Executives
Mark O'Neil - Chairman, Chief Executive Officer
Robert Cox - Senior Vice President, Chief Financial Officer
Eric Jacobs - General Counsel
Analysts
Christopher Mammone - Deutsche Bank
Andrew Jeffrey - Suntrust Robinson Humphrey
Mitch Bartlett - Craig-Hallum
Peter Goldmacher - Cowen & Co.
Gary Prestopino - Barrington Research
Franco Turrinelli - William Blair & Co.
David Scharf - JMP Securities
Ryan Stevens - Philadelphia Financial.
DealerTrack Holdings, Inc. (TRAK) Q2 2009 Earnings Call August 6, 2009 5:00 PM ET
Operator
Good afternoon, everyone, and welcome to DealerTrack's second quarter conference call. Joining us today are Mark O'Neil, Chairman and Chief Executive Officer, and Eric Jacobs, Chief Financial Administrative Officer of DealerTrack.
Mr. O’Neil will begin today's call with an overview of DealerTrack’s financial results and other key metrics for the second quarter of 2009. He will then provide a summary of the quarter from a business and strategy perspective. Mr. O’Neil will also discuss some of our latest accomplishments as well as the macro economic environment.
Mr. Jacobs will then provide further details on DealerTrack’s financial performance for the quarter and will discuss his revised guidance for the remainder of FQ2009. Afterwards, they will then be available to answer your questions.
Before we begin, they would like me to remind everyone that remarks made during 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 its 2008 Annual Report on Form 10-K.
DealerTrack disclaims 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.
DealerTrack also uses non-GAAP financial measures to represent business performance. A reconciliation of GAAP to non-GAAP financial measures is included in yesterday's press release which is available in the Investor Relations section of the company website at dealertrack.com.
And now I’d like to turn the call over to Mark O'Neil, Chairman and CEO. Please go ahead, sir.
Mark O'Neil
Thank you, operator. Hello, everyone. Thanks for joining us this afternoon.
We began 2009 with a great deal of uncertainty in the automotive retail industry. The industry was forecasting massive declines in auto sales. Two major domestic vehicle manufacturers were threatened by bankruptcy. Significant franchise dealer consolidation was imminent and the automotive credit environment was more challenging than any in recent history.
Today, new and used car sales have begun to show modest signs of improvement and Chrysler and General Motors have emerged from bankruptcy in record time with less impact on the dealership base than previously anticipated.
Finally, but no less important, we have seen a modest increase in credit application volume over the past few weeks, as a result of the Cash for Clunkers program. I’ll discuss the impact of all of these events in our business, but first let me give a couple of financial highlights.
Revenue for the second quarter of 2009 was $57.9 million and GAAP net income was $2.2 million. Diluted cash net income per share was $0.18 for the quarter and adjusted EBITDA was $9.4 million.
Our revenue is impacted by several drivers. I’ll begin with certain drivers of transaction revenue. Our active lender to dealer relationships decreased from approximately $134,000 as of March 31 to approximately $124,000 as of June 30, an 8% decrease. Since the beginning of 2009, we have lost approximately 21% of our lender to dealer relationships, which can be substantially attributed to dealership closings, lenders exiting in direct auto financing, and lenders limiting the number of dealers they lend to. As we discussed in our last call, we expect that this negative lender to dealer relationship trend to continue. The good news is that the impact on transaction revenue was not as drastic as in prior quarters, because a significant amount of the decline can be attributed to dealership closures not lender exits.
Our data shows that while consumers may shop with more than one dealership for a car, they generally apply for credit at only one. Because of this behavior, the number of active financing sources on the network is an important factor behind lender to dealer relationships.
At the end of June, we had 755 financing sources on our network, a net gain of 19 lenders in the quarter. The net gain continues to be smaller than in historic quarters, due to enders exiting indirect auto finance, including Fireside in the second quarter.
For the six months of 2009, 28 lenders exited our network due to closures or departure from indirect auto financing. We are still planning to add 100 net new lenders for the full year of 2009.
We believe that the relatively large number of lenders on our network creates a competitive advantage for us. Dealers want to start the credit application process with the network, it gives them the best chance of securing financing. Having more financing sources gives our dealers more chances to finance a car and make a sale.
Recent data has shown that over 1,800 credit units participate in indirect auto financing. These credit unions have increased their share of auto financing by over 12% in the last year to an approximately 31% share at the end of March 2009.
We will continue to add these credit unions and other financing sources to protect our competitive advantage and help our dealers to secure financing for consumers.
As of June 30, there were approximately 18,000 active dealers on the DealerTrack network. A loss of approximately 950 from the last quarter and 1,600 from the beginning of 2009. According to an industry source, approximately 1,100 franchise dealership rooftops closed during the first half of the year. Most of the remaining dealership count loss is accounted for by independent dealership closures. We expect additional contraction this year as GM and Chrysler continue their dealership closure initiatives.
Transaction revenue is further impacted by new and used car sales. We believe that car sales are impacted by the availability of credit and for sales to return there needs to be some return of consumer credit. With that said, used car sales from franchise dealers in the second quarter were approximately 200,000 units higher than the second quarter of 2008; however, the constrained credit environment has caused an increase in cash purchases and a decrease in finance purchases of used vehicles out of franchise dealerships.
