earnings per share relating to our senior convertible notes is calculated
by dividing the conversion spread value by the average share price of our common stock during the period. The conversion spread
value is the value that would be delivered to investors based on the terms of the notes, at the assumed conversion date.
The
number of shares included in the denominator of diluted earnings per share relating to the warrants issued in conjunction with
our senior convertible notes is calculated using the treasury stock method, with the dilution calculated by dividing the warrant
premium by the average share price of our common stock during the period. The warrant premium
is the value that would be
delivered to investors based on the terms of the warrants, at the assumed conversion date.
The following table sets forth the computation
of basic and diluted net loss per share for the three months ended March 31, 2014 and 2013 (in thousands, except per share amounts):
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,642
|
)
|
|
$
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding (basic)
|
|
|
47,351
|
|
|
|
43,173
|
|
Common equivalent shares from options to purchase common stock and restricted common stock units
|
|
|
—
|
|
|
|
—
|
|
Potential common shares related to convertible senior notes
|
|
|
—
|
|
|
|
—
|
|
Potential common shares related to warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding (diluted)
|
|
|
47,351
|
|
|
|
43,173
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.25
|
)
|
|
$
|
(0.00
|
)
|
Diluted net loss per share
|
|
$
|
(0.25
|
)
|
|
$
|
(0.00
|
)
|
The following is a summary of the
weighted shares outstanding during the respective periods that have been excluded from the diluted net loss per share calculation
because the effect would have been antidilutive (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
3,379
|
|
|
|
3,829
|
|
Restricted stock units
|
|
|
948
|
|
|
|
910
|
|
Performance stock units
|
|
|
307
|
|
|
|
185
|
|
Senior convertible notes
|
|
|
1,366
|
|
|
|
—
|
|
Warrants related to senior convertible notes
|
|
|
426
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total antidilutive awards
|
|
|
6,426
|
|
|
|
4,924
|
|
In regards to our senior convertible notes,
it is our intent to settle the par value of the notes in cash, and we expect to have the liquidity to do so. As a result, there
is no potential impact to diluted earnings per share except when the average share price of our common stock for the respective
periods exceeds the conversion price of $37.37, with additional dilution if the average share price exceeds the warrant strike
price of $46.18.
During the three months ended March 31,
2014, the average share price of our common stock exceeded the conversion price of the notes, which would have resulted in additional
dilution of 1.4 million shares to our diluted earnings per share calculation for the three months ended March 31, 2014. Due to
the net loss for the period, these shares have been excluded from diluted earnings per share as they would be antidilutive. For
the three months ended March 31, 2013, the average share price of our common stock did not exceed the conversion price of $37.37,
therefore there was no impact to diluted earnings per share for the three months ended March 31, 2013.
For the three months ended March 31, 2014,
the average share price of our common stock exceeded the warrant strike price of $46.18, which would have resulted in additional
dilution of 0.4 million shares to our diluted earnings per share calculation for the three months ended March 31, 2014. Due to
the net loss for the period, these shares have been excluded from diluted earnings per share as they would be antidilutive. For
the three months ended March 31, 2013, the average share price of our common stock did not exceed the warrant strike price of $46.18,
therefore there was no impact to diluted earnings per share for the three months ended March 31, 2013.
15. Stock-Based Compensation Expense
Stock-based
compensation is measured at the grant date, based on the fair value of the award, and recognized as an expense over the requisite
service period, net of an estimated forfeiture rate. We currently have three types of stock-based compensation awards: stock options,
restricted stock units and performance stock units. For further information, see Notes 2 and 14 included in our Annual Report on
Form 10-K for the year ended December 31, 2013.
The following summarizes stock-based compensation
expense by expense category for the three months ended March 31, 2014 and 2013 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Cost of revenue
|
|
$
|
276
|
|
|
$
|
271
|
|
Research and development
|
|
|
752
|
|
|
|
589
|
|
Selling, general and administrative
|
|
|
3,095
|
|
|
|
2,411
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
4,123
|
|
|
$
|
3,271
|
|
As further described in Note 1, we have
reclassified approximately $0.6 million of stock-based compensation expense for the three months ended March 31, 2013, previously
recorded in cost of revenue and product development to research and development.
16. 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 Internal Revenue Service has concluded
a review of our consolidated federal income tax returns through December 31, 2007 and is currently reviewing our consolidated federal
income tax returns for 2009, 2010 and 2011. We have agreed to various adjustments which were included in the provision for income
taxes for the year ended December 31, 2013 and are awaiting a final report. New York has concluded its review of our 2006 (amended)
and 2007 state tax returns and is currently reviewing our 2008 and 2009 state returns. California has concluded its review of our
amended returns filed for 2004, 2005 and 2006. In addition, we are appealing Pennsylvania’s assessment to our 2007, 2008
and 2009 tax return filings. Certain of our subsidiaries also file income tax returns in Canada. The Canadian Revenue Agency has
completed its review of our 2009 and 2010 tax return filings with no significant adjustments. All of our other significant taxing
jurisdictions are closed for years prior to 2009.
The total liability recorded for uncertain
tax positions that would affect our effective tax rate upon resolution of the uncertain tax position, as of March 31, 2014 and
December 31, 2013, was $0.7 million and $0.5 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 statements of operations. As of March 31, 2014 and December 31, 2013, accrued interest
and penalties related to tax positions taken on our tax returns was approximately $0.4 million and $0.1 million, respectively.
The net benefit from income taxes for the
three months ended March 31, 2014 consisted of $7.2 million of federal income tax benefit, $1.9 million of state income tax expense
and $0.7 million of tax expense for our Canadian subsidiary.
The federal benefit was $6.6 million for
the period, prior to discrete items. Discrete items include $3.4 million of expense related to the gain on sale and reversal of
deferred tax liabilities related to the sale of our investment in TrueCar, $2.9 million of benefit related to the intangible asset
charges, $1.9 million benefit from the reversal of valuation allowances on foreign tax credits and capital loss carryforwards due
to their projected use, and $0.8 million of expense related to the non-deductibility of certain transaction costs.
The state provision was $1.2 million for
the period, prior to discrete items. Discrete items include $0.3 million of expense related to the gain on sale and reversal of
deferred tax liabilities related to our prior investment in TrueCar, $0.7 million expense from apportionment rate changes, and
$0.3 million of benefit related to the intangible impairments.
17. Commitments and Contingencies
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, financial position, results of operations or cash flows.
Retail Sales Tax
On
an ongoing basis, various tax jurisdictions in the United States and Canada conduct reviews or audits regarding the sales taxability
of our products. Historically, we have been able to respond to their inquiries without significant additional sales tax liability
imposed. However, in the event we are unsuccessful in responding to future inquiries, additional sales tax liabilities may be incurred.
If we are obligated to charge sales tax for certain products, we believe our contractual arrangements with our customers obligate
them to pay all sales taxes that are levied or imposed by any taxing authority.
We currently have $0.9 million of
pending assessments in one state. In June 2013, an administrative hearing was held on this matter and a decision upholding the
original assessment was issued in August 2013. This decision is not considered a final ruling. In September 2013, we filed a complaint
with the state tax court requesting that the decision be vacated.
As of March 31, 2014, we have not accrued
any amounts related to this assessment as we believe that our position on this matter is correct. We have estimated that potential
additional assessments of $0.7 million (including interest) may exist for periods subsequent to the assessment period based upon
a calculation consistent with the pending assessment. We are not able to estimate an amount for penalties due, if any.
Employment Agreements
Pursuant to employment or severance agreements
with certain employees, we have a commitment to pay severance of approximately $9.5 million as of March 31, 2014, 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. Additionally, in the event of termination
without cause due to a change in control, we would also have a commitment to pay additional severance of $2.8 million as of March
31, 2014.
Legal Proceedings
From
time to time, we are a party to litigation matters arising in connection with the ordinary course of business, none of which is
expected to have a material adverse effect on our financial position, results of operations or cash flows. There are no litigation
matters exclusive of those arising in connection with the ordinary course of our business.
18. Segment Information
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 in Canada for the three months
ended March 31, 2014 and 2013 was approximately 7% and 9%, respectively, of our total net revenue. Long-lived assets in Canada
were $37.7 million and $39.7 million as of March 31, 2014 and December 31, 2013, respectively.
