Dealertrack Technologies Management Discusses Q4 2012 Results - Earnings Call Transcript

Dealertrack Technologies (NASDAQ:TRAK)

Q4 2012 Earnings Call

February 25, 2013 5:00 pm ET

Executives

Mark F. O'Neil - Chairman, Chief Executive Officer, President, Chairman of Dealertrack Inc and Chief Executive Officer of Dealertrack Inc

Eric D. Jacobs - Chief Financial Officer, Principal Accounting Officer, Chief Administrative Officer, Senior Vice President, Treasurer and President of Dealeraccess Canada Inc

Analysts

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

Lauren Choi - JP Morgan Chase & Co, Research Division

Chris Hogan - Barclays Capital, Research Division

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Matthew L. Williams - Evercore Partners Inc., Research Division

Mitchell O. Bartlett - Craig-Hallum Capital Group LLC, Research Division

Operator

Good evening, everyone, and welcome to today's conference call. Today's call is being recorded. Joining us today are Mark O'Neil, Chairman and Chief Executive Officer; and Eric Jacobs, Chief Financial and Administrative Officer of DealerTrack Technologies.

Mark will begin today's call with a summary of DealerTrack's financial highlights for the fourth quarter. He will then provide an overview of the operating environment, including key business metrics. He will also provide a summary of the quarter from a business and strategic perspective. Eric will then discuss DealerTrack's financial performance for the fourth quarter of 2012 and guidance for 2013. Afterwards, they will be available to answer your questions.

Before they begin, DealerTrack would like to remind everyone that remarks made during this conference call will contain forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees, but involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including, without limitation, those risks detailed in DealerTrack's filing with the SEC, such as its most recent reports on Forms 10-K and 10-Q. DealerTrack disclaims any obligation to publicly update or revise any such statements to reflect any change in their expectations or in events, conditions or circumstances on which any such statements may be based or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. DealerTrack also uses non-GAAP financial measures to represent business performance. A reconciliation of GAAP to non-GAAP financial measures is included in today's press release, which is available on the Investor Relations section of the company's website at dealertrack.com. In addition, please refer to the current investor presentation posted on the company's website for information which may be discussed during today's call, including a reconciliation of DealerTrack's fourth quarter results adjusting from certain acquisitions and dispositions.

As a reminder, DealerTrack contributed its Chrome Data business to a joint venture on January 1, 2012, and therefore, it is included in results for the fourth quarter of 2011 but not in the fourth quarter of 2012. In addition, DealerTrack acquired 1st Auto Transport Directory, ClickMotive and Ford of Canada's DMS business during 2012. And therefore, the impact of these businesses is included in results for the fourth quarter of 2012, but not in the fourth quarter of 2011. Now I would like to turn the call over to Mark O'Neil, Chairman and Chief Executive Officer. Please go ahead.

Mark F. O'Neil

Thank you, operator. Hello, everyone. Thanks for joining us this evening. I'm pleased to report that DealerTrack closed 2012 with a strong finish. In the fourth quarter, we exceeded $100 million in quarterly revenue for the first time. Revenue totaled $101.8 million, an increase of 12% on both the reported and organic basis when compared to the fourth quarter of 2011 and normalized for recent acquisitions and dispositions. We also executed well and delivered adjusted EBITDA of $25.8 million during the quarter, which represents an adjusted EBITDA margin of 25%. On a full year basis, our organic revenue grew 15%, and we exited 2012 having made significant technology investments to support our vision to enable the transformation of auto retailing by delivering a leading suite of truly integrated technologies. With customers embracing our vision, we believe we are positioned to drive strong growth in 2013 and in the years to come.

Looking at our fourth quarter in more detail, we had success in both our transaction and subscription businesses. Transaction revenue was $54.6 million, an increase of 15% in total from a year ago or a 16% increase when viewed organically. Subscription revenue was $42.2 million, an increase of 9% on both the reported and organic basis compared to the prior year period. Our transaction business continues to see strong growth across all product lines. As in recent quarters, more than half of our transaction revenue came from transactions other than credit application. Transaction revenue growth continues to be influenced by the number of cars sold, the number of cars financed and leased, the market share of our lenders, our market share of these lenders' business, and the mix of new and used vehicles sold by auto dealers. In particular, our 15% year-over-year increase in transaction revenue in the fourth quarter was driven by the growth in car sales. Our growth is further supported by our continuing efforts to add lenders to our network as well as our cross-selling activities.

Looking at car sale trends, the average new car seasonally adjusted annual sales rate, or SAAR, was 15.1 million units in the fourth quarter, up 12% from the 13.5 million units in the year-ago quarter. On a full year basis, 14.5 million light vehicles were sold in 2012, up 13% from the 12.8 million vehicles sold in 2011 and slightly above our full year guidance of 14.3 million units. Used cars sold by franchise dealers in the U.S. increased 20% to 3.4 million units in the fourth quarter from 2.8 million units in the fourth quarter of 2011. For the full year, 15 million used units were sold, up 8% from 13.8 million in 2011, above our full year guidance of 14.5 million units. In total, cars sold by franchise dealers grew 15% during the fourth quarter and 11% for the entire year.

With regards to network participants, we had 1,261 lenders and 19,067 dealers on our U.S. network at the end of the year, up considerably from 1,120 lenders and 17,543 dealers at the end of 2011. These metrics drove an increase in the number of lender-to-dealer relationships we support to approximately 175,000 at the end of the fourth quarter, up from approximately 165,000 a year ago.

In terms of credit application submissions per applicant, credit availability trends in the fourth quarter were consistent with what we saw in the first 3 quarters of the year. We believe lenders remain focused on growing market share, but the dealers remain somewhat conservative in terms of sending applications to multiple lenders. Additionally, more lenders offer full spectrum lending, somewhat mitigating the need to send applications to multiple lenders.

