CDK's net jumps 24 percent on strong DMS growth

CDK Global Inc.'s net income jumped 24 percent to $96.1 million for the fiscal third quarter ended March 31 from a year earlier, on strong pretax earnings growth from subscription services in North America and international markets for the dealership software provider.

Revenue grew 3.6 percent to $576.6 million, the Hoffman Estates, Ill., company said Thursday.

"I'm pleased to report another quarter of margin expansion and double-digit earnings growth," CEO Brian MacDonald said in a statement. "While revenue growth isn't where I want it to be, we're taking the right actions to improve our results," he said during an earnings conference call.

Those actions include a number of new products rolled out during the 2018 NADA Show in March, he said, citing Fortellis, an automotive commerce exchange, and the company's Connected Retail 2.0, among others. "There's a real fundamental product renaissance going on here."

Adjusted pretax earnings for CDK's Retail Solutions North America segment -- known mainly for its dealership management systems in auto, heavy-truck, recreational vehicle and heavy-equipment dealerships -- rose 15 percent to $182.4 million on a 4 percent revenue increase to $326 million.

Adjusted pretax profits for CDK International jumped 32 percent to $26.3 million on a 21 percent revenue gain to $93.1 million.

Sites down, revenue up

In North America, the company's automotive DMS sites fell 2.6 percent from a year earlier to 8,917, largely due, the company said, to a continued loss of one- and two-rooftop dealership clients. Those dealerships make up about one-third of CDK's DMS users. On a quarter-to-quarter sequential basis, the count for the latest quarter fell for the fifth time in the last six quarters. The company hopes eventually to stem those losses, in part through a new DMS called Drive Flex that targets one- and two-dealership groups with its features and pricing.

In contrast, average revenue per North American automotive site rose 6.4 percent to $8,483, rising for at least the sixth-straight quarter.

In the latest quarter, CDK renewed its largest dealership-group customer with another long-term contract and signed up another group with more than 20 rooftops and two with more than 10, MacDonald said. "Our backlog is high," he said, so CDK is beefing up its sales and integration resources to handle those customers and future anticipated growth.

CFO Joe Tautges added that so far this fiscal year, "We've renewed roughly four times the sites" as in years past.

On the international side, MacDonald said, CDK has signed up an international Japanese automaker in what he called "the largest deal in Asia that we've won over 10 years."

Soft advertising

In contrast, CDK's advertising business in North America was soft, with pretax adjusted profits down 6.9 percent to $9.5 million on flat revenue of $74.2 million.

CDK's specialty is "the hyperlocal digital arena," said Tautges, and advertising spending by dealerships and local ad associations that CDK had expected in the latest quarter failed to materialize.

"Given what we now know about expected advertising spend levels from our customers, advertising will be a revenue headwind for the next few quarters" and "lumpy," Tautges said. Added MacDonald: "Remember that this advertising revenue is by far our lowest-margin revenue."