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Dealertrack Technologies Inc. (NASDAQ:TRAK)

Q4 2013 Earnings Conference Call

February 19, 2014 5:00 PM ET

Executives

Mark F. O’Neil – Chairman, President and Chief Executive Officer

Eric D. Jacobs – Executive Vice President, Chief Financial and Administrative Officer

Analysts

Sterling Auty – JPMorgan Securities LLC

Kevin D. McVeigh – Macquarie Capital, Inc.

Stefan Putyera – Barclays Capital, Inc.

Tom Roderick – Stifel, Nicolaus & Company, Inc.

Timothy W. Willi – Wells Fargo Securities LLC

Gary F. Prestopino – Barrington Research Associates, Inc.

Operator

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

Mark will begin today's call with a summary of DealerTrack's financial highlights for the fourth quarter and year ended December 31, 2013. He will then provide an overview of the operating environment, including key business metrics. He will also provide a summary of the quarter and the year from a business and strategic perspective. As well as discuss DealerTrack's recent acquisitions. Eric will then discuss DealerTrack's financial performance for the fourth quarter and the year in guidance for 2014. Afterwards, they will be available to answer your questions.

Before they begin, DealerTrack would like to remind everyone that remarks made during the conference call will contain forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees, but involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including, without limitation, those risks detailed in DealerTrack's filings with the SEC, such as most recent reports on the Form 10-K and 10-Q. DealerTrack disclaims any obligation to publicly update or revise any such statements to reflect any change in their expectations or in events, conditions or circumstances on which any such statements may be based or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

DealerTrack also uses non-GAAP financial measures to represent business performance. A reconciliation of the GAAP to non-GAAP financial measures is included in today's press release, which is also available on the Investor Relations section of the company's website at DealerTrack.com. In addition, please refer to the current investor presentation posted on the company's website for information, which may be discussed during today's call.

As a reminder, DealerTrack acquired Casey & Casey in the second quarter of 2013 and a consumer-focused marketing a VINtek in the fourth quarter of 2013. Therefore these business are included in the results for the fourth quarter of 2013, but not the fourth quarter of 2012.

Now, I would like to turn the call over to Mr. Mark O'Neil, Chairman and Chief Executive Officer.

Mark F. O'Neil

Thank you, operator. Hello, everyone. Thanks for joining us today. I’m pleased to report the DealerTrack continued its momentum through the fourth quarter with record revenue of $126.1 million. The total increase of 24% and organic increase of 17%, when compared to the fourth quarter of 2012. Our record revenue results in the quarter were driven by our continued solid execution in both our subscription and transaction businesses.

We believe our success in the quarter also reflects the investment we have been to drive long-term top-line growth in the panel of auto sales and indirect auto financing trends. On a full-year basis, we reported revenue of $481.5 million, an increase of 24% from a year-ago and 16% on an organic basis, which excludes the impact of four acquisitions that we completed in 2013. We are particularly pleased that after consistently increasing full-year revenue guidance each quarter throughout the year, we were able to deliver actual results and exceeded our increased expectations.

We believe we are well positioned for an even better 2014. On a several reasons for this belief is our pending acquisition of Dealer.com. Dealer.com is a leading provider of intuitive solutions for managing a dealerships marketing and operations. We expect the website solutions will significantly enhance our position in the space, and their advertising solutions multiply the size of our market opportunity.

We believe this transaction will be a major step for realizing our vision and delivering the market-leading suite of integrated technologies capable of transforming automotive retail. We have made significant progress towards the closing of the transaction and expected to close on March 1st. We will talk more about the Dealer.com transaction and our expectations for 2014 shortly. But first I would like to discuss the fourth quarter of 2013.

Examining the fourth quarter of 2013 in more detail, subscription revenue grew to $49.1 million, an increase of 16% in total from a year ago, and an increase of 12% on an organic basis. Transaction revenue was $70.3 million, an increase of 29% in total from a year ago and then increase of 28% on an organic basis.

Over the course of 2013, we realized the number of accomplishments and successes that lay the ground work for further acceleration of our subscription revenue growth. These include the introduction of an account management sales structure, increasing our DMS installation capacity, expanding our interactive and CRM capabilities, enhancing our compliance solutions to address CFPB concerns, introducing eMenu on an iPad and launching our Digital Retailing Solutions as well as our new integrated inventory solution called Inventory+.

Well these factors had a positive impact on our fourth quarter results, we believe these positive influences will further benefit us in 2014. For example, we continue to see strong interest in our DMS solution, even after we expanded our installation capacity several times throughout 2013. We are near a full implementation schedule for the next six months.

Also during the fourth quarter we announced our plans to roll out a new sales organization structure focused on account management, effective January 1st. Today from a sales perspective, we have one account owner per dealership supported by team of sales specialist. The feedback from our internal team members and clients has been very positive and we are pleased with the execution of the roll out to date.

Looking at our 2013 subscription business by numbers, we increased our subscribing dealer account by over 200 in the quarter, for a total of over 18,400 subscribing dealers. Well, this growth includes some new clients added with customer focused marketing acquisition, our subscription based solutions continued to attract new franchise and independent dealers. The average monthly subscription revenue per subscribing dealer increased $815 in the fourth quarter from $749 in the year ago period, driven by increased sales of higher priced products including our recently acquired CRM Solution.

