Item 1.
Financial Statements
DEALERTRACK TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands, except share
|
|
|
|
and per share amounts)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
145,716
|
|
|
$
|
143,811
|
|
Marketable securities
|
|
|
18,784
|
|
|
|
34,031
|
|
Customer funds and customer funds receivable
|
|
|
28,177
|
|
|
|
16,076
|
|
Accounts receivable, net of allowances of $7,088 and $4,558 as of September 30, 2013 and December 31, 2012, respectively
|
|
|
57,490
|
|
|
|
43,679
|
|
Deferred tax assets, net
|
|
|
4,412
|
|
|
|
4,412
|
|
Prepaid expenses and other current assets
|
|
|
28,680
|
|
|
|
19,142
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
283,259
|
|
|
|
261,151
|
|
|
|
|
|
|
|
|
|
|
Marketable securities – long-term
|
|
|
—
|
|
|
|
4,428
|
|
Property and equipment, net
|
|
|
29,833
|
|
|
|
27,407
|
|
Investments – cost and equity
|
|
|
120,535
|
|
|
|
122,808
|
|
Software and website development costs, net
|
|
|
61,596
|
|
|
|
46,182
|
|
Intangible assets, net
|
|
|
106,609
|
|
|
|
117,599
|
|
Goodwill
|
|
|
278,741
|
|
|
|
270,646
|
|
Deferred tax assets, net
|
|
|
44,031
|
|
|
|
43,611
|
|
Other assets – long-term
|
|
|
16,039
|
|
|
|
16,684
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
940,643
|
|
|
$
|
910,516
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,530
|
|
|
$
|
18,834
|
|
Accrued compensation and benefits
|
|
|
17,495
|
|
|
|
15,148
|
|
Accrued liabilities – other
|
|
|
15,958
|
|
|
|
16,870
|
|
Customer funds payable
|
|
|
28,177
|
|
|
|
16,076
|
|
Deferred revenue
|
|
|
9,021
|
|
|
|
7,959
|
|
Deferred tax liabilities
|
|
|
3,141
|
|
|
|
3,031
|
|
Due to acquirees
|
|
|
—
|
|
|
|
11,124
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
83,322
|
|
|
|
89,042
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
76,832
|
|
|
|
77,368
|
|
Deferred revenue
|
|
|
6,104
|
|
|
|
5,525
|
|
Senior convertible notes, net
|
|
|
168,246
|
|
|
|
162,279
|
|
Other liabilities
|
|
|
3,868
|
|
|
|
4,985
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
255,050
|
|
|
|
250,157
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
338,372
|
|
|
|
339,199
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value: 10,000,000 shares authorized and no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.01 par value: 175,000,000 shares authorized; 47,039,437 shares issued and 43,882,981 shares outstanding as of September 30, 2013; and 45,998,679 shares issued and 42,870,061 shares outstanding as of December 31, 2012
|
|
|
470
|
|
|
|
460
|
|
Treasury stock, at cost, 3,156,456 shares and 3,128,618 shares as of September 30, 2013 and December 31, 2012, respectively
|
|
|
(53,333
|
)
|
|
|
(52,398
|
)
|
Additional paid-in capital
|
|
|
566,472
|
|
|
|
541,948
|
|
Accumulated other comprehensive income
|
|
|
5,382
|
|
|
|
7,627
|
|
Retained earnings
|
|
|
83,280
|
|
|
|
73,680
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
602,271
|
|
|
|
571,317
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
940,643
|
|
|
$
|
910,516
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
DEALERTRACK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands, except per share amounts)
|
|
|
(In thousands, except per share amounts)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
124,582
|
|
|
$
|
99,084
|
|
|
$
|
355,423
|
|
|
$
|
287,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
70,199
|
|
|
|
55,475
|
|
|
|
200,974
|
|
|
|
162,337
|
|
Product development
|
|
|
3,952
|
|
|
|
2,874
|
|
|
|
11,646
|
|
|
|
8,812
|
|
Selling, general and administrative
|
|
|
43,519
|
|
|
|
35,307
|
|
|
|
127,511
|
|
|
|
103,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
117,670
|
|
|
|
93,656
|
|
|
|
340,131
|
|
|
|
274,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,912