The new car seasonally adjusted annualized sales rate, also referred to as SAR, was approximately 9.6 million units for the second quarter. This is compared to an approximately 14 million units SAR in the second quarter of 2008, and approximately 9.4 million run rate in the first quarter of 2009. The July SAR, which is expected to be approximately 11.2 million units was accelerated significantly by the Cash for Clunkers program. It’s been estimated that the program added approximately 160,000 units in July.
We anticipate that the program will be extended, but it will not have a lasting impact with a sustainable increase in available credit. In order to reach a full year of SAR at 10.5 million units, a second half of SAR of over 11.5 million units would be required.
We continue to see increases in the number of unique applicants seeking financing on our network; however, the number of applications per unique applicant decreased slightly in the quarter.
Impacted by these trends, we've processed 13.2 million transactions in the network during the quarter versus 14.3 million transactions in the first quarter of 2009 and approximately 22.3 million in the second quarter of 2008.
Our forecast for the balance of the year assumes transactions will remain at or close to second quarter levels. In the long term, we do not believe the new car sales run rate will stay below 10 million units. Based on nearly two decades of scrappage and demographic data, we believe the natural demand for new vehicles appears to be closer to 14 million units a year. While we are not forecasting an immediate return to 14 million unit level, we think a gradual return to meet natural demand is likely. The actual rate of return will be dependent on the rate of increase and available credit for auto financing.
In discussions with our largest lenders, we have heard some interest to begin to slowly expand market share. Again, we think this expansion is necessary for new car sales to achieve a more natural level of demand.
One last point on transaction revenue. We did see average transaction price tick back up in the second quarter from $1.68 in the first quarter to $1.87, an increase of $0.19. As we stated on our last call, when the average drops $0.06 from the fourth quarter of 2008, average transaction prices driven mostly by product mix and not a change in individual product prices.
Now I’d like to discuss subscription revenue. Our goal is to help a dealer use technology to reduce cost and drive greater efficiency. As we strive to provide our dealers with seamless workflow, we have bundled our subscription products into four solutions. DMS, inventory management, sales, and compliance. Even with extended sales cycles caused by economic uncertainly, we have seen success in our new sales model. This quarter, the average subscription revenue per subscribing dealer rose to $686 dollars, compared to an average of $635 dollars a month for the first quarter of 2009.
We expected it to grow this year, due to the acquisition of AAX, the success of our DMS solution, and our ability to cross sell existing customers. The growth was further enhanced by the cancellation of a disproportionate number of lower priced subscriptions as dealerships contracted.
We expect the subscription revenue per subscribing dealer to exceed an average of $700 dollars a month by the end of the year. We believe these dealership closures will eventually lead to more profitable dealerships, an increased cross selling opportunity for us. In the near term, however, accelerated dealership closures due to the Chrysler and GM bankruptcies and the uncertainty they contribute to the dealer base will slow our subscription growth. Long term, we believe we are well positioned for growth in our subscription business because of the under penetration of our DMS and inventory solutions.
Let me give some specifics regarding dealership closures relating to the Chrysler and GM bankruptcies. Chrysler sent letters to 789 of its franchise dealerships rejecting those franchises out of the June 9, 2009. Of these dealerships, 315 had DealerTrack’s subscriptions at the time the bankruptcy filing. The total monthly revenue from these dealerships was approx $220,000; however, a significant number of the rejected dealers continued to pay us after the June 9 termination date. This indicates that they intend to remain open for a period of time under another franchise or as an independent dealership. In the case of GM, we believe potentially as many as 515 dealerships receive letters regarding a possible termination or change in their franchise agreements. Unlike Chrysler, these dealers generally have until October 2010 to wind down their franchises and GM did not release a comprehensive list of these dealerships. We only have confirmation relatively small number of the GM dealerships that receive letters. Because of this, it is more difficult to quantify the expected monthly revenue impact of the GM termination.
Taking into account the dealership closures surround the GM and Chrysler bankruptcies and the general economic conditions affecting dealerships, the number of dealers for subscription products dropped this quarter to 14,115 compared to 14,646 at the end of the first quarter. We expect that we can begin regaining subscribing dealerships when dealership closures slow on the macro economic effect and the retail automotive industry improve.
Eric will provide more details on the revenue impact of these closures later in the call.
Finally, as it relates to our dealership customer base, we are excited by our prospects in Canada and are currently piloting our DMS through our partnership with Ford of Canada, as well as selling our inventory solution in Canada on a limited basis.
We believe that long term this will open up market opportunity to help offset dealership closures in the U.S. While this will not be a material source of revenue in 2009 or 2010, it does further extend our customer base and opportunities to introduce new solutions and cross sell going forward. In addition to the macro economic factors relating to subscriptions, we want to briefly address a couple of specific products on the subscription side of the business. We continue to believe our value proposition differentiates us from the competition in the DMS market. In this case, the tough macro economic environment helps us competitively, because dealers are looking to cut fix costs. Earlier in the year we began to hear dealer concerns about the upfront cost of switching a DMS. We are sensitive to these concerns and are working with our dealer customers to offer alternatives to one time charges.