Turning to our transaction businesses, we experienced strong performance in the fourth quarter from a combination of factors, including continued growth in car sales and credit availability as well as market share gains.

Transaction revenue in the fourth quarter increased at approximately four times the reported 5% growth in new and used car sales, once again demonstrating the leverage in our transaction business to car sales. We also benefited in the quarter from a slight uptick in the number of submissions per credit application compared to what we saw during the earlier part of the year.

In addition, we expanded our product capabilities in our number of lender and dealer customer relationships, which we believe is increasing the market share of our U.S. credit application processing network.

Our acquisition of VINtek further diversifies our transaction revenue by providing electronic lien and title services for more lenders. As a result, we have increased a number of tiles we manage by over 40% and now manage approximately 36 million titles for more than 6,000 lenders.

Each of these trends positively impacted our average transaction revenue per car sold. As a result, average transaction revenue per car sold increased $8.63, up 20% from a year ago. Also helping to drive transaction revenue growth, there is a number of active lenders on our U.S. credit application network, up by almost a 150 from a year ago to a current total of more than 1,410.

Even though the number of franchise dealers in the United States has remained relatively flat over the past year, we continue to have success in adding franchised dealers to our U.S. credit application network, due to our expanding captive and other lender relationships.

Additionally, we have been able to successfully grow the number of independent dealers and interact with lenders on our network. We grew our U.S. active dealer count by almost a 1,000 in 2013 and now have over 20,000 participating on the network.

Our technology partnership with American Honda Finance Corporation was an important accomplishment during 2013. Through this relationship we are collaborating with AHFC to create an innovative solutions for streamlining the vehicle sales financing process, while improving the overall retail experience for Honda customers.

As such, we are excited that we launched the pilot in January and we will continue to rollout the pilot in the first quarter. Honda dealers have responded very positively and we are truly excited about bringing this groundbreaking and unique technology to the market.

I would now like to switch topics and talk about the recent NADA Convention and Expo that we participated in. NADA is our industry’s biggest trade show with approximately 8,000 dealer attendees this year, over a 1,000 of which demoed more than one Dealertrack solution.

The 2014 conference was held earlier than normal in January and was without a doubt our most successful NADA ever. In fact, automotive stated in one of the their articles that our booth was the busiest on the convention floor.

At NADA we demonstrated our comprehensive suite of auto retail solutions for dealers, lenders and OEMs. In addition, we unveiled DMS 2.0 with its new graphical user interface and efficient navigation. DMS 2.0 is a browser and device independent platform, which streamline financial analytics, integrated credit card processing and electronic signatures.

We also introduced our latest inventory solutions at NADA called Inventory+, which combines the best of our inventory management technology and covers the entire lifecycle of the vehicle inventory process from appraising, to stocking and sourcing, transportation, reporting, pricing and merchandizing.

Instead of focusing on just one aspect of profitability, Inventory+ charge profit per day by managing both gross profit and inventory turns. We believe that both DMS 2.0 and Inventory+ will contribute to our increasing subscription revenue growth in 2014.

One of the key things at NADA was mobility. This is a major area of focus for us to conference as well. We demonstrated many enhancements to our mobile product line, including an aftermarket sales solution for the iPad, DMS mobile capabilities and our responsive design capabilities for several of our other products.

Another major topic of conversion in NADA was our pending acquisition of Dealer.com. This acquisition is expected to be a major contributor to our subscription growth and our overall growth in 2014.

As I said earlier, Dealer.com will accelerate our ability to deliver a broad set of transformative technologies that we believe will represent the most comprehensive suite of integrated solutions for automotive dealerships, lenders and OEMs. The combination of Dealertrack’s in-store solutions and Dealer.com’s online website solutions significantly enhances our ability to help dealers transact with consumers online and empower our online purchasing.

At the same time, Dealer.com should both accelerate our subscription growth and increase the size of our total addressable market with its digital advertising solutions. By cross-selling additional technology and advertising, we expect to further deepen customer relationships and significantly increase our revenue growth opportunity.

We expect the Dealer.com transaction to further improve our revenue visibility by shifting our business mix more towards our current subscription based products, while also adding a relatively predictable stream of advertising revenue. In addition, by combining teams we will significantly expand our talent base, which we believe can accelerate innovation in new product development.

We look forward to expanding our digital marketing solutions in Dealer.com’s headquarters in Burlington, Vermont, along with our current Dallas, Texas office. We also expect to leverage Dealer.com’s strong brand by retaining the name in the marketplace to represent our advanced digital marketing products and services.

Initial customer responses have been overwhelmingly positive. Common themes echoed by customers include one, I believe that the two companies have similar vision and two, that day, the customer will benefit greatly from the integration of our product suites.

In summary, we delivered strong fourth quarter and full-year financial results and also made great strides towards our vision of transforming auto retailing with our suite of integrated technologies.

We had a number of significant accomplishments and successes in 2013, including beginning our shift to an account management sales organization, the release of our new DMS and integrated inventory solutions and commencing a partnership with American Honda that we believe we will pave the road for successful Dealertrack 2.0 launch.