|
|
|
|
5,428
|
|
|
|
15,292
|
|
|
|
12,446
|
|
Interest income
|
|
|
171
|
|
|
|
181
|
|
|
|
412
|
|
|
|
595
|
|
Interest expense
|
|
|
(3,229
|
)
|
|
|
(3,214
|
)
|
|
|
(9,938
|
)
|
|
|
(7,579
|
)
|
Other income (expense), net
|
|
|
419
|
|
|
|
(5,267
|
)
|
|
|
547
|
|
|
|
(6,117
|
)
|
Gain on disposal of subsidiary and sale of other assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33,193
|
|
Earnings from equity method investment, net
|
|
|
1,544
|
|
|
|
429
|
|
|
|
4,042
|
|
|
|
737
|
|
Income (loss) before provision for income taxes, net
|
|
|
5,817
|
|
|
|
(2,443
|
)
|
|
|
10,355
|
|
|
|
33,275
|
|
Provision for income taxes, net
|
|
|
(22
|
)
|
|
|
(488
|
)
|
|
|
(755
|
)
|
|
|
(13,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,795
|
|
|
$
|
(2,931
|
)
|
|
$
|
9,600
|
|
|
$
|
19,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.13
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.22
|
|
|
$
|
0.47
|
|
Diluted net income (loss) per share
|
|
$
|
0.13
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.21
|
|
|
$
|
0.45
|
|
Weighted average common stock outstanding (basic)
|
|
|
43,796
|
|
|
|
42,661
|
|
|
|
43,509
|
|
|
|
42,413
|
|
Weighted average common stock outstanding (diluted)
|
|
|
45,757
|
|
|
|
42,661
|
|
|
|
45,109
|
|
|
|
43,909
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
DEALERTRACK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Net income (loss)
|
|
$
|
5,795
|
|
|
$
|
(2,931
|
)
|
|
$
|
9,600
|
|
|
$
|
19,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
1,480
|
|
|
|
2,141
|
|
|
|
(2,097
|
)
|
|
|
1,985
|
|
Net change in unrealized (losses) gains on securities
|
|
|
(323
|
)
|
|
|
42
|
|
|
|
(148
|
)
|
|
|
28
|
|
Other comprehensive income (loss), net of tax
|
|
|
1,157
|
|
|
|
2,183
|
|
|
|
(2,245
|
)
|
|
|
2,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
6,952
|
|
|
$
|
(748
|
)
|
|
$
|
7,355
|
|
|
$
|
21,968
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
DEALERTRACK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,600
|
|
|
$
|
19,955
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
44,913
|
|
|
|
37,659
|
|
Deferred tax (benefit) provision
|
|
|
(906
|
)
|
|
|
9,261
|
|
Stock-based compensation expense
|
|
|
10,729
|
|
|
|
10,202
|
|
Provision for doubtful accounts and sales credits
|
|
|
8,041
|
|
|
|
5,520
|
|
Earnings from equity method investment, net
|
|
|
(4,042
|
)
|
|
|
(737
|
)
|
Deferred compensation
|
|
|
134
|
|
|
|
112
|
|
Stock-based compensation windfall tax benefit
|
|
|
(5,644
|
)
|
|
|
(4,226
|
)
|
Gain on disposal of subsidiary and sale of other assets
|
|
|
—
|
|
|
|
(33,193
|
)
|
Realized gain on sale of securities
|
|
|
(362
|
)
|
|
|
(4
|
)
|
Amortization of debt issuance costs and debt discount
|
|
|
7,043
|
|
|
|
5,244
|
|
Change in contingent consideration
|
|
|
(500
|
)
|
|
|
(900
|
)
|
Change in fair value of warrant
|
|
|
—
|
|
|
|
6,310
|
|
Amortization of deferred interest
|
|
|
946
|
|
|
|
574
|
|
Changes in operating assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(21,835
|
)
|
|
|
(17,312
|
)
|
Prepaid expenses and other current assets
|
|
|
(4,474
|
)
|
|
|
2,848
|
|
Other assets – long-term
|
|
|
7,029
|
|
|
|
6,796
|
|
Accounts payable and accrued expenses
|
|
|
(10,686
|
)
|
|
|
(5,186
|
)
|
Deferred rent
|
|
|
134
|
|
|
|
151
|
|
Deferred revenue
|
|
|
987
|
|
|
|
1,912
|
|
Other liabilities – long-term
|
|
|
(325
|
)
|
|
|
(2,190
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
40,782
|
|
|
|
42,796
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(11,060
|
)
|
|
|
(6,610
|
)
|
Capitalized software and website development costs
|
|
|
(26,701
|
)
|
|
|
(14,824
|
)
|
Proceeds from sale of Chrome-branded asset
|
|
|
—
|
|
|
|
5,500
|
|
Purchases of marketable securities
