Investors in Dealertrack Technologies (TRAK) were very pleased with the strong second quarter results which included the contribution from Dealer.com for the first time for an entire quarter.
While I very much like the strong growth, market positioning, future growth prospects and management, I am unsure about the true earnings potential in the long run. I will keep the shares on my watchlist for a long horizon, trying to learn more about the business as I move along.
Main Takeaway For The Second Quarter
Dealertrack reported revenues of $224.8 million for the past quarter, a nearly 85% increase compared to the year before.
On the bottom line the company posted a GAAP loss of $1.4 million which compares to a modest profit of $3.8 million as reported the year before. GAAP losses came in at three cents per share.
Non-GAAP adjusted earnings rose by 34% to $22.4 million. Non-GAAP earnings per share were up by four cents to $0.41 per share.
Looking Into The Performance
Of course a huge portion of growth was driven by the acquisition of Dealer.com, allowing the firm to continue to transform automotive retailing for its dealer clients. The company is very much pleased with the progress at Dealer.com as organic growth rates of 21% have been impressive as well.
There is little point at directly comparing the composition of the income statement compared to last year as Dealer.com of course had a huge impact on the business and has a completely different cost structure.
Gross margins were 46.9% of sales, down a lot from the 57.3% gross margins as reported last year. The company did show a lot of constraint in R&D as well as selling, general and administrative costs, allowing the company to post operating earnings of $3.5 million. This compared to operating earnings of $7.6 million as reported last year. Interest expenses which tripled to $9.7 million were the driver behind the losses.
Raising The Outlook
Based on the strong momentum, Dealertrack now anticipated $829 to $843 million in full year revenues. Previously the company guided for sales between $814 and $826 million.
Based on this guidance and the performance so far this year, this implies that revenues in the second half are seen around $450 million. This implies that average sales for the third and fourth quarter are seen equal compared to the second quarter. It should be noted that third and fourth quarter sales last year, did not show much sequential growth as well.
GAAP losses are now seen between $7 and $12 million, as the company previously anticipated losses between $12 and $18 million. So far this year, Dealertrack posted net losses of $13 million, implying that the company anticipates modest GAAP earnings for the second half.
At the end of the quarter, Dealertrack held roughly $134 million in cash, short term investments as well as marketable securities. The company has $965 million in long term liabilities on its balance sheet, most likely the vast majority of which is debt. The company's earnings report does not really quantify the debt position which has jumped up a lot following the Dealer.com acquisition. This would resulting a rather hefty $830 million net debt position.
With 53.6 million shares outstanding at the end of the quarter, and shares trading at $47 per share, equity in the business is valued at $2.5 billion. This values the company at around 3 times sales and a non-meaningful profit multiple.
A History Of Grwth, But What About Profits?
Over the past decade, Dealertrack has demonstrated rapid growth. After posting sales of just $70 million in 2004, revenues rose to consolidate in the $200-$250 million region between 2007 and 2010. Ever since revenues have seen growth again, while the latest deal will push revenues over the $800 million mark for this year.
The company has posted relatively modest operating earnings over this time period, leaving little to no earnings on the bottom line. The total outstanding share base of about 40 million shares has been relatively stable over time, although the outstanding share base rose by 30% as a result of the Dealer.com acquisition. The deal allowed Dealertrack to expand its advertising and related revenues to nearly $46 million. The remainder of revenues are roughly equally split between transaction and subscription service revenues.
The company went public in 2005 when shares were sold to the general public at $17 per share. Shares rose to levels close to $50 in 2007 before they fell to levels as low as $10 a year later during the crisis.
Shares have steadily recovered to highs close to $60 at the start of this year before they sold off to levels just below $40 ahead of the second quarter earnings report.
Dealertrack has shown impressive growth in its topline results, dominance and its market position since being founded in 2001. The latest sizable $1 billion deal to acquire Dealer.com helps Dealertrack's dealer customers to advertise online, generating $230 million in sales in the process.
With this deal, Dealertrack has reinforced its positioning between both dealers, financial companies providing car loans, information provides and other third parties involved in both the new and user car market. Dealertrack connects some 20,000 dealers with 1,400 lenders, not only providing credit check applications, but also services like online advertising and marketing solutions. These and related markets have an estimated $4 billion size on a SaaS basis at the moment. By 2018, this market is anticipated to grow to $10 billion according to a company presentation.
The solid organic growth rate, deals, overall limited dilution in the share base and highly recurring revenues are very appealing. Growth and market penetration appears more important than cash earnings at the moment. This allows customers to make a fast, self-directed and flexible purchase experience for consumers buying a car. Dealers see automation in their selling process with quick and low cost administration by automating their workflow.
While the company is not profitable on the preferred GAAP metrics, I had a look at the non-GAAP earnings. These earnings are forecasted at $1.47-$1.56 per share, valuing the business at around 30 times earnings. Adjusted earnings therefore are seen between $81 and $86 million, implying that second half earnings are seen between $47 million and $52 million. This results in continued profit improvements despite suggesting flattish sequential revenue growth.
As such the company has a great track record in growing the business, while limiting dilution rather effectively. Even as the shares have recovered, to see flat returns so far this year, multi-year momentum has pushed shares up a lot in the long run.
I find it rather difficult to gauge the real potential profitability of the business after the company has posted years of flattish net earnings. Yet there is some real potential given the high gross margins, while the valuation leaves some room for imagination at 3 times sales and continued prospects for growth.
Not having a great clue about the real potential profitability of the business, I continue to place the company on my watchlist aiming to learn more about the business going forwards. While I will not chase the shares following the current momentum bandwagon, I am very curious about the true earnings potential of the business in the future and potential opportunities for investors.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.