Looking at our transaction business as a whole, we processed a total of 20.8 million transactions in the fourth quarter, an increase of 11% from the 18.8 million transactions we processed the same quarter a year ago. Although transaction volume grew slower than car sales, credit application volume continues to outpace car sales by growing 19%. At the beginning of the fourth quarter, one of our agreements with a credit bureau provider expired. This agreement historically contributed more to transaction volume than revenue due to a very low price point. As a result, this impacted our overall transaction volume growth on a comparable quarter basis but did not have a material impact on our transaction revenue. On a full year basis, overall transaction revenue grew 22% in 2012, nearly double our initial outlook of 12% growth for the year and double the 11% increase in car sales from franchise dealers. We believe this achievement demonstrates the significant leverage we're able to produce as we process more transactions per car sold as a result of our cross-selling efforts and market share gains. Average transaction revenue per car sold was $7.18 in the fourth quarter of 2012 compared to $7.17 a year ago. We expect positive year-over-year trends regarding transaction revenue per car sold to continue as we focus on introducing new solutions and capture greater market share with our existing solutions. Our average transaction price was $2.67 in the fourth quarter of 2012, an increase of $0.09 from the $2.58 price in the fourth quarter of 2011.

Among our successes in 2012 was progress we made with captive lenders. We launched Mercedes-Benz Financial Services as a lender on DealerTrack's U.S. credit application network earlier in the year. In the fourth quarter of 2012, we signed an exclusive agreement with Volvo, through which Volvo's 311 dealers in the U.S. can submit credit applications to Volvo Car Financial Services. Then, earlier this month, we announced that DealerTrack and America Honda Finance Corporation, or AHFC, have entered into an exclusive long-term strategic partnership to create and maintain a cutting-edge sales and financing process, including a vehicle loan origination solution for the more than 1,200 Honda and Acura dealers in the United States. This is a very important strategic relationship to DealerTrack and validates our vision to deliver the market-leading suite of integrated technologies capable of transforming auto retailing. As part of this relationship, DealerTrack will make a significant investment and will collaborate with AHFC to design and develop the solution with a strategic focus on streamlining the vehicle sales and financing process while also improving the overall customer buying experience. In addition to processing credit application data between AHFC and Honda and Acura dealers, the solution will incorporate innovative new technologies and an integrated sales, F&I and contracting workflow.

Honda sales of 1.4 million light vehicles in 2012 represent a significant new opportunity for DealerTrack. Our partnership with AHFC gives us the opportunity to monetize those vehicle sales and potentially the sale of motorcycles and sport activity vehicles. From a business perspective, this strategic partnership agreement increases our addressable market relating to new vehicle sales from roughly 68% today to 75%. Moreover, we believe that our deeper relationship with AHFC increases our opportunity to cross-sell other transaction subscription products to Honda dealers in the U.S. While this partnership agreement with AHFC will require incremental investment in 2013 and 2014, it is expected to be a significant revenue driver as the program ramps up throughout 2014, ultimately contributing an estimated $7 million to $10 million per year to total revenue. Eric will provide some additional information on the financial impact of this relationship.

We're also making continued progress cross-selling our processing solutions. For example, a few weeks ago, we announced that Regional Acceptance Corp., a leading lender in the used vehicle market serving 17 states, would be using our total title solution for title administration processing. This extends our relationship with Regional Acceptance, who also uses our credit application and digital document services to include both paper and electronic titling services.

Our strategy in registration and titling services is to increase our national footprint, which makes our technology more compelling to large dealership groups and increases our addressable market. For example, we're excited with the opportunity to expand into Louisiana with the pending acquisition that we announced today of Casey & Casey NPS, the largest electronic vehicle registration titling provider in that state. This strategic transaction will further extend RTS' state footprint with dealers for electronic vehicle registration, as well as CMS's relationship with lenders for title and lien administration. With this acquisition, we will offer electric vehicle registration services in 15 of the 24 states that support it. Eric will provide financial information on this transaction, which is expected to close in the second quarter of this year.

Turning to subscriptions. We continue to see demand for our Dealer Management System, or DMS, inventory and sales and F&I solutions, all of which help dealers improve efficiency and reduce costs. We're pleased with the performance we're seeing from our recently acquired subscription solutions, CentralDispatch for vehicle transportation and ClickMotive for interactive websites and related services. The number of dealers with at least 1 subscription grew to 17,619 at the end of the fourth quarter of 2012, up by approximately 1,200 from the end of the third quarter. For the fourth quarter of 2012, average monthly subscription revenue per subscribing dealer was $749, up from $690 a year ago after adjusting for subscription revenue previously contributed by Chrome. In addition to new customers, we see significant cross-selling opportunities with a potential that is now more than $5,000 per month in subscription revenue if a dealer subscribed to all of our existing subscription products. The annual convention of the National Automobile Dealers Association or NADA is our industry's largest trade event, and the 2013 event in Orlando at the beginning of February was a major success for DealerTrack. With a return to strong dealership profitability, attendees were ready to buy, which resulted in record subscription-related sales for DealerTrack. At the convention, we demonstrated our comprehensive suite of technologies under our new branding. These downloads included our newly relaunched inventory suite, a fuller Digital Retailing Suite and a comprehensive offering of mobile technologies. We not only generated a lot of buzz with our industry-leading solutions, our rebranding effort also paid significant dividends.

