CDK Global's (CDK) CEO Brian MacDonald on Q2 2017 Results - Earnings Call Transcript

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CDK Global, Inc. (NYSEARCA:CDK) Q2 2017 Earnings Conference Call February 2, 2017 8:30 AM ET

Executives

Brian MacDonald - CEO

Al Nietzel - CFO

Taze Rowe - VP, Treasurer and IR

Analysts

Matthew Pfau - William Blair

Gary Prestopino - Barrington Research

Rayna Kumar - Evercore ISI

Brian Essex - Morgan Stanley

Operator

Good day, ladies and gentlemen, and welcome to the CDK Global, Inc. Second Quarter 2017 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 would now like to turn the conference over to your host for today, Taze Rowe, Vice President, Treasurer and Investor Relations. You may begin.

Taze Rowe

Thank you, operator. I’m here today with Brian MacDonald, CDK’s CEO; and Al Nietzel, our CFO. Thank you for joining us for our fiscal second quarter 2017 earnings call and webcast. Brian will begin today’s call with an overview of our results followed by some highlights for the quarter. Al will then take you through the details of the second quarter results and our forecast for fiscal 2017.

A few items before we get started. Throughout today’s call, references to financial amounts are on an adjusted basis unless otherwise noted. 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.

I would also like to remind everyone that remarks made during this conference call will contain forward-looking statements. These statements involve risks and uncertainties, including the risks detailed in our filings with the SEC, which could cause actual results to differ materially from those set forth in the forward-looking statements. And finally, we anticipate filing our Form 10-Q later today.

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

Brian MacDonald

Thank you. Hi, everyone, and thank you for joining us this morning. Today, I’d like to discuss our solid second quarter results, give you an update on CDK’s activities at the recent NADA Convention and then provide you with an update on both our business transformation and return of capital planned.

Second quarter results continued to show strong momentum. Revenues grew 5% or 6% on a constant currency basis. Our EBITDA margin was 32.8% which reflects 550 basis points of expansion for the quarter compared to last year’s second quarter.

The quarter benefitted from a combination of savings related to the business transformation and solid performance in our business with continued growth in advertising offsetting a slowdown in DMS site growth.

With the solid first half to the fiscal year behind us and despite a few anticipated headwinds in the second half, we are increasing our guidance for the remainder of the fiscal year. Al will provide more details on the quarter and outlook in a few minutes.

We recently just returned from the NADA Convention held over the weekend in New Orleans where we had a very successful show. We were pleased by the level of activity and interest we saw from the dealer community, the energy level was high and we set a record for the number of product demonstrations we did for current and potential customers.

The event was an opportunity for CDK to present dealers with an update on our progress and improving customer experience now while rolling out products that will help define the future of automotive retailing. We highlighted products such as our next generation Website that helped drive customer generation and conversion for dealers and predictive retailing products like our new MenuVantage Platinum platform that helps dealers use data to drive higher revenues.

We also showcased our Connected Store application that helps dealers convert Internet traffic into leads and streamlines the automotive purchase process for consumers. Based on the reception we saw for these and other CDK products at NADA, our latest products are meeting the market and we remain confident in our ability to continue growing with our dealer customers.

Now I’d like to a couple of items from the quarter and provide an update on our business transformation plan. First, I’m very pleased to confirm that as we anticipated on our first quarter call, we reached an agreement on a new three-year contract with General Motors. We look forward to continuing to grow the strong relationship and providing GM and its dealers with market-leading solutions.

Second, as we disclosed in our press release this morning, we completed the $1 billion return of capital plan in calendar 2016 as promised. Based on the strength of our financial results and our positive outlook for the business, we believe we have additional capacity for shareholder return. Al will walk you through our plan to return additional capital in a few minutes.

Lastly, I’d like to give you an update on our business transformation and highlight some of the progress we have made last quarter. One of our most important areas of focus is the workplace efficiency and footprint work stream. This initiative has enabled us to reduce costs by optimizing our footprint and bringing together the right teams in the right locations which allows us to improve our flexibility, increase the pace of product development and enhance customer service.