Supplemental
disclosure of revenue by service type for the three months ended March 31, 2014 and 2013 is as follows (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Transaction services revenue
|
|
$
|
77,735
|
|
|
$
|
61,364
|
|
Subscription services revenue
|
|
|
61,969
|
|
|
|
42,778
|
|
Advertising and other revenue
|
|
|
19,104
|
|
|
|
4,917
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
158,808
|
|
|
$
|
109,059
|
|
19. Operating Expense Reclassifications
As further described in Note 1, we assessed
the presentation of costs within operating expenses and determined that research and development expenses should be separately
presented on our consolidated statements of operations. The reconciliation of operating expenses for historical periods are presented
in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2013
|
|
Operating Expenses:
|
|
Historic
|
|
|
Adjustment
|
|
|
Adjusted
|
|
Cost of revenue
|
|
$
|
63,188
|
|
|
$
|
(14,978
|
)
|
|
$
|
48,210
|
|
Product development
|
|
|
3,630
|
|
|
|
(3,630
|
)
|
|
|
—
|
|
Research and development
|
|
|
—
|
|
|
|
17,630
|
|
|
|
17,630
|
|
Selling, general and administrative
|
|
|
41,490
|
|
|
|
978
|
|
|
|
42,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
108,308
|
|
|
$
|
—
|
|
|
$
|
108,308
|
|
|
|
Three Months Ended June 30, 2013
|
|
|
Six Months Ended June 30, 2013
|
|
Operating Expenses:
|
|
Historic
|
|
|
Adjustment
|
|
|
Adjusted
|
|
|
Historic
|
|
|
Adjustment
|
|
|
Adjusted
|
|
Cost of revenue
|
|
$
|
67,587
|
|
|
$
|
(15,590
|
)
|
|
$
|
51,997
|
|
|
$
|
130,775
|
|
|
$
|
(30,568
|
)
|
|
$
|
100,207
|
|
Product development
|
|
|
4,064
|
|
|
|
(4,064
|
)
|
|
|
—
|
|
|
|
7,694
|
|
|
|
(7,694
|
)
|
|
|
—
|
|
Research and development
|
|
|
—
|
|
|
|
18,269
|
|
|
|
18,269
|
|
|
|
—
|
|
|
|
35,899
|
|
|
|
35,899
|
|
Selling, general and administrative
|
|
|
42,502
|
|
|
|
1,385
|
|
|
|
43,887
|
|
|
|
83,992
|
|
|
|
2,363
|
|
|
|
86,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
114,153
|
|
|
$
|
—
|
|
|
$
|
114,153
|
|
|
$
|
222,461
|
|
|
$
|
—
|
|
|
$
|
222,461
|
|
|
|
Three Months Ended September 30, 2013
|
|
|
Nine Months Ended September 30, 2013
|
|
Operating Expenses:
|
|
Historic
|
|
|
Adjustment
|
|
|
Adjusted
|
|
|
Historic
|
|
|
Adjustment
|
|
|
Adjusted
|
|
Cost of revenue
|
|
$
|
70,199
|
|
|
$
|
(16,341
|
)
|
|
$
|
53,858
|
|
|
$
|
200,974
|
|
|
$
|
(46,909
|
)
|
|
$
|
154,065
|
|
Product development
|
|
|
3,952
|
|
|
|
(3,952
|
)
|
|
|
—
|
|
|
|
11,646
|
|
|
|
(11,646
|
)
|
|
|
—
|
|
Research and development
|
|
|
—
|
|
|
|
18,447
|
|
|
|
18,447
|
|
|
|
—
|
|
|
|
54,346
|
|
|
|
54,346
|
|
Selling, general and administrative
|
|
|
43,519
|
|
|
|
1,846
|
|
|
|
45,365
|
|
|
|
127,511
|
|
|
|
4,209
|
|
|
|
131,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
117,670
|
|
|
$
|
—
|
|
|
$
|
117,670
|
|
|
$
|
340,131
|
|
|
$
|
—
|
|
|
$
|
340,131
|
|
|
|
Three Months Ended December 31, 2013
|
|
|
Year Ended December 31, 2013
|
|
Operating Expenses:
|
|
Historic
|
|
|
Adjustment
|
|
|
Adjusted
|
|
|
Historic
|
|
|
Adjustment
|
|
|
Adjusted
|
|
Cost of revenue
|
|
$
|
76,606
|
|
|
$
|
(20,745
|
)
|
|
$
|
55,861
|
|
|
$
|
277,580
|
|
|
$
|
(67,654
|
)
|
|
$
|
209,926
|
|
Product development
|
|
|
3,555
|
|
|
|
(3,555
|
)
|
|
|
—
|
|
|
|
15,201
|
|
|
|
(15,201
|
)
|
|
|
—
|
|
Research and development
|
|
|
—
|
|
|
|
21,912
|
|
|
|
21,912
|
|
|
|
—
|
|
|
|
76,258
|
|
|
|
76,258
|
|
Selling, general and administrative
|
|
|
50,188
|
|
|
|
2,388
|
|
|
|
52,576
|
|
|
|
177,699
|
|
|
|
6,597
|
|
|
|
184,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
130,349
|
|
|
$
|
—
|
|
|
$
|
130,349
|
|
|
$
|
470,480
|
|
|
$
|
—
|
|
|
$
|
470,480
|
|
|
|
Year Ended December 31, 2012
|
|
Operating Expenses:
|
|
Historic
|
|
|
Adjustment
|
|
|
Adjusted
|
|
Cost of revenue
|
|
$
|
220,695
|
|
|
$
|
(45,223
|
)
|
|
$
|
175,472
|
|
Product development
|
|
|
11,732
|
|
|
|
(11,732
|
)
|
|
|
—
|
|
Research and development
|
|
|
—
|
|
|
|
53,616
|
|
|
|
53,616
|
|
Selling, general and administrative
|
|
|
142,518
|
|
|
|
3,339
|
|
|
|
145,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
374,945
|
|
|
$
|
—
|
|
|
$
|
374,945
|
|
20. Subsequent Events
On April 9, 2014, we entered into a lease
for a new headquarters facility consisting of approximately 233,000 square feet of office space in North Hills, New York, approximately
one mile from the current location in Lake Success, New York. The lease provides for initial base rent of approximately $7.6 million
in the first year of the lease term, with increases of 2.5% annually thereafter, subject to increases of 3.0% if the Consumer Price
Index for the prior twelve months has been equal to or greater than 4.0%. In addition, we will be responsible for additional rent
to cover certain taxes and insurance charges. The lease, which has an initial term of seventeen years with an option to extend
the term of the lease for an additional ten years, is expected to commence in early 2016.
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, and Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). Any statements that do not relate to historical or current facts or matters are forward-looking statements.
These forward-looking statements can be identified by the use of words such as “anticipate,” “believe,”
“plan,” “estimate,” “expect,” “intend,” “should,” “may”
and other similar expressions, although not all forward-looking statements contain these identifying words. These statements involve
a number of risks, uncertainties and other factors that could cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors
that could materially affect such forward-looking statements include: economic trends that affect the automotive retail industry
or the indirect automotive financing industry including the number of new and used cars sold; credit availability; reductions in
automotive dealerships; increased competitive pressure from other industry participants, including Open Dealer Exchange, RouteOne,
CUDL, Finance Express and AppOne; the impact of some vendors of software products for automotive dealers making it more difficult
for Dealertrack’s customers to use Dealertrack’s solutions and services; security breaches, interruptions, failures
and/or other errors involving Dealertrack’s systems or networks; the failure or inability to execute any element of Dealertrack’s
business strategy, including selling additional products and services to existing and new customers; Dealertrack’s success
in implementing an ERP system; the volatility of Dealertrack’s stock price; new regulations or changes to existing regulations;
the integration of recent acquisitions and the expected benefits, as well as the integration and expected benefits of any future
acquisitions that Dealertrack may pursue; Dealertrack’s success in expanding its customer base and product and service offerings,
the impact of recent economic trends, and difficulties and increased costs associated with raising additional capital; the impairment
of intangible assets, such as trademarks and goodwill; the possibility that the expected benefits of our acquisition of Dealer.com
may not materialize as expected; failure to successfully integrate the business, infrastructure and employees of Dealer.com; and
other risks listed in Dealertrack’s reports filed with the SEC, including in the section entitled “Risk Factors”
in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 21, 2014.
Investors are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place
undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date hereof
and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances
except as required by law.
