CDK Global's (CDK) CEO Brian MacDonald on Q4 2016 Results - Earnings Call Transcript

| About: CDK Global, (CDK)

CDK Global, Inc (NYSEARCA:CDK)

Q4 2016 Earnings Conference Call

August 3, 2016 08:30 AM ET

Executives

Jennifer Gaumond - IR

Brian MacDonald - CEO

Al Nietzel - CFO

Analysts

Gary Prestopino - Barrington Research

Rayna Kumar - Evercore ISI

Ian Zaffino - Oppenheimer & Co.

Timothy Willi - Wells Fargo Securities

Operator

Good day, ladies and gentlemen, and welcome to the CDK Global Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]

I'd now like to turn the conference over to your host for today, Jennifer Gaumond. You may begin.

Jennifer Gaumond

Thank you. I’m here today with Brian MacDonald, CDK's CEO and Al Nietzel, our CFO. Thank you for joining us for our fiscal 2016 earnings call and webcast.

Brian will begin the call with some highlights for the year, and then provide an update on the execution of our business transformation plan. Al, will then take you through the details of the full-year and fourth quarter results. Then provide our forecast for fiscal 2017 and our target for fiscal 2018 and 2019.

A couple of reminders before we get started, our business segment results include the actual impact of foreign exchange rate fluctuations and we have provided fiscal 2015 segment results on the same basis. However, the revenue KPIs are intended to be indicative of business performance, excluding the impact of foreign exchange rate fluctuations. Additionally, reconciliations of the adjusted amounts to the most directly comparable GAAP amounts are included in this morning's press release and are available in the Investor Relations section of our Web site. Throughout today's call, references to financial amounts are on an as adjusted basis unless otherwise noted. And finally, we anticipate filing our Form 10-Q later today. I would like to remind everyone that remarks made during this conference call will contain forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including the risks detailed in our filings with the SEC.

With that, I'll now turn the call over to Brian.

Brian MacDonald

Thank you, Jennifer. Good morning, everyone, and thank you for joining us on this call. Today I’d like to discuss our results for the fourth quarter, which were very strong, along with the full-year, and then provide you with an update on our business transformation plan.

We've now completed year one of the three-year transformation program we announced in June of 2015. We're changing the way we do business to make things easier for our customers and our employees and we're significantly expanding margins, all while growing the business.

We had a very strong fourth quarter that capped off a solid year and I’m very pleased with our results, which were ahead of our initial plans. CDK is stronger now than a year-ago and we're well-positioned to execute on our forecast for fiscal '17.

Fourth-quarter revenues grew 9% or 10% on a constant currency basis. For the year, revenue grew 5% or 7% on a constant currency basis. The benefits from the business transformation were $50 million of EBITDA for the year with $25 million of that achieved in the fourth quarter.

We exited the year at an EBITDA margin of 28.4%, which reflected 630 basis points of expansion from the fourth quarter of a year-ago. EBITDA margin for the year increased 370 basis points to 26.6% and EBITDA dollars grew 22%.

Operate -- operating results were strong despite CEO transition costs of $8.8 million recorded mostly in the third quarter, continued pressure from unfavorable foreign exchange rates, and additional interest expense from the term loan we entered into in the second quarter. Al will provide more details on these in a few minutes.

Next, I’d like to give you an update on our business transformation. Last quarter, we provided more specificity around the key work streams that we are in process of executing. We received very positive feedback from investors and I’m committed to updating you on our progress each quarter.

Additionally, I have provided greater transparency related to our financial targets for 2018 and 2019, which you can see in our press release and presentation. The execution of the transformation plan will create a more efficient organization that will allow us to greatly enhance the customer experience and realize significant earnings growth and margin expansion over the transformation plan period.

Let me emphasize that efficiency improvement and improved customer experience can and must go hand-in-hand. All of our efforts going forward are designed to make it easier for our customers to work with us, while significantly reducing unnecessary expense.

In May, we announced a comprehensive reorganization to better align the business to achieve our transformation targets, which will have a positive impact on all the work streams. Going forward, we will have two main operating groups, North America and international.

We've also integrated product management, created a single North America sales organization, and a single global R&D organization. Its key that we operate as one CDK. We’re already seeing the benefits of the reorg, which was effective July 1. We've eliminated inefficiencies and have better alignment across our teams.