While our digital retailing partnership with Auto Trader to bring more of the car buying process online continues to make progress in pilot, we recently signed Cars.com and other third-party providers as additional partners for our digital retailing initiative. We expect to continue to expand our digital retailing efforts with other potential clients and delivery channels this year. We believe our relaunched inventory suite is the most powerful and comprehensive inventory solution in the industry. Our inventory suite helps dealers price, appraise, merchandise, stock, trade and transport vehicles. With technology based on our ideal inventory model, our inventory suite now provides dealers with insight at a more granular level, making recommendations even more effective. We have also announced enhanced group trade capabilities. Group trade significantly improves the ability of dealer groups to trade vehicles internally, and leverages our ideal inventory model to match buy and sell recommendations. With inventory capabilities that go beyond the sum of the parts, we're confident that our inventory business will be back on track with ramping sales in 2013. We also showcased our interactive suite at NADA. Our interactive suite offers digital marketing tools that leverage our ClickMotive acquisition to offer individual dealer and dealer group websites, mobile websites, search, social and managed chat tools, as well as integration with our Digital Retailing Suite.

Finally, at NADA, we previewed a number of new mobile apps. We showcased menu on an iPad to improve the customer aftermarket product purchase experience. In addition, at NADA, we launched TrueScore, an inventory application that combines the dealership's data with retail market data to provide recommendations in an intuitive and informative way. In addition to new offerings launched at NADA, work on our DealerTrack Technology's 2.0 user interface, which will provide a single integrated user interface for dealers, is making progress. We expect our flexible integrated workflow to provide significant usability improvements for customers and help to promote additional cross-selling of DealerTrack products as a result of an enhanced workflow. In fact, DT 2.0 is an important factor in AHFC's decision to partner with us for their credit application network. And we will be accelerating some of our development efforts to support AHFC.

In summary, in 2012, we delivered strong financial results while making significant technology investments that position us for growth in 2013 and the years to come. Our confidence is supported by a large number of new product introductions, our success in the captive lender market, and by a positive customer response that validates our long-term vision to transform auto retailing with our comprehensive integrated suite of technologies.

Now, let me turn the call over to Eric for additional details on our financial performance and guidance.

Eric D. Jacobs

Thank you, Mark, and hello, everyone. I'm pleased to report our fourth quarter 2012 financial highlights. Revenue for the fourth quarter was $101.8 million, a 12% increase from a year ago, both in total and on an organic basis. Overall, we generated: $54.6 million in transaction revenue, up 15% in total from a year ago, and a 16% increase on an organic basis; $42.2 million in subscription revenue, up 9% total from a year ago, and a similar 9% increase on an organic basis; and $5 million of other revenue.

Included in revenue for the fourth quarter was $6.8 million in total revenue from the ClickMotive, CentralDispatch and Ford iCONNECT DMS acquisitions.

Earnings for the fourth quarter were as follows: our GAAP net income was $0.5 million or $0.01 per diluted share; our adjusted EBITDA was $25.8 million; and our adjusted EBITDA margin was approximately 25%. Adjusted net income was $13.7 million or $0.31 per diluted share.

Looking at our results on a full year basis for 2012, revenue was $388.9 million, an increase of 10% in total from 2011 and an increase of 15% organically. Included in the full year revenue was: Transaction revenue of $225 million, an increase of 22% in total from 2011 and an increase of 21% on an organic basis. Subscription revenue of $145.1 million, a decrease of 1% in total from 2011 and an increase of 9% on an organic basis. GAAP net income was $20.5 million or $0.46 per share, based on 44 million diluted weighted average shares outstanding. Our adjusted EBITDA was $97.3 million and our adjusted EBITDA margin was approximately 25% compared to an adjusted EBITDA margin of $85.9 million in 2011 or 24% of 2011 revenue.

Adjusted net income was $49.1 million or $1.12 per diluted share compared with $43.4 million or $1.02 per diluted share a year ago. Cash flow from operations for 2012 was $70.7 million compared to $64.9 million in 2011. As of December 31, we had approximately $177.8 million in cash, cash equivalents and short-term marketable securities, and an additional $4.4 million in long-term marketable investments.

Capital expenditures were approximately $16 million for the fourth quarter, which included $9.5 million of software costs, both purchased and internally developed. On a full year basis, we spent $40.8 million on capital expenditures compared to $32.2 million in 2011. This amount was impacted by the acquisitions we recently completed, and equates to approximately 10.5% of revenue in 2012 compared to 9.1% of revenue in 2011. In 2012, capital expenditures were higher than previously anticipated, as we took delivery of approximately $3 million of planned 2013 capital expenditures in late December 2012 to secure favorable pricing and get the equipment in service earlier.

Turning now to our guidance for 2013, we anticipate that new car sales will grow approximately 800,000 units to 15.2 million units, which is in line with the January SAAR number of 15.3 million units. We also anticipate that used car sales will grow approximately 100,000 units to 15 million units, as we expect that used car supplies remain relatively tight in 2013. Collectively, this yields an estimated total growth in car sales of approximately 3% in 2013 compared to 2012. In connection with our signing of AHFC, we are ramping up certain product and technology development capabilities to support this specific initiative. In particular, as Mark indicated, we are accelerating some of our efforts toward the development of DT 2.0. We expect these incremental costs to have an approximately $4 million to $5 million negative impact on adjusted EBITDA in 2013 compared to our prior expectation. This impact is due to us not expecting substantial incremental revenue from AHFC in 2013. Once fully implemented, we expect our partnership with AHFC to produce gross revenue of $7 million to $10 million per year prior to the negative impact of any contra revenue.

Starting in 2014, however, while we anticipate these investments to be substantially completed, we expect to see a material impact from AHFC's participation on our U.S. network, particularly as AHFC financed approximately 8% of all new cars in 2012. As part of the agreement, DealerTrack has agreed to reimburse AHFC up to $11 million of certain expenses associated with the development, implementation and integration of the solution over the first 3 years of the agreement. These payments will be recorded as deferred costs and upon launch of the solution will be recognized as the reduction of revenue as contra revenue over the estimated customer relationship period, similar to what we experienced after launching Ally.

