DealerTrack Holdings, Inc. Q1 2009 Earnings Call Transcript

DealerTrack Holdings, Inc. (TRAK)

Q1 2009 Earnings Call Transcript

May 8, 2009 8:00 am ET

Executives

Katherine Piscopo Stein – IR Manager

Mark O'Neil – Chairman and CEO

Eric Jacobs – SVP, CFO and Chief Administrative Officer

Analysts

David Scharf – JMP Securities

Peter Goldmacher – Cowen & Co.

Chris Mammone – Deutsche Bank

Franco Turrinelli – William Blair & Co.

Gary Prestopino – Barrington Research

Tom Roderick – Thomas Weisel Partners

Mitch Bartlett – Craig-Hallum

Presentation

Operator

Good morning, everyone, and welcome to DealerTrack's first quarter conference call. Today's call is being recorded. At this time I would like to turn the conference over to Ms. Katherine Piscopo Stein. Please go ahead.

Katherine Piscopo Stein

Thank you, Katy. Thank you, everyone and good morning and welcome. Joining me today are Mark O'Neil, Chairman and Chief Executive Officer and Eric Jacobs, Senior Vice President, Chief financial Administrative Officer of DealerTrack.

Mark will begin today's call with an overview of our financial results for the first quarter and other key metrics. He will then provide a summary of the quarter from a business and strategy perspective. He will also discuss some of our latest accomplishments on auto financing and sales environment as well as our continued strategy for 2009.

Eric will then provide further details on our financial performance for the quarter and discuss our full year guidance and assumptions for the remainder of 2009. We'll then be available to answer your questions.

Before we begin I'd like to remind everyone that the remarks made on this conference call will contain forward-looking statements made pursuant to the Safe Harbor provision 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 filings with the SEC such as our 2008 Annual Report on Form 10-K.

We disclaim any obligation to publicly update or revise such statements to reflect any changes in our expectations or in events, conditions or circumstances on which any such statements maybe based or that may affect the likelihood that actual results will differ from these set forth in the forward-looking statements.

We also use non-GAAP financial measures to represent business performance. A reconciliation of GAAP to non-GAAP financial measures is included in yesterday' press release which is available in the Investor Relations section of the Company Web site at dealertrack.com.

Now I like to turn the call over to Mark O'Neil, Chairman and CEO.

Mark O'Neil

Thanks, Katherine. Hello, everyone. Thanks for joining us this morning, particularly those on the West Coast who had to get up a bit earlier than normal. We appreciate that. As all of you are aware, the second half of 2008 and the beginning of 2009 have brought economic challenges to the retail automotive industry which we haven't seen in decades.

The continued problems with credit, the reality of Chrysler filing for bankruptcy and the threat of GM's bankruptcy or restructuring weigh heavily on our customers.

Despite these challenges as we look back on the first three months of 2009 we're pleased with the ongoing execution of our strategy and the continued expansion of our customer base in a contracting industry.

We're especially pleased with the acquisition of AAX, PriceDriver and other assets from JM Dealer Services in January of this year.

Let me first start with a discussion of our financial highlights. Revenue for the first quarter of 2009 was 55.7 million and the GAAP net loss was 5.6 million. Diluted cash net income per share was $0.04 for the quarter and adjusted EBITDA was 6.1 million.

The first half of 2009 will be difficult to compare to the first half of 2008. We did not see the rapid deterioration of the automotive financing environment and retail sales until the second half of 2008.

We expect that this trend will continue at least through the first half of 2009 because for the first time since 1982, the first quarter seasonally adjusted annualized rate of sales, also refer to as SAR fell below 10 million units.

Let's talk about some transaction drivers and let me start by discussing the metrics that impact our transaction business.

Our lender to dealer relationships decreased from approximately 156,000 to approximately 134,000 since the beginning of 2009. A 14% decrease. You may recall that our 2009 guidance was based upon on an assumption of the number of lender-dealer relationships in the DealerTrack network would decrease between 10% to 15% for the entire year. However we've lost nearly that many relationships in just the first quarter. While we expect this negative lender to dealer relationship trend to continue into the second quarter, we expect it to moderate significantly based on recent conversation with our largest lenders.

The largest and most important driver of lender dealer relationships is lenders on our network. As financing institutions exit indirect auto finance or decrease availability of origination, our dealer customers have fewer options to send a credit application to obtain consumer financing. This lack of options reduces our transaction count and decreases the dealers' chance of selling a car, which further hurts the dealership.

At the end of the first quarter we had 736 financing sources on our network, a net gain of three lenders in the quarter. The net gain is smaller than our historic quarterly gains as we saw 16 lenders close or exit indirect auto lending in the first quarter.

Despite the slow pace of adding new lenders during the first quarter we still believe we can add approximately 100 net new financing sources this year because our pipeline of lenders remains very strong, even stronger than in previous first quarters.

We believe that the large number of lenders on our network creates a competitive advantage for us. Dealers want to start the credit application process with the network because then the best chance of securing financing. Having more financing sources gives our dealers more chances to finance a car and make a sale.

The absolute number of lender to dealer relationships is also impacted by the number of active dealers on the network. However, it does not necessarily impact our transaction volume as significantly as the number of lenders.

Our data shows that while consumers may shop at more than one dealership for a car, they generally apply for credit at only one. As of March 31st, there were approximately 19,000 active dealers on the DealerTrack network. We expect the number to continue to decrease this year as GM and Chrysler execute dealer closure initiatives.

Another factor negatively impacting our transaction business is an increasing number of dealers are reluctant to increase the quantity of applications they send to multiple lenders for fear of being cut off by a lender because of deteriorating look to book ratios.

Now let me turn to some positive credit trend. Even though lender to dealer relationships are below our forecast we have seen a significant increase in the number of unique applicants seeking financing on our network this quarter. Additionally we've seen an improving trend in application approvals by auto financing sources across all bands; all credit bands, specifically in subprime and near prime approval percentages.