As a result of these achievements and expected closing of the Dealer.com transaction, we expect to experience substantial revenue growth in 2014 with growth an excess of 65% at the midpoint of our guidance. Moreover with the anticipated growth in our core subscription business as well as the contribution of Dealer.com’s subscription business, we expect to sustain a level of subscription revenue growth in excess of 20% for multiple years.

Now let me turn the call over to Eric for additional details on our financial performance and our guidance for 2014.

Eric D. Jacobs

Thank you, Mark and hello everyone. I am pleased to report our fourth quarter and full-year 2013 financial highlights. Revenue for the fourth quarter was $126.1 million, a total increase of 24% from a year ago. This is a 17% increase on an organic basis, when you exclude the impact of our recent acquisitions.

Specifically, we earned subscription revenue of $49.1 million, a total increase of 16% from a year ago and over a 12% increase on an organic basis. Transaction revenue of $70.3 million, a total increase of 29% from a year ago and a 20% increase on an organic basis. And other revenue a $6.7 million.

Included in total revenue for the fourth quarter of 2013 were $4.9 million of transaction revenue, $1.9 million of subscription revenue and $300,000 of other revenue from our acquisitions completed after the fourth quarter of 2012. This $7.2 million in total acquired revenue complements with our strong organic revenue growth.

Earnings for the fourth quarter were as follows: Our GAAP net loss was a negative $3.7 million or a net loss per diluted share of a negative $0.08. Our adjusted EBITDA was $28.1 million, which equates to an adjusted EBITDA margin of approximately 22%. And our adjusted net income was $12.4 million or $0.27 per diluted share.

Looking our full-year results for 2013, revenue was $481.5 million, an increase of 24% and total for 2012 and an increase of 16% organically. Included in full-year revenue was subscription revenue of $181.7 million, an increase of 25% in total from 2012 and an increase of a 11% on an organic basis. And transaction revenue of $276.9 million, an increase of 23% in total from 2012, and an increase of 19% on an organic basis.

GAAP net income was $5.9 million or $0.13 per share based on $45.3 million diluted weighted average shares outstanding. Compared to net income of $20.5 million or $0.46 per share in 2012. Adjusted EBITDA was a $117.7 million and our adjusted EBITDA margin was approximately 24% compare to an adjusted EBITDA of $97.3 million or 25% of revenue in 2012. Adjusted net income was $59.1 million or $1.30 per diluted share compared with $49.1 million or $1.12 per diluted share a year ago. And cash flows from operations for 2013 were $82.4 million compared to $17.7 million in 2012.

The reconciliation of GAAP to non-GAAP measures is included in our press release schedules, as well as in our investor presentation, which also includes the impact of reconciled items on individual income statement classifications and our organic revenue growth calculations.

Turning to our balance sheet. As of December 31st, we had approximately $133 million in cash, cash equivalents and short-term marketable securities. This amount did not take into account the use of cash needed to finance our pending acquisition of Dealer.com. Also not reflected in this amount is the gross proceeds from the sale of our entire minority equity interest in TrueCar, Inc.

Earlier this month we sold all of our shares of TrueCar, which was carried on at cost on our consolidated balance sheet as of December 31, 2013, the amount of $82.7 million or approximately $92.5 million in cash.

We previously received the TrueCar shares as consideration for the sale of ALG, Inc. to TrueCar. The after cash net proceeds of approximately $70 million will be used to reduce the overall borrowing required to fund the acquisition of Delaer.com and associated transaction fees.

Capital expenditures in the fourth quarter of 2013 were approximately $11.7 million, which included $900,000 of purchased software and $6.5 million of internally developed software. On a full year basis, we spent $52 million on capital expenditures, compared to $40.8 million in 2012. This equates to approximately 10.8% of revenue in 2013, compared to 10.5% of revenue in 2012.

Before turning to our 2014 guidance, let me first discuss certain financial aspects of the Dealer.com acquisition. We will be acquiring Dealer.com for a combination of $628 million in cash and approximately 8.7 million shares of our common stock for a total consideration of close to $1 billion, based on the 20-day volume weighted average price at the time of announcement.

The cash component of the purchased price in approximately $26 million in transaction expenses will be funded in the proceeds from a new fully committed seven-year senior secured term loan B credit facility, as well as the cash on our balance sheet, including cash from the TrueCar sale.

As a result of the cash proceeds from the TrueCar stock sale, we have reduced and now we expect to borrow under the senior secured term loan B facility to $575 million from $625 million, we estimated at the time of the signing an announcement of the deal.

With the expected occurrence of an amount of debt, which is $50 million less than planned, our initial trailing 12-month net debt to adjusted EBITDA leverage ratio is expected to be closer to 4x instead of our initial estimate in 4.4x to 4.6x. It’s 4x versus 4.4x to 4.6x.

As part of the Dealer.com financing, we also received a commitment for a new $200 million senior secured revolving credit facility, which will replace our current $125 million revolver. For reference purposes, Dealer.com in the 213 – I’m sorry in the 2013, with full year unaudited revenue of approximately $239 million, approximately 31% increase year-over-year, GAAP net income was $17 million and EBITDA was approximately $42 million.

Turning now to our guidance for 2014, we ancipitate that new car sales in the United States will be approximately 16.2 million units, which is in line with most industry estimates. For comparison purposes, 15.6 million units were sold in 2013 and the SAR for January 2013 was 15.2 million units.