|
|
|
(27,393
|
)
|
|
|
(70,175
|
)
|
Proceeds from sales and maturities of marketable securities
|
|
|
46,237
|
|
|
|
16,106
|
|
Return of equity method investment
|
|
|
102
|
|
|
|
—
|
|
Cash contributed for equity method investment
|
|
|
—
|
|
|
|
(1,750
|
)
|
Payment for acquisition of businesses, net of acquired cash
|
|
|
(21,121
|
)
|
|
|
(73,994
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(39,936
|
)
|
|
|
(145,747
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Principal payments on capital lease obligations and financing arrangements
|
|
|
(99
|
)
|
|
|
(496
|
)
|
Proceeds from stock purchase plan and exercise of stock options
|
|
|
8,207
|
|
|
|
6,092
|
|
Repayment of a note payable
|
|
|
(11,439
|
)
|
|
|
—
|
|
Proceeds from government grants
|
|
|
210
|
|
|
|
—
|
|
Proceeds from issuance of senior convertible notes
|
|
|
—
|
|
|
|
200,000
|
|
Payments for debt issuance costs
|
|
|
—
|
|
|
|
(7,723
|
)
|
Payments for convertible note hedges
|
|
|
—
|
|
|
|
(43,940
|
)
|
Proceeds from issuance of warrants
|
|
|
—
|
|
|
|
29,740
|
|
Purchases of treasury stock
|
|
|
(935
|
)
|
|
|
(784
|
)
|
Stock-based compensation windfall tax benefit
|
|
|
5,644
|
|
|
|
4,226
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,588
|
|
|
|
187,115
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
2,434
|
|
|
|
84,164
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(529
|
)
|
|
|
827
|
|
Cash and cash equivalents, beginning of period
|
|
|
143,811
|
|
|
|
78,709
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
145,716
|
|
|
$
|
163,700
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
3,607
|
|
|
$
|
2,708
|
|
Interest
|
|
|
4,120
|
|
|
|
1,965
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Accrued capitalized hardware, software and fixed assets
|
|
|
2,405
|
|
|
|
2,603
|
|
Assets acquired under capital leases and financing arrangements
|
|
|
206
|
|
|
|
772
|
|
Non-cash consideration issued for investment in Chrome Data Solutions
|
|
|
—
|
|
|
|
42,301
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
DEALERTRACK TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Business Description
Business Description
Dealertrack’s web-based software solutions
and services enhance efficiency and profitability for all major segments of the automotive retail industry, including dealers,
lenders, OEMs, third-party retailers, agents and aftermarket providers. Dealertrack operates the largest online credit application
networks in the United States and Canada. We believe Dealertrack delivers the industry’s most comprehensive solution set
for automotive retailers, including:
|
·
|
Dealer Management solutions, which provide independent and franchised dealers with a powerful dealer management system (DMS)
featuring easy-to-use tools and real-time data access to enhance their efficiency;
|
|
·
|
Sales and F&I solutions, which allow dealers to streamline the in-store and online sales processes as they structure deals
from a single integrated platform;
|
|
·
|
Inventory solutions, which deliver vehicle inventory management and transportation offerings to help dealers accelerate used-vehicle
turn rates and assist with the facilitation of vehicle delivery;
|
|
·
|
Processing solutions, which include online motor vehicle registration, lien and titling applications and services, and collateral
management services; and
|
|
·
|
Interactive solutions, which deliver digital marketing and website offerings to assist dealers in achieving higher lead conversion
rates by helping optimize the maximum amount of shoppers to their websites.
|
References in this Form 10-Q to “Dealertrack,”
the “Company,” “our” or “we” are to Dealertrack Technologies, Inc., a Delaware corporation,
and/or its subsidiaries.