Specifically, in the second quarter we continued to make strong progress in getting to the right footprint. We closed five facilities in the quarter bringing our total closures in the transformation plan to 10, which is more than half of our target. In conjunction with these closures, we continue to ramp up our new state-of-the-art customer service center in Norwood, Ohio. Since we opened this facility in mid-2016, we’ve added more than 500 employees and we continue to grow in support of our customers.

The benefits of this work and other investments are positively impacting our enhanced customer service work stream. CDK’s ongoing investment in service is yielding extremely positive results during our customers’ critical year-end period. Compared to previous year-end, this year’s service levels have improved by over 90% in both Internet chat and telephone response time.

In addition, we’ve seen a decrease in required service interactions of approximately 15% as we exited Q2 and entered Q3. This is a result of the reduction in the number of software releases driven up by our MoveUp! work stream as well as a 30% increase in client usage of improved self-help tool. There’s always room to improve but we feel we are making real strides.

Finally, I wanted to highlight the efforts of the team working on our strategic sourcing work stream. Our first wave of sourcing initiatives are complete and the benefits are reading through our financial results. Based on the success so far, we are increasing our expected savings from this work and the team continues to find additional opportunities.

As Al will discuss in more details later, we’re also updating the cost and benefit forecast associated with the transformation plan. As we extend the program into fiscal 2019, we see additional benefits from the program but we also expect costs associated with the plan to run higher as we’re relying more on outside services and consultants to help speed and optimize the transition.

Now I’ll turn it over to Al.

Al Nietzel

Thanks, Brian, and good morning, everyone. As I do on each of our calls, my comments for the quarter as well as our forecast will largely be on adjusted non-GAAP basis. Reconciliations between these adjusted results and the most directly comparable GAAP results can be found in the schedules accompanying our earnings release.

We posted very solid results for our second quarter. As Brian said earlier, total revenue growth was 5% and 6% on a constant currency basis. And we continue to see some headwinds from foreign exchange rate fluctuations primarily against the weaker pound. Also framing my comments on revenues are the KPIs, which exclude the impact of foreign exchange rates. These KPIs are also provided in the earnings release.

Our Retail Solutions North America segment revenues grew 5%. Increased average revenue for DMS customer site was the driver of this growth with the revenue impact of DMS site penetration and transactions basically flat. The number of customer Websites declined 1% year-over-year due to changes for certain OEM programs that began in late fiscal 2015. We did, however, see sequential growth in Websites versus the first quarter suggesting the impact of these program changes starting to dissipate.

For Advertising North America, revenues grew a solid 18% due to higher OEM-driven advertising spend and increased overall advertising spending associated with the calendar year-end. For CDK International, revenues were down 4% entirely due to the unfavorable exchange rates but we grew 3% on a constant currency basis primarily from increased revenue per DMS customer site from added users. Site counts also continued to increase on a year-over-year and sequential basis.

Moving from revenues to cost, cost of revenues on a GAAP basis increased $2 million or a bit less than 1% from last year. This was due to costs associated with the business transformation plan of $10 million versus $2 million last year, which are shown as pro forma adjustments on our non-GAAP tables along with growth in advertising costs in the ANA segment. These items were partially offset by lower labor-related cost due to reduced headcount and a more favorable geographic labor mix. Our research and development spend, which is included in cost to revenue represents about 7% of CDK’s overall revenues.

SG&A increased $5 million or 5%. Included in SG&A were costs related to the transformation plan of 9 million versus 4 million last year, which are also shown as pro forma adjustments in our non-GAAP tables, and increased stock-based compensation costs. Partially offsetting these costs were benefits due to lower labor-related cost from reduced headcount and like cost of revenues, a more favorable geographic labor mix.