According to CNW, approval ratios for subprime applications have improved from 14% to 19% and near prime approvals have improved from 73% to 80% from October of 2008 to March of 2009.

As we have also stated, transaction revenues further impacted by new and used car sales. The new car seasonally adjusted annualized sales rate SAR was 9.4 million for the first quarter. This is compared to a 15.3 million unit SAR in the first quarter of 2008, and a 10.5 million run rate in the fourth quarter of 2008. April SAR was 9.5 million units, a very slight improvement from the first quarter average, but nonetheless an improvement.

On the other hand, used car sales from franchise dealers in the first quarter were only slightly lower than the first quarter of 2008. Approximately 2.2 million used units were sold in the first quarter. It is uncertain what the total impact of Chrysler's bankruptcy and GM's potential bankruptcy will be on total car sales.

Impacted by all of these economic trends, we've processed 14.3 million transactions in the network during the quarter versus approximately the same number of transactions in the fourth quarter of 2008 and 23.9 million in the first quarter of 2008.

Our forecast for the balance of the year assumes transactions will remain at or close to first quarter levels.

Now let's talk about some of the subscription drivers. We believe our subscription business remains well-positioned to continue taking market share. A silver lining of these challenging economic times is that dealers are looking for ways to use technology to reduce costs and drive greater efficiency. We believe dealers find our solutions to be of a higher value on lower cost than the competition. That's confirmation of this opinion.

DealerTrack was named the winner of the Auto Dealer Monthly 2009 Dealers' Choice Awards in three categories

First, DMS. The DealerTrack, Dealer Management system, DMS, was named the Diamond Award Winner in the DMS category. The Diamond Award is the highest in the category. Inventory solutions. DealerTrack's AAX inventory management solution also received a diamond award. Third and lastly, our dusking tool in the category of dusking tools, DealerTrack sales maker product received a platinum award in the dusking software category for the second consecutive year.

The total number of dealers with subscription products on our network was approximately 14,600 as of the end of March, compared to approximately 14,300 as of December 31, 2008. We continue to add subscribing dealerships despite the exit of approximately 270 dealerships during the first quarter.

Our account was helped in part by the acquisition of AAX. Credit availability is also impacting our dealership customers and in turn subscription sales. The credit crisis is accelerating dealership closing because tightened credit makes floor plan financing more difficult to secure. Lack of credit availability also makes some dealers hesitant to incur upfront or monthly costs of a subscription product even if there maybe a clear return on investment on that solution.

Average spend per dealer with a subscription. During the first quarter, our sales team began focusing on offering solutions to our dealer customers instead of individual products. These four solutions are, DMS, Inventory Management, Sales and Compliance. We believe this will increase customer usage and retention rates longer term and allow DealerTrack to capture a larger share of dealer IT spend.

In the first quarter of 2009, the average subscribing dealer spend $635 per month on subscription products, compared to an average monthly spend per subscribing dealer of $595 per month in the fourth quarter of 2008.

This number was positively impacted by the acquisition of AAX and by the success of our DMS solution. Both of which are higher price offerings. We expect this number to continue to grow through 2009 and to be approximately $700 in the fourth quarter as we cross-sell our products to existing subscribers and generate interest in our bundled solution.

Importantly, the bankruptcy of Chrysler and pending GM dealership closures will directly impact our subscription business. GM has indicated that approximately 42%, which is approximately 2,700 dealers will lose their franchises in the next two years. Chrysler has not yet indicated what bankruptcy will do to its dealer count and the combination of Chrysler and Fiat may change any existing speculation about dealerships. Recent filings have indicated that Chrysler may close 25% of its dealerships in conjunction with the bankruptcy; however, at this point that is still speculation.

In the past, we have stated our exposure to any given manufacturer substantially mirrors their position in the industry, in looking specifically at Chrysler and GM dealerships we have found we have subscriptions in approximately 54% of those dealerships. While we cannot time GM and Chrysler's accelerated dealer closures, the following example may help gauge the potential impact. Assume that 30% or approximately 2,900 of the total GM and Chrysler dealers close on July 1st 2009, if we apply our approximately 54% subscription penetration rate and average monthly spend per subscribing dealer of $635 to these dealers, we would expect to lose almost $6 million in revenue in the second half of 2009.

Additionally, our current outstanding balance and accounts receivable as of April 30, 2009 for GM and Chrysler directly is collectively approximately $1.1 million. We have not quantified any accounts receivable exposure from GM and Chrysler dealers or captive finance companies, because there are too many variables that could impact the actual exposure.

Long term, we expect this dealership consolidation to make the remaining dealerships much more profitable. We believe that of approximately 4,000 franchise dealers closed, leaving 16,000 dealerships in the United States, the average dealership profitability could rise from approximately 1% today to 1.7% in the future.

Overall, economic fears have elongated our sales cycle and decreased dealer appetite for new subscription products in the quarter. We believe we are managing dealer worries and spending by continuing to demonstrate clear ROI to further address dealer concerns, we have recently introduced DealerTrack assurance commitment, which provides the dealers and dealer groups will not be responsible for future monthly subscription fees on any new subscriptions for DealerTrack solutions, used by stores that are subsequently closed, sold, or lose their floor plan financing. We believe this program will help eliminate one of the challenges our sales people have encountered.

Now some specific highlights on each of our four solutions. DMS highlights. Relating to DMS, in the first quarter, dealers became more concerned with the upfront conversion trending costs associated with switching dealer management systems. While an average of 20,000 to 25,000 an one-time charges is typically earned back by dealerships in approximately seven months of monthly savings we are sensitive to dealer concerns and are working with our dealer customers to offer alternatives to the one-time charges. We are testing programs that may result in a shift from recognizing data conversion, forms programming and training fees upfront to recognizing higher recurring monthly fees over the customers’ subscription life.