Basis of Presentation
The accompanying unaudited consolidated
financial statements for the three and nine months ended September 30, 2013 and 2012 have been prepared in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, they do not necessarily include all information
and footnotes required by accounting principles generally accepted in the United States (GAAP) for complete financial statements.
The December 31, 2012 balance sheet information has been derived from the audited financial statements at that date but does not
include all disclosures required by GAAP.
In the opinion of management, the unaudited
financial information for the interim periods presented reflects all adjustments, which are normal and recurring, necessary for
a fair presentation of the statement of results of operations, financial position, other comprehensive income and cash flows. These
consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included
in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission (SEC) on
February 26, 2013. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the
results that may be expected for the full year ending December 31, 2013.
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosures
of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those
estimates.
2. Significant Accounting Policies
Our significant accounting policies are
those that we believe are both important to the portrayal of our financial condition and results of operations. Management believes
there have been no material changes to the significant accounting policies discussed in Note 2 of our Annual Report on Form 10-K
for the year ended December 31, 2012, except as set forth below.
Stock-Based Compensation Expense and Assumptions
Expected Life
As of January 1, 2013,
we determine the expected life of any issued stock-based awards based upon our historical exercise
patterns
and the period of time that the awards are expected to be outstanding
. Previously, due to our limited public company history,
the expected life was determined based upon the experience of similar entities whose shares are publicly-traded.
Net Income (Loss) Per Share
Basic earnings per
share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period.
Diluted earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding,
assuming dilution, during the period. The diluted earnings per share calculation assumes (i) all stock options which are in the
money are exercised at the beginning of the period, (ii) if applicable, unvested awards that are considered to be contingently
issuable shares because they contain either a performance or market condition will be included in diluted earnings per share if
dilutive and if their conditions have (a) been satisfied at the reporting date or (b) would have been satisfied if the reporting
date was the end of the contingency period, and (iii) if applicable, potential
common
shares which may be issued to satisfy the conversion spread value of our senior convertible notes.
The
number of shares included in the denominator of diluted earnings per share relating to our senior convertible notes is calculated
by dividing the conversion spread value by the average share price of our common stock during the period. The conversion spread
value is the value that would be delivered to investors based on the terms of the notes, at the assumed conversion date.
3. Recently Adopted Accounting Pronouncements
In February 2013,
the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2013-02,
Reporting of Amounts Reclassified
Out of Accumulated Other Comprehensive Income
. We adopted this update in the first quarter of 2013. See Note 5 for the amounts
reclassified out of accumulated other comprehensive income (AOCI) during the three and nine month periods.
In July 2013, the FASB
issued Accounting Standards Update 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward,
a Similar Tax Loss, or a Tax Credit Carryforward Exists
. The guidance is effective for interim and annual periods beginning
after December 15, 2013, with early adoption permitted. This standard will be effective for us beginning with the quarter ending
March 31, 2014. We do not expect the adoption to have a material impact on our consolidated financial statements.
4. Fair Value Measurements
Fair value is defined
as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Inputs used to measure fair value are prioritized into a three-level fair value hierarchy.
This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three
levels of inputs used to measure fair values are as follows:
|
•
|
Level 1 –
Quoted prices (unadjusted) in active markets for identical
assets or liabilities that the reporting entity can access at the measurement date
.
|
|
•
|
Level 2 –
Inputs other than quoted prices included within Level
1 that are observable for the asset or liability, either directly or indirectly
.
|
|
•
|
Level 3 –
Unobservable inputs for the asset or liability
.
The fair value hierarchy gives the lowest priority to Level 3 inputs.
|
We have segregated all financial assets
that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the
inputs used to determine the fair value at the measurement date in the table below. There were no transfers between levels of the
fair value hierarchy during the periods presented below.
The fair value of our investments in debt
securities, reported by the fund managers, are verified by management through the utilization of third party pricing services and
review of trades completed around the period end date. We consider market liquidity in determining the fair value for these securities.