Also on our P&L were restructuring expenses of $2 million for the quarter. These primarily represent severance cost incurred in connection with our transformation plan and are also reflected in our non-GAAP tables. Interest expense was $12 million for the quarter compared to $10 million last year’s second quarter, primarily due to the full year quarter impact of the December 2015 term loan and to a lesser extent, a partial quarter impact of the December 2016 term loan coupled with higher interest expense on existing debt.

Moving on from cost, adjusted earnings before income taxes grew 26% and our pre-tax margins expanded 420 basis points. Each segment posted strong pre-tax margin expansion. Retail Solutions North America delivered 510 basis points, primarily due to lower costs from our transformation efforts, followed by scale from increased revenues.

Our Advertising segment delivered 500 basis points driven by scale from increased revenues and lower cost from our business transformation plan, partially offset by the impact of product mix on the business. And International delivered 390 basis points driven by benefits of the transformation and leverage on the revenue growth.

Total CDK EBITDA margins expanded 550 basis points year-over-year to 32.8% primarily due to benefits from our transformation plan as well as strength in the business and operating leverage on the revenue growth. Net earnings grew 37% and diluted earnings per share grew 45% to $0.64 per share.

As you saw in our release this morning, we had $4.9 million of benefits from discrete tax items in the quarter, including 3 million due to the adoption of the new stock comp standard. This benefited the quarter by approximately $0.03. Our cash balance was 327.6 million, of which approximately 200 million is held outside the U.S.

Now, I’ll turn my comments to return of capital. You may recall in December 2015, we announced our plan to distribute $1 billion of capital to our shareholders by December 2017 through a combination of dividends and share repurchases. In June of '16, we accelerated the pace of the $1 billion return by a full year to December 2016.

And as Brian mentioned earlier, I’m pleased to note that we completed the $1 billion return of capital as promised in the second quarter, executing $20 million in open market share repurchases, a $330 million ASR and paying $20 million in dividends. As we look forward, we continue to see growth in revenue and earnings for CDK consistent with our long-term targets. This growth, coupled with the highly recurring nature of our business, provides us with flexibility to pursue additional return of capital.

We now anticipate an annual return of capital by dividends and share repurchases of $750 million to $1 billion in each of the next three calendar years through 2019. These levels are intended to maximize returns to shareholders while being mindful of the liquidity in our stock and the potential impacts of our repurchase activity on our stock price.

The capital return actions will be funded by our strong free cash flow generation and from additional borrowings. We anticipate that incremental borrowing will bring our overall leverage, measured by the ratio of net debt to adjusted EBITDA, to a range of 2.5x to 3x over this period. And we believe these leverage ratios continue to reflect the strong balance sheet that will provide us with excellent access to capital. In the event that other opportunities such as significant M&A require the use of cash or debt capacity, we may slow the pace of the returns temporarily to maintain that balance sheet strength.

Now before I turn to guidance, I wanted to provide an update on the financial impacts of our business transformation plan. In August, we extended the measurement period for the plan which originally ran from fiscal 2016 through '18 to include fiscal year 2019. Over that period, we now expect benefits of approximately $300 million, up from $250 million to $275 million. Our forecast for the fiscal 2017 year also has increased to 95 million to 105 million from 85 million to 95 million.

Also, we now expect the overall cost of the plan to be $225 million to $250 million, up from the original estimate of $150 million. This is due to the extended transformation period and increased benefits coupled with the greater than originally anticipated use of outside resources and consulting services needed to accelerate the projects and improve outcomes.

Moving on to the forecast for fiscal 2017, for our forecast the year-over-year comparisons are again on the as adjusted basis. Due to the strong performance in the quarter and despite anticipated increases in expenses related to interest expense and stock-based compensation expected for the remainder of the year, we are increasing our adjusted full year earnings outlook.

We continue to anticipate 4% to 5% revenue growth, which includes 1 point drag from foreign exchange rates. We are increasing the range of pre-tax earnings growth to 23% to 26% from 21% to 25%, and increasing the lower borrowing for EBITDA margin expansion to a range of 550 to 575, up from 525 basis points in our prior forecast.