To meet expected demand, we have increased the headcount, supporting our DMS business. This increase in headcount is offset by the realignment of our workforce in January, which reduced overall headcount by approximately 90 individuals. We expect this investment in people for our DMS business to see a return in the latter part of 2009 and accelerate in 2010.

Lastly, the launch of OpenTrack at NADA in January was met with great enthusiasm by dealers and technology vendors alike. Since NADA over 85 technology vendors have expressed interest and the list continues to grow.

OpenTrack further differentiates us from our DMS competition by allowing other technology vendors including competitors to seamlessly integrate with our subscription products.

OpenTrack allows dealers to select multiple technology partners without compromising transaction work flow. OpenTrack is a micro version of the iPhone app store we believe we'll create a large group of technology vendors advocating our DMS solution.

Let's talk about inventory management. Dealers are increasingly turning to our inventory management solution to help them increase inventory turns and improve per unit profitability.

With the acquisition of AAX in late January, DealerTrack became the clear leader in the inventory management space with six of the top 10 public groups using one of our solutions, with three distinct offerings, AAX, InventoryPro and PriceDriver, we cover the full spectrum of the dealerships inventory management needs ranging from the small single point dealership to the enterprise wide solution for a large dealership group.

Dealerships using our inventory management solution are able to optimize their inventories and turn them faster, which is even more important than the current credit environment as many providers have floor plan financing, increase interest rates as inventory ages.

We expect to continue to invest in our inventory management solution as inventory is the most strategic component of the dealers business.

Let's discuss compliance. Increasing government regulation is making a compliance solution a necessity for dealers. A dealer can also help mitigate risk with their lenders with a good compliance program. As a result, we continue to gain momentum with our industry leading compliance solution. As the deadline for dealers to comply with the FTC' red flag rule approaches, which is now August 1st, dealers continue to realize that our comprehensive compliance solution can help them not only run red flag identity checks, but also help them safeguard customer data, manage adverse action notices and promote employee education and training. Our most recent web compliance webcast had over 500 dealers participating, generating valuable leads for our sales team.

Now let's discuss sales solution highlights. Our bundling of products in one solution does support the sales process is resonating with dealers. Dealers utilizing the complete solution can implement consistent processes and improve work flow to increase profitability and mitigate risk.

With our sales solution, the sales person on the floor of the dealership can quickly and easily try out several different deal structures and using our dusking tool present them to the customer in a printed menu. This is increasingly critical as financing sources change their auto lending criteria.

As part of the work flow, the customers’ data can be submitted to the applicable lenders and aftermarket providers. Because the sales team and finance team are using consistent tools to show products and options the dealer is providing a better selling experience, thereby improving selling potential and profitability.

A few other events that are important for investors to be aware of. A brief update regarding our pending patent litigation. As we've previously announced, the trial commencement date has been moved to September 1st 2009 in order to allow for more time to address certain pre-trial motions.

Also, on April 29, 2009, DealerTrack filed its preliminary proxy statement with a proposal for a one-time stock option exchange. If implemented, eligible employees would be able to exchange certain options that have exercises prices above the two-week high raiding price for a lesser number of stock options with an exercise price equal to our stocks than current price.

Executive officers and Directors will not be eligible to participate in this program. Exchange ratios will be designed to make replacement options, accounting expense are neutral. DealerTrack believes this program is important to help us to motivate and retain our employees in the current economic environment.

Now, Eric Jacobs, our CFO, will provide further details about our financials. Eric?

Eric Jacobs

Thank you, Mark. Our revenue of 55.7 million for the first quarter break down as follows

Transaction revenue of 24.1 million, subscription revenue of 27.9 million and other revenue of 3.7 million. Our revenue mix continues to shift towards subscription. This was the second consecutive quarter where subscription revenue was greater than transaction revenue. Subscription revenue also grew 25% from Q1 '08 and of this growth, 38% was organic.

Included in our first quarter financials is the acquisition of assets including AAX from JM Dealer Services. We closed this transaction on January 23, 2009. The net purchase price was approximately 30.9 million plus professional service fees and expenses in the amount of approximately 400,000.

As we stated on our last earnings call we expect this acquisition to be dilutive to adjusted EBITDA margins in 2009 and to become accretive in 2010. During the first quarter, we incurred approximately 6.7 million in restructuring charges, which approximately 3.9 million was a non-cash expense.

Restructuring also includes a 200,000 charge for the relocation of our digital services facility and a gain of approximately 200,000 related to the sale of our SES business. The SES business accounted for approximately 1.9 million of revenue in 2008.

For the quarter, GAAP net loss was 5.6 million, the GAAP net loss per share was $0.14, cash and income was 1.8 million and the cash net income per diluted share was $0.04. These amounts are all negatively impacted by the restructuring.

Adjusted EBITDA for the first quarter was 6.1 million, compared to 13.8 million for the first quarter of 2008. The adjusted EBITDA margin was 11% for the first quarter of 2009. Adjusted EBITDA was negatively impacted by a reduction in transaction volumes, integration of the recent acquisition, increased investments in our DMS business.

As we discussed in our last earnings call we expect the adjusted EBITDA margin to be compressed particularly in the first half of the year. We also stated our belief that we would have improved leverage in our subscription business in the back half of 2009, driven in part by increases in DMS and inventory management sales.

Before consideration of GM and Chrysler closures we expect the fourth quarter adjusted EBITDA margin to be approximately 16% to 18%. Our expectation is due in part to cost management plans we implemented in April. Our margin percentage however will be ultimately impacted if we cannot reduce costs further to offset accelerated dealer closure initiatives by GM and Chrysler.