Overview
Dealertrack’s
web-based software solutions and services enhance efficiency and profitability for all major segments of the automotive retail
industry, including dealers, lenders, OEMs, third-party retailers, agents and aftermarket providers. Dealertrack operates the largest
online credit application networks in the United States and Canada. We believe we deliver the industry’s most comprehensive
solution set for automotive retailers, including:
|
·
|
Digital Marketing solutions, which delivers websites, digital advertising products, and digital marketing offerings to assist
dealers in achieving higher lead conversion rates by helping to optimize the number of shoppers to their websites;
|
|
·
|
Dealer Management solutions, which provide independent and franchised dealers with a powerful dealer management system (DMS)
featuring easy-to-use tools and real-time data access to enhance their efficiency;
|
|
·
|
Sales and F&I solutions, which allow dealers to streamline the in-store and online sales processes as they structure deals
from a single integrated platform;
|
|
·
|
Inventory solutions, which deliver vehicle inventory management and transportation offerings to help dealers accelerate used-vehicle
turn rates and assist with the facilitation of vehicle delivery;
|
|
·
|
Registration & Titling solutions, which include online and cross-state vehicle registration services; and
|
|
·
|
Collateral Management solutions, which include electronic lien and titling applications and service, title and collateral administration,
as well as our digital contracting processing services.
|
Executive Summary
Below are selected highlights of our operations for the three months ended March 31, 2014:
|
·
|
Revenue for the three months ended March 31, 2014 was $158.8 million, an increase of $49.7 million from the three months ended
March 31, 2013.
|
|
·
|
Net loss for the three months ended March 31, 2014 was $(11.6) million as compared to a net loss of $(34,000) for the three
months ended March 31, 2013. Net loss for the three months ended March 31, 2014 was adversely impacted by $7.5 million, net of
tax, of charges relating to changes in expected use of certain assets as we integrate solutions and was positively impacted by
$6.8 million, net of tax, from the gain on the sale of our investment in TrueCar.
|
|
·
|
On March 1, 2014, we completed our acquisition of Dealer.com, a leading provider of comprehensive digital marketing solutions
and services for the automotive retail industry. See Note 12 for further detail.
|
|
·
|
In February 2014, we signed agreements to sell all of our equity interest in TrueCar. We received proceeds of $92.5
million from
the sale of
the shares, which had a carrying value of $82.7 million. This resulted in a gain of $6.8 million, net of
taxes. The tax liability of $22.3 million, before utilization of tax attributes, on the taxable gain of approximately $58.8
million is included within income taxes payable of $16.0 million presented within accrued liabilities – other as of
March 31, 2014. We used a portion of the after-tax proceeds from the sale as part of the purchase consideration for the
acquisition of
Dealer.com.
|
|
·
|
On February 28, 2014 we entered into a credit agreement which provides credit facilities aggregating $800 million, including a $575 million term loan B credit facility and a $225 million revolving credit facility. The proceeds of the term loan B credit facility were used to pay the cash consideration for the acquisition of Dealer.com. The proceeds of the revolving credit facility, under which no amounts have been borrowed, may be used for general corporate purposes of Dealertrack and its subsidiaries (including certain acquisitions, capital expenditures and investments).
|
Non-GAAP Financial Measures and Other Business
Statistics
We monitor our business performance using
a number of measures that are not found in our consolidated financial statements. These measures include the number of active dealers
and lenders, active lender to dealership relationships in the Dealertrack network, the number of transactions processed, average
transaction price, transaction revenue per car sold, the number of subscribing dealers in the Dealertrack network, 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.
The following table consists of our non-GAAP
financial measures and certain other business statistics that management continually monitors (amounts in thousands are GAAP net
loss, adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA), adjusted net income, capital
expenditure data and transactions processed):
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
GAAP net loss
|
|
$
|
(11,642
|
)
|
|
$
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures and Other Business Statistics:
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (non-GAAP) (1)
|
|
$
|
30,514
|
|
|
$
|
24,229
|
|
Adjusted net income (non-GAAP) (1)
|
|
$
|
11,487
|
|
|
$
|
12,036
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, software and website development costs
|
|
$
|
22,559
|
|
|
$
|
9,581
|
|
Active dealers in our U.S. network as of end of the period (2)
|
|
|
20,719
|
|
|
|
20,041
|
|
Active lenders in our U.S. network as of end of the period (3)
|
|
|
1,443
|
|
|
|
1,291
|
|
Active lender to dealer relationships as of end of the period (4)
|
|
|
202,984
|
|
|
|
181,578
|
|
Transactions processed (5)
|
|
|
28,560
|
|
|
|
24,106
|
|
Average transaction price (6)
|
|
$
|
2.76
|
|
|
$
|
2.60
|
|
Transaction revenue per car sold (7)
|
|
$
|
11.20
|
|
|
$
|
8.99
|
|
Subscribing dealers in U.S. and Canada as of end of the period (8)
|
|
|
23,624
|
|
|
|
17,832
|
|
Average monthly subscription revenue per subscribing dealership (9)
|
|
$
|
956
|
|
|
$
|
737
|
|
Active dealerships on advertising platform as of end of the period (10)
|
|
|
7,053
|
|
|
|
*
|
|
Average advertising spend per dealer rooftop (11)
|
|
$
|
1,708
|
|
|
$
|
*
|
|
* Historical amounts not applicable
(1)
|
Adjusted EBITDA is a non-GAAP financial measure
that represents GAAP net income (loss) excluding interest, taxes, depreciation and amortization expenses, stock-based compensation,
contra-revenue and certain items, as applicable, such as: impairment charges, restructuring charges, impact of acquisition-related
activity (including contingent consideration changes, compensation expense, basis difference amortization, and professional service
fees), realized gains on sales of previously impaired securities, gains or losses on sales or disposals of subsidiaries and other
assets, rebranding expenses and certain other items that we do not believe are indicative of our ongoing operating results.
|
|
|
|
|
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 certain items, as applicable, such as: impairment charges, restructuring charges, impact of acquisition-related
activity (including contingent consideration changes, compensation expense, basis difference amortization, and professional service
fees), realized gains on sales of previously impaired securities, gains or losses on sales or disposals of subsidiaries and other
assets, adjustments to deferred tax asset valuation allowances, non-cash interest expense, rebranding expenses and certain other
items that we do not believe are indicative of our ongoing operating results. These adjustments to net income (loss), which are
shown before taxes, are adjusted for their tax impact at their applicable statutory rates.
Adjusted EBITDA and adjusted net income are presented
because management believes that they provide additional information with respect to the performance of our fundamental business
activities and are also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable
companies. We rely on adjusted EBITDA and adjusted net income as primary measures to review and assess the operating performance
of our company and management team in connection with our executive compensation plan incentive payments.
|
|
|
|
|
Adjusted EBITDA and adjusted net income have limitations as analytical tools and you should not consider them in isolation from, or as a substitute for, analysis of our results as reported under GAAP. Some of these limitations are:
|
|
|
|
|
|
|
•
|
|
Adjusted EBITDA and adjusted net income do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
|
|
|
|
•
|
|
Adjusted EBITDA and adjusted net income do not reflect changes in, or cash requirements for, our working capital needs;
|
|
|
|
•
|
|
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA and adjusted net income do not reflect any cash requirements for such replacements;
|
|
|
|
|
|
•
|
|
Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it from adjusted net income and adjusted EBITDA when evaluating our ongoing performance for a particular period;
|
|
|
|
|
|
•
|
|
Adjusted EBITDA and adjusted net income do not reflect the impact of certain charges or gains resulting from matters we consider not to be indicative of our ongoing operations; and
|
|
|
|
|
|
•
|
|
Other companies may calculate adjusted EBITDA and adjusted net income differently than we do, limiting its usefulness as a comparative measure.
|
|
Because of these limitations, adjusted
EBITDA and adjusted net income should not be considered as measures of discretionary cash available to us to invest in the growth
of our business. We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA and adjusted
net income only as supplements to our GAAP results. Adjusted EBITDA and adjusted net income are measures of our performance that
are not required by, or presented in accordance with, GAAP. Adjusted EBITDA and adjusted net income are not measurements of our
financial performance under GAAP and should not be considered as alternatives to net income (loss), operating income or any other
performance measures derived in accordance with GAAP or as alternatives to cash flow from operating activities as a measure of
our liquidity.