Our anticipated effective tax rate is modestly lower at 32.5% to 33% compared with 33.8% in fiscal 2016. The decrease in the rate is primarily related to the tax benefits associated with the adoption of the new stock-based compensation accounting standard on July 1.

Most of these benefits were realized in the first half which implies an effective tax rate approaching 34% for the second half of the fiscal year. The new standard will continue to affect our provision for taxes resulting in increased volatility in our rate going forward.

We are increasing the ranges of both net earnings growth and growth in diluted earnings per share to 26% to 29% and 34% to 37%, respectively, resulting in an anticipated diluted earnings per share range of $2.33 to $2.38. The forecast includes future repurchases in the later part of the fiscal year as we start to implement our new leverage targets.

And as we’ve discussed in prior calls, there are a number of items that result in slower year-over-year growth in pre-tax earnings in the second half of the year. First, we anticipate incremental interest expense over fiscal 2016 which will create pressure on the year-over-year comps. We estimate the total incremental interest expense in the second half to be $10 million to $15 million.

Second, as we execute our transformation, we anticipate incremental stock-based compensation expense in our fiscal fourth quarter of $10 million to $15 million. There is no anticipated material impact on quarterly comparisons related to foreign exchange rate movement. In summary, this forecast represents solid progress toward our transformation targets to achieve a 35% adjusted EBITDA margin for fiscal 2018.

With that, I’m going to turn it back to the operator and Brian and I will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question comes from Matt Pfau of William Blair. Your line is now open.

Matthew Pfau

Hi, guys. Thanks for taking my questions and nice quarter.

Brian MacDonald

Thanks, Matt.

Matthew Pfau

First, just wanted to touch on the macro environment that you’re seeing out there in terms of your customer base. Has there been any sort of hesitation or change in attitude as there’s some certainty now about potentially trade agreements or border tax adjustments?

Brian MacDonald

Yes, it’s Brian here, Matt. I would say our customers – the dealers are fairly bullish. Volume was obviously good last year. December was a very good month. January was soft but I think people are still expecting a pretty good year in terms of volume. I think there’s obviously a certain degree of uncertainty around some of the border tax issues that have been raised as potentials and I think the various dealer groups are getting together to start to lobby on those and first kind of understand the impacts with their respective manufacturers. But I think putting that aside and the uncertainty that that has, I think people feel like this is going to be a pretty good year from a volume perspective. And obviously volume was good the last couple of years and I think our dealers are feeling pretty good about volume this year.

Matthew Pfau

Got it. And then I wanted to touch on the combination of digital marketing and the RNA segment. Now I guess it’s been about two quarters that they’ve been together. Can you talk about any sort of benefits you’re seeing there in terms of cross-sell or anything else from combining those two segments together?

Brian MacDonald

We reorganized the company not just those segments but we reorganized the whole company effective July 1, and it’s actually interesting. I think it was probably in September or October I said to the management team that for a company that just reorganized itself, probably the most significant reorganization in the company in a long time if not ever, we were operating pretty well and I think our results speak to that. We’re getting benefits on multiple sides. On the product side, we’ve reorganized the way we develop product and have a consumer facing product group and a product mentality in particular that brought together our digital assets and some of our baseline assets. On the sales side, we see good integration. We have a better face-off to the OEMs in terms of the whole suite of products and services that we’re doing. We have all the sales under one very capable leader, so we really have a much better coordinated sales effort between what we’re getting the OEMs to partner with us on and products and services that OEMs want to drive at, at the dealerships. And then obviously we have our traditional sales force which is very strong and feet on the street at dealers and dealer groups. So we’re pretty happy with how this has come together quite frankly, and I think the results speak to that. And last week at NADA, one of the themes we have here at the company is we call it one CDK. We’re really trying to leverage all of the assets of the company to benefit the customers. And it was interesting last week at NADA. A number of dealers said to me that they really felt like the company was one company. It wasn’t very siloed, which I think was historically a customer criticism of CDK that we were very siloed. We didn’t present ourselves to customers with a common base. And so last week at NADA we got a lot of positive feedback about the way that we presented ourselves and that customers can see that trickling through to our products and our services and the way we face-off against them. So overall very happy with the reorganization and how we’re operating under it.