Now I'd like to highlight some of the wins we’ve had in four of our work streams. In the sales area, I challenged our North America sales team to secure renewals in the fourth quarter. Not only did the sales team meet that goal, they exceeded it by a wide margin by renewing 670 customers, which is a record for CDK. This represents approximately one in five of our automotive DMS sites and roughly one in 10 of total rooftop to North America.

I want to say that again, so you have the right context. In the fourth quarter, we renewed approximately or roughly one in 10 of the North American rooftops in all of North America. Our focus on improving the experience is resonating with our customers and we're delighted that they’ve chosen to continue to partner with us.

We had a major milestone in our move up work stream in the fourth quarter. We upgraded approximately 2,700 dealer sites to the most current version of our drive DMS software. We now have nearly 100% of our hosted base on the current version. This represents our biggest customer migration since Y2K, 16 years ago.

By being on our most current version, our customers can take advantage of our full product suite and we are able to reduce the number of software versions we support. Migrating this many customers was no small task. Our teams worked diligently to ensure that this was all done with minimal disruption to our customers.

Another great win for the move up work stream was the elimination of approximately 20% of our 1,500 software versions during the fourth quarter. We still have a long way to go, but we're -- we’ve had a great start.

In our enhance the customer experience work stream, we signed up over 3,300 dealerships on our service connect anywhere product in the fourth quarter. This product allows customers to access our service connect chat product from any device. Service connect is the fastest way to get in touch with our service teams to help resolve customer issues.

Lastly an update on the workforce efficiency and footprint work stream. In July, we officially opened our customer experience Center in Cincinnati. We now have over 500 employees there and hiring will continue as we ramp up that facility. This new service model is designed to provide the fastest, most effective response to dealers questions and critical issues.

Additionally, last quarter we discussed our goal to reduce the number of our North American facilities by at least 40%, by the end of fiscal 2018. Yesterday we announced to our employees the North American offices that will be closing through fiscal 2018, that encompass this 40% reduction.

Through this transformation process, we are keenly focusing on limiting operational disruption and creating positive customer outcomes as we strive to significantly increase profitability and expand margins while growing our revenues. These actions are all value-added to our customers and our shareholders and we're taking CDK to another level. We are committed to delivering results and meeting the targets we laid out.

We're anticipating $85 million to $95 million in savings from our transformation plan from fiscal 2017. That combined with the savings in fiscal 2016, which exceeded our initial plan, gives me confidence that we will achieve our target.

Before I turn the call over to Al, I also like to note that today we announced that we will be adding two new Directors to our Board as part of an agreement with Elliott Management. We will work with Elliott to select Board members who can add value and we're all looking forward to working with them as we continue our successful transformation.

With that, I will now turn it over to Al, to take you through our results for the year and for the fourth quarter, our '17 forecast, and our fiscal '18 and '19 targets.

Al Nietzel

Thanks, Brian, and good morning, everyone. We posted strong results for fiscal 2016. And as I do on each of our calls, my comments for Q4 full-year, FY17 forecast, and our fiscal '18 and '19 targets will largely be on an adjusted non-GAAP basis.

As Jennifer mentioned, reconciliations between these adjusted results and the most directly comparable GAAP results can be found in the schedules accompanying our earnings release.

Now let's move on to the results for fiscal 2016. As Brian stated, total revenue growth was 5% and 7% on a constant currency basis. We continue to face headwinds from exchange rates primarily against the Canadian dollar, pound sterling, and euro. The impact of FX this year was once again significant to the ARI business, although less of a drag in the fourth quarter.

And framing my comments on revenues are the KPIs related to recurring revenues excluding the impact of foreign exchange rates. These KPIs are also provided in the earnings release.

ARNA segment revenues grew 5% and 6% on a constant currency basis. Increased site penetration of our DMS contributed 1 points of growth, increased average revenue per DMS contributed 4 points of growth, and increased transaction revenues contributed nearly 2 points. A decline in one-time revenues reduced growth by approximately 1 point.

For ARI, revenues were down 2% entirely due to unfavorable exchange rates, but grew 6% on a constant currency basis, primarily from increased revenue per DMS site brought on by additional users. Site counts increased on a year-over-year basis for the first time this year. We're seeing fewer bankruptcies and out of businesses in Europe along with site growth in Asia and the U.K regions.

For digital marketing, revenues grew 9% driven by higher advertising spend. However, the number of customer Web sites declined 6% as a result of changes to certain OEM programs that began in last year's third quarter. We continue to anticipate further declines in the first half of fiscal '17.