|
|
|
The following table sets forth
the reconciliation of adjusted EBITDA, a non-GAAP financial measure, from net loss, our most directly comparable financial measure,
in accordance with GAAP (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
GAAP net loss
|
|
$
|
(11,642
|
)
|
|
$
|
(34
|
)
|
Interest income
|
|
|
(100
|
)
|
|
|
(124
|
)
|
Interest expense – cash
|
|
|
2,740
|
|
|
|
1,062
|
|
Interest expense – non-cash (12)
|
|
|
3,170
|
|
|
|
2,302
|
|
Benefit from income taxes, net
|
|
|
(4,639
|
)
|
|
|
(1,170
|
)
|
Depreciation of property and equipment and amortization of capitalized software and website costs
|
|
|
10,595
|
|
|
|
6,581
|
|
Amortization of acquired identifiable intangibles
|
|
|
20,696
|
|
|
|
7,316
|
|
|
|
|
|
|
|
|
|
|
EBITDA (non-GAAP)
|
|
|
20,820
|
|
|
|
15,933
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
4,123
|
|
|
|
3,271
|
|
Contra-revenue(13)
|
|
|
1,157
|
|
|
|
1,354
|
|
Acquisition-related and other professional fees
|
|
|
6,974
|
|
|
|
483
|
|
Acquisition-related contingent consideration changes and compensation expense, net (14)
|
|
|
929
|
|
|
|
35
|
|
Integration and other related costs (15)
|
|
|
5,792
|
|
|
|
799
|
|
Gain on sale of investment
|
|
|
(9,828
|
)
|
|
|
—
|
|
Amortization of equity method investment basis difference (16)
|
|
|
547
|
|
|
|
706
|
|
Rebranding expense
|
|
|
—
|
|
|
|
1,648
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (non-GAAP)
|
|
$
|
30,514
|
|
|
$
|
24,229
|
|
The following table sets forth the reconciliation
of adjusted net income, a non-GAAP financial measure, from net loss, our most directly comparable financial measure in accordance
with GAAP (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
GAAP net loss
|
|
$
|
(11,642
|
)
|
|
$
|
(34
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
Interest expense – non-cash (not tax-impacted) (12)
|
|
|
3,170
|
|
|
|
2,302
|
|
Amortization of acquired identifiable intangibles
|
|
|
20,696
|
|
|
|
7,316
|
|
Stock-based compensation
|
|
|
4,123
|
|
|
|
3,271
|
|
Contra-revenue(13)
|
|
|
1,157
|
|
|
|
1,354
|
|
Gain on sale of investment
|
|
|
(9,828
|
)
|
|
|
—
|
|
Acquisition-related and other professional fees
|
|
|
6,974
|
|
|
|
483
|
|
Acquisition-related contingent consideration changes and compensation expense, net (14)
|
|
|
929
|
|
|
|
35
|
|
Integration and other related costs (15)
|
|
|
6,481
|
|
|
|
799
|
|
Rebranding expense
|
|
|
—
|
|
|
|
1,648
|
|
Amortization of equity method investment basis difference (16)
|
|
|
547
|
|
|
|
706
|
|
Amended state tax returns impact (non-taxable)
|
|
|
—
|
|
|
|
56
|
|
Tax impact of adjustments (17)
|
|
|
(11,120
|
)
|
|
|
(5,900
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted net income (non-GAAP)
|
|
$
|
11,487
|
|
|
$
|
12,036
|
|
(2)
|
|
We consider a dealer to be active in our U.S. network as of a date if the dealer completed at least one revenue-generating credit application processing transaction using the U.S. Dealertrack network during the most recently ended calendar month. The number of active U.S. dealers is based on the number of dealer accounts as communicated by lenders on the U.S. Dealertrack network.
|
|
|
|
|
(3)
|
|
We consider a lender to be active in our U.S. network as of a date if it is accepting credit application data electronically from U.S. dealers in the U.S. Dealertrack network.
|
|
|
|
(4)
|
|
Each lender to dealer relationship represents a pair between an active U.S. lender and an active U.S. dealer at the end of a given period.
|
|
|
|
|
(5)
|
|
Represents revenue-generating transactions processed in the U.S. Dealertrack, Dealertrack Aftermarket Services, Registration and Titling Solutions, Collateral Management Solutions and Dealertrack Canada networks at the end of a given period.
|
|
|
|
(6)
|
|
Represents the average revenue earned per transaction processed in the U.S. Dealertrack, Dealertrack Aftermarket Services, Registration and Titling Solutions, Collateral Management Solutions and Dealertrack Canada networks during a given period. Revenue used in the calculation adds back (excludes) transaction related contra-revenue.
|
|
|
|
(7)
|
|
Represents transaction services revenue divided by our estimate of total new and used car sales for the period in the U.S. and Canada. Revenue used in this calculation adds back (excludes) transaction related contra-revenue.
|
|
|
|
(8)
|
|
Represents the number of dealerships in the U.S. and Canada with one or more active subscriptions at the end of a given period. Subscriptions to Dealertrack CentralDispatch have been excluded as their customers include brokers and carriers in addition to dealers.
|
|
|
|
(9)
|
|
Represents subscription services revenue divided by average subscribing dealers for a given period in the U.S. and Canada. Revenue used in the calculation adds back (excludes) subscription related contra-revenue. In addition, subscribing dealers and subscription services revenue from Dealertrack CentralDispatch have been excluded from the calculation as a majority of these customers are not dealers.
|
|
|
|
(10)
|
|
We consider a dealership to be active on our advertising platforms as of a date if it incurred advertising spend in that month.
|
|
|
|
(11)
|
|
Represents advertising services revenue divided by average active dealerships on our advertising platforms for a given period.
|
|
|
|
(12)
|
|
Represents interest expense relating to the amortization of deferred financing costs and debt discount in connection with the senior convertible notes, term loan B credit facility, and revolving credit facility.
|
|
|
|
(13)
|
|
For further information, please refer to Note 17 in the accompanying notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q and Note 17 and Note 18 in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
|
|
|
|
(14)
|
|
Represents the change in the acquisition-related contingent consideration from the ClickMotive acquisitions and other additional acquisition-related compensation charges.
|
|
|
|
(15)
|
|
The adjustment for adjusted net income exceeds the adjustment for Adjusted EBITDA by $0.6 million of accelerated amortization charges relating to internally developed software for changes in expected asset use as we integrate solutions, which is included in the depreciation adjustment within the Adjusted EBITDA reconciliation.
|
|
|
|
(16)
|
|
Represents amortization of the basis difference between the book basis of the Chrome assets contributed to the Chrome Data Solutions joint venture and the fair value of the investment in Chrome Data Solutions.
|
|
|
|
(17)
|
|
The tax impact of adjustments for the three months
ended March 31, 2014 are based on a U.S. statutory tax rate of 38.7% applied to taxable adjustments other than amortization of
acquired identifiable intangibles, stock-based compensation expense and gain on sale of investment, which are based on a blended
tax rate of 38.6%, 38.3% and 31.0%, respectively. Additionally, the tax impact of adjustments includes $1.6 million of incremental
deferred taxes related to the acquisition of Dealer.com. The tax impact of adjustments for the three months ended March 31, 2013
are based on a U.S. statutory tax rate of 38.2% applied to taxable adjustments other than amortization of acquired identifiable
intangibles and stock-based compensation expense, which are based on a blended tax rate of 38.1% and 37.7%, respectively.
|
Revenue
Transaction Services Revenue.
Transaction services revenue consists of revenue earned from our lender customers for each
credit application or contract that dealers submit to them. In addition, we earn transaction services revenue from lender customers
for each financing contract executed via our electronic contracting and digital contract processing solutions, as well as from
lender customers for collateral management transactions.
We also earn transaction services revenue
from dealers or other service and information providers, such as aftermarket providers and credit report providers, for each fee-bearing
product accessed by dealers. This includes transaction services revenue for completion of on-line registrations with department
of motor vehicles, completion of inventory appraisals, and accessing of credit reports.
Subscription
Services Revenue.
Subscription services revenue consists of revenue earned from primarily our dealers and other customers (typically
on a monthly basis) for use of our subscription products and services. Our subscription services enable dealer customers to manage
their dealership data and operations, compare various financing and leasing options and programs, manage the allocation of advertising
spend, sell insurance and other aftermarket products, analyze, merchandise, advertise, and transport their inventory and execute
financing contracts electronically.
Advertising and Other Services Revenue.
Advertising revenue consists of amounts we charge customers for the third-party
cost of online display advertisements and paid search campaigns related to our advertising products. We recognize the gross amount
of such advertising spend as advertising revenue. Amounts we charge to manage the allocation of advertising spend are included
in subscription services revenue.
Other revenue consists of revenue primarily earned through forms programming, data conversion, hardware and equipment sales from
our Dealer Management solutions, and shipping fees and commissions earned from our digital contract business. Training fees are
also included in other revenue.
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), expenses incurred in implementing and maintaining website service operations, third-party
advertising costs associated with certain of our search and media product offerings, data and image licensing fees, and the cost
of third party tools and services integrated into our various product platforms. Compensation and related benefits, technology
consulting fees and other operating expenses for certain network and technology departments, DMS installation teams, customer relationship
and digital marketing implementation teams, strategic inventory consulting and digital marketing professional service and dealer
support teams and the production teams of our digital contract, registration and titling and collateral management solutions are
also included. In addition, cost of revenue includes amortization expense on acquired intangible assets and capitalized software
and website development costs, amounts paid to third parties pursuant to contracts under which (i) a portion of certain revenue
is owed to those third parties (revenue share) or (ii) fees are due on the number of transactions processed, hardware and travel
costs associated with our DMS product offering and installation personnel, and temporary labor expenses associated with personnel
who process transactions for our digital contract, collateral management, and registration and titling solutions.
Research
and
Development Expenses.
Research and development expenses consist primarily of compensation and related benefits,
technology consulting fees and other operating expenses associated with our software engineering, project management, quality assurance
and product development departments. These departments perform research and development of new product offerings, in addition to
enhancing and maintaining existing products.
Selling, General
and Administrative Expenses.
Selling, general and administrative expenses consist primarily of compensation and related benefits,
consulting fees and other operating expenses associated with departments performing sales, marketing, customer service and administrative
functions. Also included are facility costs, professional fees, amortization related to internal applications, public company costs
and any other cost not deemed to be related to cost of revenue or research and development.
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 are
reflected in each operating expense category.