Matthew Pfau

Got it. And last one from me, just wanted to touch on the subscription revenue line item. It decreased slightly sequentially. Al, maybe just a little bit more detail on what kind of drove that?

Al Nietzel

Yes, there’s no real color on that other than just normal seasonality that we have in the business from a dollar basis. There’s a little bit of translation on the – but not a whole bunch. So ultimately there’s nothing unusual on that low, Matt.

Matthew Pfau

Got it, perfect. Thanks, guys. I appreciate you taking my questions.

Brian MacDonald

Sure.

Operator

Thank you. Our next question comes from Ian Zaffino of Oppenheimer. Your line is now open.

Unidentified Analyst

Hi. Good morning, guys. This is [indiscernible] filling in for Ian. Thanks for taking my questions. So I just want to dig a bit into three products of the performance at Retail Solutions North America, the RSNA. So with roughly 1% decline in sites year-over-year, I know you guys mentioned that there were transformation and even reorganizational factors that impacted it. But I just wanted to check in to see if there were any I guess detailed insights on contracts in the pipeline between auto and the adjacencies to drive growth I guess going forward, and just to help think about the segment’s performance going to 2017 and '18 following the transformation?

Al Nietzel

Yes, let me take a crack at that. At the end of it, the overall RSNA site counts with the adjacencies and most, like a marine RV and heavy equipment are actually up. But your comment on the auto segment is correct. There was a slight deterioration sequentially quarter-to-quarter and it really just reflects some of the competitiveness of the market that we’re in right now obviously. What we’re seeing is that particularly at the lower end of the market there’s far more competition and we’re making some decisions on market share and whatnot. You’ll notice that the average revenue per site is up, so it implies that some of the sites that we’re losing are some of the lower revenue items. But we’re expecting to see again this continued pressure in the market relative to competition.

Unidentified Analyst

Got it. Thanks for that. So I guess going forward you guys might be I guess targeting higher margin customers?

Brian MacDonald

It’s Brian here. Look, we want to have more customers. We want it to be a valuable relationship for them and for us. We generally vector towards larger customers because of the nature of our product, as Al said. And we want to have more customers where it makes sense for them and for us.

Al Nietzel

And our sales team is absolutely focused on continuing to gain conquest and market share and so forth, so that’s a continued focus and will be for CDK for a long, long time.

Unidentified Analyst

Got it. Thank you for the color. Great quarter. Thank you, guys.

Brian MacDonald

Thank you.

Operator

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

Gary Prestopino

Good morning, everyone. I guess would be to Brian, at the beginning of your comments you talked about headwinds. So the headwinds really are what you just addressed in the last question. It’s just becoming a little more competitive at the lower end.

Brian MacDonald

Yes, we have a couple of financial headwinds in the second half of the year versus our first. So we have higher interest expense, some higher stock-based comp expense, so that’s primarily what we’re getting at, Gary. But, yes, look it’s a very competitive market especially at the low end and our job is to manage our combination of discounting and site growth and make sure we’re getting the right balance if we’re gaining sites that were not deemed sites by overly discounting. And a real focus on the products we have, some of the stuff that we talked about earlier that we highlighted at NADA, like our next generation Websites, Connected Store product. We’ve got to sell the value of our product set and not sell on price.

Gary Prestopino

No, that’s fine. Considering the switching cost to remove a DMS incumbent like what happened with Hendrick, you really have to get more average revenue per DMS user. And so the next question would be, you mentioned three new products that you talked about. Could you maybe just drilldown on the specific competitive advantages or just advantages of these products that you’re going to be rolling out or you have rolled out and you showed it at NADA. I think there was Websites, there was a retail product and then I’m particularly interested in the Connected Store application. What’s the functionality there?