Moving from revenues to cost, our cost of revenues declined $30 million or 2% from last year's on a GAAP basis. Favorable year-over-year comps helped us in the quarter including favorable impacts of foreign exchange of $21 million, the acceleration of the digital marketing trademark amortization, and the divestiture of the Internet leads business, both of which happened last fiscal year.

We're also realizing lower labor related costs due to reduce headcount and more favorable geographic labor mix as a result of our continued transformation efforts. Partially offsetting these benefits are cost related to growing the business and cost related to our transformation plan.

Transformation costs totaled $19 million and are showed as pro forma adjustments on our non-GAAP tables. Research and development spend, which is included in cost of revenues represents about 8% of CDK's overall revenue.

Moving onto S G&A, which on a GAAP basis increased $17 million or 4%. Included in SG&A were cost related to the CEO transition of $8.8 million, cost related to the transformation plan of $21 million and $17 million of incremental stand-alone public company cost. The latter two items are both shown as pro forma adjustments on our non-GAAP tables.

Similar to cost of revenues, exchange rates in the second half of the year and benefits achieved from our sales optimization work stream reduced SG&A. You also saw on our P&L restructuring expenses of $20 million in the year. These primarily represent employee related costs incurred in connection with our transformation plan and are also reflected as adjustments on our non-GAAP tables.

Interest expense was $40.2 million for the year compared to $28.8 million a year-ago primarily due to the following items. The full-year impact of the senior notes that were issued in fiscal 2015, the new term loan that was entered into in December 2015 in connection with our ASR and LIBOR rates are also higher versus last year.

Moving on from cost, earnings before income taxes grew 28% or 31% on a constant currency basis. Our pre-tax margins expanded 370 basis points for the year. The CEO transition cost of $8.8 million reduced pre-tax margin and EBITDA expansion 40 and 20 basis points respectively for the year.

Each of our segments posted strong pre-tax margin expansion this year with ARNA at 360 basis points, ARI at 470 basis points, and digital at 330 basis points fueled by the positive impact of our transformation efforts, as well as from strong operating performance.

Total CDK's EBITDA margin expanded 370 basis points for the year to 26.6% and EBITDA dollars grew 22% to $562.1 million. About one-third of the margin expansion came from strength and operating leverage in the business with the remaining margin expansion due to benefits from the transformation plan.

And as Brian said in his opening remarks, we achieved $50 million of incremental EBITDA from the transformation, which was ahead of our initial estimate of $45 million. Net earnings grew 30% and diluted EPS grew 34% to $1.74 per share.

Now briefly onto the fourth quarter, which exceeded our expectations. Total year-over-year revenue growth for the fourth quarter was 9% or 10% on a constant currency basis. ARNA had a strong quarter with 5% revenue growth driven primarily by increased revenue per DMS site and increased transaction revenue.

ARI grew revenues 8% or 11% on a constant currency basis. ARI's revenue growth benefited from one-time unfavorable items in 2015 that contributed approximately 5 points of revenue growth.

Digital marketing revenues increased 22% due to increased advertising. Pre-tax margins for the fourth quarter increased 710 basis points to 21.7%. ARNA's pre-tax margins expanded 600 basis points to 36.1%, ARI expanded over a 1,000 basis points to 19.9%, and digital expanded 500 basis points to 15.5%.

Total company EBITDA margin expanded 630 basis points to a strong exit rate of 18.4%. Net earnings grew 69% and diluted EPS grew 75% to $0.49 a share. And our cash balance as of June 30, was $219.1 million. Clearly our fourth quarter results were very strong showing that our transformation efforts are taking hold. And these results provide strong momentum to fiscal 2017, which I will cover in a moment.

Now I will turn my comments to return of capital. You may recall, in December 2015, we announced our plan to distribute $1 billion in capital by December 2017 through a combination of dividends and share repurchases. In June of this year, we accelerated the pace of this $1 billion capital return by a full-year to December 2016.

The initial $250 million ASR which we spoke about in our second quarter call settled in June. We entered into another $300 million ASR in June, which is currently in the market and scheduled to settle in Q1 of fiscal '17. These two ASR's combined with the $63 million in dividends we’ve paid since the December return plan was announced, represents a total of $613 million return to shareholders toward our $1 billion goal.

