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Dealertrack Technologies (NASDAQ:TRAK)

Q1 2014 Earnings Call

May 12, 2014 5:00 pm ET

Executives

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

Eric D. Jacobs - Chief Financial Officer, Principal Accounting Officer, Chief Administrative Officer, Executive Vice President and Treasurer

Analysts

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Stefan Putyera - Barclays Capital, Research Division

Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division

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

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

Kevin D. McVeigh - Macquarie Research

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

Operator

Good evening, everyone, and welcome to today's conference call. Today's conference 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 first quarter ended March 31, 2014. He would then provide an overview of the operating environment, including key business metrics. He will also provide a summary of the quarter from a business and strategic perspective, as well as discuss Dealertrack's recent acquisition. Eric will then discuss Dealertrack's financial performance for the first quarter and updated guidance for 2014. Afterwards, they will be available to answer your questions.

Before we begin, Dealertrack would like to remind everyone that remarks made during this conference call will contain forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees, but involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including, without limitation, those risks detailed in Dealertrack's filings with the SEC, such as its most recent reports on Forms 10-K and 10-Q.

Dealertrack disclaims any obligation to publicly update or revise any such statements to reflect any change in their expectations or events, conditions or circumstances on which any such statements may be based or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

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

As a reminder, Dealertrack acquired Casey & Casey in the second quarter of 2013; Customer Focused Marketing and VINtek in the fourth quarter of 2013; and Dealer.com in the first quarter of 2014. Therefore, businesses are included in Dealertrack's results for the first quarter of 2014, but not for the first quarter of 2013.

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

Mark F. O'Neil

Thank you, Darryl [ph]. Hello, everyone. Thanks for joining us today. I'm pleased to report that Dealertrack continued its sales growth momentum in the first quarter, with revenue of $159 million, a total increase of 46% and an organic increase of 21% when compared to the first quarter of 2013. Our strong organic performance was a result of healthy growth across our subscription and transaction businesses and the overall investments we've been making in our business.

A significant highlight of the first quarter was the completion of our acquisition of Dealer.com on March 1. This acquisition positions us to accelerate our vision of delivering a market-leading suite of integrated technologies capable of transforming automotive retailing. This transformation will happen as we integrate Dealer.com's online digital marketing solutions with Dealertrack's in-store solutions.

Looking at our first quarter results in more detail, subscription revenue of $62 million increased 45% from a year ago or 13% on an organic basis. Transaction revenue of $78 million increased 27% from a year ago or 16% on an organic basis. Advertising and other revenue was $19 million and included advertising revenue of $12 million from our Dealer.com acquisition.

We are excited about the progress we are making, as an increasing portion of our revenue shifts to highly predictable subscription revenue, as well as very visible advertising revenue that is based on monthly spending commitments. Notably, we were able to grow our diversified transaction business independent of car sales, as demonstrated by 16% organic transaction revenue when car sales were mostly flat in the quarter. As you know, we're striving to become a full-suite technology partner for our dealership clients. As our product portfolio has broadened, we've seen a distinct shift in our engagement with dealers. Specifically, dealers are increasingly engaging with us in dialogue regarding the purchase of our full suite of solutions instead of individual point products. With that shift, we steadily made progress in increasing the average monthly subscription revenue per subscribing dealer. At the same time, total potential subscription revenue per dealer has increased, as our portfolio of solutions has expanded.

Our acquisition of Dealer.com further contributes to both of these trends. During the first quarter, which only includes 1 month of Dealer.com revenue, the average monthly subscription revenue per subscribing dealer increased 30% from the prior year first quarter to $956 per month. For comparison purposes, in March of this year, the first full month that included Dealer.com's results, we averaged $1,191 per subscribing dealer for that month alone. We added 5,160 subscribing dealers in the quarter, including dealers acquired through Dealer.com who are not already in Dealertrack's subscription dealer count to reach a total of over 23,000 subscribing dealers as of the end of the first quarter.

In addition to expanding the actual monthly subscription revenue per dealer and the number of dealers with a subscription, our total addressable opportunity has also expanded, with current breadth of our solutions, potential monthly subscription revenue per subscribing dealer now approaches $10,000 per month. In other words, there's ample opportunity to continue to grow our subscription business for years to come.

During the first quarter, we also saw a continued interest in our DMS and Inventory+ solutions. As expected, during the first quarter, we're impacted by a dip in new sales for websites and CRM solutions in anticipation of the closing of our Dealer.com acquisition. Due to the forthcoming consolidation of our website and CRM solutions, we believe that we will see elongated sales cycles with these subscription products. As such, this effect will make it a challenge to achieve our prior organic growth objectives for our subscription revenue this year, so we continue to expect subscription revenue growth to accelerate each quarter throughout the year due to a number of factors. These include the benefit from increased sales productivity from our new account management sales structure, increased DMS installation capacity, an expanded Inventory+ solution and digital retailing capabilities.