With the background I just provided, our guidance for 2013 is as follows: Revenues expected to be between $447 million and $456 million, which represents approximately 15% to 17% growth. Transaction and subscription revenue are anticipated to grow approximately 12% and 23%, respectively, at the mid-point of our guidance. From a seasonality perspective with our subscription model, we anticipate sequential increases in subscription revenue throughout the year and we anticipate the second and third quarters will be the strongest quarters of the year from a transaction revenue perspective, reflecting typical car sales seasonality. While we typically see stronger subprime sales activity in the first quarter, with shoppers in this category funding down payments with income tax refunds, the late start to the tax season could potentially shift some of this activity into the second quarter in 2013. We had not seen a pickup in subprime activity that we typically see in late January until the second half of February. We view this as a potential shift in seasonality that we do not expect to impact our full year results.

GAAP net income is expected to be between $10 million and $13 million or $0.22 to $0.29 per share. With regards to GAAP earnings -- sorry, with regards to non-GAAP earnings, we expect adjusted EBITDA between $111 million and $115 million, an increase of $16.7 million at the mid-point or 17% over 2012, and adjusted -- sorry, and an approximately 25% adjusted EBITDA margin, which is consistent with 2012, after considering the incremental investments we are making to support our relationship with Honda that we outlined earlier, and adjusted net income between $54 million and $57 million or $1.19 to $1.26 per share. Our guidance does not include the addition of Casey & Casey, which we expect to close sometime in the second quarter. For the full year 2012, Casey & Casey had unaudited transaction revenue of approximately $7.5 million, and we expect the business to grow consistent with our transaction business in 2013 with no meaningful impact on adjusted EBITDA margin percentages. Our first quarter earnings call in early May will include additional information, as well as the impact that this transaction will have on our full year results.

Our 2013 guidance assumes an effective tax rate of 38% at the mid-point of guidance and it assumes an anticipated full year average diluted share count of 45.4 million shares. As for capital expenditures, we anticipate approximately $44 million of capital expenditures in 2013. Our capital expenditures as a percentage of revenue is expected to decline from 10.5% in 2012 to approximately 9.7% in 2013 despite significant capital costs related to new technology initiatives, including Honda and additional office moves.

We believe that the strategic investments that we're making position us extremely well to benefit from the emerging trends in automotive retail. With several significant new offerings, our vision is being validated by our customers and we are well positioned to execute on our long-term vision of helping car dealers transform auto retailing. Please refer to our investor presentation posted on our company website for additional assumptions embedded in our current guidance, as well as a reconciliation of GAAP to non-GAAP measures and organic growth calculations. Operator, we'll now take questions from conference call participants.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Peter Goldmacher from Cowen and Company.

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

Eric, just wanted to give you ask you a quick question on your guidance. So you think that the late start to tax season could make 1Q, which is seasonally weak, just maybe a little bit weaker so you'd be more comfortable as we build out our quarterly models, maybe keeping Q1 a bit soft and then more -- slightly more than usual strength in 2Q and 3Q?

Eric D. Jacobs

Yes, Peter, but it's not dramatic. It's a couple of weeks late start to when we see subprime kick in, so the number of units is not significant in Q1 in total when you look at the rest of the year. So it's not dramatic but there could be a slight impact.

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

Okay. And can you talk a little bit more about this Casey & Casey acquisition? Is it -- well, just a little bit more commentary than in your prepared comments would be helpful, I think.

Eric D. Jacobs

So they're the market leader in their space, which think about both registration and lien processing in the State of Louisiana, it's a long-term, family-owned business. Dan is the current President, a multi-generation owner here, and he's agreed to stay with us for a significant period of time, which is terrific, and this is going to help us substantially increase our footprint. As we evaluate building out new states organically versus potentially such as with this acquisition acquiring, it's very helpful, particularly with larger strategic accounts, to have a large footprint. I think most dealers prefer when possible to deal with one partner when they can, and if you don't cover all of the states, it's more challenging to develop that relationship. And this just add one more state to our geographic footprint and as we add a number this year organically by building relationships with DMV. It just, it puts us on our steady march of getting to that 24, 26, 28, whatever it's going to be a year or 2 years from now of states that enable electronic transaction processing.

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

So this deal wasn't necessarily a technology deal, it was just a -- geographically motivated and does it have, once it's part of the DealerTrack -- once it's part of DealerTrack, can it move out from Louisiana into Mississippi, Alabama, Texas?

Eric D. Jacobs

Well, each state is unique. So first and foremost, no, it wasn't the technology we're buying, it was relationships, it was footprint. Casey & Casey has terrific scale and breadth throughout Louisiana. They are clearly the market leader in the state by a long shot and their expertise is really in the State of Louisiana. That said, certainly Dan brings us a wealth of knowledge and experience in building state relationships, and we believe he can help us in the years ahead as we try to build those same kind of relationships with other states that we expect to enter into. My guess is that most of his energy will be focused on the Southeast, but not necessarily exclusively there. So really, Peter, this is about buying relationships. Louisiana is a very strong state for long-term relationships and Dan built them and they would have been hard to penetrate organically.

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

I'm sorry, I'm still confused. So you get these relationships and then is the opportunity to sell more stuff into those clients because if it's the market leader and it's a $7.5 million business and you paid $20 million, I guess, I'm thinking you want it for more than just what they're doing now, right?