We are committed to continuously evaluate our capital return strategy. At the conclusion of the current $1 billion return program, we will determine the appropriate next steps to best use our free cash flow, including share buybacks, dividends, and investing in the business.

Now moving to our forecast for fiscal 2017. For our '17 forecast, the year-over-year comparisons are again on an as adjusted basis. We anticipate 4% to 5% revenue growth from the 2.1 billion in fiscal 2016. This includes a 1 point drag from unfavorable FX rates. We forecast 20% to 24% growth in pre-tax earnings from the adjusted $426.4 million in fiscal 2016, and 500 to 550 basis points of margin expansion from the 26.6% in fiscal 2016.

We anticipate a fiscal '17 exit EBITDA margin rate of approximately 33% which puts us in a great position to achieve our fiscal '18 target of a 35% EBITDA margin. Our forecast includes $85 million to $95 million of incremental EBITDA from the transformation plan and these benefits will be achieved steadily over the fiscal year.

We anticipate $65 million to $70 million of restructuring and other charges in the year. We expect these cost to be steadily incurred over the fiscal year as well. These charges will be presented on an as adjusted basis and are not included in our adjusted earnings forecast. And we will continue to evaluate the transformation costs as we execute against our targets.

The effective tax rate for fiscal '17 is anticipated to be 33% to 33.5% compared to 33.8% in fiscal '16. The FY17 anticipated ETR range is lower than the fiscal 2016 rate due to a forecasted tax benefit associated with the adoption of a new stock compensation accounting standard on July 1. Tax benefits and deficiencies related to the plan adoption of the standard are likely to affect our tax provision, resulting in increased volatility in our rate throughout the fiscal year.

We anticipate 22% to 26% growth in net earnings from the $274.6 million in fiscal 2016 and 31% to 35% growth in diluted earnings per share from the $1.74 in fiscal 2016. This results in an anticipated diluted EPS range of $2.28 to $2.35 per share for fiscal '17. The forecast includes the impact of the final settlement of our June ASR and future repurchases as part of the $1 billion return program.

Next, I’d like to provide some directional comments regarding the quarterly skewing. I already mentioned the expected FX headwind of approximately 1 point for the year for both revenue and pre-tax earnings. We anticipate the FX headwind to be relatively even throughout the year.

The remaining quarterly skewing items I will cover are anticipated to impact our pre-tax earnings. Our tax rate forecast anticipates excess tax benefits for the year. We estimate that nearly half of these excess tax benefits will occur in the first quarter resulting in a lower tax rate. Beginning in the second quarter, we anticipate incremental interest expense over fiscal 2016, which will create pressure on a year-over-year comparison.

For the third quarter, the CEO transition cost of $8.1 million in fiscal 2016 will not repeat and therefore a benefit to year-over-year growth comparisons for Q3. On an EBITDA basis, this benefit is $4.6 million. We also anticipate additional stock-based compensation expense in Q4 fiscal 2017 associated with the incentive compensation related to our transformation plan. Our strong fourth quarter fiscal 2016 results will also add additional pressure to the year-over-year comparisons.

As I mentioned earlier, the EBITDA dollars from our transformation plan are anticipated to be delivered evenly over the year. In summary, the forecast represents progress toward our transformation targets to achieve the 35% margin in fiscal '18.

I also wanted to remind you the way we will report our fiscal 2017 segment results will change from what you have seen in the past through the reorganization Brian announced in May. Our three reportable segments will be retail solutions North America, advertising North America, and international. Our segment data will be restated for 2015 and '16 and will be available when we report our Q1 fiscal results.

Now I'd like to provide a few comments on our fiscal 2018 targets. Our 2018 targets are in line with the initial targets we laid out during the launch of our transformation at Investor Day, in June of last year. However, we wanted to provide some additional targets related to fiscal '18 and provide more clarity.

We anticipate 5% revenue growth from fiscal '17, 35% EBITDA margin, and an EBITDA exit margin of 36% to 38%. Additionally, we anticipate EBITDA dollar growth from fiscal 2016 to 2018 of 44% to 48%. Once we complete the transformation period, we will be well-positioned to further improve our business. Therefore, we’re providing fiscal 2019 target EBITDA exit margin of 40% or above.

As we communicated at our Investor Day, once we’ve completed the transformation period, we will continue to improve margins and we believe this fiscal '19 target demonstrates that commitment.

And with that, I will turn it back to the operator, and Brian and I will be happy to take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Gary Prestopino from Barrington Research. Your line is open.