When the timing of these dealer closures is clear we will be more definitive on the financial impact to us. We expect most of the impact to occur in the second half of 2009 and 2010. While we are aggressively controlling expenses across the organization, we are still targeting additional new investments in the areas of business that we believe will benefit substantially from those investments. As a result we've increased our DMS and inventory headcount.

We some types need to incur expenses in advance of revenue. For example, new DMS sales and installation of employees generally takes about 90 days to become productive and start contributing revenue. This is a critical investment in the business because our competitors lock dealers into five-year contract and if we are not able to install DMS system when a dealer comes to us we may have to wait five years to see that business again.

Switching to cash flows, cash flows from operations was a negative 1.2 million for the first quarter of 2009 compared to 9 million for the same period last year. Cash flow from operations was negatively impacted by 2.8 million related to the restructuring.

We ended the first quarter with approximately 161.6 million in cash, cash equivalents and short-term investments. Our effective tax rate for the quarter was 37.6%; our guidance for the full year 2009 assumes an effective tax rate of approximately 34% to 38%.

We did not repurchase any shares during the first quarter of 2009 under our authorized stock repurchase program. This program expired on March 31st 2009. Capital expenditures for the quarter were 5.3 million and were affected in part by the continued build-out of our new Canadian platform, the relocation of our digital services facility to Tennessee and other capitalized software.

With regards to guidance. As we have discussed, our number of lender to dealer relationships and industry new car sales are substantially below our previous forecast. As a result we've lowered our full year revenue guidance. We expect our transaction revenue to be relatively flat from quarter to quarter for the remainder of the year with less seasonality than prior years.

However, due to tight cost management we still expect to meet our adjusted EBITDA, cash net income, diluted cash net income per share guidance for the full year. Additionally, GAAP net loss for the year was reduced primarily due to a change in our estimate for full year amortization of acquired intangibles from 25.4 million to 20.3 million. This change relates to the actual valuation of the assets acquired in the AAX acquisition on January 23.

To summarize, a revised GAAP earnings guidance is as follows

Revenue for the year is expected to be between 232 million and 238 million compared to the previous estimate of 242 million to 250 million. GAAP net loss for the year is expected to be between 7 million and 5.5 million compared to the previous estimate of 11.1 million to 9.6 million. And GAAP net loss per share for the year is expected to be between $0.18 and $0.14 compared to the previous estimates of $0.28 to $0.24.

We are reaffirming our non-GAAP earnings guidance for the full year, which is adjusted EBITDA between 31 million and 33 million, cash net income between 16.7 million and 18.2 million, diluted cash net income per share between $0.40 and $0.44.

Our guidance assumes a full-year decrease in lender to dealer relationships of 15% to 20% from January 1, 2009. It also assumes U.S. new car sales of approximately 9.5 million units to 10.5 million units and franchise dealership used car sales of approximately 12 million units to 13 million units in 2009. Lastly, we continue to use the National Automobile Dealers Association estimate that 1,100 dealers will close during the year.

Our per share expected cash net income for the full year 2009 is based on the estimate of 41.3 million diluted weighted average shares outstanding and per share expected GAAP net loss for 20009 is based on 40 million basic weighted average shares outstanding.

Our guidance does not reflect impacts accelerated GM and Chrysler dealer closures as this information we have today is still speculative. While we know GM forecasts approximately 2,700 dealers will close between now and 2010, we do not currently know the rate of closure. We've heard a lot of speculation about Chrysler's dealership plans, but nothing is definitive yet. We expect to have more clarity around GM and Chrysler dealerships closures by our next earnings call.

Operator? We'll now take questions from conference call participants.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). We'll go first to David Scharf, JMP Securities.

David Scharf – JMP Securities

Good morning.

Mark O'Neil

Good morning, David.

David Scharf – JMP Securities

A few things, Mark. Obviously we know about the cyclical headwinds, I like to focus more on kind of how you think the structure of your end markets are going to ultimately look once we come out of this cycle. You've mentioned something, first on the transaction side, you've made a comment that currently dealers are worried about sending sort of multiple applications, they don't want to, which I interpret to mean they don't want to be sort of viewed as being shopping around too much by a particular lender. Do you have any sense that once we emerge from this credit crisis there is more stability in both the lender and the dealer base that we're going to see the same type of profile as we saw prior to this cycle in terms of the number of applications that a dealer typically sends out or do you think there's anything structural in the industry that's going to change suggesting that the typical borrower has a lower number of normalized applications?

Mark O’Neil

Good question, David. Couple of thoughts on it. One, I do think that there is a structural change. I think fundamentally, part of the decline, and then the last year from 2008-2009 we've seen roughly a 25% decrease in the number of submissions per application, pretty unique application to lenders and look, big part of that is lenders deciding to pull back and lend only to their most profitable dealers and because virtually every dealer out there has gone through the experience of being cut off by one or more lenders they're very reluctant to engage in behavior that could cause that to happen. Now, the good news is mostly on the credit side, we see those things subsiding, but we clearly felt it through the first quarter.

The other thing to note is we've lost a number of subprime players and of the ones remaining number of those are now capital constrained in terms of how many loans they can originate. So I think those two combined factors, particularly, the latter two, would suggest that the 25% decline in behavior is not likely to return all the way. Do I think we can get 5% or 10% of that back? I think we probably can. I think most of the transaction volume increase though will come from an increase in unit sales over the next few years as opposed to an increased behavior on dealers’ shortcoming more applications.

David Scharf – JMP Securities

Okay, fair enough. And just to clarify, I think you had said based on current trends you're pretty much forecasting aggregate transaction volumes for the rest of the year, close to Q1 levels?