We continue to test programs that may result in a shift from recognizing data conversion, forms programming, training fees upfront to recognizing higher recurring monthly fees over the customer subscription light.
At Asbury’s request, we have accelerated the installation of our DMS in their stores and expect that project to be completed in the first quarter of 2010. Our installation backlog remains strong and we believe our DMS solution will continue to grow as dealerships look for higher value alternatives.
On the inventory management side, we continue to experience sales success as June was our best inventory sales month to date. We have renamed our full inventory suite, DealerTrack Inventory Optimization, powered by AAX. While we continue to go to market with good, better and best approach to the solution, we believe that consolidated branding will help improve dealership recognition of our products in the marketplace.
Inventory management remains an area of growth for DealerTrack, because our solution helps dealers turn cars faster and at a higher profit per vehicle. We believe as the dealership base consolidates, surviving dealers will sign more vehicles and our inventory management solution will become an even more necessary tool.
Now for an update other events, which are important for our investors to know. Regarding our patent litigation, as we announced on July 8, 2009, we expect Judge Gilford to dismiss our case against Route 1 of Finance Express due to a recently decided case by the Court of Appeals with the Federal Circuit of Inrey Filsky. DealerTrack expects to file a notice of appeal. We do not expect that the legal cost of this appeal will have a material impact on our 2009 financial results.
Lastly, I wanted to discuss the option exchange program that was approved by our shareholders at our annual meeting in June. We expect to launch the program tomorrow. Eligible employees will be able to exchange certain options that have exercised prices above the 52-week high trading price for a lesser number of stock options with an exercise price equal to our stocks then current price. Executive officers and directors are not eligible to participate in the exchange program.
Exchange ratios were designed to make replacement option accounting expense neutral. DealerTrack believes that this program is important to help us to motivate and retain our employees in the current economic environment.
And now, Eric Jacobs, our CFO, will provide further details about our financials.
Eric Jacobs
Thank you, Mark. Hello, everyone.
Our revenue of $57.9 million for the second quarter break down as follows. Transaction revenue of $24.6 million, subscription revenue of $29 million, and other revenue of $4.3 million.
Our revenue mix continues to shift towards subscriptions. This was the third consecutive quarter where subscription revenue was greater than transaction revenue. Transaction revenue for the second quarter increased approx $600,000 compared to the first quarter in 2009.
Subscription revenue for the second quarter increased approx $1.1 million compared to the first quarter of 2009.
The challenging economic environment affecting auto sales and credit began impacting our business in the second half of 2008. Because of this, it is difficult to compare this quarter’s transaction revenue against the same period in 2008.
Our subscription revenue for the second quarter of 2009; however, grew 27% compared to the second quarter of 2008. Of this growth, 26% was organic. The acquisition of assets, including AAX, continues to positively impact our subscription revenue. As we have seen dealerships close, our organic revenue growth has suffered. We believe we can reverse this trend once dealership closures level off.
Now to discuss specific quarter results. GAAP net income was $2.2 million. The GAAP net income per share was $0.05. Cash net income was $7.3 million and the cash net income per diluted share was $0.18.
Adjusted EBITDA for the second quarter was $9.4 million, compared to $113.9 million for the second quarter of 2008.
The adjusted EBITDA margin was 16% for the second quarter of 2009. We had expected our adjusted EBITDA margin to reach this level by the end of the year; however, due to cost controls initiated in advance of the Chrysler and GM bankruptcy files, we were able to achieve this margin sooner. We expect this margin to remain relatively steady for the remainder of the year and as we look forward to 2010, we believe margins can expand into the 20% range.
For the first six months of 2009, GAAP net loss was a negative $3.4 million, GAAP net loss per share was a negative $0.09, cash net income was $8.9 million, and the cash net income per diluted share was $0.22.
Adjusted EBITDA for the first half of 2009 was $15.5 million, compared to $27.7 million for the first half of 2008.
The adjusted EBITDA margin was 14% for the first half of 2009. Both GAAP and cash net income was favorably impacted by an approx $1.1 million tax benefit relating to state tax returns.
Additionally, cash net income was favorably impacted by a realized gain of approx $9 million related to the sales securities.
With regard to accounts receivable, upstanding from Chrysler and GM, as of the day of the respective bankruptcy filings, we have collected substantially all amounts that were due. The primary reason that we’ve been so successful that GM deems us a critical supplier, even though we do not supply parts. Because of this distinction, GM continues to pay for pre-petition services during bankruptcy.
Cash flow from operations for the second quarter 2009 was $18.9 compared to $15.6 million for the same period last year. Negative $1.2 million for the first quarter of 2009. Cash flow from operations for the first half of 2009 were $18.6 million compared to $24.3 million same period last year.
First half of 2009 cash flow from operations was negatively impacted by the substantial reduction in transaction revenue and by $2.8 million related to our January 2009 restructuring. As of June 30, 2009, we had approx $179.4 million in cash, cash equivalents and short-term investments, an increase of $17.7 million from March 31, 2009.
Our effective tax rate for the quarter was 21.6% and the first half of 2009 was 39.8%. Effective tax rates are adjusted for approx $1.1 million of discreet items.