In previous periods, certain development,
engineering and quality assurance costs related to our research and development efforts were recorded within cost of revenue on
our consolidated statement of operations. In conjunction with the acquisition of Dealer.com, the categories of operating expenses
were reviewed and it was determined that presentation of these costs within their own caption, research and development, within
operating expenses was more useful to readers of our financial statements. Product development expenses, previously presented
on their own line within operating expenses, are now included as research and development expenses. In addition, certain technology
and development costs relating to our internal ERP and CRM applications, which were also previously recorded in cost of revenue,
are now being presented in selling, general and administrative expenses. The following table provides a reconciliation from the
prior presentation to the current presentation for the three months ended March 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2013
|
|
Operating Expenses:
|
|
Historic
|
|
|
Adjustment
|
|
|
Adjusted
|
|
Cost of revenue
|
|
$
|
63,188
|
|
|
$
|
(14,978
|
)
|
|
$
|
48,210
|
|
Product development
|
|
|
3,630
|
|
|
|
(3,630
|
)
|
|
|
—
|
|
Research and development
|
|
|
—
|
|
|
|
17,630
|
|
|
|
17,630
|
|
Selling, general and administrative
|
|
|
41,490
|
|
|
|
978
|
|
|
|
42,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
108,308
|
|
|
$
|
—
|
|
|
$
|
108,308
|
|
A reconciliation of operating expenses from
the prior presentation to the current presentation for the preceding two fiscal years is included in Note 19 to these financial
statements.
Acquisitions
On March 1, 2014, we completed the acquisition
of the outstanding equity of Dealer.com for $617.9 million in cash and 8.715 million shares of our common stock for a total cost
of $1,089 million, subject to working capital and other adjustments.
Dealer.com is a leading provider of comprehensive
digital marketing solutions and services for the automotive retail industry. We expect the acquisition to further our vision of
transforming automotive retailing by delivering the most advanced solutions for dealers, OEMs, lenders and car shoppers.
For further information, please refer to
Note 12 in the accompanying notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q.
Fair Value Measurements
We have segregated
all financial assets that are measured at fair value on a recurring basis into the most appropriate level within the fair value
hierarchy based on the inputs used to determine the fair value at the measurement date.
In connection with our October 1, 2012 acquisition
of ClickMotive, a portion of the purchase price included contingent consideration that is payable in 2014 based upon the achievement
of certain performance targets in 2013. The fair value of the contingent consideration is primarily determined based upon probability-weighted
revenue forecasts for the underlying period. The contingent consideration is revalued each reporting period, until settled, with
the resulting gains and losses recorded in the consolidated statements of operations. We estimated the fair value of the contingent
consideration as of March 31, 2014 to be $0.3 million. We recorded income of $0.3 million for the three months ended March 31,
2014 as a result of the decrease in the estimated settlement of the contingent consideration from the estimated amount of $0.5
million as of December 31, 2013.
A reconciliation of the beginning and ending
balances of the contingent consideration, a Level 3 liability, is as follows (in thousands):
Balance as of December 31, 2013
|
|
$
|
(500
|
)
|
Change in fair value of contingent consideration
|
|
|
250
|
|
|
|
|
|
|
Balance as of March 31, 2014
|
|
$
|
(250
|
)
|
Critical Accounting Policies and Estimates
Our management’s
discussion and analysis of our financial condition and results of our operations is based on our consolidated financial statements,
which have been prepared in accordance with generally accepted accounting principles (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. We believe 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, 2013, except as set forth below.
Revenue Recognition
Subscription Services Revenue
Subscription services revenue consists
of revenue earned from primarily our dealers and other customers (typically on a monthly basis) for use of our subscription products
and services. Our subscription services enable dealer customers to manage their dealership data and operations, compare various
financing and leasing options and programs, manage the allocation of advertising spend, sell insurance and other aftermarket products,
analyze, merchandise, advertise, and transport their inventory and execute financing contracts electronically. Revenue is recognized
from such contracts ratably over the contract period. Set-up fees, if applicable, are recognized ratably over the expected dealer
customer relationship period, which is generally 36 to 60 months. For contracts that contain two or more subscription products
and services, we recognize revenue in accordance with the above policy using relative selling price when the delivered products
have stand-alone value.
Advertising and Other Revenue
Advertising revenue consists of amounts
we charge customers for the third-party cost of online display advertisements and paid search campaigns related to our advertising
products. We recognize revenue as clicks are recorded on sponsored links on the various search engines for paid search or as impressions
are delivered for display advertisements. As we are the primary obligor in a majority of our arrangements, subject to the credit
risk and with discretion over price, we recognize the gross amount of such advertising spend as advertising revenue and the cost
of such advertising from online search providers as cost of revenue. In instances in which we are not the primary obligor, our
customers advertising spend and amounts paid to the online search providers do not impact our consolidated results of operations.
In both instance, we record as subscription services revenue the amounts we charge to manage the allocation of advertising spend.
Other revenue consists of revenue primarily
earned through forms programming, data conversion, hardware and equipment sales from our Dealer Management solutions, and shipping
fees and commissions earned from our digital contract business. Training fees are also included in other revenue. Other revenue
is recognized when the service is rendered.
State and other Incentive Credits
We participate in certain programs, primarily
sponsored by state governments, whereby we receive cash incentives based on achieving certain employment and capital expenditure
milestones and by participating in qualifying training activities. Credits relating to capital spend are recorded as a reduction
in capital expenditures. Credits relating to employment are recorded as a reduction of operating expenses.
Net Income (Loss) Per Share
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 (loss) 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, (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, (iii) if applicable, potential
common
shares which may be issued to satisfy the conversion spread value of our senior convertible notes, and (iv) if applicable, potential
common shares which may be issued to satisfy the warrants issued in conjunction with our senior convertible notes.
The
number of shares included in the denominator of diluted earnings per share relating to our senior convertible notes is calculated
by dividing the conversion spread value by the average share price of our common stock during the period. The conversion spread
value is the value that would be delivered to investors based on the terms of the notes, at the assumed conversion date.
The
number of shares included in the denominator of diluted earnings per share relating to the warrants issued in conjunction with
our senior convertible notes is calculated using the treasury stock method, with the dilution calculated by dividing the warrant
premium by the average share price of our common stock during the period. The warrant premium
is the value that would be
delivered to investors based on the terms of the warrants, at the assumed conversion date.
Concentration of Credit Risk
Our assets that are
exposed to concentrations of credit risk consist primarily of cash, cash equivalents, short-term and long-term marketable securities
and receivables from clients. We place our cash, cash equivalents, short-term and long-term marketable securities with financial
institutions. We regularly evaluate the creditworthiness of the issuers in which we invest. Our trade receivables are spread over
many customers. We maintain an allowance for uncollectible accounts receivable based on expected collectability and perform ongoing
credit evaluations of customers’ financial condition.
Our revenue is generated
from customers in the automotive retail industry. As of March 31, 2014, one customer accounted for 14% of our accounts receivable.
As of December 31, 2013, no customer accounted for more than 10% of our accounts receivable. For the three months ended March 31,
2014 and March 31, 2013, no customer accounted for more than 10% of our revenue.
Related Party Transactions
One of our stockholders, who owns more
than 5% of our outstanding common shares, also has an ownership interest in a third party that Dealer.com sells services to in
the normal course of business. Revenue for the one month period from the date of acquisition to March 31, 2014 from this third
party was $1.5 million and the accounts receivable from this third party as of March 31, 2014 was $2.9 million.
Results of Operations
The following table sets forth, for the
periods indicated, the consolidated statements of operations:
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
$ Amount
|
|
|
% of Net Revenue
|
|
|
$ Amount
|
|
|
% of Net Revenue
|
|
|
|
(In thousands, except percentages)
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
158,808
|
|
|
|
100
|
%
|
|
$
|
109,059
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
89,907
|
|
|
|
57
|
%
|
|
|
48,210
|
|
|
|
44
|
%
|
Research and development
|
|
|
24,048
|
|
|
|
15
|
%
|
|
|
17,630
|
|
|
|
16
|
%
|
Selling, general and administrative
|
|
|
67,486
|
|
|
|
42
|
%
|
|
|
42,468
|
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
181,441
|
|
|
|
114
|
%
|
|
|
108,308
|
|
|
|
99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(22,633
|
)
|
|
|
(14
|
)%
|
|
|
751
|
|
|
|
1
|
%
|
Interest income
|
|
|
100
|
|
|
|
—
|
%
|
|
|
124
|
|
|
|
0
|
%
|
Interest expense
|
|
|
(5,910
|
)
|
|
|
(3
|
)%
|
|
|
(3,364
|
)
|
|
|
(3
|
)%
|
Other income, net
|
|
|
709
|
|
|
|
—
|
%
|
|
|
66
|
|
|
|
0
|
%
|
Gain on sale of investment
|
|
|
9,828
|
|
|
|
6
|
%
|
|
|
—
|
|
|
|
—
|
%
|
Earnings from equity method investment, net
|
|
|
1,625
|
|
|
|
1
|
%
|
|
|
1,219
|
|
|
|
1
|
%
|
Loss before benefit from income taxes, net
|
|
|
(16,281
|
)
|
|
|
(10
|
)%
|
|
|
(1,204
|
)
|
|
|
(1
|
)%
|
Benefit from income taxes, net
|
|
|
4,639
|
|
|
|
3
|
%
|
|
|
1,170
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,642
|
)
|
|
|
(7
|
)%
|
|
$
|
(34
|
)
|
|
|
0
|
%
|
Three Months Ended March 31, 2014 and 2013
Revenue
|
|
Three Months Ended March 31,
|
|
|
Variance
|
|
|
|
2014
|
|
|
2013
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Transaction services revenue
|
|
$
|
77,735
|
|
|
$
|
61,364
|
|
|
$
|
16,371
|
|
|
|
27
|
%
|
Subscription services revenue
|
|
|
61,969
|
|
|
|
42,778
|
|
|
|
19,191
|
|
|
|
45
|
%
|
Advertising and other revenue
|
|
|
19,104
|
|
|
|
4,917
|
|
|
|
14,187
|
|
|
|
289
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
158,808
|
|
|
$
|
109,059
|
|
|
$
|
49,749
|
|
|
|
46
|
%
|
Transaction
Services Revenue.