At the end of 2013, we began implementing a new account management sales structure with 1 central the relationship person for each of our customers. That account management person quarterback is supported by a multiple product experts for additional support. This account management structure helps promote familiarity with the full breadth of our offerings and strengthens the customer engagement process. As I stated on our last call, dealers are expressing more interest in looking at our full suite of solutions, as opposed to just individual products, which we believe is, in part, attributable to the account management sales structure. We're already seeing more cross-selling among our subscription products, and we expect this trend to increase over the course of the year.

We have seen strong demand for our DMS solution, and to meet this demand, we increased our DMS installation capacity significantly in 2013. This increased capacity will benefit us through 2014 as new team members become fully trained and more efficient in supporting new installs.

With the acquisition of Dealer.com and its leading website and advertising solutions, we also added new CRM capabilities, which we plan to combine with our other CRM offering into a single solution. We are very excited about the longer-term opportunity to enhance our CRM solution by providing dealers with predictive data analytics from our online and in-store solutions to enhance the vehicle sales and customer interaction process. In March, we had over 60 million visitors to the combined websites we manage, putting us in a unique and strong position to leverage this data to materially improve the auto shopping and purchase process. With Dealer.com's websites, we're also seeing increased interest in our digital retailing solutions, due in part to these solutions providing an optimized link between our online and in-store solutions.

Our digital retailing tools help a dealer with their online presentation of payments, financing and inventory.

Turning to our transaction businesses. We delivered 16% organic growth in transaction revenue in the first quarter, despite a very tough winter through much of the country that resulted in first quarter car sales growing at approximately 1%. This growth rate was well below most industry experts' expectations. We have stated on numerous occasions that believe -- that we believe we can continue to grow our transaction revenue independent of overall car sales. Our results this quarter clearly demonstrate this belief.

Looking at some of our transaction business metrics. Average transaction revenue per car sold increased to $11.20, up 25% from 1 year ago. This metric benefited in the quarter from VINtek and Casey & Casey acquisitions. Also helping to drive transaction revenue growth was a number of active lenders on our U.S. credit application network, which is up by over 150 from a year ago. We now have a total of more than 1,440 lenders who are serving over 20,700 franchise and independent dealers.

We continue to make progress on our technology partnership with American Honda Finance Corp. We are close to completing the first phase out of our partnership, which has enabled Honda and Acura auto dealers to submit credit applications and receive decisions back from Honda's new Ideal platform. This platform is leveraging DT 2.0, which is the core part of Dealertrack's next-generation of workflow technology solution. Based on our progress, we are now earning transaction revenue from American Honda Finance Corp. We expect this revenue will provide a positive contribution to our overall transaction revenue throughout the rest of 2014 and in the future years.

With the completion of our Dealer.com acquisition, we expect advertising revenue to be a significant contributor to our overall business. Advertising represents a significant long-term opportunity for us, with a total available market expecting to almost double by the end of 2018 to approximately $20 billion according to our bureau research report. We ended the first quarter with 7,053 active dealerships on the advertising platform, generating $1,708 of monthly advertising revenue per dealership.

A significant development during the quarter was the launching of a digital marketing program for Ford dealers. Ford Motor Company provides certain reimbursements to its over 3,000 plus dealers, as a way to encourage the expanded use of digital advertising while maintaining brand integrity and centralizing data. While this arrangement had a limited period of exclusivity, the vast majority of dealers who adopted the program are continuing to partner with us, creating opportunities to further deepen our relationships with Ford dealers in the months ahead. The bulk of the dealer digital advertising spend in the early stages of the Ford program has been directed towards paid search. We anticipate that as dealerships gain more experience of the benefits of the program, a higher percentage of their advertising spend will be directed towards display, which generally results in higher margins for Dealertrack.

While we expect Ford dealers who advertise with us to increase their overall spend over time, we also expect a number of total Ford advertisers will decrease in subsequent quarters due to the limited period of exclusivity of the Ford agreement. We continue to be very enthusiastic about the joining of Dealer.com's digital marketing solutions and Dealertrack's in-store software solutions. We believe the integration of the 2 businesses is going well, in part, this is due to our common vision of transforming auto retailing with a highly differentiated value proposition. We have identified more opportunities than we originally projected to offer more enhanced products and functionalities as the organizations come together. With regards to the integration, there are some product overlaps between our organizations. As I mentioned earlier, we plan to consolidate our CRM platforms. With respect to websites, we are continuing to support all of our existing website solutions, ClickMotive and eCarList, in partnership with Dealer.com.