After completing our validation procedures, we did not adjust any fair value measurements provided by the fund managers. These
investments in debt securities are included in Level 2 of the fair value hierarchy below.
Financial assets and liabilities measured
at fair value on a recurring basis include the following as of September 30, 2013 and December 31, 2012 (in thousands):
As of September 30, 2013
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
September 30, 2013
|
|
Cash equivalents (1)
|
|
$
|
5,510
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,510
|
|
Marketable securities (2)
|
|
|
—
|
|
|
|
18,784
|
|
|
|
—
|
|
|
|
18,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,510
|
|
|
$
|
18,784
|
|
|
$
|
—
|
|
|
$
|
24,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (3)
|
|
|
—
|
|
|
|
—
|
|
|
|
(500
|
)
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(500
|
)
|
|
$
|
(500
|
)
|
As of December 31, 2012
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
December 31, 2012
|
|
Cash equivalents (1)
|
|
$
|
63,774
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
63,774
|
|
Marketable securities (2)
|
|
|
—
|
|
|
|
38,459
|
|
|
|
—
|
|
|
|
38,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
63,774
|
|
|
$
|
38,459
|
|
|
$
|
—
|
|
|
$
|
102,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (3)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,000
|
)
|
|
$
|
(1,000
|
)
|
|
(1)
|
Cash equivalents consist
of highly liquid investments with original maturity dates of three months or less, for which we determine fair value through quoted
market prices. As of September 30, 2013 and December 31, 2012, these investments were at least AA rated.
|
|
(2)
|
As of September 30, 2013,
Level 2 marketable securities include corporate bonds, certificates of deposit, and non-U.S. government securities. As of December
31, 2012, Level 2 marketable securities (short-term and long-term) included U.S. treasury and agency securities, corporate bonds
and municipal bonds. Fair market value was determined based on the quoted market prices of the underlying securities.
|
|
(3)
|
In connection with our
October 1, 2012 acquisition of ClickMotive, a portion of the purchase price included contingent consideration that is payable
in the first quarter of 2014 based upon the achievement of certain performance targets in 2013. The fair value of the contingent
consideration is determined based upon probability-weighted revenue forecasts for the underlying period. The contingent consideration
is revalued each reporting period, until settled, with the resulting gains and losses recorded in the consolidated statements
of operations. We estimated the fair value of the contingent consideration as of September 30, 2013 to be $0.5 million. We recorded
income of $0.5 million for the nine months ended September 30, 2013 as a result of the decrease in the estimated settlement of
the contingent consideration from the estimated amount of $1.0 million as of December 31, 2012.
|
A reconciliation of the beginning and ending
balances of the contingent consideration, a Level 3 liability, is as follows (in thousands):
Balance as of December 31, 2012
|
|
$
|
(1,000
|
)
|
Change in fair value of contingent consideration
|
|
|
500
|
|
|
|
|
|
|
Balance as of September 30, 2013
|
|
$
|
(500
|
)
|
Senior convertible notes
Our senior convertible notes are shown in
the accompanying consolidated balance sheets at their original issuance value, net of unamortized discount, and are not marked
to market. The approximate aggregate fair value of our senior convertible notes as of September 30, 2013 and December 31, 2012
was $259.0 million and $211.5 million, respectively.
The fair value of the senior convertible notes
was estimated on the basis of quoted market prices of similar securities, which, due to limited trading activity, are considered
Level 2 in the fair value hierarchy
.
5. Marketable Securities
Our investments in marketable securities
are made within the guidelines of our investment policy, which has established guidelines relative to the diversification of our
investments and their maturities, with the principle objectives of capital preservation, maintaining liquidity, and avoiding concentrations.