Gary Prestopino

Hi. Good morning, everyone.

Brian MacDonald

Hi, Gary.

Gary Prestopino

Couple of questions here. On the automotive retail DMS client sites, you haven't put anything -- nothing has been signed up yet in regards to the Hendricks sites that you won, right. And that was what you cited in your deck, that you won a large deal, that’s you were talking about Hendricks, right?

Brian MacDonald

Yes. Gary, we are going through the installation process right now and it's at the early stages of it. We communicated that that rollup was going to take us about a year. There's a lot of planning and an early execution of sites and so forth. So, it hasn’t materially impacted the site counts that we have right now.

Gary Prestopino

Okay. And then, on this where you’re combing sales forces, digital marketing, and automotive retail North America, what exactly -- are you doing a lot of cross training? I assume you’re, but what -- how do you go about doing that? I mean, you’ve two different sales forces that was selling two different things entirely. So maybe if you could give us a little color on that?

Brian MacDonald

Yes. Gary, we actually had six or seven different sales forces, to be honest with you.

Gary Prestopino

Okay.

Brian MacDonald

We are reporting to different places in the organization. So, we now have all sales for North America reporting up to one organization and then underneath that we reorganize the sales teams a little bit, the -- brought together all the sales operations, and we have some specialized sales focusing on certain parts of the business. And one of the things we're really trying to leverage is our -- we obviously have a very strong footprint in our DMS client base. But within that we haven't had the success quite frankly that’s with our digital products that one would expect given how strong we are with the DMS. So that’s the focus area for us to cross-sell our other products into the DMS clients better. Another focus area for us is selling our layered apps, getting better penetration of our layered apps into those DMS customers as well.

Gary Prestopino

Okay. And then, just lastly you had pretty good year-over-year growth in adjacencies, client sites. Was there any vertical that you’re serving that really stood out in terms of adding new sites or was it just across the board?

Brian MacDonald

Yes. I mean, we’ve -- there is three segments or three business lines in there. It’s the motorcycle, marine, RV space that you’re well aware of, Gary. We also have the heavy equipment space, as well as the heavy truck space. And we’ve seen good growth in frankly all three of those segments. We are quite pleased with the results that we’re seeing out of the adjacency space right now.

Gary Prestopino

Okay. Thanks.

Brian MacDonald

Okay.

Operator

Thank you. And our next question comes from Rayna Kumar from Evercore ISI. Your line is now open.

Rayna Kumar

Good morning.

Brian MacDonald

Hi, Rayna.

Rayna Kumar

Now that Elliott Management will have two seats on your Board, what impact do you expect them to have on the future performance of CDK? And also, what are the key terms of the standstill agreement with Elliott?

Brian MacDonald

So I'll start at the end. The standstill will be filed or has already been filed, but I would describe it as fairly normative standstill, a one-year standstill, and our Board will work together with Elliott to choose, two new Directors. And we will have some new insight from those Directors, and we will continue to work very constructively with Elliott. We’ve had very open dialogue, candid dialogue with them. Along the way, I have -- I personally have good relationships with them, and we’ll continue to have those direct dialogues with, Elliott. They’re obviously a major shareholder, and we’ll continue to talk openly and candidly with them as we’ve been doing for the last six to nine months. And then we’ll have some new directors which will bring some new insight.

Rayna Kumar

Got it. What are your expectations for pricing trends, for both the DMS and Digital Marketing Businesses in 2017?

Al Nietzel

Yes, Rayna, we haven’t broken those out in specific details. But there’s nothing overly unique or different from the trajectory that we’ve been on with respect to pricing. I think I’ve covered on numerous calls before and through other sessions that the strategies that we’ve got are really centered around some different disciplines around discounting and other activities that we believe will yield some nice benefits for us, and secure value for the -- value adds that we bring to the market and so forth. So, there isn’t any specific pricing direction other than the things that I described previously.

Rayna Kumar

Understood. Where do you think there could be upside to your numbers from your business transformation plan at this point if any?

Brian MacDonald

Yes, I mean, I think there is, in all the things we’re doing, I mean, I think there is upside. I mean there is a lot of -- I like to say, there’s a lot of wood to chop. We grew our margins 630 basis points versus a year ago from quarter-to-quarter. We have a 1300 basis point improvement target which is not trivial. We’ve got 630 of that behind us, and so the math would say we got another 700 to go. And we’re pretty confident that we’re going to get there. We’re working hard on a lot of areas. We’ve got a lot of stuff to execute. And frankly I think there’s upside in most of the work streams we have. And as we execute and get more comfortable with our execution then we’ll communicate that to the street accordingly.