Our guidance for the full year 2009 assumes an effective tax rate, excluding discreet items, of approximately 37 to 40%.
Capital expenditures for the quarter were $5.8 million and were affected in part by the continued build-out of our new Canadian platform and other capitalized software projects.
We have focused our efforts for the past several months on major infrastructure projects that we believe will better enable us to deliver innovative technology and data solutions to the retail automotive industry.
With regards to guidance, the guidance we gave in May did not include the impact on the Chrysler/GM bankruptcies, because we did not have clarity at that time. We are issuing revised guidance today to factor in the impact of those bankruptcies and the results in dealership closures.
However, due to effective cost control, we expect to exceed our prior adjusted EBITDA, cash net income, diluted cash net income per share guidance for the full year.
To summarize, our revised revenue guidance is as follows: Revenue for the year is expected to be between $228 million and $232 million.
We expect our transaction revenue to be relatively flat in the second half of the year compared to the second quarter, which reflects the decrease in seasonality we have seen this year compared to prior years.
We are raising our GAAP and non-GAAP earnings guidance for the full year, which is GAAP net loss between negative $4.3 million, a negative $2.8 million. GAAP net loss per share between a negative $0.11 and a $negative $0.07. Adjusted EBITDA between $32 million and $34 million, cash net income between $17.9 million and $19.4 million, and diluted cash net income per share between $0.43 and $0.47.
The guidance assumes that available credit for auto financing, lender to dealer relationships, and new and used car sales are similar to the second quarter.
The guidance includes expected revenue impact of the Chrysler and GM bankruptcies and related franchise terminations.
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 2009 is based on $40.3 million basic weighted average shares outstanding.
This concludes our prepared remarks. Operator, Mark and I will now take questions from conference call participants.
Question-and-Answer Session
Operator
Thank you. (Operator instructions). We'll go first to Chris Mammone, Deutsche Bank.
Chris Mammone - Deutsche Bank
On the revenue guidance, is the change from the last time you reported, is it purely just factoring in the impact from the dealership closures or have you also given yourself a little bit more room for the environment getting worse or I just want to know a little bit better the flip and takes on that change.
Mark O'Neil
It’s substantially factoring in the impact of the closures. We don’t expect the industry to get worse, we expect it to run very similar that’s run in Q2. We also said Cash for Clunkers was seeing some good success. At the very end of July, the prognosticators are saying it’s going to pass the senate today or tomorrow. So August may tick up a bit, but what we don’t know is are we pulling a little bit demand out of the fourth quarter. So we’re trying to be realistic here that we don’t expect a major change in the macro economic environment.
So I think the second half similar to the second quarter is appropriate and we have factored in the numbers, the bankruptcy impact.
Eric Jacobs
There’s not just the dealership impact of the bankruptcy. We do have business, in particularly with GM that we expect to see some negative impact on because of the bankruptcy.
Chris Mammone – Deutsche Bank
Your comments on your adjusted EBITDA margin, 20% next year, do you expect at the beginning of 2010 or toward the end? What’s the timing?
Mark O'Neil
More color, we’ll give you after the third quarter earnings call or sometime in the latter part of the year.
Chris Mammone – Deutsche Bank
I guess we should interrupt the comments to think of sort of the year as a whole in approaching that level and not exiting next year at that level.
Mark O'Neil
That is not exactly what I said. Why don’t you interrupt it as we expect to be in the 20%-plus level, as Eric articulated. We’ll give you more detail on how it’ll throw it out for the year when we talk about the year.
Chris Mammone – Deutsche Bank
My final question on the subscription business. Are you noticing any change versus three months ago on willingness. Are dealers warming at all to willingness to spend on some of these services or is it still sort of status quo from earlier in the year?
Mark O'Neil
It’s improved a little bit. It hasn’t improved substantially. It’s dealership enthusiasm moral has improved in the last ten days, since July 25th, but it is a fairly short window where there’s a little bit of exuberance out there, but it’s way too early to see a significant shift. That said, the DMS pipeline is probably more robust than it’s ever been. Certainly lots of engagement with dealers there. Still taking longer than we’d like, but plenty entering the pipeline.
I think inventory is still, you know, a lot more describing why it’s a valuable product and how technology and data can help a dealer better manage their business. We’re still pushing that into the market as opposed to being in a pull position. The rest of the products I’d say really just very dealer by dealer, because the compliance deadline was pushed from August to November. We saw a little sense of an urgency at the end of the second quarter for dealers to enroll in that product, because the mandate isn’t there for another 90 or 120 days.
Operator
Next we’ll turn to Andrew Jeffrey - Suntrust Robinson Humphrey
Andrew Jeffrey - Suntrust Robinson Humphrey
I’m just trying to understand a little better the guidance. The revenue guidance I get, but when I look at the rest, going down the P&L, GAAP and non-GAAP, you sort of guided to an EBITDA margin looks a lot like we just saw this quarter and revenue that’s not down a ton from the level of which we were in the second quarter. Yet, it doesn’t seem to translate down to the EPS line, the adjusted EPS line, and I realize there are a few more shares out, but is there something else I’m missing there?