The increase in transaction services revenue is primarily due to an increase in automobile sales,
increased credit application activity, and improving credit availability. These industry trends had a positive impact on the following
changes in our key business metrics:
|
|
Three Months Ended March 31,
|
|
|
Variance
|
|
|
|
2014
|
|
|
2013
|
|
|
Amount
|
|
|
Percent
|
|
Average transaction price (1)
|
|
$
|
2.76
|
|
|
$
|
2.60
|
|
|
$
|
0.16
|
|
|
|
6
|
%
|
Transaction revenue per car sold
|
|
$
|
11.20
|
|
|
$
|
8.99
|
|
|
$
|
2.21
|
|
|
|
25
|
%
|
Active lenders in our U.S. network as of end of the period
|
|
|
1,443
|
|
|
|
1,291
|
|
|
|
152
|
|
|
|
12
|
%
|
Active lender to dealer relationships as of end of the period
|
|
|
202,984
|
|
|
|
181,578
|
|
|
|
21,406
|
|
|
|
12
|
%
|
Transactions processed (in thousands, except percentages)
|
|
|
28,560
|
|
|
|
24,106
|
|
|
|
4,454
|
|
|
|
18
|
%
|
(1) - Revenue used in the calculation adds back (excludes) contra revenue.
|
|
|
|
|
|
|
|
|
|
Our average transaction
price and the total number of transactions processed increased 6% and 18%, respectively, which resulted in an increase in revenue
of $4.6 million and $11.6 million, respectively. In addition there was a decrease in contra-revenue of $0.2 million. Contributing
factors to the increase in average transaction price and the total number of transactions processed included increases of 12% in
active lender customers in our U.S. Dealertrack network and a 12% increase in our active lender to dealer relationships, as well
as an increase in car sales volumes and transaction pricing. While new lender customers are generally lower transaction volume
customers, they have higher average prices per transaction.
Additional volumes
in Registration & Titling solutions and Collateral Management solutions (including the additional volume from Vintek acquired
on October 1, 21013), which are at a higher average price than our other transactions, also contributed to the increase in average
transaction price and the total number of transactions processed. The increase in our number of lender to dealer relationships
was attributable to more active dealers, more active lenders on our U.S. network, and an increase in the average number of lenders
that dealers use. In addition, expanded use across our range of transaction products increased our transaction revenue per car
sold. The Vintek and Casey & Casey acquisitions contributed $4.4 million and $2.1 million to transaction services revenue,
respectively, for the three months ended March 31, 2014.
Subscription
Services Revenue.
The increase in subscription services revenue is primarily a result of additional subscription
services revenue from the acquisitions of Dealer.com and CFM, as well as from organic growth. The net increase in subscription
services revenue was a result of the following changes in our key business metrics:
|
|
Three Months Ended March 31,
|
|
|
Variance
|
|
|
|
2014
|
|
|
2013
|
|
|
Amount
|
|
|
Percent
|
|
Average monthly subscription revenue per subscribing dealership (1)(2)
|
|
$
|
956
|
|
|
$
|
737
|
|
|
$
|
219
|
|
|
|
30
|
%
|
Subscribing dealers in U.S. and Canada as of end of the period (2)
|
|
|
23,624
|
|
|
|
17,832
|
|
|
|
5,792
|
|
|
|
32
|
%
|
(1) - Revenue used in the calculation adds back (excludes) contra revenue.
|
|
|
|
|
|
|
|
|
|
(2) - Subscribing dealers and subscription revenue from Dealertrack CentralDispatch have been excluded from the calculation as a majority of these customers are not dealers.
|
Our average monthly
subscription revenue per subscribing dealer and the number of subscribing dealers increased 30% and 32%, respectively. Dealer.com
and CFM contributed $12.8 million and $1.6 million to subscription services revenue, respectively, for the three months ended March
31, 2014. In addition, we had continued success in selling DMS and Sales and F&I products, including our ability to cross sell
those solutions to existing customers, which increased the average monthly spend per subscribing dealer.
Advertising
and Other Revenue.
The increase in advertising and other revenue is primarily due to the acquisition of Dealer.com and
its advertising products related to paid search and display advertising. These industry trends had a positive impact on the following
changes in our key business metrics:
|
|
Three Months Ended March 31,
|
|
|
Variance
|
|
|
|
2014
|
|
|
2013
|
|
|
Amount
|
|
|
Percent
|
|
Active dealerships on advertising platform as of end of the period
|
|
|
7,053
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Average advertising spend per dealer rooftop
|
|
$
|
1,708
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
* Historical amounts not applicable
Advertising and other revenue increased
$14.2 million primarily due to the Dealer.com acquisition in March 2014, which contributed $12.3 million to the total increase.
Operating Expenses
|
|
Three Months Ended March 31,
|
|
|
Variance
|
|
|
|
2014
|
|
|
2013
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Cost of revenue
|
|
$
|
89,907
|
|
|
$
|
48,210
|
|
|
$
|
41,697
|
|
|
|
86
|
%
|
Research and development
|
|
|
24,048
|
|
|
|
17,630
|
|
|
|
6,418
|
|
|
|
36
|
%
|
Selling, general and administrative
|
|
|
67,486
|
|
|
|
42,468
|
|
|
|
25,018
|
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
181,441
|
|
|
$
|
108,308
|
|
|
$
|
73,133
|
|
|
|
68
|
%
|
Cost of Revenue.
Additional compensation and related benefit costs of $4.9 million primarily due to additional
team members, including those from the acquisitions of Casey & Casey, Vintek, CFM and Dealer.com, contributed to the increase.
These acquisitions also contributed an increase of $13.8 million in direct costs of revenue.
Other increases included $13.4 million of intangible amortization expense, $2.9 million of amortization of software development
costs and $4.2 million of technology expenses, including technology consulting and other related expenses. The increase in amortization
expense is primarily a result of additional acquired intangibles as well as $8.9 million from charges relating to changes in expected
asset use. Technology expenses also include $3.2 million of charges relating to changes in expected asset use.
Research and Development Expenses.
The increase was primarily the result of an increase of $4.3 million in compensation and related benefit costs primarily due to
additional team members, including those from acquisitions, and $1.4 million in additional technology expenses, including technology
consulting and other related expenses.
Selling, General and Administrative Expenses.
The increase was primarily the result of $10.4 million of additional compensation and related benefit costs, primarily due
to additional team members, including those from acquisitions, and $6.5 million of additional transaction related costs, primarily
from the Dealer.com acquisition.
There were also increases of $0.8 million
in recruiting and relocation, $0.9 million in travel and related costs, $1.4 million of marketing expenses, $1.2 million in professional
fees (including acquisition and integration costs), $0.7 million in occupancy and telecom costs (primarily acquisition-related),
$1.6 million in additional technology expenses, including technology consulting and other related expenses, and $0.5 million in
depreciation expense.
Interest Expense
|
|
Three Months Ended March 31,
|
|
|
Variance
|
|
|
|
2014
|
|
|
2013
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(5,910
|
)
|
|
$
|
(3,364
|
)
|
|
$
|
(2,546
|
)
|
|
|
76
|
%
|
Interest expense related to the convertible notes for the three months ended March 31, 2014 consisted of coupon interest of $0.8
million, amortization of debt discount of $2.1 million, and amortization of debt issuance costs of $0.3 million.
Interest
expense related to our term loan B credit facility for the three months ended March 31, 2014 consisted of cash interest of $1.8
million and
amortization of debt discount of $0.1 million
.
Interest
expense related to our 2014 and 2011 revolving credit facilities for the three months ended March 31, 2014 consisted of commitment
fees of $0.1 million and amortization of debt issuance costs of $0.7 million, including acceleration of $0.5 million.