Rayna Kumar

That's helpful. And just lastly, could you just call-out your tax rate expectation for the first quarter?

Al Nietzel

Lower than the 33% is what I would say that you should be using, Rayna. I mean, I’m not going to ...

Rayna Kumar

Got it. Thank you.

Brian MacDonald

Thank you.

Operator

Thank you. And our next question comes from Brian Essex from Morgan Stanley. Your line is now open.

Unidentified Analyst

Good morning.

Brian MacDonald

Hi, Brian.

Unidentified Analyst

This is Zaheer [ph] sitting in for, Brian. Regarding the Hendricks deal, you mentioned it could take about a year to rollup. Any update on the side count adds this would contribute? And as a second part of that question, your 2018 guidance of 5% growth is at the top end of your typical 4% to 5% revenue guidance growth. How much of this is due to the Hendrick signing versus growth in other segments?

Al Nietzel

The Hendrick is relatively de-minimis in the first year just because of the ramp that it will have. It really doesn’t meaningfully contribute to the growth for the year-over-year. So, I wouldn’t attribute a whole bunch of the 4% to 5% is that. It's early in the year, I think as Brian likes to say or Brian said earlier, we’ve got a lot to do over the course of the next year. We’re comfortable with the range we’ve provided based on the programs we have in place. And as we progress through the year adjustments will be made, and if we’re feeling that that's more to the high-end, I’ll let you know that it's the high-end. But I think right now you should just use and think about the goalpost that we set with 4% to 5%, which recall includes a drag of one point due to the strong dollar year-over-year.

Unidentified Analyst

Great. Thanks. And as a follow-up, it looks like digital marketing, web site counts declined sequentially which you had previously alluded last quarter to being due to I think those OEM changes. It sounds like that number should stabilize after the first half of 2017 based on your prior comments. But is there a way to back out what the OEM contribution was? What the drag was on organic side growth?

Al Nietzel

I mean, we’ve continued to -- we made some assumptions on the amount of the business that we would retain when those OEM relationships moved from exclusivity to being open to more players. And the assumption that we made was a little bit high in terms of what we retained and that's why we’re still seeing some of the reduction. We haven’t really quantified that publicly for that, the delta between what’s directly due to those. But I think what you should think about is that, the losses are largely due to those OEM relationships that exclusivity has been lost. This is the way I would say it.

Unidentified Analyst

Understood. Thank you.

Brian MacDonald

Thank you.

Operator

Thank you. And our next question comes from Ian Zaffino from Oppenheimer. Your line is now open.

Ian Zaffino

Hi. Thank you very much. Can you hear me, okay?

Brian MacDonald

Yes.

Ian Zaffino

Okay. So the question would basically be -- okay, thanks. So what are the incremental margins when you [technical difficulty] hit the 5% growth. Just as I’m looking at 35%, I guess for 2018. [Technical difficulty] cost kind of coming down the line with 20.5% almost now. Sometimes [technical difficulty] what the operating leverage is on that 5% growth [technical difficulty] conservative. Please help us understand that a little bit [technical difficulty]. Thanks.

Al Nietzel

Yes, Ian, I’ll try to answer that. I mean, with what we’ve described as our guidance of 5% in revenue and substantially higher overall growth in earnings, it implies because of the efforts through the transformation plan that the incremental earnings on those 5% -- 4% to 5% of revenues is greater than 100%, which is what you’re seeing because of the benefits associated with the $85 million to $95 million of efficiencies and benefits to this transformation program that we’re realizing. So, you can do the math on X amount of revenue and X amount of earnings, and you’ll notice that, that incremental growth is coming in at more than 100%. And that's all part of the strategy that we’ve outlined in terms of getting that.

Ian Zaffino

Okay.

Al Nietzel

Okay.

Ian Zaffino

Okay. And then the second question -- yes, the second question be, the business just in general. Because I know when SAAR had a tough time back [technical difficulty] sales for to have about 5%. Has anything changed in the business or changed from kind of your mix that we would, you don’t think we get greater sensitivity or should we really assume a similar sensitivity I mean SAAR is at its peak, and may come down, [technical difficulty]? Thanks.