We find each website product has merits for different customers and by offering multiple solutions, we believe we can garner a greater share of the total opportunity. Similarly, we continue to support Dealer.com's Inventory product along with our Inventory+ solution with the potential to further integrate these technologies over the medium term.

In summary, we are pleased to have delivered strong first quarter results in spite of relatively flat trends in car sales growth. We believe this performance clearly illustrates the diversity of our solutions. With the closing of the Dealer.com acquisition on the quarter, and initial integration efforts successfully underway, we are enthusiastic about the contribution that we are already seeing from Dealer.com. Additionally, we are optimistic as we look ahead and embark on a common vision of transforming automotive retail together. Now let me turn this call over to Eric for additional details on our financial performance in the first quarter and our updated guidance for 2014. Eric?

Eric D. Jacobs

Thank you, Mark, and hello, everyone. I am pleased to report our first quarter 2014 financial highlights. Revenue for the first quarter was $159 million, a total increase of 46% from a year ago. This is a 21% increase on an organic basis when you adjust for the impact of recent acquisitions.

Looking at revenue in more detail, subscription revenue was $62 million, a total increase of 45% from a year ago and a 13% increase on an organic basis. Transaction revenue was $78 million, a total increase of 27% from a year ago and a 16% increase on an organic basis and advertising and other revenue was $19 million. As Mark mentioned, this includes $12 million for 1 month of advertising revenue from the Dealer.com business.

Recent acquisitions including the acquisition of Dealer.com, which closed on March 1 and other acquisitions since the first quarter of 2013, contributed a total of approximately $35 million to our total revenue in the first quarter, complementing our strong organic revenue growth in the quarter.

Earnings for the first quarter were as follows: our GAAP net loss was a negative $12 million or a net loss per diluted share of a negative $0.25; our adjusted EBITDA was $31 million, which equates to an adjusted EBITDA margin of approximately 19%; and our adjusted net income was $12 million or $0.23 per diluted share.

I'd like to highlight several items that are included in our first quarter GAAP net loss. First, as Mark highlighted, we are combining our existing CRM solution with Dealer.com's CRM solution. This, along with the overlap of ClickMotive and Dealer.com's website solutions, resulted in the impairment of certain assets in the first quarter, an amount of $7.5 million, net of taxes, or a loss of $0.16 per share.

Second, on February 2014, we sold our interest in TrueCar, Inc. for approximately $93 million, for which we realized a net gain after taxes of $6.8 million, or $0.14 per share. Each of these above items are excluded from our non-GAAP measures.

Our adjusted EBITDA margin in the first quarter was slightly lower than expected. We saw a slight shift in our anticipated allocation of technology development costs away from internally developed capitalized software to research and development expense. In addition, anticipated cost synergies from the Dealer.com acquisition were lower than initially expected for the first month. However, we continue to expect cost synergies of approximately $5 million this year. These items had a slight negative timing impact in our expected earnings.

A 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 classification and organic revenue growth calculations.

Turning to our balance sheet, as of March 31, we had approximately $149 million in cash, cash equivalents and short-term marketable securities, compared to approximately $133 million at the end of 2013. The cash component of the Dealer.com purchase price and related transaction expenses were primarily funded with the proceeds from a new 7-year senior secured Term Loan B credit facility, as well as cash in our balance sheet, including cash from the sale of our TrueCar equity interest. As part of the Dealer.com financing, we also received a new commitment for a $225 million senior secured revolving credit facility, which replaced our current $125 million revolver. This revolver is currently undrawn.

Capital expenditures in the first quarter of 2014 were approximately $23 million, which included $4.7 million of purchased software and $8.8 million of internally developed software.

Before turning to guidance, I would like to discuss our outstanding convertible notes. As we disclosed in our Form 8-K filing on April 17, we delivered a conversion notice to the holders of the notes. The convertibility test of the notes was met at the end of the first quarter, as the closing price of our common stock for a certain number of days exceeded the $48.58 trigger for convertibility. As a result of this convertibility test being met, the holders technically have the ability to convert their notes to cash through June 30, 2014, and we have moved the outstanding balance of our convertible debt to a short-term liability as of the end of the first quarter. Notwithstanding the forgoing, we do not expect holders to convert during this period of time, and the notes have a scheduled maturity of March 15, 2017.

As previously discussed, in conjunction with the convertible notes offering, we entered into a convertible bond hedge and separate warrant transaction to effectively increase the conversion price of the notes from $37.37 to approximately $46.18. The $37.37 conversion price is used to determine dilution from a GAAP perspective, and the $46.18 amount is used to determine dilution from a non-GAAP perspective.