Brian MacDonald

So let me start with our Websites. Our Websites are responsive. They’re very easy to modify. You can see we’ve rolled them out across the majority of Lexus stores. They’ve worked very well in mobile which is where 75% or 80% of the customers are coming in through a mobile device. And that’s connected with our suite of advertising services. So you can look at some Lexus sites and you’ll get a sense of the Website. And then underneath that, one of the key benefits is our ability to basically update the site very quickly for specific merchandizing offers, other particular things that the dealer wants to do. We’ll be rolling those out across all the GM brands as well this year. And then on Connected Store, some of the features of Connected Store – really Connected Store as we call it is meant to bridge the out-of-store and in-store experience, so you can basically start your purchase process online, leverage our quote engine and basically get an accurate quote including taxes and fees, and basically do as much of the buying process as you want online. Different customers obviously have different appetites to do either a soft credit app, a full credit app online. And different dealers have different philosophy about how much they want to happen outside the store versus inside the store. And so basically we have that product. It’s in general released. We’ve got a lot of interest in that product from some OEMs who want to white label it for their brand and a lot of interest from different dealer groups. So really the way to think about that product, Gary, is it’s really allowing you to do the purchase process online and work on – it ultimately will have digitized contracts for that process. We have a full credit app now. Different states require you, as you know, to sign physical paper. So some of the limitations of the digitization of the processes are driven by different state requirements. But that’s a product that has a tremendous amount of interest from the customers and it’s in general released already and we have it at some customers already. And it’s an interesting product because we really have interest from dealers, dealer groups and OEMs. And so we’ll ultimately white label that for some OEMs and they’ll move it across an entire brand.

Gary Prestopino

Okay. Was there a third product, Brian, released as retail product?

Brian MacDonald

Yes, so we have another product, F&I Menu, which is a very exciting product, got a lot of interest at NADA. It basically uses some predictive data and analytics to offer the customers some F&I product that more suited to them; very easy to use. Again, that’s connected in with our quoting tool so that very quickly you get a revised monthly payment or lease payment, a financing payment, whatever the customer is looking at in terms of their option. So that product is in general released, it’s in the market. We’re selling it and installing it and that got a lot of interest from customers last week at NADA as well. We’re also getting very good traction with our Service Edge product which is a tablet-based product for an improved service experience. So we’ve gotten really good traction with that product in the last four or five months and we see the penetration rate moving up in terms of the attach rate relative to our DMS is moving up. And we have a white label version of that product for a major OEM that they’re rolling out across all of their dealers as well. So that’s a pretty exciting product that’s getting traction as well.

Gary Prestopino

Just one last question. With all these products that you cited, do those work with competitors’ DMS sites as well or does this have to be a CDK DMS site?

Brian MacDonald

No. They can API [ph] into the majority of the competitive DMS.

Gary Prestopino

Thank you.

Brian MacDonald

Thank you.

Al Nietzel

Thanks, Gary.

Operator

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

Rayna Kumar

Good morning. What factors would cause you to be at the low end of your 2017 margin target versus the high end?

Brian MacDonald

Hi, Rayna, it’s Brian. As I mentioned, we have some pretty exciting stuff going on with OEMs and where they may want us to rollout some of our products or Websites. But we have some pretty exciting stuff going on with them that if that comes to fruition, we’ll incur some upfront costs for that development in this year. Then obviously the benefit will come next year. So that’s one side of that, I think one. The other side is we had some programs with some OEMs that we expect it to rollout. Some of those have been delayed not because of our decisions but because of other factors either at the OEMs or the dealers. So I think that may kind of push us out a little bit. Al, do you want to add to that?

Al Nietzel

We talked about a couple of opportunities potentially internationally to accelerate a few things. So we feel very good about, Rayna, where the guidance sits right now. The second half of the year due to the challenging comps within the advertising segment because last year is when it really started to pick up, so the revenue in the second half of the year is slower than what we have in the first half, particularly in advertising. But we feel very good about the range of our guidance.