The following is a summary of available-for-sale
securities as of September 30, 2013 and December 31, 2012 (in thousands):
As of September 30, 2013
|
|
Aggregate
Cost Basis
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Aggregate
Fair Value
|
|
Non-U.S. government securities
|
|
$
|
5,077
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
5,076
|
|
Certificates of deposit
|
|
|
3,436
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,436
|
|
Corporate debt securities
|
|
|
10,272
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
10,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,785
|
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
|
$
|
18,784
|
|
As of December 31, 2012
|
|
Aggregate
Cost Basis
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Aggregate
Fair Value
|
|
U.S. Treasury and agency securities
|
|
$
|
17,706
|
|
|
$
|
20
|
|
|
$
|
0
|
|
|
$
|
17,726
|
|
Corporate debt securities
|
|
|
20,545
|
|
|
|
20
|
|
|
|
(2
|
)
|
|
|
20,563
|
|
Municipal securities
|
|
|
170
|
|
|
|
—
|
|
|
|
0
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,421
|
|
|
$
|
40
|
|
|
$
|
(2
|
)
|
|
$
|
38,459
|
|
As of September 30, 2013, $18.8 million
of
marketable securities had scheduled maturities of less than one year. In addition,
more
than half of our marketable securities were AA rated, and all securities had at least an A rating.
Investments in money market and similar
short-term investments are recorded on our consolidated balance sheets as cash and cash equivalents.
Realized gains and losses are included as
a component of other income, net, in our consolidated statement of operations. For the three and
nine
months ended September 30, 2013, r
ealized gains on available-for-sale securities of $0.4 million and $0.4 million, respectively,
have been reclassified out of
AOCI
to other income, net. For the three and
nine
months ended September 30, 2013, r
ealized losses on available-for-sale securities were not material.
For the three and nine months ended September
30, 2012, amounts reclassified out of AOCI were not material.
6. Property and Equipment
Property and
equipment are recorded at cost and consist of the following (dollars in thousands):
|
|
Estimated
Useful Life
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
(Years)
|
|
|
2013
|
|
|
2012
|
|
Computer equipment
|
|
|
3 – 5
|
|
|
$
|
51,984
|
|
|
$
|
47,052
|
|
Office equipment
|
|
|
5
|
|
|
|
5,003
|
|
|
|
5,245
|
|
Furniture and fixtures
|
|
|
5
|
|
|
|
6,321
|
|
|
|
5,171
|
|
Leasehold improvements
|
|
|
3 – 10
|
|
|
|
6,240
|
|
|
|
4,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, gross
|
|
|
|
|
|
|
69,548
|
|
|
|
62,043
|
|
Less: Accumulated depreciation and amortization
|
|
|
|
|
|
|
(39,715
|
)
|
|
|
(34,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
|
|
|
$
|
29,833
|
|
|
$
|
27,407
|
|
Depreciation expense related to property
and equipment for the three and nine months ended September 30, 2013 was $2.9 million and $8.5 million, respectively, and for the
three and nine months ended September 30, 2012 was $2.4 million and $6.9 million, respectively.
7. Investments
Investments as of September 30, 2013 and
December 31, 2012 consist of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Cost method investment
|
|
$
|
82,690
|
|
|
$
|
82,690
|
|
|
|
|
|
|
|
|
|
|
Equity method investment
|
|
|
37,845
|
|
|
|
40,118
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
120,535
|
|
|
$
|
122,808
|
|
Cost method investment
In consideration for the sale of ALG in
2011, we received an equity interest in TrueCar, as well as a warrant that we subsequently exercised, both of which are included
within our cost method investment.
TrueCar’s business simplifies and
clarifies the car buying process for consumers by providing accurate market information which helps buyers make better, more informed
decisions. TrueCar saves consumers time and money by providing price clarity and transparency, while delivering the benefits of
higher close rates and vehicle sales to dealers. TrueCar reaches consumers via two channels – direct and indirect. The direct
channel is a website that provides vehicle pricing transparency to consumers and dealers and the indirect channel is a private-label
affinity buying program for major brands.
We assessed recoverability of the investment
as of September 30, 2013
and do not believe
this investment was impaired.
Equity method investment
We record in our consolidated statement
of operations fifty percent (50%) of the net income of Chrome Data Solutions. Cash distributions, which are recorded as a reduction
of our investment upon receipt, are based on a calculation considering results of operations and cash on hand. Distributions are
expected to be received quarterly.
Our earnings from the equity method investment
are reduced by amortization expense relating to the basis difference between the book basis of the contributed assets and the fair
value of the investment recorded. This basis difference, based upon a valuation of the fair value of contributed assets, is
being recorded over the lives of the underlying assets which gave rise to the basis difference, which range from 3 to 10 years.