Mark O'Neil
No, I mean if you look at the second quarter and you look at the guidance, I think based on what we’re saying is if you translate Q3 and Q4 the second half as an extension of what we saw in the second quarter, we feel pretty comfortable with those numbers right now.
If you go back to the prior quarters, we were operating just over 10% in the first quarter and we think we’ve seen pretty nice progression. I think we’re very interested in hitting our numbers and we’re very cautious on putting any tailwind behind us for the second half. We’re comfortable with the continuation of the improvement we did see in the second quarter.
Andrew Jeffrey - Suntrust Robinson Humphrey
I guess I’m looking at the first half $0.20, which obviously had a significantly depressed first quarter and I guess the share count goes up a little bit, but it seems like the EPS guidance doesn’t fully flow through the higher EBITDA margins.
When I think about steady profitability despite closures, for example. I assume the incremental subscription that you’re losing is pretty high margin. How are you making up for the loss of that, especially in light of flat expectations for transaction volume. Is it lower DMS conversion expenses or is there something else going on?
Mark O'Neil
We’re doing a good job of controlling expenses here and I wouldn’t say there is any one particular area. Asbury specifically is not giving us material leverage. They’re a great partner and they’re certainly helping us with the installs in a way because of their scale that say an individual dealership doesn’t do, but that’s not driving the performance. It’s the result of very tight cost containment, which we started in the first half and are just continuing well into the second half as we continue to grow the subscription base.
Andrew Jeffrey - Suntrust Robinson Humphrey
Clarify or elaborate a little bit on the transaction trends. Should we infer from your guidance was relatively flat back half transaction, we should see a leveling off of the lender to dealer connection declines. Obviously we saw a good deceleration in the rate of decline in the second quarter. Should we be thinking flattish in the back half?
Mark O'Neil
Let me just give you a couple stats and a little bit of a reset. For the last year, we’ve really been driving this point home that there is enormous relationship between lender, dealer, and application volume. In fact, as we pointed out here in the second quarter for the first time we saw less than we’ve ever seen and that’s because there’s a big difference when lender to dealer relationships drops because a lender goes out of business, and when it drops because the dealer goes bankrupt or comes out of the network.
The dealer impact is negligible. In fact, I would almost say non-existent, and the lender is very significant, and what’s happening now it looks like most of the decline is due to dealer. At least on a going forward in our estimation. Look today there’s an announcement America Credit is going to start expanding it’s loan program. We saw a bit of expansion out there with Cash for Clunkers recently.
I think it’s just a less impactful metric. So if it goes down a bit, we don’t think it’s really that relevant. That said, June to July, just to give you some sense was the smallest decrease we’ve seen in two years.
And so, I think we’re getting very comfortable that the system has sorted itself out and it is not going to be a metric that we are going to have to be worried about for the back half of the year.
Operator
Next to Mitch Bartlett, Craig Hallum.
Mitch Bartlett - Craig Hallum
You talk a lot about the indirect financing, the credit unions coming up, the market share going up 12 points to 31%. Pretty impressive, and your expansion to 755, very impressive. So what impact did that have on your mix this year versus last? How did it affect you?
Mark O'Neil
A couple ways and I don’t want you to describe any particular weight. I’m just going to give you a couple of variables. More smaller lenders drives up transaction price, because we do price based on volume. So as we add lenders, you’re going to see a natural rise in transaction price.
Not having the majority of the representation of a 1,500-plus group of lenders, a third of those. That group is representing a third of almost all financial transactions is impactful, meaning stuff isn’t going through our network that could go through our network.
It’s going through either paper, a competitive network or maybe direct to the credit union, unlikely in electronic form, but probably in a fax form.
And so, there’s missed opportunity as the market has shifted there. We see an opportunity not only to continue to drive up transaction price, but to both lender and dealer relationships and ultimately grow transaction. If you like the 755 number, we should break 800 plus by the end of the year and we continue to look at ways we can accelerate that number in our subsequent years.
It’s still important. It’s more important than ever, unless the existing 750 get real aggressive and go back to kind of a year or two years ago, a campaign of signing up more dealers and doing for volume with them. Although we’re seeing a lit bit signs of few lenders talking on that direction, we don’t see them really bouncing back to the degree they were out there two years ago. So the credit union has become very important.
Mitch Bartlett – Craig Hallum
Is there a little bit of a disconnect there?
Mark O'Neil
Maybe it’s degrees and a bit of caution. Look, Ameri Credit said it publicly today, so I’m comfortable using their name. It’s one lender of 755. I could name two or three others who had conversation with us, not public, and we’re encouraged by those, but I can’t tell you that either the Ameri Credit news or the other two lenders I’m referring to that I could go back and look at their enrolled dealers and see a material uptick in that number.
I think some of this might be timing. That we’re not exactly certain when they’re going to expand and they’re not being extremely definitive of how much. In fact, I can just say generally speaking, I had a conversation with a reasonable size lender about oh probably 45 days go who thought they could expand in the year well in excess of 10%, but have yet to execute on that. Maybe what they really meant is by fourth quarter they’re going to start ticking up and the 10% will happen. The impact on the year might be if you spread that linearly 2 to 2.5%.
It’s exciting, it’s interesting, but there’s just not enough traction yet that we think we should translate that to a different perspective on the industry.