We believe the January is not indicative of a trend, and it was relatively due to the harsh winter weather experienced throughout the country for most of the months. We also anticipate that used car sales by franchise dealers will have a slight uptick of 200,000 units from the 50.7 million units we saw in 2013 to 50.9 million units in 2014. As we expect, new supply growth to be constrained.

Collectively, this would yield the growth in car sales for approximately 3% in 2014, compared to 2013. While we typically would not include a pending acquisition and our guidance until after the transaction closes, we have decided to include the impact of Dealer.com in our guidance assuming the March 1 close.

The reasons for this include the transaction size, the fact that we have already received regulatory clearance. We have fully committed financing and a path to a March 1 closing is clear. Our guidance will likely change however if the acquisition did not close on the date as planned.

With that backdrop, assuming a March 1, 2014 close, the Dealer.com acquisition, our guidance for 2014 is as follows.

Revenue is expected to be between $800 million and $816 million, which would represent growth of approximately 68% at the midpoint from 2013. This assumes an approximately 17% to 18% growth rate for Dealertrack’s core business, which is consistent with our preliminary thoughts on our last earnings call.

It also assumes Dealer.com will contribute approximately $240 million to $250 million, a revenue over the 10-month period, which represents a growth rate of over 25% prior to adjusting for a total of approximately $5 million of negative revenue synergies and the impact of purchase accounting on deferred revenue for that business. We expect our transaction revenue to grow approximately 11% at the midpoint or almost 4x the 3% anticipated growth in 2014 car sales.

With regards to subscription revenue, we expect to grow approximately 92% at the midpoint and we still expect our fourth quarter 2014 organic subscription growth rate to be in excess of 20% consistent with our last earnings call. Other revenue including Dealer.com’s advertising revenue will make up the remainder of revenue. And our GAAP net loss is expected to be between a negative $7 million and negative $13 million or a negative $0.13 to a negative $0.24 per share.

With regards to non-GAAP earnings, we expect adjusted EBITDA to be between $180 million and $188 million. This represents an adjusted EBITDA margin of approximately 22.8% at the midpoint of adjusted EBITDA and revenue guidance. This margin level reflects an approximately 24% adjusted EBITDA margin for Dealertrack’s core business, which is consistent what we discussed on our last earnings call.

The slight dip for our core business compared to our 2013 margin percentage reflects the negative margin impact of our recent CFM and VINtek acquisitions. We are also assuming an approximately 80% adjusted EBITDA margin for the Dealer.com business, prior to any synergy savings, which is also consistent with our comments when we announced the deal.

With regards to synergies, we expect to realize approximately $5 million in potential net cost synergies in 2014. As discussed on our prior call, we anticipate over $10 million of the annualized net cost synergies in future years. And we expect adjusted net income between $78 million and $84 million or $1.42 to $1.53 per diluted share.

With the addition of Dealer.com – sorry while the addition of Dealer.com is expected to produce some of the seasonality we have historically seen in our quarterly adjusted EBITDA margin. We expect the first quarter of 2014 to be the slowest margin percentage period of the year at approximately 20%.

Our 2014 guidance assumes an anticipated full year average diluted share count of 55 million shares. The full year average diluted share count reflects the expected issuance of an additional approximately 8.7 million shares of common stock as of March 1 in connection with the closing of the Dealer.com transaction.

As for capital expenditures, we anticipate between $85 million and $90 million of capital expenditures in 2014, representing an estimated 10.8% of revenue at the midpoint with the same percentage of revenue as in 2013. A significant amount of capital expenditures continues to be spent on major technology projects associated with DT 2.0, recent acquisitions, infrastructure and other growth initiatives.

Please refer to our Investor Presentation posted on our company website for additional assumptions embedded in our guidance, as well as a reconciliation of GAAP to non-GAAP measures and our organic growth calculations.

To summarize with our successes and short momentum in 2013, we are well positioned to deliver healthy results as we head into 2014. As we joined forces with Dealer.com, the opportunities our combined talent and technology will bring as we unite and execute on our common vision of transforming automotive retail.

Operator, we will now take questions from conference call participants.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Sterling Auty of JPMorgan. Your line is now open.

Sterling Auty – JPMorgan Securities LLC

Yes, thanks. Hi guys, how are you doing?

Mark F. O'Neil

Hi Sterling.

Eric D. Jacobs

Hi Sterling.

Sterling Auty – JPMorgan Securities LLC

So, real procedural one here. So, when you report the March quarter, how should we think we about the Delaer.com revenue being split up in the subscription versus transaction because you kind of you broke out the advertising kind of separate from subscription. How is it going to layer in or you can change kind of the reporting structure?

Eric D. Jacobs

So, we expect to include their subscription revenue with our subscription revenue and we will include their advertising revenue with our other revenue.

Sterling Auty – JPMorgan Securities LLC

Great. And then can you give us an update in terms of you mentioned kind of the progress on Honda from a high level. But how should we think about the integration there and when that will start to start contributing more meaningful revenue.

Mark F. O'Neil

As I indicated, the pilot we expect to go through the first quarter – at the end of the first quarter will, we’re making a decision whether we are in full national roll out. And if we are then we would expect the contribution beginning in them in mid-part of the second quarter and through the balance of the year.