As of March 31, 2014, the fully diluted share count used to calculate our GAAP net loss per share excluded 1.8 million shares related to the convertible notes and warrants, as they would be anti-dilutive due to the GAAP net loss for the period, while our non-GAAP adjusted net income per share included 400,000 additional shares. These additional shares had an impact of less than 1% per share on a non-GAAP adjusted net income per share, reflecting the warrant dilution on the convertible notes.

To be more consistent with other SaaS companies in including how Dealer.com presented its prior financials and to improve investors' ability to analyze and compare results, in the first quarter, we changed the product development financial statement category, in our consolidated statement of operations, to read research and development. In conjunction, we reclassified certain development engineering and quality assurance expenses that we historically presented within cost of revenue to research and development expense. We also reclassified certain internal system technology costs that we historically presented within cost of revenue to selling, general and administrative expenses. Our Form 10-Q, as well as our investor presentation for the first quarter, includes reclassified historical results for the past 2 years, based on this new classification format.

Turning now to our updated guidance for 2014. Even with January and February car sales relatively flat year-over-year due to harsh winter weather through much of the country, we are seeing sales begin to pick up again and anticipate that new car sales in the United States will still be approximately 16.2 million units, in line with our prior guidance and most industry estimates. The actual SAAR average is 15.7 million units for the first quarter and 16 million units in April.

We also anticipate that used car sales by franchised dealers will be approximately 15.9 million units in 2014, even though we averaged 15.7 million units in the first quarter. Collectively, our guidance assumption translates to an expected growth in car sales of approximately 3% in 2014 compared to 2013.

With that backdrop, we are updating our 2014 guidance as follows: revenue is expected to be between $814 million and $826 million, which would represent growth of approximately 70% at the midpoint from 2013. This is an increase of $12 million from the midpoint of our prior guidance of $800 million to $816 million. This increase is expected to -- this increase in expected revenue reflects our over-performance in the first quarter and assumes that Dealer.com revenue contribution for 2014 will be between $250 million to $260 million, which reflects the $10 million increase in anticipated advertising revenue from our prior guidance. Our GAAP net loss is expected to be between a negative $12 million and a negative $18 million or a negative $0.23 to a negative $0.34 per share.

With regards to non-GAAP earnings, we expect adjusted EBITDA to be between $180 million and $188 million, which is unchanged from our prior guidance despite a shift to some expenses from capital expenditures to research and development expense. This represents an adjusted EBITDA margin of approximately 22.4% at the midpoint of our adjusted EBITDA and revenue guidance. This margin level reflects a slight decline from our prior guidance as a result of the increase in lower margin advertising revenue associated with the Ford digital marketing program, which is below typical advertising margins.

While we are not changing adjusted EBITDA guidance for the year, we are increasing our expected free cash flow by decreasing capital expenditure guidance by $2 million at the midpoint to reflect the shift mentioned above. Our updated capital expenditure expectation for the year is to be between $84 million and $87 million, instead of our prior guidance of between $85 million and $90 million.

With respect to synergies from the Dealer.com acquisition, we continue to expect to realize approximately $5 million in net cost synergies for the full year and we expect adjusted net income to be between $78 million and $84 million, or $1.42 to $1.53 per diluted share, which is also consistent with our prior guidance. 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 believe that first quarter will be the lowest-margin period for the year.

Our 2014 GAAP net loss per share guidance is based on an estimated diluted share count of 53 million shares and adjusted net income per share guidance is based on diluted share count of 55 million shares. Both of these include the 8.7 million shares issued in connection with the acquisition of Dealer.com. Our adjusted net income per share guidance also includes the expected dilution impact of the convertible notes. 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 organic growth calculations.

To conclude, with an excellent start to 2014 and the completion of the acquisition of Dealer.com, we are excited about our achievements in the quarter and believe we are well positioned to deliver strong results through 2014. We expect to capitalize on the opportunities presented to us, as we combine forces to transform automotive retail.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Sterling Auty of JPMorgan.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

So why don't you [indiscernible] onto a couple of items. First, there is the commentary about the organic subscription revenue growth perhaps not reaching the target that you've previously set. I missed what was causing the delays in it. And then looking at the increased revenue guidance, would it be fair to say then, just at the highest level, that your expectation from Dealer.com is now higher to offset any of the lower organic growth in the year?

