CDK hones in on dealer software, customer service

Dealer software giant CDK Global Inc. is a markedly different company than it was a year ago.

CEO Brian Krzanich, now at CDK's helm for eight months, is shedding the company's digital marketing business, a decision that follows a move this year to remake customer service and simplify the billing practices that had bedeviled dealership clients. CDK also has reshuffled its executive ranks under Krzanich.

The changes position CDK to focus more fully on growing its core dealership software business. And that's drawing the praise of analysts who track the company.

"All of the analysts were telling them to get out of" digital marketing, said Gary Prestopino of Barrington Research.

CDK in late June announced it would divest that digital marketing business, including all assets of its North America advertising segment and portions of its North America retail solutions segment related to mobile advertising and website services. The digital marketing business represented about 19 percent, or $332 million, of revenue and 13 percent, or $50 million, of pretax earnings in the nine months ended March 31, the company said. CDK's annual revenue in its last fiscal year totaled $2.3 billion.

The reasons for divesting only grew after General Motors announced in January it would add website vendors its Buick, Chevrolet and GMC dealers could use. CDK had been GM's exclusive preferred provider and manager of websites.

The company's website and digital marketing business had always been cyclical, while the core software business is consistent, Prestopino said. After the GM decision, "you'd be fighting an uphill battle for a number of years to regain any growth in that business," he said.

Ian Zaffino of Oppenheimer & Co. said the move "significantly simplifies the story" for CDK while removing costs, enhancing growth and improving margins. "A deal will allow management to divest a low-margin business with challenging growth prospects," Zaffino wrote in a research note.

Zaffino, citing CDK management, said in the note that potential buyers of the digital marketing business could include "strategics in the space" or private equity, or even one of CDK's peers with a platform, such as Cox Automotive or Cars.com — itself the subject of sale speculation.

Zaffino expects the divestiture to happen within six months. CDK has said it plans to get rid of the business within 12 months.

The focus on software is also part of a broader shift for the Hoffman Estates, Ill., company. Krzanich, a onetime chief of Intel, in November replaced former CEO Brian MacDonald. Krzanich declined to talk to Automotive News for this story.

MacDonald's era was marked by the influence of Elliott Management Corp., a New York activist fund, which Prestopino said appeared to be pushing the company toward a sale. Elliott Management could not be reached for comment.

In May 2016, when Elliott held an 8.6 percent stake in CDK, the investment company sent a letter to CDK leadership two months after MacDonald had been named CEO, outlining a plan to improve business and boost shareholder value. The letter forecast that such a plan, if executed correctly, should yield a stock price of $81 within 14 months, a 72 percent gain. CDK shares traded around $47 just before the letter was issued. They closed Tuesday, July 2, at $50.04.

The Elliott letter came less than two years after CDK's spinoff from ADP in October 2014. In general, Elliott lamented what it said was a lack of progress after the spinoff and said CDK could and should be more efficient.

When Krzanich was named CEO, Elliott reportedly reduced its share of CDK. Elliott Management no longer has a material ownership stake in CDK, the company confirmed.

Dealers also had concerns. Krzanich wrote an open letter to CDK's customers in January, saying that he had heard those concerns and was working to fix them. Simpler billing is being rolled out with Drive Flex, CDK's Web-based DMS introduced in 2018. CDK touted Drive Flex at the 2019 NADA Show, calling it a modern, easy-to-use DMS that would eventually replace Drive, the company's flagship DMS product.

CDK also told dealers in January that it would expand customer service hours by 30 percent to include weekends and some holidays. Krzanich said at the time that CDK may add engineers to speed product rollouts. It also planned to hire 100 more customer service specialists by June.

Software developments such as Drive Flex and Fortellis, CDK's open exchange platform, were in progress before Krzanich took the helm, but he told Automotive News this year that he would accelerate the efforts.

Krzanich also has tuned CDK's executive ranks. In April, CDK hired Mahesh Shah as chief product and technology officer. Rajiv Amar, CDK's previous global chief technology officer, left the company. Shah is overseeing a new Silicon Valley office in San Jose, Calif. CDK plans to employ 50 there in its first year, but head count could rise to 400 during the next three years.

In another move, the company announced internally this spring that Ron Frey, chief strategy officer since 2017, would transition to an external adviser role this summer. His departure hasn't yet happened, and Frey is still technically with CDK, the company said. Frey declined to comment on the change, citing a confidentiality agreement.

In other moves, Dan Flynn was named executive vice president and business leader of CDK's core DMS business. He was previously president of CDK North America. Jen Cole was promoted to senior vice president and business leader of digital. John Hickey was promoted to executive vice president of North America customer experience.

"It's a normal executive shuffle," analyst Prestopino said. "You got a new CEO; they want to put their team in, obviously."

With the leadership changes, product portfolio leaders now report to the CEO, Flynn said. The changes "put more focus on product and put product at the center of the equation to really help dealers do better."

And that focus on the dealer customer is key.

"The changes that have happened in my time with the company have really been driven always around the customer, and just not only support but making the software better," said Flynn, who joined CDK in February 2016.

With Krzanich at the helm, Flynn said, "we're now positioned with a technologist leading our company to really capitalize on some of the work we did in the last three years."