Sterling Auty – JPMorgan Securities LLC

Okay and last question. Can you give us an update in terms of the state of electronic registrations I think the last time you talked about you are around 15 states, where does that stand and what’s kind of the rollout plan for 2014?

Mark F. O'Neil

Right. So, that the current number is 15, with two more potentially pending this year. We are working with two different DMVs to see if we can launch additional ones. Both Colorado and Nevada, Nevada will be just a temp tag introduction. So and we don’t have clarity at this programs although “approve” when they will be operational we can't forecast yet.

So, know that there is continued growth. We continue in all others states in the pipeline, that we’re working with. So, I think our two, three years back we said, we tried at least two year I think we are still on track to do that.

Eric D. Jacobs

In some states it requires a significant rewrite if you will and the states of change there requirements and so we have to work on those states, update those particular platforms.

Mark F. O'Neil

I believe Maryland is also new this year right and Connecticut is a major rewrite, one of the ones Eric referring to where the stage just completely revamping their system.

Sterling Auty – JPMorgan Securities LLC

All right. And maybe if I could just sneak one last one in. In terms of the sales integration, so if, knock on wood, you close March 1st with Dealer.com, how should we think about the availability of selling the Dealer.com solutions by the rest of the DealerTrack sales force.

Mark F. O'Neil

So, I think you well aware, would certainly talked about in the script a moment ago. We moved in the account management model. So that basically means there is a primary owner for each dealership account. That primary owner then have specialist which they go on to support them to go in-depth on any individual solution whether that’s a website and advertising solution such as Dealer.com or ClickMotive or our DMS or inventory et cetera. So, that model really positions us well to keep that intact. And that relationship person would now just place a call to one of the Dealer.com specialists to sit down and discuss about advertising and website and other digital solution.

So, we expected to be fairly seamless. We are quickly going to move onto a joint instance of Salesforce.com. They use Salesforce.com, as do we – and we want to coordinate those efforts as quickly as we can. We think that will take somewhere between four and six months to complete that integration. And so in the interim we will be using more manual related systems to make sure the communication is in place. But the teams are ramped up and ready to go. I think they understand the solutions, since we do sell a website solution today. We have to bring them up to speed a little bit on advertising. But again that’s the role of the specialist and once an opportunity is presented to command in help close the sale.

Sterling Auty – JPMorgan Securities LLC

Great, thank you.

Mark F. O'Neil

You’re welcome.

Operator

Thank you. And our next question comes from the line of Kevin McVeigh of Macquarie. Your line is now open.

Kevin D. McVeigh – Macquarie Capital, Inc.

Great, thanks. Hey Mark, just back on to the integration process and the potential service, it sounds like there is about $5.14 million on its way and $10.15 million, where is that coming from and if you think about again, the integration of sales force, will it tweak their compensation package at all as they cross-sell both in terms to the core offerings then ultimately will comes in from dealer at that comp?

Mark F. O'Neil

Yes. The synergy question first. It really comes from a number of areas. It comes in the market where it does not come let me make that clear first because it relate to second part of the question. It does not come from any team member reduction. So we expect both teams to take completely staffed as they are now and the fact they grow through the year.

So that said, we have joint solutions. We have a CRM solution, they have a CRM solution. They have an inventory solution, we have an inventory solution. We expect to ultimately have one of each of those solutions and either combine the teams or to repurpose team members to do other things, should there be some overlap there, since there’s a lot of growth opportunity.

But we won’t have the same degree of necessary growth. So, what we originally were forecasting for team member growth in CRM, what they were, well obviously, only one of the two will be necessary.

So, there is an area. Marketing, an example would be NADA. A very large expense for both of us, multimillion dollar expense. We don’t both need to be exhibiting separately and NADA just happened in January so that savings won't happen until 2015.

There are a number of senior executive positions that either had been built for a part of 2013, or they were recruiting for in 2013, but now in 2014, we won’t follow through and hire, because we have those positions at Dealertrack.

There are some natural synergies and combining audits and legal expenses, and all of the kind of administrative stuff are running the business. So, these are big areas, we think $5 million is very achievable this year and as we start ramping up, $10 million is very achievable the following year.

Kevin D. McVeigh – Macquarie Capital, Inc.

Super. Go ahead, I’m sorry.

Mark F. O'Neil

On sales, so we’re going to keep the teams and the paper hands in place. They have very aggressive growth goals, we expect them to hit those growth goals and to do that, we thought that the sales team ought to stay for the most part status quo albeit as I mentioned to sterling, linking from a communication perspective, the calling strategies and accounts, so that dealers don’t have two different individuals going to sell two different solutions.

Kevin D. McVeigh – Macquarie Capital, Inc.

Understood. Then just switching gears to Honda, any sense of the initial goals on the transaction side. Have you had any initial conversations bearing off some of the subscription as well or is it still too early to process to determine where we are on that.

Mark F. O’Neil

Yes. It’s definitely too early. I mean we’re just in pilot, with a handful of dealers on the transaction side. So look, I think that’s more of the broader relationship building with Honda dealers and in fact, I would say with Dealer.com, just a broader relationship, the broader expense of the Dealertrack suite. We would expect to steadily help position us better and better in the subscription business. I don’t think Honda will be a material contributor at all in 2014, not on that side of the business or material impact.