Mark F. O'Neil

So a couple things on that, Sterling. Pre-closing the deal -- remember we announced the Dealer.com acquisition at the end of the year, we didn't close it until March 1. So during that 2-month period as we indicated on the last call, we really had a stall in subscription sales. I mean just everyone was waiting to see, what are you going to do on website? Whose platform is going to win or going to survive? What are you going to do on CRM, you have 2 of those? And then post closing the acquisition, it's created a lot of buzz around Dealertrack about, hey, all of a sudden, the conversation is going from "We're thinking of buying a website" or "We're thinking of buying an inventory solution" to "We're wondering if we should go all-in with Dealertrack." And that's obviously a great conversation and a very exciting transition of dialogue, but what it means to you, in terms of growth or financial results, is the sales cycle is longer than it's ever been because, all of a sudden, it's not a 30-day process to evaluate a product, it's maybe a 90-day process to evaluate a suite of solutions. That's the kind of dialogue we want. I can say we have a record pipeline if I look at the, not backlog, but the total amount of interest that we booked in terms of leads, it is at record levels. And so look, eventually, that's going to catch up here. What does it mean, though? By the fourth quarter, we think it's likely to slip a quarter or so in terms of hitting that goal. Where will it come from? Yes there will be more advertising revenue, as I think we indicated there. And that's substantially where the increase is going to come. There's still going to be some in the transaction side and, believe me, you're going to see good growth on the subscription side and very steady quarter-over-quarter, it's just that single-point milestone in the fourth quarter we think is a stretch at this point. We want to manage expectations there.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Exactly. So a high-quality problem to have the -- if they go to the full suite. Switching gears, you gave us a lot of metrics, and I want to make sure that I'm clear. So you gave us kind of revenue-per-dealer subscription versus advertising. So a subscription just has the Dealer.com website-hosting-related products plus the traditional Dealertrack, correct? That was the $956 I think you said.

Mark F. O'Neil

Yes. Yes, that's exactly right.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Okay. Now in that -- one of the questions we get often from investors is, wait a minute, if I look at the cost like DMS and the cost of Inventory, how come that number is not higher already? What does the mix of the products look like? And as you layer in Dealer.com, how should we think about that? Meaning, what are the biggest revenue contributors in terms of subscription products at the moment?

Mark F. O'Neil

Yes. So good questions. So one of the things that drives the mix or the subscribing number down per dealer per month is mix-related. And 2 things dilute the number and mix. One is our enormous success in the compliance area. So look, as we've talked about it being very strong in the sales and finance area, dealers look to us and sell -- and for compliance solution, that's a $300 to $400 solution. So you have really broad penetration out there with that now, that's going to bring your average number down. The other number that even impacted more is book-out. It's less these days but it still is pretty impactful. It ranges from $49 and $79 a month and you put much of that in the mix and it just brings the whole number down. So think about that being a little bit of a drag on that average revenue per month number, but in terms of absolute, what's driving it up, so 3 things now. DMS is well above the average price point, right now, of average revenue per subscribing dealer. The Dealer.com website solution bundled with multiple products is also well above the average, that would not include just the core website but additional solutions on top of that whether you bundle Digital retailing in there, whether you have video, whether you have social components, et cetera, they all drive the average spend per website up. And you want to comment on it?

Eric D. Jacobs

I'll say Inventory.

Mark F. O'Neil

Sure, Inventory+ is above the thousand-dollar mark as well. So that would bring the current average up, not substantially from the 900, but it would tweak it up absolutely in the mix.

Eric D. Jacobs

And we don't use this number now. We used to put a number of subscriptions per dealer, but as we didn't -- as we started to sell more and more bundles, it became less relevant. But generally speaking, the typical dealer has somewhere between 2 and 3 subscription products from us. So if, as Mark mentioned, if you're having a bookout and a client switches the type of the subscription where we have the most subscribers, that would drive the average down.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Okay. And then last question, the 16% organic growth in transaction, you gave some color, but if you just look at where the largest incremental dollars came from this year versus last year in the transaction [indiscernible]?

Mark F. O'Neil

I'm going to say, in noncredit application revenue. So look, think about registration transactions, think about title transactions, between VINtek, Casey & Casey adding to that number, combined with our own growth and expansion of those solutions, the average price point on all of those exceeds the average price point from a credit app. So as the mix shifts that way, that drives that average revenue up pretty materially. And just to restate, just to go back to your early one, so 956 was the average revenue per dealer per month for the quarter. Remember we didn't have 2 months of Dealer.com, so if you have included that, excuse me, not trying to pro forma, just look at that number from March, which would include Dealer.com we're getting close to $1,200, $1,191 per subscribing -- per month, per subscribing dealer. So it helps a little bit on seeing that number move up. Obviously, you're going to expect us to move nicely in Q2 as we have a full quarter of Dealer.com.

Operator

And our your next question comes from the line of Raimo Lenschow of Barclays.

Stefan Putyera - Barclays Capital, Research Division

This is actually Stefan Putyera in for Raimo. Just a quick question for you guys. On the CRM integration, between the 2 companies, I know you guys laid it out a the high level, but can you talk a little bit more about the integration there and kind of what the expected contribution that's going to halve the revenue once you consolidate those 2 systems into 1 product. And I have a follow-up.