Mark O’Neil

Yes, in essence, to be very flat, and look, you can read in the general press, there are a lot of folks who think that's too conservative, cover of automotive news not cover, but full page article at a Mazda talking on the industry in this week's automotive news and other executives all say, it's going to be a stronger second half. We're just not ready to say that. In fact, I'd tell you that the first weekend after Chrysler announced its bankruptcy looking at volumes in the network you can tell, consumers are worried right now. They want some clarity as to what's going to happen and it maybe a 60 day in and out and again that's very speculative, but I think we've got to see that stuff sort out right now and we've got another good quarter of this consumer reluctance to do anything and to maybe even more so given the bankruptcy shadows and when that stuff clarifies, perhaps, we're a little better off. Certainly, the banking situation as we all can see from the general news appears to be slightly improving. In fact, again in this week's automotive news there is an article at Wachovia, one of the largest independent lenders indicated that they are going to start to increase some lending. I think those are small trends, in fact, they did increase in the first quarter and they are not going to come back in a V-shaped recovery here. It will be very gradual on our opinion so we're being conservative with saying, let's assume it's a flat market through the end of the year.

Okay, turning to subscription sales and the outlook. Just to try to dig through what's behind the subscription revenue number, based on your comment about how much of the growth was organic, I'm calculating AAX contributed close to 3.5 million of revenue in the quarter. If that calculation is correct that now would imply that for the first time, subscription sales organically actually declined sequentially. Number one, is that correct, and number two, did we just see an unusual amount of churn more than offset any new subscription sales in the quarter?

Mark O’Neil

Yes. So you're directionally correct there. And yes, we do think we saw a little bit of an abnormal spike there between Q4, Q1 in terms of dealers' kind of rightsizing their business I'll call it and trying to cut costs everywhere. Look, that combined with a little bit of an accelerated dealer closure number in the first quarter before you saw any of this bankruptcy stuff, we think we're some of the primary drivers behind that.

David Scharf – JMP Securities

Okay. And your hypothetical on the GM and Chrysler situation, it looks like you're actually less penetrated among those franchises than you are as a whole I think when you used to be reporting penetration numbers, is it more, over 60% or so?

Mark O’Neil

Yes, we're 65% penetrated in franchise dealers in general and only 54% in GM and Chrysler. Look, one of the reasons we're reluctant to be too specific and obviously, we gave you this kind of 6 million revenue impact, but to be more specific in that, look, Wall Street Journal this week now it says they think there will be a bidding war for Saturn. First I think at Penske rumored to be buying in and of course you distribute smart cars today and then the rumor was Renault was going to be bidding on it and now there's some discussion that it might be Peugeot as well and maybe even a Chinese company. That's a pretty big change. That's 400 dealers so do you say if someone bids on it do you keep your subscription business and they stay in business or do they go out of business, and until we get some clarity on that, we're just reluctant to be more specific because there's just, the degree of speculation is absolutely rampant right now and each scenario has a different impact to us, but I think 6 million gives you probably an extent of the high end there from a subscription perspective.

David Scharf – JMP Securities

And 6 million was a six month figure for Chrysler and GM?

Mark O’Neil

It assumed a July 1 closing and we have the majority of the GM and Chrysler folks hitting right away.

David Scharf – JMP Securities

Okay, so it's 12 plus on an annualized basis. Last question and I'll get back in queue. In light of what you've seen in the beginning of the year with probably an acceleration of dealership attrition beyond maybe what you were looking for, and then of course the GM and Chrysler events, it sounds like you're still adding bodies on the DMS side that you still remain pretty comfortable within both the pipeline today as well as the longer term opportunity. I mean, has there been any brakes put on those hiring plans or is it still pretty much, I believe it was 100 new bodies on the last call you talked about bringing on board in the first half of this year. Is that still the plan?

Mark O’Neil

Yes. It will be less than that. We did bring on DMS bodies in the first quarter and then at the beginning of the second quarter, we have slowed that down and we talked about being aggressive on cost cutting, a big part of that is postponing future hires. We think at this stage we could probably reallocate some folks internally and if we did that we would reallocate into both inventory and to DMS, because both of those products really are experiencing very good growth and we want to keep fueling that growth, so I talked about if you miss the DMS opportunity, you sometimes don't get another crack at it for another five years, so you want to have enough capacity in place to grab each opportunity that comes up this year, so you will see them moderate. You will not see us add as many people in the next three quarters as we did in the first quarter, but I won't say there might not be a trickle there.

David Scharf – JMP Securities

Got you. Thanks a lot.

Mark O’Neil

You're welcome.

Katherine Piscopo Stein

Dave, we talk to you later.

Operator

We'll go next to Peter Goldmacher, Cowen & Co.

Peter Goldmacher – Cowen & Co.

Hey, good morning, guys. Mark, in the past you had talked about taking advantage of the downturn to continue to be acquisitive and you've already done a deal this year. Can you talk a little bit about how you're thinking about that on a going forward?

Mark O’Neil

Not much has changed. It has to fit and it has to really fit one of our key strategic areas of focus and as we build-out the (inaudible) platform for dealers, it surprisingly valuations and many of the candidates in our pipeline have not adjusted nearly the same extent the market has and as we've always told you, we're going to be disciplined here. I don't see anything on the immediate horizon, but as always the pipeline is robust. Things do change on very short notice. AAX happened very quickly and the timing could not have been predicted and that happens with so many deals. You talk to people for years and years. We plant seeds and build the pipeline and at any one point something could break and come through. So look, with a strategy is still in place we're being very cautious to make sure that any deal we do has the right economics and we're still looking, I guess is really the short story there.

Peter Goldmacher – Cowen & Co.

Okay, great. Thanks.

Mark O’Neil

You're welcome.

Operator

We'll go next to Chris Mammone, Deutsche Bank.

Chris Mammone – Deutsche Bank

Thanks. Let's see, guess a lot been covered already so, maybe just to be clear on the various outcomes for GM and Chrysler, appreciate the color there. So I guess the picture that you painted the $6 million should we think of that as more of a worst case scenario as opposed to a most likely scenario? How are you thinking about that?