Eric D. Jacobs

Yes. Well, look, they're introducing a number of new products. They've actually been very innovative on introducing products such as temp tags and other ancillary products for the Louisiana market. They've been very innovative there. And we do anticipate this business growing in Louisiana just as an organic business similar to the expected growth rates for DealerTrack. So look, although they are market-leading, there's potential to sell more of the product still on the state, so that's one. Second, there's clearly -- he has relationships in the State of Louisiana, or Casey & Casey does broadly, that we don't sell subscriptions in today, and given their footprint in the state, their relationship individually with many of those dealers, we think they'll be a terrific platform to cross-sell other subscription and transaction solutions into. And then strategically, by having Louisiana added to our geographic footprint, it allows us to begin the process of calling on larger dealer groups who have multistate footprint, particularly any who had stores in Louisiana that we couldn't meet that need.

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

Okay. Now the question I really had. Can you give us an update on -- a little more detail on inventory and how your fixes have gone and how the markets reacted to kind of the year of more challenges than you had hoped?

Mark F. O'Neil

Yes. The year being 2012, not 2013.

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

I hope so.

Mark F. O'Neil

No, we got terrific feedback. So at NADA, we launched 3 new pieces of functionality that were the result of the integration of the 2 solutions. And substantially, we launched those functionalities in eCarList, which has been a challenge up to that point in time, and the dealer reaction was terrific. We actually exceeded our sales expectations at NADA for our inventory solutions so that gives you a sense of -- and us, that we're back on track. We delivered as promised. We're still doing some infrastructure work behind the scenes. In fact, we'll have a very big release in the next week here to complete what's been a long journey of solidifying the infrastructure behind those 2 solutions. But I'm pleased and dealers were pleased with what we launched, and as you see our guidance for this year, we had significant subscription revenue growth. We expect inventory to be contributing to that in 2013 where it was not a big contributor in 2012.

Operator

Our next question comes from Lauren Choi from JPMorgan.

Lauren Choi - JP Morgan Chase & Co, Research Division

This is Lauren for Sterling at JPMorgan. Just wanted to go over the growth rates really quickly. So on the transaction side for 2013, you mentioned 23% at the mid-point and then also I guess the new cars is 3% growth for 2013. Can you just help me maybe rank or just tell me a little bit about what are the major kind of growth drivers for '13 that you're kind of thinking about?

Eric D. Jacobs

So just to be clear, in terms of growth rates, the 23% is for subscription, not transaction. I think, I believe you said transaction.

Lauren Choi - JP Morgan Chase & Co, Research Division

So then, I guess, I'm talking about the other side which was, let's see here, was it 9%?

Eric D. Jacobs

So transaction revenue should grow 12%, roughly at the mid-point. And so that's on approximately 3% or 900,000 unit growth in car sales. So approximately 3x the growth in car sales this year, a little different than 2012. 2012, we knew going into 2012 that the -- our -- what we call submissions per applicant was -- there was a pretty large ramp-up throughout 2011, so that run rate was going to benefit us in 2012. If you look, there's a chart in our investor deck that shows it's been relatively flat in 2013. We're going to get the gains from cross-selling, adding new customers, different areas than necessarily submissions per app, although we do have some expectations of growth in submissions per applicant in 2013.

Lauren Choi - JP Morgan Chase & Co, Research Division

That is still -- I think in one way, you talk about half of the transactions is still coming from the credit application network. I just kind of wanted to understand, are there new, I guess, growth drivers that are kind of gaining traction in '13 that may not have been there in 2012? Or are we kind of still thinking similar run rates?

Mark F. O'Neil

No, there are some new growth drivers. Some of the new states from RTS, so California ramped all through 2012 as we had more dealers coming onto that one. California mandated the use of online registration systems, so California, Georgia, Illinois, second half of the year, we expect to launch a relationship with Virginia to accelerate. So there would be a good example of the state footprint and RTS contributing the expanse of that to transaction growth. We clearly expect CMS, particularly in the back end of the year, so that's lien processing. We have a number of new clients coming on. In fact, 2 or 3 fairly large clients, but they won't have a material impact into the back half. But again, nice organic growth there with conquesting some new lenders onto that system.

Lauren Choi - JP Morgan Chase & Co, Research Division

Okay. And what about on the subscription side? I guess relative to inventory and how do you think about DMS in '13?

Mark F. O'Neil

So I think 3 drivers to the growth, the annual growth and subscriptions, that's pretty healthy number. DMS and inventory will be significant contributors, and right behind that, I think our digital retailing solution will be a material contributor. Again, very successful launch at NADA. And last but not least, Interactive, which is a website business that we acquired vis-a-vis ClickMotive. Again, very strong reaction. In fact, Chrysler just endorsed us as 1 of only 4 authorized players to sell a managed chat service, which is part of our whole interactive offering into Chrysler dealerships, a big win for the team. So call it really the 4 solutions will be the four-legged stool driving subscription growth and that's healthy. It's nice to not have a single point of dependency there.

Lauren Choi - JP Morgan Chase & Co, Research Division

Got it. Great. Next question is on Honda. Can you just help us also understand a little bit about the economics on the contract? I think, first, I guess, the credit application network, the 7 million to 10 million you mentioned for '14, is that mostly from that still, or are you assuming a build-out and what is exactly that you're assuming in there?

Mark F. O'Neil

So let me just correct something you just said. It will not be 7 million to 10 million in 2014, we'll be ramping our way toward 7 million to 10 million, which is a steady state number. We won't likely see steady state until the end of 2 years. So really, maybe run rate at the end of '14 but definitely not for '14. So in that relationship, look, it's probably not appropriate to get into the details of the pricing and the agreement, but the contract is basically structured for us to support them in the overall processing of a loan and all the activities involved with putting a loan on the books. So that's credit application, that's the contract itself, it's structuring payments to help find the best transaction for the consumer, and that package of processes and services is what we price. By the way, as I mentioned on the call, we not only expect to help them change the sales and financing process and enhance it for new cars but we also expect it for motorcycles and sport activity vehicles, which should expand the market for us. And all of that will be transacted on a per completed transaction from American Honda Finance, not per credit app as we bill traditionally. Does that help? You can do a little math on -- look at Honda's total sales and you can come up with some probably numbers that are in the ballpark, but we're certainly not getting into any detail on the nature of the agreement beyond that.