Kevin D. McVeigh – Macquarie Capital, Inc.

Got it, got it. Okay, thank you. I’ll get back in the queue.

Mark F. O’Neil

You’re welcome. Thanks.

Operator

Thank you. Our next question comes from Raimo Lenschow of Barclays. Your line is now open.

Stefan Putyera – Barclays Capital, Inc.

Hey, guys. This is actually Stefan Putyera in for Raimo, just a quick question from me on the subscription revenue side, it looks like organic growth was about 12% on year-over-year and kind of what are your thoughts on how that will also progress through 2014 and I think you mentioned that it’s still supposed to about 20% on the exit run rate in Q4.

Mark F. O’Neil

Yes.

Stefan Putyera – Barclays Capital, Inc.

And kind of what is bridging that between the 12% and the 20%?

Mark F. O’Neil

Yes. So the resurgence or the repositioning of the inventory solution and the continued growth of the DMS business would be the two primary drivers on the Dealertrack side obviously, we think that subscription business relative to websites will also grow significantly, but that will be a little muddier water, because if we have a solution and Dealer.com has a solution and there is clearly going to be some trading from our solution to their solution as they have a bit broader product offering.

Physical retailing, CRM, across the board, we expect to see growth in each of the subscription products that we currently have.

Eric D. Jacobs

Yes. And I think our confidence level is high, because of particularly the resurgence of the inventory business and having position in 2013, we’re adding DMS capacity throughout the year. That capacity comes on in the first and second quarter and then fully gets realized in the second half of the year. So we should be positioned nicely quarter-over-quarter to continue to grow the subscription business this year.

Stefan Putyera – Barclays Capital, Inc.

Got you. And then just if I could follow up with one more on beyond – with regards to the pipeline build coming out of the NADA conference, what have you guys seen on that end and if there is any particular product where you’re seeing an uptick there?

Mark F. O’Neil

NADA was successful across the board, but if I picked a standout, I’d I pick inventory, our new Inventory+ solution probably had the highest sales in any given solution. So there was clearly the most interest there. So if you remember what happens, so typically we’ll sign a contract and then we will install that, and so the impact of revenue on the first quarter is minimal, particularly because NADA was held at the end of January, so if you think about it for the quarter impact, typical 30-day process, generally to install a customer and then you start recognizing revenue. So at most, we’ll see the NADA success; have its first initial hit in March, which is certainly a third of the quarter. and then we’ll feel the impact on the second and third quarter forward. So a real good quarter, just a real good event. Just a bit of a delay in terms of the impact.

Eric D. Jacobs

Just to be clear when Mark was talking about a month to install, that doesn’t include the DMS, which is looking more or like a six plus month period of time before we install those customers, right.

Mark F. O'Neil

Q1 is already committed in DMS. It is essentially full across the board for January, February and March, maybe a little capacity for a buy-sell or an odd install here or there. but as Eric said, we’re that full six months out.

Stefan Putyera – Barclays Capital, Inc.

Got you. Thank you, guys.

Eric D. Jacobs

You are welcome.

Operator

Thank you. Our next question comes from the line of Tom Roderick with Stifel. Your line is now open.

Tom Roderick – Stifel, Nicolaus & Company, Inc.

Hi, gentlemen, good afternoon. So I wanted to follow up a little bit on Sterling’s question. Sterling addressed that the mix between subscription and advertising. So addressing the advertising side of business, can you just give us a quick refresher as to sort of the mechanics of that business model and also sort of growth rates and if there is any sort of respective difference in gross margins that we ought to think about between that subscription business from the Dealer.com side, that would be great? Thank you.

Mark F. O'Neil

Yes, you are welcome. So let me make a couple of comments and I’ll let Eric also comment. So how that business works? So typically a dealer sets a budget for a year and says I’m going to spend $5,000 a month on digital marketing or I’m going to spend $3,000 or I’m going to spend that $5,000, $2,000 on paid search or I’m going to spend $3,000 on display. They’ll make some decision and then that we’ll happen pretty consistently month over month through the year, and that’s why we say it’s very much like recurring subscription revenue, because they will set budgets and intend to spend that on a very predictable basis month over month.

So that’s how that works and how that’s we get some sense of what not only we’re going to recognize in the quarter. but what do you expect for quarters ahead. It is a lower margin business. It has been our subscription business and actually advertising has two different components to it. And I’ll let Eric speak to those, because paid search has very different margins than display ads. And so again, mix can throw you off a bit on margins. You want to…

Eric D. Jacobs

So it’s paid search and display are the two primary components. The paid search margins are more in the sort of teens. The display margins are higher than our average as a company. So it’s really the mix is – it’s mixed driven and the long-term trend is towards more display. Right now, most of the advertising that dealers are doing is paid search with us, but we see a steady uptick, while I should say with Dealer.com was the advertising is the paid search, but we see that trend towards display longer-term with the higher margins.

Tom Roderick – Stifel, Nicolaus & Company, Inc.

Right. and a follow-up on that one, Eric. Is the – is it the model something that lends itself to some pretty steady trends in more recent time period, but is there an element of seasonality with dealer advertising spend and what component that revenue stream is variable versus fixed and in another words, do the dealers sort of commit to a minimum level and then they are over or above it or they commit to an annual? What do you see from a commitment standpoint?