Rayna Kumar

That’s very helpful. It’s good to see the GM contract renewal. Are the economics similar to your previous contract?

Brian MacDonald

We’re not going to talk about economics of a major contract like that. But suffice it to say we’re very happy and excited to continue to work with General Motors. And we’re just not going to talk about specifics of a contract.

Rayna Kumar

Thank you.

Brian MacDonald

Thank you.

Al Nietzel

Thanks, Rayna.

Operator

Thank you. [Operator Instructions]. Our next question comes from Brian Essex of Morgan Stanley. Your line is now open.

Brian Essex

Hi. Good morning, guys. Thank you for taking the question. I was wondering if you had talked a little bit about the progress in your transformation effort. If we look at gross cost takeout and Brian, I noted you indicated that you’re investing in operations. Is there any way to kind of quantify or at least give us some kind of sense, it seems as though you made some nice progress in the transformation effort and hopeful to [indiscernible] that effort. So what’s left on a gross basis and where are we spending in terms of cost and net against that gross savings?

Brian MacDonald

I think what Al updated today, Brian, I think kind of gets to that. We expect to over the life of this program spent $225 million to $250 million for a net benefit of $300 million. So that’s pretty good return on investment. And we’ve obviously – you can look at the P&L, we’re obviously moving the margin up with a pretty good trajectory. So there’s more to do. Every day here we’re chopping wood here every day and it’s hard work, but clearly we’re making good progress on the P&L. You can see the benefit in the P&L. We have all the work streams detailed for you guys. I’m not going to go through that today but we detailed all of our work streams. Whether that’s moving to and improving our customer service, strategic sourcing, footprint rationalization and what we’ve been doing each and every quarter is giving you an update on some of those in a level of detail. We don’t have time to go through all 9 or 10 of them. But today we updated you that we’re halfway through our facility closings. We have 20 facilities to close and rationalize and we finished 10 of those so far. As I said, we’re making good progress. We clearly have more to do. We’re very focused and we continue to find some new opportunities along the way. That’s why we’ve bumped up the target to 300 and extended it through FY '19.

Al Nietzel

And the benefits, Brian, we’re really seeing through the P&L where we got earnings growing at a far greater rate obviously than revenue due to the combination of cost takeout and some scale that we get in the business. So I know we’ll spend some time together after, but we’ve made some really good progress. As Brian said, there’s a lot to do yet. There’s continued opportunities to serve the clients and develop products quicker and faster and support our clients in a way that they need to be supported. And we’re seeing good traction.

Brian MacDonald

Yes, one other thing, Brian, I just did this math myself. I don’t have it right in front of me but if you go and you look at the first two quarters of this year, our revenue is up maybe $63 million or something and then you look at our EBITDA. Our EBITDA is up like $79 million. So just looking at those two numbers, putting the two quarters together and looking year-over-year, that gives you a sense of the magnitude of the benefits of the transformation right there.

Brian Essex

That’s helpful. And I guess if I think about – you guys don’t break out R&D but you’ve had quite an acceleration of new product development recently. How should we expect – I guess how has R&D trended historically and how should we expect that trend going forward given that you’ve had this kind of rollout available of different products?

Brian MacDonald

Our R&D – 7% of revenue give or take a little bit. We have some things in the products we need to make better obviously. We have an effort to get to what we call N [ph] which is the common version. And look, this is obviously a very competitive market. This is technology space. There’s lots of innovation. So we need to continue to innovate the product. And as I like to tell the customers and the employees, we are transforming CDK and we are finding opportunities to cut cost and be more efficient. But the things that impact our customers, services and products, we’re investing in those and we’re making those better. We talked about service today. Our service is dramatically better than it was a year ago and we continue to invest in product. And we’re not cutting spending from R&D and we’re really focused on products. And so I always tell our dealers and our employees that we are transforming the company and we are looking to be more efficient. But the things that impact customers, products and services are not places that we’re cutting cost. Those are places where we’re investing for a better experience.