Operator

Our next question comes from Raimo Lenschow from Barclays.

Chris Hogan - Barclays Capital, Research Division

This is actually Chris Hogan in for Raimo. A quick question on the Honda deal as well. Can you just talk a little bit more about exactly how in-depth the development work is that's going to go into the platform? And is there any risk that it takes longer than you guys expect or takes more money than you expect to kind of build that platform in conjunction with them?

Mark F. O'Neil

Yes, so it's an extensive build, to be very candid, and it's scoped out as a project with multiple deliverables substantially over a 2-year period so you can get a sense just from the time frame alone that this is a very big endeavor. Now that said, the building blocks of that technology effort are many things that DealerTrack has already has expertise in. So whether that's credit applications, whether that's eContracting, whether that's desking services, menu services, all contract processing type pieces of technology. So many of the building blocks we understand well. They'll be put together in a very different way than they are today. There will be many enhancements to those technologies. We're going to leverage, in essence, a move to what we call DT 2.0, which is built in open source and many of our current solutions are built in .net. So there is some risk as we go through that. This has been a very long journey though. We've been working on this multiple months with Honda and scoping out what we need to do, how we're going to do it, what they're going to contribute versus what we're going to contribute. And I think we've taken many steps to mitigate the potential risk of a large-scale project. But it is a big project. To say there's no risk would not be appropriate. But I think we have managed those risks and I think they're embedded in our guidance and you'll notice that we don't -- we don't expect any material revenue contribution this year; that gives us a little bit of wiggle room on our game plan.

Chris Hogan - Barclays Capital, Research Division

Okay. No, that makes sense. And then, I mean, I think you talked about a little bit in the press release, but with those milestones obviously that determines whatever, certain pieces of the revenue that's embedded in the agreement kicks in with each milestone that gets delivered, I assume. Is that just how that -- that's how the agreement is set up?

Mark F. O'Neil

Yes. And look, again, it's a multi-phased agreement. At the end of Phase 1, we'll be in a position to earn the first level of revenue as it may be in that agreement and then there's a Phase 2 and then there's a Phase 3. And as we work through the phases, we have an opportunity to ramp the total revenue from the relationship.

Eric D. Jacobs

And it's not just revenue from the relationship. It gives us the ability to cross-sell Honda dealers with our other subscription products and solutions.

Chris Hogan - Barclays Capital, Research Division

Okay.

Mark F. O'Neil

Yes. I think once we roll out Phase 1, we'll be in a strong position. We will be well integrated with virtually every Honda and Acura store because to deliver Phase 1, we've got to produce technology and process improvements for all of their dealer network.

Chris Hogan - Barclays Capital, Research Division

Okay. Okay. That makes sense. And then as you look at the full of 2013, I know you talked a little bit about it in Q1, but how do you think about the mix, the credit quality of the borrowers throughout the full year, do you expect any material change or should it hold relatively stable compared to what we saw in 2012?

Mark F. O'Neil

Yes, we think certainly talking to the lender community, no one expects a material shift in credit quality. We are seeing right now what we typically see and that's in a -- post the receipt of electronic tax returns, we usually see the subprime or less strong credits come into the market. They are coming into credit, into the market, as Eric said, a little bit later because as, I think, we're all well aware, with all the tax rule changes this year it took a while for the government to kind of get all the new forms up and going. So we've seen a little delay. That said, it's starting to pick up pretty materially right now at the end of February; if the momentum continues into March, look, we could be right on track. We're just giving you the heads-up that it could shift a bit into April where prior years we would have seen the spike clearly in February and be tapering down by the end of March.

Chris Hogan - Barclays Capital, Research Division

Got you. Okay. And then just last one real quick. The Casey & Casey revenue, you said it was about $7.5 million in 2012 and I just want to make sure I heard you guys correct. That's not obviously included in any of that transaction revenue guidance that you gave. And you expect that to grow about 15% in 2013, right?

Eric D. Jacobs

So yes to your first question, it's not included in our guidance, and it should grow relatively consistent with our transaction revenue growth this year in 2013, which is about 12%. And the reason for that is that there is some deferred revenue negative impact. But we won't have the results for the full year, it will be for that portion of the year that we own it. So it will be a prorated piece.

Operator

Our next question comes from Gary Prestopino from Barrington Research.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Mark, with signing of Honda and Acura, what captives don't you have at this point now? Is it just Ford and Toyota, x Toyota Southeast?

Mark F. O'Neil

Yes, that's exactly right, qualified. Toyota and Ford are on a competitive network. BMW and VW still have proprietary networks, so similar to what Honda had for all these years. They have their own internal network, they don't use an external credit network. So I guess you can say, there are 4 captives that for different reasons that are not on our network. VW includes Audi, by the way, and it's all the same corporate structure.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Okay. Great. In terms of Cars.com, are you doing the same thing for them that you're doing for Auto Trader? Are you putting that -- was it FinanceDriver on the website or I'm mistaken?

Mark F. O'Neil

So, FinanceDriver and PaymentDriver are contemplated in the relationship. There are also some other things we're going to do with Cars.com, which is too early to articulate, but let's say the relationship we expect to be a bit broader.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Okay. All right. And then in terms of -- just a little confused here with titling and registration and states that do it. Can you -- how many states allow for electronic registration, how many allow for electronic titling and how many are you in respectively in each of those categories?