Interest expense related to the convertible
notes for the three months ended March 31, 2013 consisted of coupon interest of $0.8 million, amortization of debt discount of
$1.9 million, and amortization of debt issuance costs of $0.2 million.
Interest
expense related to our 2011 revolving credit facility for the three months ended March 31, 2013 consisted of commitment fees of
$0.1 million and amortization of debt issuance costs of $0.1 million.
Gain on Sale of Assets
|
|
Three Months Ended March 31,
|
|
|
Variance
|
|
|
|
2014
|
|
|
2013
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets
|
|
$
|
9,828
|
|
|
$
|
—
|
|
|
$
|
9,828
|
|
|
|
100
|
%
|
During the three months ended March 31,
2014, we recorded a gain of $9.8 million on the sale of all our shares in TrueCar.
Earnings from Equity Method Investment,
Net
|
|
Three Months Ended March 31,
|
|
|
Variance
|
|
|
|
2014
|
|
|
2013
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from equity method investment, net
|
|
$
|
1,625
|
|
|
$
|
1,219
|
|
|
$
|
406
|
|
|
|
33
|
%
|
The net earnings from the Chrome Data Solutions
joint venture for the three months ended March 31, 2014 consisted of our 50% share of the joint venture net income of $2.2 million,
which was reduced by approximately $0.5 million of basis difference amortization.
The net earnings for the three months ended
March 31, 2013 consisted of our 50% share of the joint venture net income of $1.9 million, which was reduced by approximately $0.7
million of basis difference amortization.
Benefit from Income Taxes, Net
|
|
Three Months Ended March 31,
|
|
|
Variance
|
|
|
|
2014
|
|
|
2013
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit from income taxes, net
|
|
$
|
4,639
|
|
|
$
|
1,170
|
|
|
$
|
3,469
|
|
|
|
296
|
%
|
The net benefit
from income taxes for the three months ended March 31, 2014 consisted of $7.2 million of federal income tax benefit, $1.9 million
of state income tax expense and $0.7 million of tax expense for our Canadian subsidiary.
The federal benefit was $6.6 million for the period, prior to discrete items. Discrete items include $3.4 million of expense related
to the gain on sale and reversal of deferred tax liabilities related to the sale of our investment in TrueCar, $2.9 million of
benefit related to intangible asset charges, $1.9 million benefit from the reversal of valuation allowances on foreign tax credits
and capital loss carryforwards due to their projected use, and $0.8 million of expense related to the non-deductibility of certain
transaction costs.
The state provision was $1.2 million for
the period, prior to discrete items. Discrete items include $0.3 million of expense related to the gain on sale and reversal of
deferred tax liabilities related to our prior investment in TrueCar, $0.7 million expense from apportionment rate changes, and
$0.3 million of benefit related to the intangible impairments
The net benefit
from income taxes for the three months ended March 31, 2013 consisted primarily of $1.3 million of federal income tax benefit,
including $0.4 million from research and development credits, $0.4 million of state income tax benefit and $0.5 million of tax
expense for our Canadian subsidiary.
Our effective
tax rate for the three months ended March 31, 2014 was 28.5% compared with 97.2% for the three months ended March 31, 2013.
Liquidity and Capital Resources
We expect
that our liquidity requirements will continue to be primarily for working capital, acquisitions, capital expenditures and general
corporate purposes. Our capital expenditures, software and website development costs for the three months ended March 31, 2014
were $22.6 million, of which $15.8 million was paid in cash.
The closing
sale price of our common stock exceeded $48.58 (130% of the conversion price of $37.37) for at least 20 of the last 30 trading
days of the quarter ended March 31, 2014. As a result, the senior convertible notes may be surrendered for conversion during the
following calendar quarter (the quarter ending June 30, 2014). Due to this potential conversion ability, the net carrying value
of the senior convertible notes is presented as a short-term liability on the consolidated balance sheet as of March 31, 2014.
It is our intent to settle the par value of the notes in cash, and we expect to have the liquidity to do so, through the use of
either cash, our revolving credit facility, or a combination thereof.
As of March 31, 2014, we had $144.3 million
of cash and cash equivalents, $5.1 million in short-term marketable securities and $5.5 million in working capital, as compared
to $122.4 million of cash and cash equivalents, $10.6 million in short-term marketable securities and $135.8 million in working
capital as of December 31, 2013. The decrease in working capital is primarily due to the reclassification of $172.4 million of
senior convertible notes to current liabilities at March 31, 2014 as a result of the holders’ potential conversion ability
during the following calendar quarter, which is the quarter ending June 30, 2014.
For further
information, please refer to Note 11 in the accompanying notes to the consolidated financial statements included in this Quarterly
Report on Form 10-Q.
On
March 1, 2014, we completed the acquisition of the outstanding equity of Dealer.com for $617.9 million in cash and 8.715 million
shares of our common stock for a total cost of $1,089 million
.
For further information,
please refer to Note 12 in the accompanying notes to the consolidated financial statements included in this Quarterly Report on
Form 10-Q.
On February 28, 2014, Dealertrack and Dealertrack
Canada, Inc., a corporation organized under the laws of Ontario and a subsidiary of Dealertrack entered into a credit agreement
(the 2014 Credit Agreement) which provides credit facilities aggregating $800 million, including a $575.0 million term loan B credit
facility and a $225.0 million revolving credit facility. The $575.0 million proceeds of the term loan B credit facility were used
to pay the cash consideration for the acquisition of Dealer.com, to effectuate the payment in full of amounts due under our prior
Credit Agreement dated as of April 20, 2011 (2011 Credit Agreement), to pay the fees and expenses related to the acquisition of
Dealer.com and the refinancing of the 2011 Credit Agreement, and for general corporate purposes. The proceeds of the revolving
credit facility, under which no amounts have been borrowed, may be used for general corporate purposes of Dealertrack and its subsidiaries
(including certain acquisitions, capital expenditures and investments). Up to $25.0 million of the revolving credit facility may
be used to obtain letters of credit, up to $25.0 million of the revolving credit facility may be used to obtain swing line loans,
and up to $35.0 million of the revolving credit facility may be used to obtain revolving loans and letters of credit in Canadian
Dollars. The 2011 Credit Agreement was terminated upon the signing date of the 2014 Credit Agreement.
In February 2014, we signed agreements
to sell all of our equity interest in TrueCar. We received proceeds of $92.5 million from the sale of the shares, which had a carrying
value of $82.7 million. This resulted in a gain of $6.8 million, net of taxes. The tax liability of $22.3 million, before utilization
of tax attributes, on the taxable gain of approximately $58.8 million is included within income taxes payable of $16.0 million
presented within accrued liabilities – other as of March 31, 2014. We used a portion of the after-tax proceeds from the sale
as part of the purchase consideration for the acquisition of Dealer.com.
We expect to have sufficient liquidity
to meet our liquidity requirements for the next twelve months (including capital expenditures and acquisitions) through working
capital and net cash flows from operations, cash on hand, investments in marketable securities and our credit facility.
The following
table sets forth the cash flow components for the following periods (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Net cash used in operating activities
|
|
$
|
(92,864
|
)
|
|
$
|
(5,000
|
)
|
Net cash used in investing activities
|
|
$
|
(459,134
|
)
|
|
$
|
(12,821
|
)
|
Net cash provided by financing activities
|
|
$
|
574,972
|
|
|
$
|
5,980
|
|
Operating Activities
The increase
in net cash used in operations of $87.9 million is primarily due to non-cash items including, an increase in net loss of $11.6
million, an increase in the deferred tax benefit of $33.4 million, and an increase of $9.8 million of realized gain from the TrueCar
investment. These were offset by an increase in depreciation and amortization of $17.4 million (increased amortization from acquired
intangibles and impairment of certain assets).
The net changes in operating assets and liabilities resulted in a decrease in cash flows of $47.4 million, primarily from a payout
of acquired liabilities from the Dealer.com acquisition.
The increase
of $33.4 million in the deferred tax benefit was a result of a deferred tax benefit of $34.6 million for the three
months ended March 31, 2014 as compared to $1.2 million for the three months ended March 31, 2013. The 2014 deferred tax
benefit includes the impact of the TrueCar investment gain reclassified from deferred tax expense to current tax expense.
Investing Activities
The increase in net cash used in investing
activities of $446.3 million is primarily the result of a payment of $541.3 million for the acquisition of Dealer.com, net of acquired
cash, offset by $92.5 million of proceeds from the sale of our cost method investment in TrueCar, Inc.
Other changes included an increase in capital
expenditures, software and website development costs of $8.4 million, a decrease in purchases of marketable securities of $15.9
million, and a decrease in sales and maturities of marketable securities of $5.0 million.