Al Nietzel

And we really see the benefits of the reorganization that Brian did shortly after his arrival where we can stretch the R&D dollars more efficiently and it’s all part of the moving up initiative. I think you’ve heard Brian mention before prior to the reorg, we had six or so different R&D organizations led by different people that used different tools and different processes and that has been a big win for our technical community and we’re seeing results that are paying off.

Brian Essex

Great. That’s very helpful.

Brian MacDonald

I’ll give you an example, Brian. This is very encouraging. So we obviously have been reducing our versions of N, software versions and made very good progress last year. And looking at November and December, the service interactions we had were down by double digits overall, right, which I think is a function of having less versions higher quality. And then year-end accounting is an extremely difficult busy time for dealer finance departments. And our service interactions related to year-end accounting and customers needing help or having questions, those are down roughly 20% year-over-year. And our service levels are better by 90% something versus a year ago. So fundamentally, we see the benefits of reducing the versions of the product and having more consistency in the product, and we see that benefit coming through in terms of the customer interaction, service interactions we have to have which is obviously good for the dealers. They don’t need help. They don’t have a question or an issue and that’s good for us, because we’re not getting those interactions.

Brian Essex

Got it, very helpful. Thanks. Maybe last one I’ll sneak in is for the sales force changes, maybe are there any other incremental thoughts there? Is that done or anymore to go and what do you see as incremental transformational challenges coming up in the next couple of years? I think that was a pretty meaningful one in our view and it’s nice to see that you’ve had some good progress there. But just wondering what else are you focused on going forward that you kind of have to get right?

Brian MacDonald

We had some big system changes. We have a lot of complexity in our billing process, a lot of older legacy systems that we’re combining into one system. That’s a very big project for us, because one of the biggest complaints from our customers is about our billing and the complexity of our billing and that has a lot of upstream benefits in terms of how we quote, how we bill, how nimble and agile we can be in that process. So that’s a big one that we’re working on. Any systems implementation in any company is obviously complicated and risky, so that’s a big one for us. We have a lot of great work underway around getting to N and I think we’re probably somewhere around 950 versions of N, maybe a little less now, we started at 1,500. So we’ve made good progress but we have a lot more to do, so that has a big impact, because that as I talked about before affects service, affects the niche process and ultimately our billing and other things. So I think that’s a work stream that we definitely have to get right. And look, we just have a lot of little things. I always like to tell investors that there isn’t like two big things we’re doing here. There’s like a 100 projects. There’s a 100 projects of things that we’re doing. We have a formal project management office, we have consultants helping us and some of the projects are small and some of the projects are big. But there’s just a lot of pieces of this that we’re doing and we’re obviously getting good results and making great progress. But we also have more to do and we remind ourselves of that every day when we come to work.

Al Nietzel

The one comment Brian made about the contracting process, we were just at the show in New Orleans and I had multiple conversations with dealers just about what it takes to contract with CDK. And it’s a painful process that we have to make easy for both our sales organization, because it winds up taking time on them, and also the client experience. So we’re putting a lot of shoulder right now behind an internal project to revamp our quote to cash process and we’re driving a lot on it.

Brian MacDonald

But just to be clear, our contracting process is a little funky because of our old systems but we’re not hard to deal with.

Brian Essex

That’s very helpful. Thank you.

Operator

Thank you. Ladies and gentlemen, 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

We appreciate you joining us this morning, thanks again. As we’ve highlighted, our very solid second quarter results show continued progress towards our goal for fiscal '17 and beyond, and allows us to raise our guidance for the year. The 550 basis point increase in our adjusted EBITDA margin to 32.8% shows great progress towards our 35% target for fiscal 2018.

We continue to make real progress in the transformation of our business to make it more efficient and improve service for our customers. And as we demonstrated at NADA, we have products that are driving significant dealer interest as the dealer community looks to the next generation tools to drive their customer interactions.

Thank you 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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