Eric D. Jacobs

I'll take that one. So in terms of registration, which is the dealer side of the business, we're in 15 of 24 states. And for electronic lien and title administration for lenders, we're in all 18 of those 18 states.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Of 18. All right. So given, are there -- in a state like Louisiana, probably a midsized state, population wise, are there multiple entities that do this electronic registration? And then in order to get into the other states, too, it's got to be a buy versus a build decision then?

Mark F. O'Neil

So yes, there are multiple entities. That said, Casey & Casey is the leader in Louisiana. In other states, there are both greenfield opportunities and acquisition opportunities, and it really depends the state. There are some states that have nothing electronically today so it would be a greenfield for us or any competitor because today, everything is done in a manual, traditional paper process way. So and that's -- when you look at the 26 states that no one's in, is that right, there are 24 total available that says there are 26 where there's not an opportunity to do an electronic transaction. In those, it's a level playing field. So there are 9, 24 minus 15, that we're not in today. The opportunity for us exists to either greenfield and go in and build a relationship with the DMV and then go knock on dealer by dealer door or potentially to look at relationships with existing players in that market. And I think, much as we did in Louisiana, we'll continue to look at all alternatives and with no particular bias other than what makes the most economic and strategic sense for DealerTrack.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

So what -- in the states that -- in the 9 that you're not in right now, if you were to greenfield, what do you have to do? Do you have to get a direct electronic connection into the DMV?

Mark F. O'Neil

Yes, and that takes time, takes resources and it sometimes, the challenge, the bigger challenge is often the DMV's resources and time as opposed to our own. They have certain windows they open up where they let technology providers come in. You obviously have to be certified. Those windows aren't always open. When they are open, they don't always have the resources prioritized to necessarily do something with you even though you might want to do it with them. So there are a lot of variables here and honestly, it's very hard to give you a cookie-cutter answer for any one state of the best way to go in because it does vary state-by-state and it's why we chose the acquisition route for Louisiana.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Just one last question on that. With registration of vehicles, does the dealer, when you trade in a car, does the dealer have to register that car with the DMV as well? And would that be done electronically through the system or is it just on car sales to the public?

Mark F. O'Neil

It's just on the car sales to the public, but what you might do, when you trade a car, a dealer might go on to the electronic system to verify the current ownership and registration of the vehicle to make sure there are no issues. In some states, you could be liable if you take a car in trade, and say there are outstanding tickets or liens on that car, you have to make sure you fulfill the resolution of those liens or tickets, et cetera. And so the electronic systems are very helpful at the time of trade for that purpose. But until the car is resold, it's not reregistered. It gets registered only upon sale.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

I promise, just 2 more questions. Would a dealer sole-source this or would a dealer multiple-source this?

Mark F. O'Neil

No, I would say generally speaking that this is going to be a sole source. I think it would be very rare. There may be some cases but it would be the minority where a dealer would have more than 1 system.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

And then the average ticket for this, can you give us an idea of what that is or is that something you can't make public?

Mark F. O'Neil

No. It's just that it varies so significantly and it's regulated by every state. Probably $3 to $15 is probably the breadth of range right now in registration. I can maybe narrow that down for you a little with some more data. That's a pretty good range, though. It's not going to be too far off. It varies a lot.

Operator

Our next question comes from Matt Williams from Evercore Partners.

Matthew L. Williams - Evercore Partners Inc., Research Division

Just 1, I guess, 2 questions on the Honda deal that hasn't really come up to this point, but we've talked a little bit about the revenue milestones and obviously that's something that's further down the road. I'm a little more interested on the expense side and I understand that it's going to accelerate some investments for this next year and into '14 as well. But can you provide any sort of color on sort of how, is that going to be sort of a set level of increased expense each quarter? Or is that going to ramp throughout the year? Just any sort of linearity color that you could provide would be helpful.

Mark F. O'Neil

Yes. So most of the investment and the ramping of the team will be made between -- well, it's already being made between now and April, so substantially over a 90-day period. And then it stays very constant. We committed to a team of a certain size that we thought it took to execute the project and I think we can stick within that as we move forward here. So I wouldn't expect a lot of variability in the size of the team. And in terms of expense, $4 million to $5 million of annual expense roughly for us for that team.

Matthew L. Williams - Evercore Partners Inc., Research Division

Okay, that's helpful. And then, the other sort of component. As you sort of hit these milestones throughout the development process and more things go live, is there an opportunity to take what you're developing with Honda to other vendors and other relationships that you have? Or is this strictly going to be sort of just strictly developed for Honda and it's going to be just for them going forward? Or do you have other revenue opportunities outside of just the relationship with Honda with some of the development work you're doing?

Mark F. O'Neil

Yes, typically what we've seen when we've done work of this nature, even the early days when we did a lot of, call it, unique development for various lenders who came onto the network, maybe it was reporting, maybe it was payoff quotes, there's a lot of functionality in our system that is driven by individual particularly large lenders' needs. Honda has a very unique vision of what they like to do and our goal is to execute that vision on their behalf. Do I think others will follow? I don't think they will in terms of a holistic way. Is any 1 lender likely to say over the next year, 2 years, 5 years, hey, that was a pretty neat thing. Could you do something similar? They might. It's an industry that we've been surprised at the lack of necessarily going in the same direction as one another. So, look. I would tell you that for now, our energy is focused on developing it for Honda and meeting their unique needs and we'll see what happens with others.

Matthew L. Williams - Evercore Partners Inc., Research Division

Okay. Great. And then maybe just one last one, sort of switching gears a little bit. But you've announced, I guess, the pilot with Cars.com. Could you provide a little bit of an update on the Auto Trader relationship and sort of how that's progressing?