Mark F. O'Neil

Yes, so the integration work will begin over the next month. It'll continue mostly into the third quarter, but be substantially done by the end of third quarter. So that's happening very quickly. As we enter into the fourth quarter, we'll have a fully integrated CRM solution, with most of the function, not all, of each of the 2 independent solutions, but we'll be well down that path. So we expect that to be contributing, as we go into the fourth quarter, nicely. That said, the momentum will really grow into next year, because most of this year will be spent on the consolidation there.

Stefan Putyera - Barclays Capital, Research Division

And is that going to have a corresponding negative impacts on revenue, as you guys migrate from one CRM system to the other? Or how is that going to work?

Mark F. O'Neil

No. So we intend to take the current -- so the goal is to have a best-in-class solution with all the functionality of both the CFM solution and the Dealer.com solution being in one solution. So that if you're currently on either solution, you're happy because you're going to get the same or more functionality when we convert you. Similarly, we expect to keep at least the current revenue, if not incremental, with some of the new features coming out. But the early transition will probably hold the customer base flat, with most of the increase coming with the new CRM installs. From the point forward, we have the best-in-class solution. And that solution will be well over $1,000, to address another comment from Sterling, that and as we go into Q4 and into next year, will cause average revenue per subscribing dealer to go up.

Stefan Putyera - Barclays Capital, Research Division

Got it. And in terms of the overall product integration, is that kind of the main one that you guys outlined so far from the 2 companies? Or is there any sort of incremental kind of product consolidation that we should expect as you guys kind of go further into this integration with Dealer.com?

Mark F. O'Neil

No. That's the substantial significant integration. The other parts of the integration are bringing Dealer.com into the FUSION platform, which we -- or FUSION initiative, as we've talked about in prior calls. So anything that's done in Dealer.com, any customer that's created, any user profile created, any vehicle description is -- those all 3 of those types of things and some other things are seamlessly moving between the various solutions, and that will be completed by the end of this year as well.

Eric D. Jacobs

And that's the remaining piece of the infrastructure integrations that are more behind the scenes.

Operator

And our next question comes from the line of Tom Roderick of Stifel.

Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division

So this is the first time we've seen the numbers of subscribing dealers exceed the number of connected dealers. Do you see the delta here as potential new transaction customers? And then just more generally speaking, do you see a greater potential up-sell opportunities to those, I think, 5,000 incremental customers you acquired from Dealer.com?

Mark F. O'Neil

Yes. So yes, we expect incremental revenue from the 5,000 Dealer.com customers. Because, again, just as we're cross-selling Dealer.com customers, we're cross-selling Dealertrack customers. So that works both ways. So yes, we expect more cross-selling. In terms of having more subscribing dealers than transaction dealers, do we think there's more opportunity to expand transacting dealers? I think that's a smaller opportunity. I think most of the opportunity comes with selling more to those customers, more subscriptions than more transactions. Well with that said, we've been successful in growing market share. We'll -- and we've been successful in expanding our footprint in our registration transactions, particularly as it relates to the States. And you will continue to see that growth, and that's a big driver of 1 in a 1% sales market growth, we're able to grow 16%. Because look, as we've said in the last few years, we're trying to control our own destiny and drive organic growth by expanding share in our footprint and we continue to execute on that.

Eric D. Jacobs

If I can make one more point, Tom. In some ways, they're apples and oranges that we're talking about dealers, but the subscribing dealer number is U.S. and Canada, which include several thousand dealers in Canada. The number of dealers in the U.S. network is just the United States, not including any Canadian network.

Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division

Got it. And then in terms of Dealer.com's advertising business, you're clearly seeing some strength there. Could you provide some color in terms of who you compete against, what's driving that strength, who you're replacing? Any sort of incremental color on that business will be helpful.

Mark F. O'Neil

Look, I think the biggest displacement is traditional media. More shift from your traditional print and TV and radio to pure digital, that's the first and foremost shift we're seeing, and we're capturing a nice portion of that. Competitively, we compete with other website providers and those providers will have advertising platforms. And clearly, on the advertising business, it's a very fragmented business, many a small player there. I couldn't really name a primary one in that space.

Operator

And your next question comes from the line of Matt Williams with Evercore.

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

I was wondering, just because it came up on the call, could you provide a little bit more color on the Ford advertising deal and sort of what you guys were doing there and I guess what to expect a little bit better going forward?

Mark F. O'Neil

Sure. Good question, Matt, and we try to bring this out just to get a little clarity as people are building numbers and looking at number of dealers on the advertising platform. We had a little bit of a spike there as we had a very short-term exclusivity measured in a number of months, as opposed to years, with Ford for our advertising platform. So a very short period we had. The whole Ford dealers had to use a platform, that exclusivity subsequently ended and, obviously, that spikes your number of dealers using a platform. We expect that to fall off a little bit in the next couple of months so that we didn't want you to worry about and think there was any degradation in the business when you looked at the number of dealers using our advertising platform. The good news is actually, relative to our internal forecast, we're seeing much less fall off, a lot of stickiness there, but we're seeing a little bit of fall off measured in the tens, if not hundreds, as opposed to the thousands.