Al Nietzel

Yes, Ian, I guess, I’d say and I think we’ve covered some of this in the past. Our business sensitivity -- direct sensitivity to the SAAR volume is not a direct correlation. We’ve talked about that being an outstanding indicator of the health of the industry and the business and whatnot. But transactions for us represent in and around 10% of our total revenues. And ultimately if the number goes up or down by 3% to 5% or 10% it doesn’t really impact the overall results for CDK, but it does clearly demonstrate the health of the industry and the dealers propensity and the OEMs propensity to spend and invest and so forth. So, I don’t see, and I don’t see anything dramatically different in terms of our business mix or any other macro factors that seem to be impacting our trajectory in 4% to 5%. So to me it's kind of business as usual. Yes, there’s always activities going on, but we don’t see anything overly significant that would impact the projections that we’re making for the year.

Unidentified Analyst

Okay. That's great. [technical difficulty] the business really coming through. Thank you very much. I’ll turn it over to the next person [ph].

Al Nietzel

Thanks, Ian.

Operator

Thank you. And our next question comes from Timothy Willi from Wells Fargo. Your line is now open.

Timothy Willi

Hi. Thanks and good morning.

Al Nietzel

Hi, Tim.

Timothy Willi

Hi, Al. I just had one question around sort of capital and allocation. Obviously you guys laid out sort of the dividend in the buyback programs. I’m just sort of curious how you think about tuck-in M&A acquisition opportunities relative to what you’ve already outlined. Number one, in terms of your appetite; number two, in terms of sort of the availability or sort of the target environment if you will that you’re keeping an eye on. And I guess, maybe third, just ability is on M&A program with all the internal efforts or if that sort of been maybe sidetracked for a bit. Just any color you could add there?

Brian MacDonald

Yes. Tim, this is, Brian. So we have strong cash flow that's pretty clear. Our margins are increasing, our revenue increasing which will continue to drive that cash flow even stronger. We have bouncy capacity, we have strong balance sheet. And so, I think, sufficed to say we have a lot of flexibility around capital return as well as M&A opportunity. We do have as you said rightly so a lot going on internally. So our M&A activity have slowed down a little bit. We’ve done a few tuck-in things, and we’ll continue to look at that. We really want to make sure we fix the -- we have a solid foundation to do M&A on top of. So, I think what you’ll see from us, you’ll continue to see us do some tuck-in acquisitions perhaps a little bit slower paced, then if you went back a few years. But we’ve done a few things in the recent quarters. We’ve got a couple of things in the pipeline we’re looking at. And we’ll continue to add to our product portfolio to grow the business.

Timothy Willi

Thank you. Can I ask one follow-up if I could; and again I apologize if you mentioned this, I jumped on a bit late. But just in terms of the overall, I guess, your interactions with dealers. In the dealer environment, I guess, there’s a lot of advantage where we’re at in terms of vehicle sales and the cycles. Could you just, anyway to sort of characterize the conversations or the tones, discussions that you have with yours or your sales force about where the dealers I guess, heads are at around spending plans etc relative to the debate around the auto cycle and where we’re at right now?

Brian MacDonald

Yes, I mean, I’ve been on the road probably in the last month. I’ve been on the road and I’ve met with a number of dealers in Canada and in the U.S. Look, I would say that people are feeling good. The volume is good, new car grosses are down. I don’t have to tell you that. You see that from the public. But all in all volume is pretty good. I think they’re feeling good. And look fundamentally, what do we provide to the dealers? We provide them technology to help them run their operations more efficiently, sell more vehicles. And so, they are largely interested and they’re continuing to invest in the business, and use that technology to make their operations more efficient or grab those incremental sales. So, I think they’re in active dialogues with us. They’re obviously very economically conscious in terms of how they spend their money and the value that they want to see for the money they spend. But I haven’t noticed anything different in my conversations with dealers in the last 30 days. I think everybody kind of receives that, if we’re not at the peak of the market, we’re pretty close to it. But no one seems to be feeling like there’s a dramatic decline coming or anything of that nature. So, I would say, to net it all out, I think dealers are feeling pretty good. They’re having a good year. The volume is still pretty good, and they’re still looking to invest in their business and they haven’t looked, the fact that we got all these renewals done shows that they are very willing to have conversations with us. We continue to win new dealers. So they’re having conversations with us. They’re interested in what we can bring to the table. And we got good momentum with them in terms of service levels and product, and you can see it’s shown up in the P&L.