Eric D. Jacobs

As Mark said, they generally set it and then they adjusted from time-to-time and it’s typically an upwards adjustment. That said, you will occasionally see around certain holidays temporary uptick, but there is generally certain holidays in each quarter. So you don’t see much seasonality within the year when you look quarter-to-quarter. And so from how that kind of impacts our margins going forward. As I mentioned, during our prepared remarks, we expect Q1 to be less than the prior quarters, I’m sorry, the other quarters due primarily to NADA and the marketing around that and that’s typical to our business. but we would see more flatter margins going forward than we have historically, because of adding the advertising, the subscription mix to our overall revenue; it kind of offsets the seasonality in our transaction business.

Tom Roderick – Stifel, Nicolaus & Company, Inc.

Perfect, that’s helpful, thank you guys.

Mark F. O’Neil

Yes, very welcome.

Operator

Thank you. Our next question comes from the line of Tim Willi of Wells Fargo. Your line is now open.

Timothy W. Willi – Wells Fargo Securities LLC

Thank you, and good afternoon, Mark and Eric.

Mark F. O'Neil

Hi, Tim.

Timothy W. Willi – Wells Fargo Securities LLC

A couple of questions here, some of them I guess probably a little bit of housekeeping, but in terms of the guidance for 2014, Eric, I apologize if I missed this, but are there any deal related costs that are not backed out for the adjusted EPS calculation?

Mark F. O'Neil

Those are – those costs are backed out from an adjusted EBITDA and adjusted net income perspective.

Timothy W. Willi – Wells Fargo Securities LLC

Okay. So you backed out everything related to deal then. okay, great.

Mark F. O’Neil

The costs associated with the deal are about $26 million of actual cash costs, not all of those are being added back, some of those will be hung up on the balance sheet. And so there’s really sort of some of the financing in the like, but our investment banking fees are fees related to our ratings and such will be belong to the income statement and be added back from adjusted EBITDA and adjusted net income purposes.

Timothy W. Willi – Wells Fargo Securities LLC

Okay, perfect. And the other housekeeping one I had, for a question about the business. While as the CapEx number, $0.01-ish percent of revenues, understanding what you guys are doing around development in product and software and why that number is – what it is, any color on when that would go to what would view as a more normalized run rate of CapEx to revenues maybe like a mid single-digit number, what you deem to be a little bit more normalized and is that 12 to 24 months out or is it longer than, just want to get a feel for sort of the free cash flow dynamics beyond 2014 relative to earnings and things like that?

Mark F. O’Neil

Every time we think that it’s going to happen and we do another acquisition of size and changes, a little hesitant to kind of go further out in 2014 at this point. That said, we are committed to it and think we can bring it down. a lot of our CapEx is growth CapEx and as long as we think that there’s opportunities longer-term, we want to have that the flexibility to invest for that future growth. And so if you can turn the downturn, we were doubling down if you will on our capital expenditures, because we saw the long-term opportunities. so it’s kind of hard to say what percentage, we don’t have a particular target percentage other than we know that we can bring it down if we don’t see the growth.

Eric D. Jacobs

And let me just add, Tim, you had said the way we see it mid single digits. No, that’s too low. So I think sort of the range here and say, 10.8 is probably at the high end and when you think about the acquisitions, we did last year, two of them alone, we said we would drive $12 million of CapEx and that’s a big number. The good news is the near-term, we don’t see any significant acquisitions, we’re obviously very focused on just getting Dealer.com down and successfully integrating that.

So look, it is – I think getting below 10 is the first objective, and then I think we’re more in the high single digits on a very long-term basis, as Eric said, they’ll now depend on are we acquiring or are we not acquiring. But it’s hard to fathom below 8% frankly and in the near-term, I think we will be shooting in the 9% to 10% range even before you think about 8%.

Timothy W. Willi – Wells Fargo Securities LLC

Okay, I appreciate that. The last question I have was I guess just about the cross-selling the relationship management sort of sales structure you have in place. The broader products set. I don't really recall on these types of calls you ever being questioned about pricing pressure anything like that. Maybe it's because it's never really been something to talk about.

But if you tie in the sort of a stickiness factor that you’re building with more product and hopefully better sort of relationship management. Is there anything that we should think about in terms of that pricing dynamic, whether it’s there is never been pricing pressure, maybe, there is a chance to improve the pricing metrics to Dealertrack or to sort of reverse a pricing trend or just anything along those lines. It seems like you’re going to have real opportunity here, basically the only source and talent and lock people in. I’m sort of curious how you think about the revenue relationships with your customers given the dynamic over time?

Mark F. O'Neil

I just want to clarify that, we’re definitely not the only game in town that would be a nice dynamic, but that is not the case. It really any of our solutions. So that said, there are many games in town. The way where we think we ultimately win and the way we continue to grow the business, first and foremost is to deliver the integrated suite, that is very competitively differentiated when you can completely integrate into the workflow, the transaction elements as well as all of the customer interactions and touch points.

So many applications today standalone and data doesn’t move between them. A very simple one, just because the question came up is, moving data from our completed transaction directly to a DMV often all that data is re-keyed and yet obviously, if just customer and vehicle information exists on one application or another, there’s really no reason in the future here, you couldn’t add maybe one piece of data, the weight of a vehicle hit register and that transaction is done.