Eric Jacobs
Just to be clear, when I said our revised guidance assumes that available credit for financing, new and used car sales are similar to the second quarter. To expect that changes, we do expect to see an impact on us in the market.
Operator
Now we’ll turn to Peter Goldmacher, Cowen & Co.
Peter Goldmacher - Cowen & Co.
I just wanted to circle back to some commentary you had made, Mark, regarding franchise dealers getting out franchise business, but doing used car dealers. Does anything change for you with your relationship with them? Is it safe to fairly say that you now have more relationships with the independent dealers? As we think about the key variables for transaction growth, is this actually a good thing for you ex-franchise guys become independent?
Mark O'Neil
We would not say it’s generally a good trend to see us lose an independent dealer or franchise going independent dealer, because there’s some risk when they make that transition that they won’t keep all what they have. That said, the balance, the shrinking number of new franchise dealers when the industry is selling fewer cars is a good thing. You get more profitability per dealer then a more profitable dealer is more likely to invest in technology, because their volumes are going up.
You increase potential, but you may lose actual revenue. So you increase your potential revenue, but you may lose some actual in the short term. I would not say that we can generalize. Some dealers are just, as we indicated, are keeping everything they had. We’re not sure if that’s just because they’re trying to make a go of it and if it doesn’t work, they’ll drop off in a couple months or if it’s going to be a sustained transition. There’s a lot of first-time stuff happening for all us and it’s very hard to project, but I would say generally speaking we’re keeping more of the dealers than we thought we would and that’s a good thing.
Will it remain in force? I think it’s going to depend on sales continuing at the rate they’re continuing. If we saw another drop in used sales, maybe it’s not sustainable for all these new independent dealers, because now they’re sharing. There are more dealers on that side with the same volume and it hasn’t sorted out yet, but we feel good about what’s happened in the near term and we feel generally good that we can keep some level of business with them. We’re just now sure we can keep it all.
Peter Goldmacher - Cowen & Co.
If you have some of the bigger guys getting more active in subprime again and just to return to some of the big guys that had gone away, do you think that potentially damages some of the smaller guys? Are we getting potentially some of the smaller guys giving up some of the market share gain they may have gotten in this challenging period where they had a better opportunity because there was less competition. Indirect way of asking, could we potentially see a downtake in (?) transaction again?
Mark O'Neil
I think very unlikely. We’d have to see a very substantial increase in volume with the existing guys.
I think the statistic we gave you regarding credit union penetration is just enormously telling to go from roughly 20% a year ago first quarter to 30% roughly first quarter this year is a massive shift in volume.
Now part of that is going to be because some of the captives really had some struggles and pulled in their credit guidelines, but what happened in that process and by the way, the captives are coming back into the market, but dealers were burned by that and many were very dependent on just a couple of sources and that really hurt them when those sources pulled back. I think the learning from that is they’re not going to subject themselves to be so sole-sourced. A couple of lender dependencies, they’d rather have five than three or six than four or three. So I think some of that is here to stay and I think they’ve also gotten a taste of how competitive the credit unions are about financing rate perspective.
So I would not project a decrease in transaction pricing, definitely not in the near term. We’d want to see a whole lot more change in the industry before we even come close to talking about direction.
Operator
We'll turn to Gary Prestopino, Barrington Research.
Gary Prestopino - Barrington Research
Does your guidance still assume that the range of new and used vehicle sales that you gave us first quarter, a 15 to 20% decline in lender dealer relationships?
Eric Jacobs
What we try to do is use the second quarter as for a better proxy for the basis for the guidance. The original guidance about 9.5 to 10.5 new and higher used number instead of trying to go back to the beginning of the year and we try to level set it from what it is today and use that as a better base for the future.
Gary Prestopino - Barrington Research
So the SAR was $9.6 million or something like that?
Eric Jacobs
Yes, so assume it stays around there. Remember too, Gary, we’ve always said a couple hundred thousand don’t make a difference. A million makes a real measurable difference.
Gary Prestopino - Barrington Research
And then, your guidance assumes the closure of the Chrysler dealerships, but the GM dealerships are still operating, so that hasn’t been factored in, correct?
Mark O’Neil
No, we said we factored in the impact of the bankruptcies, but what we’ve also said is we think we’re going to see some of the GM, and this isn’t going to happen this year, it’s going to happen into next year. Now, what’s really sorting out there, and again, it may have very minimal impact on us. We just know yet, but let’s take Saturn, for example. Saturn is being spun out of GM. So it’s being divested from GM, but from our perspective, if a Saturn dealer, and it’s a look like, I don’t think the transaction has closed, but a consortion of investors I think led by Pensky is going to buy that car business or that brand. If a Saturn dealer right now say is buying our inventory product or our compliance product, well just because GM divested it and Pensky decides to invest in it, we actually think we’re going to keep that now, but GM is counting it as a closed dealer, but it doesn’t impact us. Now it might impact us if we’re in a different business, but that’s pretty good. So there’s 400 stores, maybe 300, if they do a little trimming there. Again, we don’t know. So some of GM is going to be mitigated because although they’re getting rid of the dealership, someone else is picking them up, Hummer. Again, that brand is not going away. If it closes, the Chinese manufacturer will not only be owning that but running those dealerships and we would expect early on the way that GM phrase their number and 2,000 dealers, we thought we were going to lose them when all of the sudden you find out – well that really means I’m selling off a few and they’re just going to change names. All of the sudden that’s nice for us.