Financing Activities
The increase
in net cash provided by financing activities of $569.0 million is due to borrowings under our term loan B credit facility in the
amount of $575.0 million. These borrowings were reduced by financing costs recorded as debt discounts and debt issuances costs
in the amount of $15.5 million. In addition, there were $7.6 million of additional proceeds from the exercise of stock options
and $5.1 million of additional windfall tax benefits.
Contractual Obligations
T
he
following table summarizes our contractual obligations as of March 31, 2014 (in thousands):
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
Senior convertible notes (1)
|
|
$
|
208,875
|
|
|
$
|
3,000
|
|
|
$
|
205,875
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Term loan B credit facility (2)
|
|
|
714,198
|
|
|
|
20,125
|
|
|
|
40,250
|
|
|
|
40,250
|
|
|
|
613,573
|
|
Notes payable - Dealer.com acquisition (3)
|
|
|
9,314
|
|
|
|
578
|
|
|
|
965
|
|
|
|
959
|
|
|
|
6,812
|
|
Note payable - Vintek consideration (4)
|
|
|
4,092
|
|
|
|
2,013
|
|
|
|
2,019
|
|
|
|
—
|
|
|
|
—
|
|
Operating lease obligations (5)
|
|
|
62,007
|
|
|
|
13,099
|
|
|
|
20,325
|
|
|
|
13,356
|
|
|
|
15,227
|
|
Capital lease obligations
|
|
|
311
|
|
|
|
109
|
|
|
|
202
|
|
|
|
—
|
|
|
|
—
|
|
Hosting and data licensing agreements (6)
|
|
|
17,230
|
|
|
|
7,498
|
|
|
|
9,226
|
|
|
|
506
|
|
|
|
—
|
|
Advertising agreement (7)
|
|
|
36,082
|
|
|
|
12,000
|
|
|
|
24,082
|
|
|
|
—
|
|
|
|
—
|
|
Continuing employment compensation
|
|
|
5,856
|
|
|
|
3,356
|
|
|
|
2,500
|
|
|
|
—
|
|
|
|
—
|
|
Contingent consideration (8)
|
|
|
10,750
|
|
|
|
5,500
|
|
|
|
5,250
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
1,068,715
|
|
|
$
|
67,338
|
|
|
$
|
310,694
|
|
|
$
|
55,071
|
|
|
$
|
635,612
|
|
(1) Consists of $200.0 million aggregate principal
amount of 1.50% convertible senior notes that mature on March 15, 2017, unless earlier repurchased or converted prior to maturity.
The amounts in the table assume the payment of interest on our senior convertible notes through their maturity date and the payment
of the principal amount of the notes at their maturity date. Interest on the notes is payable semi-annually. The senior convertible
notes will be convertible, subject to certain conditions, into cash, shares of our common stock, or a combination of cash and shares
of common stock, at our option. It is our intent to settle the par value of the notes in cash, and we expect to have the liquidity
to do so.
(2) Consists of $575.0 million aggregate principal
amount of term loan B credit facility notes that mature on February 28, 2021. The amounts in the table assume the payment of interest
through its maturity date and the payment of the principal amount of the notes at their maturity date. Interest on the notes is
payable semi-annually and is assumed to be at a rate of 3.5%, which was the rate in effect at March 31, 2013.
(3) For further information, see Note 12
in
the accompanying notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q.
(4) For further information, see Note 9 in our Annual
Report on Form 10-K for the year ended December 31, 2013.
(5) Operating lease obligations do not include the
lease for our new headquarters facility, which provides for initial base rent of approximately $7.6 million in the first year of
the lease term, with increases of 2.5% annually thereafter, subject to increases of 3.0% if the Consumer Price Index for the prior
twelve months has been equal to or greater than 4.0%. In addition, we will be responsible for additional rent to cover certain
taxes and insurance charges. The lease, which has an initial term of seventeen years with an option to extend the term of the lease
for an additional ten years, is expected to commence in early 2016. For further information, see Note 20.
(6) We have agreements with third parties to provide
services for hosting operations and to license the use of data and images, which have terms that range from one to three years.
The agreements require a payment of a minimum amount per month for a fixed period of time in return for which the hosting service
provider provides certain services and we may use certain data and images. Additional payments are required when usage exceeds
the minimums. All agreements expire by January 2019, with optional renewals.
(7) We have an agreement with a third party for the
purchase of advertising impressions. The initial term of the agreement is 43 months with an option to renew for additional two-year
terms and an option to cancel after December 31, 2015. The agreement requires us to make minimum payments on an annual basis for
the purchase of impressions. Any impressions purchased under the annual minimum commitment that are not consumed in the year can
be carried forward to be used for the first six months of the following year.
(8) Contingent consideration includes settlement of the ClickMotive contingent consideration as well as a contingency acquired
as part of the acquisition of Dealer.com. The Dealer.com acquired contingency was fully funded as part of total acquisition consideration
and any amounts not paid to settle the contingency will be returned to seller.
Other Contractual Obligations
Pursuant to employment or severance agreements
with certain team members, we have a commitment to pay severance of approximately $9.5 million as of March 31, 2014, 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. Additionally, in the event of termination
without cause due to a change in control, we would also have a commitment to pay additional severance of $2.8 million as of March
31, 2014.
The total liability for the uncertain tax
positions as of March 31, 2014 and December 31, 2013 was $4.4 million and $0.9 million, respectively, which may be reduced by a
federal tax benefit, if paid. The increase is primarily related to uncertain tax positions acquired as part of the Dealer.com acquisition.
As of March 31, 2014 and December 31, 2013, we have accrued interest and penalties related to tax positions taken on our tax returns
of approximately $0.4 million and $0.1 million, respectively.
We have a $225.0 million revolving credit
facility which is available subject to certain conditions. The revolving credit facility matures on February 28, 2019. As of March
31, 2014, we had no amounts outstanding under this revolving credit facility and we were in compliance with all covenants and financial
ratios. For further information, please refer to Note 11 in the accompanying notes to the consolidated financial statements included
in this Report on Form 10-Q.
Off-Balance Sheet Arrangements
We do not have
any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating
off-balance sheet arrangements or for other contractually narrow or limited purposes.
Industry Trends
We are impacted by trends in both the automotive retail industry and the credit finance markets. Our financial results are impacted
by the number of dealers serviced and the number of vehicles sold. The number of transactions processed through our network is
impacted by vehicle sales volumes, the level of indirect financing and leasing by our participating lender customers and our market
shares of their business, special promotions by automobile manufacturers and the level of indirect financing and leasing by captive
finance companies not available in our network.
The number of lending relationships between
the various lenders and dealers available through our network continues to increase as the number of franchised dealers has stabilized
and lenders are deploying more capital to auto finance. While the number of independent dealers appears to be declining, our market
share of independent dealers is increasing.
In recent years, the franchise dealership
count has remained consistent at approximately 17,500 based on data from the National Automobile Dealers Association. We do not
anticipate a significant change in the number of franchise dealerships over the next few years. A reduction in the number of automotive
dealers reduces our opportunities to sell our subscription products.
The automobile industry’s new light
vehicle sales for 2013 increased to 15.6 million vehicles, an increase of 8% from the 14.5 million new light vehicles sold
in 2012, according to Automotive News. While new light vehicle sales is expected to increase in 2014, the growth rate is expected
to be lower.
Used vehicle sales continue to be impacted by vehicle supply. Used vehicles sold by franchised
dealers for 2013 increased to 15.7 million vehicles, an increase of 5% from the 15.0 million used vehicles sold in 2012, according
to CNW Research. The supply of used vehicles that are newer models is limited compared to pre-recession levels due to the decline
in new car sales, fleet purchases and leasing during the recession. The average age of cars and trucks in the United States is
at a record high of 11.4 years compared to an average age of 9.8 years during the five year period ending in 2007. The total used
vehicle supply will likely not increase until at least 2015 as the more recent increases in new vehicles sold start to be traded
in to dealerships or leases are returned.
While total used vehicle supply remains
limited, the used car market mix is expected to continue to change with a larger percentage of used vehicles being sold by franchised
and independent dealers, and less through private sales.
In regards to digital marketing and advertising spending, dealers spend more of their advertising budgets on traditional advertising
methods, such as newspaper, television, and radio than online. Based on data from the National Automobile Dealers Association,
in 2012, franchise dealers spent 26.5% of their advertising dollars on the internet. We expect a continued shift of advertising
spend from traditional media to online digital marketing and advertising. In addition to direct advertising spend made by dealerships,
additional advertising spend is funded by automotive OEMs, both directly and via regional associations and dealership co-op programs.
Strengthening annual sales rates over the
past several years have resulted in a general increase in dealer profitability. While increased profitability may be expected to
increase the number of subscriptions, the dealers need for solutions may not be as high as they were during more difficult historic
economic periods, in which certain offerings were essential to dealerships for maintaining liquidity.
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, increased federal taxation, residential and commercial real estate
markets, reductions in business and consumer confidence, stock market volatility and increased unemployment.
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.