Similarly if you think about interacting on the website and a consumer, so we had in December, we had about 17 million hits to our finance driver application, which is software enables the consumer to get real-time payments on a car, and we deliver that through multiple different channels and certainly about 17 million hits about 7 minutes on average of time spent there, that’s a lot of information. And inevitably we could have gleaned from that that we could, if a consumer allowed us to pass directly to the dealership to significantly speed up the financing process once they’re in the store.

And again, by tightly integrating applications, now the online application of the in-store applications, we think we can find that time savings, we think we can improve the efficiency of the transaction, the accuracy of the transaction. Again, this isn’t necessarily creating innovation by new feature and functionality, although I see a lot of that coming, look at the DMS announcement we just made about now mobility function, new dashboard reporting, new credit card swipes, new contracting capability.

So, clearly some feature and function adds are coming. But also then tying all of these software solutions together is very powerful. That’s what I think differentiates Dealertrack, and that’s what I think drives the cross-sell of multiple solutions as we go forward quarter-after-quarter. And we've already had some very interesting brainstorming sessions with the Dealer.com team of how with our online assets and our in-store assets, we can significantly enhance the online purchase process. So stay tuned, we think there’s lots of neat innovation coming, because of integration as well as new feature and function ads.

Timothy W. Willi – Wells Fargo Securities LLC

Great, thanks very much.

Mark F. O’Neil

You’re very welcome. thanks for the question.

Operator

Thank you. Your next question comes from the line of Gary Prestopino of Barrington Research. Your line is now open.

Gary F. Prestopino – Barrington Research Associates, Inc.

Hi, good afternoon.

Mark F. O’Neil

Hi, Gary.

Gary F. Prestopino – Barrington Research Associates, Inc.

At one-time or another you said that, a dealer took all of your subscription products would be about $5,000 or $6,000 a monthly spend.

Eric D. Jacobs

Yes.

Gary F. Prestopino – Barrington Research Associates, Inc.

Is that about where it is now with the Dealer.com, where does that go to?

Eric D. Jacobs

And probably on the pure subscription side another thousand, probably at the top end of you range is $6,000 plus. But then if you look at advertising spend, that number we can all get kind of crazy at $2,000 to $3,000 straight down the fairway number, but their dealer is spending $10,000 to $20,000 a month. So, could it be 25,000 a month? Yes, you can think about those numbers, particularly when you look at the online ad spend numbers, we expect in 2014 of $10 billion of marketing spend, and in 2017, 2018 that number doubles again, net of $20 billion, look the numbers are so large. we just know there’s a lot of runway and we know we can – our addressable market, we think it’s comfortably over $10,000 per month for dealer, those are big numbers right now. I’d say, let’s be thinking about getting a nice portion on that without expanding the market anymore and we’ve got a lot of runway to grow Dealertrack.

Gary F. Prestopino – Barrington Research Associates, Inc.

And are you seeing given that the industry just really strengthened here over the last couple of years, are you seeing more of an appetite from the independent dealers for the credit application product as well as some of your subscription products.

Mark F. O’Neil

Yes.

Gary F. Prestopino – Barrington Research Associates, Inc.

Could you maybe break down your subscribing dealers between independents and franchise?

Mark F. O’Neil

Well, the vast majority are still franchise, but this will be the first year where we actually have a dedicated team, just focused on independent dealers. And they’re focused on not only selling subscription solutions, but also on transaction network utilization. So we find there are more lenders who are to looking to expand the market and want to lend, particularly the top-tier independent dealers, we’re focused on them by the registration solutions, the titling solutions obviously, as that relates indirectly there and very much on the subscription side of the business.

And look on the DMS side, I think we’ve always had nice independent dealer penetration; we expect that to continue to grow, inventory, we expect to grow. So look, but growth is relative I think 90% of our business really on both sides of business, will continue to be driven by new car franchise dealers. By a 10% to material number, when you think the total revenue is approaching $800 million this year. If you can get the 10% is going to come from independents, that’s big. And the market is at least half on as large as just it is on the new car franchise side. So we’ll focus on it and we expect some more growth to come from there.

Gary F. Prestopino – Barrington Research Associates, Inc.

Okay. and then Eric, I could like that the – what were the proceeds from the sale of TrueCar?

Eric D. Jacobs

$92.5 million.

Gary F. Prestopino – Barrington Research Associates, Inc.

Okay and then lastly your organic growth of 2013 overall and then per subscription transactions or revenue.

Eric D. Jacobs

So, yes our organic growth per subscriptions with 11%. And for a transactions, one second.

Mark F. O'Neil

12%

Eric D. Jacobs

Subscription is 11% and transactions were 19%.

Gary F. Prestopino – Barrington Research Associates, Inc.

19% that’s for 2013, right?

Eric D. Jacobs

Correct.

Gary F. Prestopino – Barrington Research Associates, Inc.

Okay thank you.

Operator

Thank you. And I am showing no further questions. I would like to hand the call back over to Mark O'Neil for any further remarks.

Mark F. O'Neil

That will wrap it up for us, everyone. Thanks for the continued interest and the continued engagement. I appreciate the questions. As always we will be following up with the analyst community here after this call of one-on-one. So, thanks very much everyone. I appreciate the time this evening.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day everyone.

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