Mark F. O'Neil

So Auto Trader continues to -- the pilot continues to go on. We have identified between the 2 companies some changes we'd like to make based on our learnings from the pilot. It'll be very late the first quarter, early in the second quarter as those changes go into effect. I think based on what we learn from those changes, we'll be able to more definitively comment on when we go from pilot to something beyond that. So stay tuned. I don't think it will have a material impact on either of our businesses in the first half of the year and depending on what we learn in the second quarter, it could start to have an impact in the second half.

Operator

Our next question comes with Mitch Bartlett from Craig-Hallum.

Mitchell O. Bartlett - Craig-Hallum Capital Group LLC, Research Division

So from 60,000 feet, we've just gone through Auto Trader and Cars.com, but in the past you've been a little bit reticent to give kind of the green light on digital retailing, the dealers kind of contracting with you on digital retailing. Did you come off the big conference -- I think I heard you say earlier that you expect digital retailing to be material in 2013. Are you getting a sense that these guys are starting to move in that direction, the dealers?

Mark F. O'Neil

Yes, so call it materializing immaterial growth. It's still small, the subscription pricing's under $400 here so and it depends on what you buy. So it will take a while for that foundation to build up. But I will tell you, it far exceeded our expectations at NADA. It was one of the areas of greatest interest. We are in the process of putting some white papers together based on the experience from the pilot. In terms of conversion rate, I will tell you we've seen conversion rates, and this is not statistically significant yet, in excess of 30%. So that means someone who went through part of the digital retailing process, what percent of those customers convert and actually bought a car, not always the same car but bought a car from that dealership. That's an incredibly high conversion rate and we're very intrigued by it. As I said, it's not statistically significant yet, but we've seen enough early data points that suggest there's a lot of opportunity with this solution. It's going to take, I think, a couple iterations to tweak it and figure out how to optimize that, how to repeat those kind of results on a large scale. But it will be a growth driver for us in the future. And I would say the most sophisticated dealers particularly in large metro areas are most intrigued by digital retailing, and we're very happy with the momentum here. So stay tuned. I think -- we can talk in more detail because we'll have a lot more data at our hands when we do our first quarter call.

Mitchell O. Bartlett - Craig-Hallum Capital Group LLC, Research Division

Second question would be, not a lot of this call was devoted to ClickMotive. You just acquired it. It's early days, but it was a significant new market that you're opening up, a new kind of -- is it fair to say that as you are an acquisitive company and you're obviously back filling certain areas with some of your acquisitions, but that front-of-the-store online marketing kind of exposure will be an area that you focused on? Is it a high priority area going forward?

Mark F. O'Neil

Yes. I would say interactive and digital are high priorities for us because they are also high priorities for our customers and so we want to remain in sync with them. To be clear, we actually had a small website presence with eCarList and so ClickMotive was really doubling down because we did see the opportunity in the area. And if you think about the digital retailing offering that we've been discussing, that fits very nicely with that business. And it helps us considerably in executing on mobile. They had an award-winning mobile application for websites and there's a lot of learning for us there. They're very good in social, obviously a big buzzword these days. So I would say the broad front-end presence is definitely an area that we're focused on but not singularly. We're focused on it in an integrated fashion of how does it fit with all of our other solutions and how do we integrate those set of solutions to create a seamless process bridging what's happening online with what's happening in store so that it's not just managing 1 activity but actually connecting 2 parts of the ultimate purchase process.

Mitchell O. Bartlett - Craig-Hallum Capital Group LLC, Research Division

Last question is related to Honda. So if I go back to the GMAC deal that you did, and it was also a very large customized deal with an implementation period but also at the end of that, there was supposed to be the opportunity not only to capture a lot of their basic credit app business but also to expand to a lot of your other products, compliance, et cetera. Did that happen such that you see kind of these big deals paying off in an expanded cross-sell?

Mark F. O'Neil

The short answer is yes. The ROI on the Ally relationship has been terrific. And I would be so bold as to say for both of us. Ally got to its expand its footprint, they have materially expanded their volume, particularly outside of new cars, and we've expanded, obviously, our relationship with them and we've expanded it beyond credit apps. So I would say on all dimensions, that relationship has met or exceeded our expectations both quantitatively from a financial perspective, as well as qualitatively.

Eric D. Jacobs

And it's not required for the Honda deal to make sense for us financially. We expect it in terms of our ability to cross-sell other products and such, but we believe that we can generate significant revenue just from the relationship with Honda.

Mark F. O'Neil

Said another way, call it the cross-sell, we expect the icing on the cake, but this is a long-term relationship. In the near term, we're putting a lot into this Honda relationship, as you can tell, and we adjusted our guidance here, as well as we're indicating it's going to take multiple years to get to steady state. So its complexity is definitely greater, but the structure of the relationship supports that. So, look, we're excited about it. I think we'll be able to, I think, have a more engaging dialogue for all parties at the end of the year when we've delivered our first phase versus now. Look, it's a lot of good feeling right now. I think both companies are feeling terrific about the decision. The next 9 months are all about execution and building some code and getting it deployed.

Operator

That is all the time we have today. I'll turn it back to Mark O'Neil for closing remarks.

Mark F. O'Neil

Thank you very much, operator, but mostly thanks to all of those on the call. Thanks for your support through 2012. I think if you look back, we told you what we were going to do at the beginning of the year and we did that plus some. We've given you, we think, very solid guidance for this year. I think reflective of our continued excitement about the business, our ability to continue to grow it organically and find unique opportunities to supplement that growth from an acquisitive perspective, so we think the future remains bright for DealerTrack and we appreciate your continued support. So thank you very much, everyone.

Operator

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!