Mark O’Neil

I think we would probably think of it more in the likely as opposed to worst case. Look, there are other variables that come into play really on timing and dealer behavior here and it's such a wide range in our modeling. $6 million is a number we gave you because we felt comfortable with that. Do I think it could be worse? I think it's unlikely, but I wouldn't say it couldn't be and could it be less? It could be less substantially if folks, if some of these closures really are transfers of ownership. So, look, I think it's the right number to use right now, Chris, until we have more clarity in the industry, and as soon as we have more clarity, we'll work to get that out to you guys. Look, we've also given you a fairly wide revenue range. I think between the two, the $6 million and the range in revenue, I'd feel like there's high probabilities we can stay within those numbers.

Chris Mammone – Deutsche Bank

Okay. And then –

Eric Jacobs

Chris, this is Eric. Let me just add that we gave you an example that assumes our average subscriptions revenue per month per dealer, the actual revenue for GM and Chrysler dealers is below that, but for purposes of we don't want to give the actual amount out, but because we don't know what actual dealers will be going or not be going, so it's kind of hard to use that as the absolute number, but directionally, we feel like we've given you some information that can help you model some things. We didn't include any transaction revenue impact because as we said in the past we believe those, as long as car sales either remain constant or increase, there shouldn't be any negative impact on transaction as the application will just move to another dealer.

Chris Mammone – Deutsche Bank

Okay. That's helpful, and then I guess switching over to the transaction side, I think I heard you correctly say that you're not modeling any sort of V-shaped recovery, but certainly we've seen those assumptions at least out there from other forecasters, I guess. Could you maybe comment on some of the recent or pending government initiatives and I guess more specifically, has TALF helped at all to this point? I know Nissan did a financing through TALF, but maybe comments there and also maybe your thoughts on potential cash for Congress program and what that might mean for demand perhaps in the back half of 09?

Mark O’Neil

Yes. So we haven't seen any significant impact from TALF. I know there's still talk of it. We've seen a few securitizations get done. I don't know whether they were late first quarter or very early part of April, but they were recent. That's a good sign, but no dramatic shift and that's probably what we would expect to reenergize the industry as a CEO, more healthy pipeline of securitizations and we haven't, but we've seen one off ones and that's encouraging. We went through a year plus dry spell there. So even a few is encouraging, but there's not enough momentum that we would say there's a trend here.

So the second comment, the government programs, if you use Western Europe I guess is a gauge they've had great success with their cash for old age cars, I don't know whether they phrase it as gas guzzlers or environmentally unfriendly cars, whatever their program was, it had a lot of success and stimulated sales and now we're thinking of something similar in the U.S. Anywhere up to $4,500 of rebate money if you trade in an inefficient or a gas guzzler car for a more fuel efficient car, that you would have to believe, based on the data coming out of Europe that, that would stimulate sales in our market. We're not assuming that passes this summer, we're not assuming that sales get stimulated but if it does pass then I would say good, we've been conservative.

The last sentiment I think is probably the most important of all of the items is just lenders appetite to lend. The more readily a lender will lend, and with lending comes a little bit of an assumption of loosening credit criteria, that will stimulate car sales, and I think again, we see lenders more willing to originate loans, but you still see pretty tight standards in terms of down payments going up again and a lot of recent news, some data coming out, down payments were up significantly in the $500 to $1,000 range. Terms for loans are down. We're seeing less extended term loans and we're seeing higher credit scores for folks coming in, meaning the lower credit guys aren't getting the credit or aren't walking in because they're afraid, people are being more conservative in terms of asking for more money down and shorter term loans. You'd want to see those trends start to flatten or turnaround the other way I think to say, hey, credit is a little bit looser and car sales would therefore increase as a result of that. We haven't quite seen that but then again we've seen a lot more chatter that's coming and things are stabilizing. So again, I think the cautious way to go is to assume it doesn't happen for the next three quarters and when it starts to happen then we can readjust our numbers.

Chris Mammone – Deutsche Bank

Okay. That's great color. Thanks.

Mark O’Neil

You're welcome.

Operator

We'll go next to Franco Turrinelli, William Blair & Company.

Franco Turrinelli – William Blair & Co.

Hi, Mark.

Mark O’Neil

Good morning, Franco.

Franco Turrinelli – William Blair & Co.

A couple of quick question here. The lenders that close, was there any kind of pattern there? Are they large, small, subprime, mixed, just give us a little bit more color there, please?

Mark O’Neil

Mixed. Boy, do they have a pattern? No. They don't have a pattern. I'd say most are full spectrum lenders. In April, we did, now that's after the first quarter. FireSide announced they were going out and they were primarily non-prime and I'd call them a good medium size lender, so that one might skew it and that is in the 16th, call it the 17th now that we know of but the others I'd say were just a mix, and the good news is we still have not seen a lender leave our network for competitive reasons or anything from a general operating perspective. I think these are folks still saying auto is a risky segment. I don't want to be exposed to it. It's a bit of a spike. If I look at April and early May numbers it seems to be moderating and again an encouraging trend and again we're not calling a bottom there but hopefully, the first quarter was a bit of a spike there on lenders exiting.

Franco Turrinelli – William Blair & Co.

Ultimately, I guess, with all of these different trends you've talked about, the dealer lender pair number in a sense might actually become less important than before if we see more one-to-one relationships so to speak between dealers and lenders, but a continuing decline of that number might not actually indicate a continuing decline of applications.

Mark O’Neil

You're absolutely right. In fact we've noticed the same thing when we looked at the decline and then we looked at transaction volume relative to the fourth quarter you would expect a more significant decline in credit aps but what happened is we saw more unique applicants so we saw more folks on the network. Does that mean we gained competitive share? Does that mean that dealers are being more focused in how they used the network?