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

Okay. That's helpful. And then maybe one more follow-up just on the subscription side, obviously, I understand some of the disruption, potentially, from the CRM product integration, but just a little bit of an update, if you could, on the DMS and Inventory+, I know that's a relatively new offering. Just any feedback or color you can give on sort of those core offerings outside of what's going on the CRM side.

Mark F. O'Neil

Yes. Look, we continue to be very pleased with the DMS business. As we've said, we added capacity all through last year, we're fully utilizing that capacity. We're still running about a 6-month backlog in DMS. We probably have more multi-point dealerships considering our DMS solution than we ever have. And in fact, I don't think that's -- I think that's probably a factual number. I don't have the specifics right at my fingertips, but I know that is the case from a pipeline perspective, and that's terrific. I think more and more dealers are understanding that our solution really works for virtually any size franchise and that's terrific. On the inventory side, a really nice momentum, starting to expand the functionality of that solution. Last year was very focused in the Inventory world on consolidating 2 platforms the AAX platform, the eCarList platform into Inventory+. We've launched it in ADA [ph] this year, now, has been focused on beginning to add functionality to that platform, particularly, things like the integration of CentralDispatch, which is our transportation network to that business, particularly, the expanding functionality on group trade and the analytics behind our models. So we're excited, and we have a very good roadmap for that solution throughout this year to steadily expand that product. And I'd say, we've gone from an infrastructure development mode in inventory, to really an enhanced feature and function development mode and I think that's going to pay dividends as we go throughout this entire year.

Operator

And our next question comes from the line of Mitch Bartlett of Craig-Hallum.

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

Continue to focus because there's been a lot of questions on the advertising business, the number of subscribing dealers, et cetera. So when you acquired Dealer.com, you acquired a number of dealers on the -- on their advertising platform, I thought it was around 3,000 or so. Grossing up to the 7,000 you have in the table would be your own ClickMotive and those kind of guys on there, as well as the Ford, is that the way...

Eric D. Jacobs

Actually, it was over 4,000 dealers. I can't give you the exact number, but Ford added several thousand dealers.

Mark F. O'Neil

Right, all 3,000. Remember we had that brief period where they spiked, so that's why we're signaling this. And then all of a sudden, it was opened up to multiple players. And again, we're really happy, believe me, it's going to be well above the 4,000 on a sustained rate. It's just we won't retain every Ford dealer, post the exclusivity. But as I said, we're very pleased with the retention we are seeing. Just signaling you, we don't want somebody grab that 7,000 number, the next quarter wonder why it came down. Why did it come down? Because the exclusivity, we already know, it will come off a little bit.

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

Got it. Got it. What was Dealer.com's advertising platform growth rate year-over-year, or maybe sequentially? However, you want to do it.

Mark F. O'Neil

I don't have that number in my fingertips.

Eric D. Jacobs

We have to go back to the investor presentation that we did from the last deal, it was north of 30%. But I don't have the exact numbers.

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

Okay. But the $12 million number seems pretty substantial on a sequential basis.

Mark F. O'Neil

Now you're looking at ad dollars. Sorry, I thought your first question was on number of dealers.

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

I was, I was just trying to focus on that number. Okay. And then in the table in the presentation, it says the other revenues' organic growth was up 56%, is that primarily just installation revenues and strong DMS?

Mark F. O'Neil

It's -- in other, so there's advertising, and the other component is DMS install, substantially, yes.

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

So that grew fairly strongly, too. And then just understanding on the total revenues, the press release says 18% organic growth and I think Eric said 21%, and so does this chart that you issued with the presentation. What's the...

Mark F. O'Neil

Sorry if we [indiscernible] number 21% is the number, so the 18 and...

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

Okay, 21% organic growth.

Operator

And our next question comes from the line of Kevin McVeigh from Macquarie.

Kevin D. McVeigh - Macquarie Research

I wonder if you could give us an update -- it sounds like you're right on track on the Honda win on the transaction side. Any update on how we're progressing on the subscription side and just how that scales in '14, into '15?

Mark F. O'Neil

Yes. So a couple of things just to reiterate, we did say subscription growth would continue to accelerate quarter-over-quarter. Sequential quarters, not just year-over-year. So we're happy with that. It's going to grow in Q2 over Q1, and it's going to grow Q3 to Q2 and then Q4 versus Q3. We also think that will grow into Q1. And I think, based -- at this point in time, because we have seen that -- a bit of elongation in the sales cycle I talked about, because I'm all of a sudden looking at the whole suite of solutions versus just single products. I think we want another quarter under our belt before we give any specific commentary on how that will translate percentage-wise. That said, it will continue to grow into 2015.

