Growth in its North American retail business helped CDK Global Inc. to higher revenue and earnings in its fiscal third quarter. But looking to the fourth quarter, CDK executives warned a bumpy road could lie ahead for its dealership website revenue after General Motors reversed an exclusivity arrangement for some of its brands.
CDK on Tuesday reported revenue of $602.1 million and net earnings attributable to CDK of $99.8 million in the quarter that ended March 31. The company's earnings before income taxes stood at $137.5 million, while adjusted earnings before income taxes totaled $166.4 million.
The third-quarter numbers were generated using new accounting standards adopted by the company as of July 1. Public companies are moving to the new standard, which reflects revised revenue recognition rules. While CDK has said it is not restating prior-year results for comparative purposes, it did provide current-year results calculated under the old standard so comparisons could be made.
Taking those into account, third-quarter revenue rose 4 percent; net earnings increased 1 percent; adjusted earnings before income taxes fell 5 percent; and earnings before income taxes dipped 1 percent.
In a conference call with analysts, CDK executives touted the company's retention of its core dealership management system business, but warned that its dealership website revenue could be hurt by GM's January announcement to dealers that they would get new company-approved vendor options. GM had been using CDK as its exclusive preferred provider of websites for Chevrolet, Buick and GMC dealerships.
CDK leaders said during Tuesday's conference call that they expect to see the financial impact of this decision in the last three months of its fiscal year ending June 30 and into fiscal 2020. The change could lead to a mild headwind on revenue in fiscal 2020, CEO Brian Krzanich said.
Overall revenue for the company's North America retail solutions unit grew 11 percent in CDK's fiscal third quarter, while revenue for the much-smaller North America advertising business shrunk 18 percent.
For fiscal 2019, CDK maintained its revenue guidance of $2.32 billion to $2.35 billion and lowered the top end of its guidance for net earnings from $360 million to $345 million. CDK's full-year guidance now calls for net earnings of $330 million to $345 million.
The bright spot in the quarter was retention in dealership sites using CDK as their DMS provider. Krzanich said the company had a 50 percent year-over-year improvement in site retention during the period as CDK continues to change its culture to be "more customer-centric." CDK turned around 10 straight quarters of site loss in the third quarter, he said.
Krzanich said the improvement was spread fairly evenly across three "buckets" of the kinds of sites CDK services, including dealership groups that have five or fewer stores, five or more and newly acquired customers.
Retention at smaller sites has been driven by CDK's new DMS product Drive Flex, while retention among larger sites is being aided by the company's Customer Success initiative to improve support and service to dealership customers, Krzanich said. Gains in adding newly acquired customers is being driven by a combination of those factors, he said.
CDK shares were down 1 percent to $60.98 at mid-afternoon Tuesday.