Franco Turrinelli – William Blair & Co.

We can't really tell for sure but is a very astute observation that the decline there may not be as much of a signal that transactions are going to go down and in fact, almost assuredly I would expect a decline in, I don't know whether it will be the second or Third Quarter because of some dealer bankruptcies. We don't know how many when but we know there's some coming and so that number will come down but since consumer behavior is such that you only apply in one store for financing so if we lose two Chrysler dealers in a metro market and there are five and three remaining, will process the transactions and should have minimal to no impact on us but LDR would have dropped, and so yeah, it is probably becoming less impactful.

Mark O’Neil

We just don't have enough data today to tell you how much less impactful. Right, and certainly continued disclosure I think is useful and helpful us. Another question that you probably can't really answer but can you give us an update on the success or Bob, just basically what you're hearing back from dealerships with the new product strategy, if it's more suite kind of approach that you're taking, is that more difficult right now because people are balking at higher costs or is it working because people get the integrated solution pitch? I think generally they get the integrated solution pitch. I mean the feedback from our sales team has been generally very positive but what offsets that is what we call internally dealer paralysis. It's just amazing how many dealers and particularly the domestics obviously, want to wait to make a decision and particularly after a GM or Chrysler deal you want to wait to see if you're going to get one of these letters or the news that you aren't going to be in business because why go through the process of implementing something new if you'll be winding down your business so that's one.

The second is people are being very cautious involving more people in the decision-making and wanted to think about it longer, and that elongates the sales cycle, and that's more of what we're seeing. We are not seeing things like that's, hey, there's too much functionality, there's too much price, that's too big a solution. In fact we're hearing almost none of that which is very encouraging, so I think the team feels good about it and I think dealers are responsive to it. Dealers also like not being bombarded by 12 and 13 kind of one off product presentations. It's very, they like that you kind of have it all packaged in one solution and you can present it as that, so we're very encouraged by the overall strategy.

Franco Turrinelli – William Blair & Co.

One last one and I'll jump back into queue. Given that the independent dealerships have been doing a little bit better in terms of car sales, any increased appetite on your part to refocus on that side of the business?

Mark O’Neil

No. Not yet. Again, we're taking the let's be cautious approach until we know whose going to survive and look, this is another call it offset to the bankruptcy. You can read, generally even a number of the dealers who have already closed this year or given back their franchise shingles, a number of them have gone into the used car business and turned their dealerships into large used car lots. We think those could be attractive candidates to sell into. We're just not ready to focus there yet but we'll watch that over the next couple quarters and if we think when things settle out that's an opportunity then great.

We went from 20,000 to maybe 16,000 new car franchise sales opportunities but we'll probably have picked up one to 2000 real good independent sales opportunities and again that would mitigate some of the impact of the closings and that's the stuff we consider on the bright side out there. We're just not willing to put any bright side in our numbers at the moment. Yes, understood and again thank you for providing that additional disclosure. I think it's very helpful. Thanks guys. You're welcome.

Operator

We'll go next to Gary Prestopino, Barrington Research.

Gary Prestopino – Barrington Research

Good morning, everyone.

Eric Jacobs

Good morning, Gary. I think that's Barrington in your lingo, but how are you?

Gary Prestopino – Barrington Research

Good, that's alright. Mark, could you just give us an idea of on a monthly spend of $635 per subscription, right?

Mark O’Neil

Yes

Gary Prestopino – Barrington Research

What is the expense payback that a dealer would hope to get from that, is it three times that? Is it four times that?

Mark O’Neil

So we set a threshold for ourselves that we like a minimum of twofold return in the spend, so if I'm spending 600 a month I want to be saving at least 1200 a month. In some cases, it may be substantially higher than that. It really, in the inventory arena we could probably show you some models that have it four and five times the return, but think of it as the low end of the target of 2 X. Okay, so there's definitely some positives to that and then just in general with the industry, one thing that I don't get maybe you could help is that this whole issue with dealer closures, I mean, do you think it's an issue of that the powers that be are admitting that probably it's only going to be a 12 million SAR to 13 million SAR over time or are they trying to really shrink the distribution network to get rid of a lot of this ridiculous price discounting that goes on in car sales?

There are too many dealers. I think on any measure, looking in any metro area you can find dealers within three to five miles of each other. You just don't need that kind of saturation. Now is it a comment on car sales? Here is what we think on car sales. The U.S. scrappage rate is approximately 12 million vehicles per year. There are about 2 million new license drivers coming in per year because of population trends, that's a 14 million number. There maybe as many as 25 million, too many cars on the road in terms of the average, there's 1.1 cars per licensed driver so maybe we're going to see a little deleveraging over the next couple years where it's more one-to-one, but on a sustained basis, we think 14 million is a reasonable number. I think 12 was just too low on a sustained basis now. I wouldn't tell you we're coming back to 12 this year. Again, I think we're closer to the 10 number, but do I think 11 or 11 to 12 is reasonable next year and the following year. Somewhere in the 12 to 13. I think that's probably right and then maybe three years out we get to the steady state of 14 million plus, which obviously a huge increase from where we are today.

Gary Prestopino – Barrington Research

And dealer profitability goes up.

Mark O’Neil

Dramatically. We've modeled it under our number of scenarios. Dealers are going to be healthier after this realignment and that's good for us. We view that as a very positive thing although painful in the short-term.

Gary Prestopino – Barrington Research

And that should happen even with the dramatic increase in car sales.

Eric Jacobs

Well that's what I'm kind of getting at. The industry is really hurting now but it comes out a lot stronger in the end.

Mark O’Neil

Hugely, so. The right things happening. It is happening in the right manner and the timing has its great look, those are all editorial comments. It is a healthy thing long-term for a company like us.