Timothy Willi

Great. That's all I had. Thanks very much.

Brian MacDonald

All right. Thank you.

Operator

Thank you. And we do have a follow-up question from Gary Prestopino from Barrington Research. Your line is now open.

Gary Prestopino

Thanks. Just on the renewals that you did. Are most of the renewals now still five year deals or have the industry gone to three year deals?

Brian MacDonald

Gary, its Brian, here. Yes, we have, I mean, there’s some three year renewals, there’s some -- there’s five years, we have six in some cases. But we haven’t really changed our practice, our mix. Some folks were only willing to do three. And so, in those cases we will do three. But we’re generally focused on five. And I would say that in this set of renewals that we just did, the big push we had put in place our mix of annualization wasn’t really different than our historic mix.

Gary Prestopino

Right. Okay. All right. And then last question, is your fiscal Q4 usually a big quarter for renewals?

Al Nietzel

Not really, Gary. I think what Brian, and the team were challenged to do, what Brian challenged the team to do was to really make a move to renew the clients. And it was clearly bigger than anything that I’ve seen in the years I’ve been here, and I don’t think anyone would dispute that. It really goes to show in our view what can happen when you focus folk’s efforts on it. And I think for us that boards well for what we’re trying to do to continue to penetrate our base with additional products and solutions. So, that for us is a key vocal point, and we had what we think is a good proved statement that our capable sales organization and client base are willing to do that. So, we felt pretty good.

Brian MacDonald

Yes. What I would say, Gary is, we had probably not put as much focus on these renewals over the last couple of quarters is arguably we should have. So we had a little bit of -- we had more customers on kind of a month-to-month extension than I would like. And then obviously, I wanted to get my -- really get my sales team ramped up, and get some momentum in the market, and get some momentum with my sales team. And so, we really put a focus on this. We had a sales campaign, which means some extra compensation for the sales people if they delivered the results, which they clearly did. And then, we pulled in some renewals that we otherwise would have been working on this year which frees up sales capacity, frees up my sales team to focus on other things. And so, I’ve done this in other lines, and this is probably if not the most successful sales campaign I’ve even run. It's -- maybe it's definitely the second if it's not the first. And just I want to repeat it again, I mean, the sheer magnitude of this in terms of rooftops this is roughly one in ten rooftops, auto franchise and heavy duty franchise dealers in North America renewed with us. Take a drive around your town, look at ten dealerships. The probability is one of them renewed with us in the fourth quarter alone. So it's a pretty big success, and a pretty big proof point on the progress we’ve made on our service levels and the commitments and belief that dealers have in CDK, in what we’re doing.

Gary Prestopino

Okay. That sounds really good. I mean, was this really the first time that your sales force was presented with the opportunity to get extra compensation for spurring on renewals?

Brian MacDonald

I think of this magnitude, I mean, I think the company has done other sales spiffs before, focused campaign sales. But for people that had been in the company a long time, this is the most successful sales campaign that the companies had like ever, certainly in the last recent history and, I mean there’s extra compensation in our P&L for the sales team this quarter for executing against this. And our sales team and our sales leaders are walking around with a pretty good bounce in their step. We had a sales leadership meeting in Phoenix in early July. And the sales team is pretty buzzed up, pretty happy and really motivated going into this year. And that was one of my objectives of doing this is really to, to get the sales team jazzed up, get these renewals done and in place and then create some sales capacity to go sell some other products.

Gary Prestopino

No, it's great. I mean, you don’t mind doing it if you get the results. So that's just -- that's really great. Thank you.

Brian MacDonald

All right.

Operator

Thank you. And this does conclude our question-and-answer session. I would now like to turn the call back over to Brian MacDonald, for any further remarks.

Brian MacDonald

Thanks everyone for joining this morning. As we said, we’re very pleased with our fourth quarter results. The fourth quarter was very strong and has given us good momentum going into 2017. We’ve made tremendous improvements to our business making things easier for our customers and our employees. We achieved 370 basis points of EBITDA margin expansion in the year. And we look to increase EBITDA margins 500 to 550 basis points of expansion in fiscal ’17, putting us on track for 2000 EBITDA margin of 35%. CDK has never been in a stronger position to achieve its targets, and I feel very good about where we are and where we’re going. We’re on the right path to deliver exceptional value to our customers, shareholders and employees. I hope you share enthusiasm for what’s to come. Thanks for listening, and have a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

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