The unrecorded basis difference as of September 30, 2013 is $9.4 million. The amortization of the basis difference to be recorded
for the remainder of 2013 is $0.7 million.
The change in our equity method investment
for the three and nine months ended September 30, 2013 was as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2013
|
|
|
September 30, 2013
|
|
Beginning balance
|
|
$
|
38,976
|
|
|
$
|
40,118
|
|
Share of net income
|
|
|
2,250
|
|
|
|
6,160
|
|
Amortization of basis difference
|
|
|
(706
|
)
|
|
|
(2,118
|
)
|
Cash distributions received
|
|
|
(2,675
|
)
|
|
|
(6,315
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
37,845
|
|
|
$
|
37,845
|
|
Included in the consolidated cash flow statement
for the nine months September 30, 2013 is a return of investment of $0.1 million as the cash distributions received since inception
have exceeded our share of earnings since inception.
We incur an annual data license fee payable
to Chrome Data Solutions of $0.5 million, which is recorded as cost of revenue. For the three and nine months ended September 30,
2013, we accrued approximately $0.1 million and $0.4 million, respectively, of expense in connection with the annual data license.
Exclusive of the annual data license fee,
during the three and nine months ended September 30, 2013 we incurred expenses of approximately $0.2 million and $0.3 million,
respectively, for services received and earned income of approximately $0.1 million and $0.2 million, respectively, for services
performed, related to agreements with Chrome Data Solutions. The amounts were generally recorded as selling, general and administrative
expenses and other income, respectively.
The unaudited summarized financial information
of Chrome Data Solutions is presented below (in thousands):
Condensed Balance Sheet
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
Current assets
|
|
$
|
12,853
|
|
|
$
|
10,577
|
|
Non-current assets
|
|
|
32,588
|
|
|
|
34,053
|
|
Total assets
|
|
$
|
45,441
|
|
|
$
|
44,630
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
6,887
|
|
|
$
|
5,525
|
|
Non-current liabilities
|
|
|
—
|
|
|
|
226
|
|
Total liabilities
|
|
$
|
6,887
|
|
|
$
|
5,751
|
|
Condensed Results of Operations
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Revenue
|
|
$
|
12,518
|
|
|
$
|
11,353
|
|
|
$
|
35,542
|
|
|
$
|
33,385
|
|
Gross profit
|
|
|
8,068
|
|
|
|
7,005
|
|
|
|
23,105
|
|
|
|
20,574
|
|
Net income
|
|
|
4,501
|
|
|
|
2,850
|
|
|
|
12,320
|
|
|
|
7,451
|
|
8. Intangible Assets
Intangible assets are recorded at estimated
fair value and are amortized over their estimated useful lives. The gross book value, accumulated amortization and estimated useful
lives of the intangible assets were as follows (dollars in thousands):
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
Estimated
|
|
|
Gross Book
Value
|
|
|
Accumulated
Amortization
|
|
|
Gross Book
Value
|
|
|
Accumulated
Amortization
|
|
|
Useful Life
(Years)
|
Customer relationships
|
|
$
|
86,281
|
|
|
$
|
(33,332
|
)
|
|
$
|
99,673
|
|
|
$
|
(43,229
|
)
|
|
4 - 10
|
Technology
|
|
|
71,520
|
|
|
|
(32,263
|
)
|
|
|
69,620
|
|
|
|
(22,369
|
)
|
|
4 - 8
|
Trade names
|
|
|
11,000
|
|
|
|
(3,634
|
)
|
|
|
9,100
|
|
|
|
(2,480
|
)
|
|
3 - 10
|
Non-compete agreements
|
|
|
7,150
|
|
|
|
(5,052
|
)
|
|
|
7,540
|
|
|
|
(4,469
|
)
|
|
3 - 6
|
State DMV relationships
|
|
|
7,790
|
|
|
|
(2,851
|
)
|
|
|
6,190
|
|
|
|
(1,977
|
)
|
|
6 - 8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
183,741
|
|
|
$
|
(77,132
|
)
|
|
$
|
192,123
|
|
|
$
|
(74,524
|
)
|
|
|
Amortization expense related to intangibles
for the three and nine months ended September 30, 2013 was $7.8 million and $22.8 million, respectively, and for the three and
nine months ended September 30, 2012 was $7.0 million and $20.5 million, respectively.