Kevin D. McVeigh - Macquarie Research

Got it. And then as you think about -- so it sounds like there's a potentially larger market opportunity than, obviously, when you first signed the contract. And then on the advertising side, as you think about kind of that revenue stream, how do we think about kind of the predictability relative to kind of the subscription or pure transaction? Is it somewhere in between or more recurring? Just any thoughts on how we're thinking about that.

Mark F. O'Neil

So it's probably much closer to the subscription than it is to transaction. But if you think about what we've talked about over the last year when we have a pretty nice slide in our Investor Deck, transaction revenue, technically, is not recurring revenue. That said, because we've bracketed the -- what we think the downside is in terms of car sales in the U.S. and we know we have increasing revenue coming out with new states and new lenders and market share, for example, like with Honda, we are fairly confident that 75% to 80% of our transaction revenue is recurring one quarter to the next. And you can see all the data behind that in our investor presentation. So if you set that as a floor and then you say, "Look, we're a company that runs north of 81% retention rates." You'd expect the subscription numbers and the advertising to run higher percentages than that. But if you had to be real technical, I'll put subscription at the very top, advertising right behind it, within a few percentage points, and then transaction behind that.

Operator

And our next question comes from the line of Gary Prestopino of Barrington Research.

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

Most questions have been answered. But, Mark, have you entered that 17 states yet for e-Registration?

Mark F. O'Neil

No. We hope to by the end of the year. We have 2 pending states right now we're trying to get by the end of the year. So stay tuned. That said, we are expanding in the new states that we are in. And as we indicated last year, we started to rewrite Virginia, which for all practical purposes the new states for us, we had virtually no new car franchise penetration there, only substantially independent. And now we have a good and growing new car franchise penetration in that state.

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

You're in 15 states now or 16?

Mark F. O'Neil

I should know this right off the top of my head, Gary. I believe it's 15. Yes.

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

So 2 more to go.

Mark F. O'Neil

With more to go.

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

I'm sorry?

Mark F. O'Neil

Definitely, with more to go.

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

Okay. That's fine. And then in terms of pipeline and acquisition opportunities, et cetera, how is the market looking? And is there any -- in what you build here, is there any pool that you see in the product portfolio that you'd like to have?

Mark F. O'Neil

Yes. So let me just make one more comment on your prior question, Gary, and I'll point you on Page 13 in our investor deck, because of all the questions we've got on our footprint in ELT and registration states, we thought, hey, let's share a where-we-are, where-we're-going slide. So just an FYI, you'll find more data there. And to answer your question on M&A, look, we're going to slow down our M&A activity as we focus on digesting Dealer.com. Anything we do is likely to be fairly small, very much a tuck-in. And what does a tuck-in mean? It means a very niche functionality or overlapping with something we do today. Maybe picking up a state, maybe picking up a small incremental product that perhaps is a consolidation opportunity. We don't have any significant strategic apps. That said, we do have a few targeted ones and areas we have spoken of in the past that we'll continue to, at least, look at is the fixed ops area, which is parts and service. It's probably where I'd say we have gaps that we'd like to fill new or new functionality that we'd like to add that may be faster to do with an acquisition versus with organic co-development, that -- we'll continue to look at both of those.

Operator

And at this time, I'm showing no further questions in the queue. I would like to turn the call back over to Mark O'Neil for any closing remarks.

Mark F. O'Neil

Thanks, everyone. We really appreciate you joining us this evening. If I can make one summary comment is, look, we should all be excited about the transformation that's underway. And really, that's transformation in 2 ways: one is the dialogue with dealers completely going to a new level of Dealertrack, let's talk about a full suite solution from digital marketing all the way through all the in-store solutions; as well as the transformation in terms of how they interact to their customers. More and more, our customers are seeing us as a leading-edge technology provider to help them change the way they do retailing, fundamentally, in the next couple of years. And both of those engagements are really exciting for us and continue to give us a strong validation that we continue to grow the business at a healthy organic rate, as you can see why we've raised guidance to that end. And the diversity of our solutions will continue to position us well on the market by having 3 primary pillars to operate from, instead of the 2 that we've just had historically. So thanks for the continued support, and we'll look forward to seeing you guys in the weeks ahead here, as we're out on the road a lot, Eric and I and Paul, over the next 3 weeks. So thanks a lot, everyone. Appreciate your time this evening.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.

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Source: Dealertrack Technologies' (TRAK) CEO Mark O'Neil on Q1 2014 Results - Earnings Call Transcript
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