I think we have pretty clear visibility into 2009 and we don’t have perfect visibility into 2010, because we haven’t seen these asset transfers consummate and there’ll be some residual felt from some pure GM dealer…and we may not have visibility into that.
We’ll communicate to you as we learn more there. It could be some impact, we just don’t know in 2010.
Gary Prestopino - Barrington Research
I heard that especially with the domestic players, before all this shook out, the market was basically frozen in wanting to commit to subscriptions. Is your sales force now finding that the decision has been made. We know which dealers could possibly close. That some of these domestic OEM dealers are now much more amenable to talking to your sales force and expressing interest in some of these subscription products?
Mark O'Neil
I’d say they’re more amenable, but very cautious on breaking out the checkbook and signing on dotted line. They continue to probably do more due diligence than they’ve ever done. They continue to caucus among their peers or key managers in the dealership.
So we’re seeing improvement, but we’re not seeing significant improvement that would change us raising our numbers further. It’s too early to call it either way, so we’re going to call it same-o.
Operator
We'll go next to Franco Turrinelli, William Blair & Company.
Franco Turrinelli - William Blair & Co.
First, Eric, there seemed to be a lot of questions at the beginning of the call, kind of digging into the guidance, and one thing that I did want to make sure that I understood correctly is I’m assuming the full year guidance does include the tax benefit that we saw in this quarter, about $0.03 per share.
Eric Jacobs
It does include it. I haven’t done the calculation.
It also includes the gain on sale as well. So $1.1 million tax benefit, .1 gain of sale, so it’s about $2 million, it’s about $0.05 in Q2.
Franco Turrinelli - William Blair & Co.
I think people are just going to look at the first half and say well look, the second half should be higher than the first half, but you’re not forecasting any of those non-recurring items in the second, so I think that may be part of the disconnect for people.
Second, Eric, looking back over my notes from the first quarter, I think you were expecting some additional restructuring costs in this quarter, but the only disclosure that I see is actually a slight negative adjustment to the restructuring. Is it correct that you did not in fact incur any meaningful additional restructuring expenses?
Eric Jacobs
That’s correct. I don’t know exactly what you’re referring to, but the only thing that we have is we have some payments that are going to be made I believe in the third quarter, but that was all accrued in the first quarter. We don’t have an expectation for the second quarter and beyond.
Franco Turrinelli - William Blair & Co.
Mark, just going back to the subscription revenue question. What else are you seeing from the competitors in the subscription market? Is it really kind of frozen for everybody? Are people renewing their existing subscriptions, because they’re worried about that upfront cost?
Mark O'Neil
I would say, certainly your commentary is referring to the DMS area. In the DMS area, the more awareness we get, the more consideration we get, and we are getting more consideration amongst larger dealers. That’s kind of good news, because the larger the dealer, the less the upfront really seems to be an issue.
With the smaller dealer, because of tough times, they continue to look. They continue to want to explore alternatives. It’s just they’re longer in the decision-making process.
In our other products, we get a bit of a restructuring in June or July with our sales force and how we’re selling inventory. We kind of allocate more resource in that area. We’ve pulled a lot of people out of the field to put them through a very extensive training program, because when you’re selling a product like our inventory optimization product, you really need to understand the concepts of turn and optimal inventory, core inventory versus non-core inventory, wholesale losses versus, you know, front end profit on retail sales, and it’s fairly complex. So we pulsed all of our district managers out of the field, put them through some very intense training, added some specialists to that, because we are seeing more interest. We are seeing dealers beginning to get it. We’re getting a lot more data points out there where we can be very specific about improvement in days of turn and improvement in vehicle profitability per unit.
And so, again, we find it’s a lot of education to talk to the dealers about the technology and how we’re using all the data we have to help them make better decisions.
It’s a longer sales cycle than we anticipated, but we’re very pleased with the uptick. We had a record sales month in June. We remain excited about that, but it takes time to sell that and we have very little recognition in the market that we offer that product and so we’re looking at how to grow that.
In the other products, compliance slipped a little bit in intensity, because the deadline that the FTC had set was pushed out. So you mix it all together and you say, really I think the second half is going to be similar to the second quarter. I don’t think people are going to jump back in and change behavior dramatically, but we’re going to see a slow and steady improvement.
Operator
We’ll turn to David Scharf, JMP Securities.
David Scharf - JMP Securities
I want to focus on two things. First on the transaction side. I’m interested in trying to get a handle on what your thoughts are surrounding the definition of a normalized transaction revenue. By that I mean you peaked at $39 million in the end of ’07, I think in Q3, and we know that was 16 million new vehicle environment, subprime applications through the roof. We’re unlikely to revisit those levels. Right now, it looks like 24 million represents sort of the quarterly trough. Based on everything we’ve been talking about on this call in terms of the number of relationships, applications a dealer is likely to send out in a more normalized environment versus how many they sent out in the past. Transaction fees that you remarked you thought were actually not going to head down. Throwing all of this together. Let’s forget about calling a bottom in a recovery. Somewhere in between 24 million and 40 million of transaction revenue a quarter is kind of a definition of I think a normal stable environment. How should we think about where in between those bounds we should set our sights.