Gary Prestopino – Barrington Research

Okay, and then Eric, just a couple of things in terms of modeling purposes, could you help us as to what you're thinking the run rate of amortization of intangibles will be in D&A for this year as well as net stock comp expense?

Eric Jacobs

So for amortization of intangibles I think if you look at our guidance, there is a reconciliation.

Gary Prestopino – Barrington Research

There is, okay? There is on the sheet here?

Eric Jacobs

Yes.

Katherine Piscopo Stein

In the release, Attachment 4 in the release.

Gary Prestopino – Barrington Research

Okay, I'll go through that. Thank you then.

Eric Jacobs

It's 20.3 million for amortization of acquired intangibles and depreciation and amortization is 16.1 million.

Gary Prestopino – Barrington Research

And the stock comp is in the release too?

Eric Jacobs

Yes.

Gary Prestopino – Barrington Research

Okay, I'm sorry. Thanks, guys.

Mark O’Neil

Thank you very much.

Operator

We'll take our final question from Tom Roderick, Thomas Weisel Partners.

Tom Roderick – Thomas Weisel Partners

Hi, guys, thanks and good morning. So just in thinking about the transactional business, the big four dealerships haven't historically really been the sweet spot for you if I've got my history right there, so I guess as we think about transactions moving elsewhere with GM and Chrysler shutting down some dealerships, is there actually potential for you to experience some share gains on the transactional side of the business as you look at one year or two years out here?

Mark O’Neil

Well, look, we've actually been very successful in terms of our transaction volume, a significant percent comes from GM, Chrysler, and Ford dealers, so because they have full spectrum lending and although historically they did the majority of their new cars with their captive finance companies who are not on our network. They did a lot of used cars on our network and some of the new cars that particularly weren't (inaudible) they did on ours. And I think we've seen a little bit more of a trend that way because the captives got in a bit of a challenge situation. GMAC originations declined significantly for a while which means someone had to pick it up and there was some of the larger independent banks. That probably benefited us. But do we see a major shift coming? I don't think so. Look, GMAC is getting stronger I think by the week here and now they are going to be handling Chrysler dealers. I think their share is going to be fairly significant out there and Ford I think stayed pretty constant. So I wouldn't expect any significant shift in terms of where domestic transactions are coming from now. If more volumes used to the imports, that could benefit us. There's probably equal argument to say there's going to be a Buy America sentiment over the next year or two and the imports won't benefit from that. Really, Tom, I think very hard to make any significant assumptions or modeling changes based on domestic import transactions.

Tom Roderick – Thomas Weisel Partners

Okay, fair enough, and Mark, could you provide just an update on the integration of AAX, now that you've had it for a quarter? How are you thinking about the product road map for your various inventory management products and where does AAX fit into that?

Mark O’Neil

Yes. There's a good, better and best strategy currently with PriceDriver as an entry product and then InventoryPro and then full blown AAX. We do think that there is, we could streamline that a bit and we're looking at that right now. I'm just not prepared to talk publicly on our product strategy plans at this point when we haven't announced them to our customer base or even our sales team so, stay tuned on that. That said we're finding good traction, good efficiencies with putting InventoryPro and AAX together and very good customer reception. In fact, we just closed a fairly significant deal recently, again showing us we've got good traction with raw material players in the market there.

Tom Roderick – Thomas Weisel Partners

Okay, sounds good. Thanks, Mark.

Mark O’Neil

You're welcome.

Eric Jacobs

Let me just address one of Gary's comments regarding stock comp. The gross for 2009 is approximately $17 million and that includes $3.9 million from the restructuring.

Operator

We'll go next to Mitch Bartlett, Craig Hallum.

Mark O’Neil

And this will be our last call guys and then we'll do one on ones.

Mitch Bartlett – Craig Hallum

Yes, most of the questions have been asked at this point. I'll just go back to what maybe Franco was asking and just maybe you could put a finer point to the psychology around the dealers. You said it's a little bit of gear in headlights as you approach with some of your larger priced subscriptions when they don't know what the outlook is. But I'm surprised that the dealers haven't pretty much gone into two camps, those that might go out and those that are going to be benefited by those going out and have two different camps of attitudes towards buying new products.

Mark O’Neil

Yes, Mitch, let me bifurcate it in another way and there's a camp out there that we've seen just say, let's cut everything we have that's not essential. Look, yes, okay, that will return, but in the good old days we used a yellow pad and we figured this out without any fancy computer systems and software, and believe it or not there is a camp that's gone there. They are just back to basics. We're getting rid of everything, we're not buying anything new kind of mentality and there's a camp that's been, this is a crisis, we've got to think about a new way to run our business, and while they're thinking about a new way to run their business and how to use technology more efficiently and streamline processes, they are also trying to figure it out and "Make the right decisions for the longer term" and that's taking longer, but they are more open to looking at technology, so either camp has some negative to us at the moment. One camp obviously is negative because they're shedding product and the other is taking a lot longer to figure out what they want to do and what the right thing to do is and we're trying to help them through that and by and large, particularly with some more strategic products, we're being successful, it's just taking us longer to get them to say, yes.

Mitch Bartlett – Craig Hallum

Great. Thanks.

Mark O’Neil

You're welcome. Okay, guys. I think that wraps up the calls. Again, thank you for the continued support. I think on balance here, look, we've had a tough couple of quarters given the industry. We're going to learn a lot in the second quarter here on the future of Chrysler and GM, and once we have that clarity, we're going to communicate it to you and look, then we're going to get beyond this and start in the upward phase here as the industry I think starts to come back. So we're encouraged with the long-term here and I think we're navigating through the bumps in the short-term. Again, we really appreciate your support through the process. Take care, everyone. Bye-bye.

Operator

This concludes the DealerTrack conference call. Thank you.

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: [e-mail]. Thank you!