Mark O'Neil
The middle is always a great place in a range. Now let me give you some more thinking on some drivers.
Let’s start with new car sales first. There is no one in the industry who thinks we’re going to get back to 16 million on a sustained basis. So when we do talk to people and we highlighted as a little bit of our thinking, I would say most of the people we talked to say that a normalized sales rate is 13 to 14 million units. So that’s down 2 to 2.5, 3 million from the peak numbers we saw early in this current decade. So we know there’s going to be fewer cars, new cars sold. Now I’ll tell you one thing that I think could potentially have us all be wrong on that number. We’ve done some very interesting forecasting two-three-four years through our ALG group that focuses on residual values of cars, looks at trends three and five years out for the lending community and the OEM community. It is very clear to all of us that we’re going to have a significant shortage in used cars and it’s starting in 2011. No one really understands yet, whether that’ll mean we’ll just sell fewer or whether there’ll be a demand shift to new. So it’s very possible that we get back to that 13-14 a little faster and in a year we might run higher for a year or two, because we’re just short. We didn’t manufacture enough used cars so we didn’t sell enough new ones last year or this year and next. The sustained demand is 13 million per used and there aren’t that many cars available, does it translate to new? And we just know that yet, but look at scrappage data, look at demographics. We feel real comfortable on that 14 million range. We get there somewhat linearly over the next three years. So next year we would expect to be in the 11 millionish range, 12 the following, 13-plus the following. You can add a couple thousand either way. We do think the behavior of the last two years where dealers sent lots of applications to lots of lenders will never quite come back to the same rate, because they realize that behavior can result in them being cut off from a lender or the first to go when things get tight.
So we probably won’t see the same application volume we saw. In terms of for each customer, how many different lenders they were sent to.
David Scharf - JMP Securities
Mark, if I can interrupt. That seems to be the single biggest driver. I mean we’re obsessing over monthly SAR numbers, but at the end of the day when we talk about whether normalized transaction is 24 million in a quarter or 40 million, it seems like that dealer behavior, the number of apps per borrower, ultimately may be the most important metric. Can you give us a sense or where we’re gone? You know, how much we’ve come down from and where you think it’ll ultimately work its way back up to or is the current habits that are being formed right now likely to persist for the next few years?
Mark O'Neil
You know, in a year period down 30% over two years of peak down 40%-plus, but we think it returns some. Let me take Ameri Credit, in an article, but they expect to look for more business for some dealers that they used to do business with but aren’t doing now. That’s going to help, that kind of behavior, but I don’t think we come all the way back, but I do think that number comes back a bit and as credit unions get more active in here, that’s going to help too. Then they sign up more and they’re more available on the networks.
So it is one of the most important variables. I don’t think we’re going to forecast in any of our numbers that it comes back to its heyday. But if you go back to sort it all out, so take the new car, take the app, the ratio of unique application, the total applications, and look at pricing, and mix it all up into the equation. This 24 to 40 million, I think that 30, 32, 33, you know a 100 million average per year, and in the kind of environment we’re talking about is probably a realistic get back to and as you’re well aware that’s very accretive incremental transactions, but I don’t think we get back to the 40 million number. I think that’s a stretch.
David Scharf - JMP Securities
We’ve been talking so much just about GM and Chrysler. Let’s just forget them for a moment. I know we started the year with you mentioning kind of the off-quoted industry, conventional wisdom that we’re going from roughly 20,000 to 15,000 rooftops this year.
Mark O'Neil
Over a three year period.
David Scharf - JMP Securities
Is 15,000 the number of rooftops we ought to be thinking about? Is it likely over the next three years it’s going to come down to a higher floor, maybe 17,000?
Mark O'Neil
I think 15 is a real low because of the Saturn, the Hummer type numbers. We don’t really know all the drivers, but we do know a couple of pieces of drivers. So originally what we thought was out of business is really a change of name. I don’t think we still seen what Fiat is going to do with Chrysler here…
We know Mahindra and Mahindra has signed up about 300 new dealers. They have two models of a pickup truck that they’re distributing in the U.S. starting this year. We know there’s some Chinese manufacturers who are very interested in the U.S. market. Now will they come in by buying a brand that someone wants to shed or sell or will they come in and set up a new distribution network like Hyundai and Kia and a bunch of Asian manufacturers did over the last couple of decades.
We just don’t know, but I think to get to 15, you have to assume a lot of negative, more negative than apparent right now. So I think it’s a floor number, but I don’t think we’re likely to get there in three years. Given the time, we’ll take one more call.
Operator
And that will come Ryan Stevens with Philadelphia Financial.
Ryan Stevens - Philadelphia Financial.
Can you maybe speak a little more on the intensity of competition you’re seeing as it relates to ADP and Reynolds in terms of market share?
Mark O'Neil
Lender count within ADP and Reynolds would be two completely different conversations. They did announce a joint venture.
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