Amortization expense that will be incurred
for the remaining period of 2013 and for each of the subsequent four years and thereafter is estimated as follows (in thousands):
Remainder of 2013
|
|
$
|
7,976
|
|
2014
|
|
|
28,531
|
|
2015
|
|
|
25,842
|
|
2016
|
|
|
16,744
|
|
2017
|
|
|
10,247
|
|
Thereafter
|
|
|
17,269
|
|
|
|
|
|
|
Total
|
|
$
|
106,609
|
|
9. Goodwill
The change in carrying amount of goodwill
for the nine months ended September 30, 2013 was as follows (in thousands):
Goodwill, gross, as of December 31, 2012
|
|
$
|
270,646
|
|
Accumulated impairment losses as of December 31, 2012
|
|
|
—
|
|
Goodwill, net, as of December 31, 2012
|
|
$
|
270,646
|
|
|
|
|
|
|
Impact of change in Canadian dollar exchange rate
|
|
|
(934
|
)
|
Acquisition of Casey & Casey
|
|
|
9,029
|
|
Goodwill, gross, as of September 30, 2013
|
|
$
|
278,741
|
|
|
|
|
|
|
Accumulated impairment losses as of September 30, 2013
|
|
|
—
|
|
Goodwill, net, as of September 30, 2013
|
|
$
|
278,741
|
|
10. Senior Convertible Notes
On March 5, 2012, we issued $200.0 million
aggregate principal amount of 1.50% senior convertible notes in a private placement. In connection with the offering of the notes,
we entered into privately negotiated convertible note hedge transactions with initial purchasers of the notes or their respective
affiliates. The notes are senior unsecured obligations, subordinated in right of payment to existing and future secured senior
indebtedness. We do not have the right to redeem the notes prior to maturity. The notes will mature on March 15, 2017, unless earlier
repurchased or converted. For further information, see Note 19 included in our Annual Report on Form 10-K for the year ended December
31, 2012.
The net carrying amount of the liability
component of the notes as of September 30, 2013 and December 31, 2012 consists of the following (in thousands):
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
Principal amount
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
Unamortized discount
|
|
|
31,754
|
|
|
|
37,721
|
|
|
|
|
|
|
|
|
|
|
Net carrying value
|
|
$
|
168,246
|
|
|
$
|
162,279
|
|
Total interest expense associated with the
notes consisted of the following for the three and nine months ended September 30, 2013 and 2012 (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Cash interest expense (1.50% coupon rate)
|
|
$
|
750
|
|
|
$
|
750
|
|
|
$
|
2,250
|
|
|
$
|
1,708
|
|
Amortization of debt issuance costs and debt discount
|
|
|
2,264
|
|
|
|
2,118
|
|
|
|
6,705
|
|
|
|
4,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
3,014
|
|
|
$
|
2,868
|
|
|
$
|
8,955
|
|
|
$
|
6,519
|
|
As of September 30, 2013, total capitalized
debt issuance costs remaining to be amortized to interest expense was $3.9 million.
As of September 30, 2013, the "if-converted
value" of the notes exceeded the principal amount by $29.3 million.
It is our intent to settle the par value
of the notes in cash and we expect to have the liquidity to do so based upon cash on hand, net cash flows from operations, and
our credit facility. As a result, there is no potential impact to diluted earnings per share unless the average share price of
our common stock for the respective periods exceeds the conversion price of $37.37, with additional dilution if the average share
price exceeds the warrant strike price of $46.18.
During the three months ended September
30, 2013, the average share price of our common stock exceeded the conversion price of the notes, which resulted in additional
dilution of 0.3 million shares to our diluted earnings per share calculation for the three months ended September 30, 2013. For
the nine months ended September 30, 2013, the average share price of our common stock did not exceed the conversion price of $37.37,
therefore there was no impact to diluted earnings per share.
For the three and nine months ended September
30, 2012, the average share price of our common stock did not exceed the conversion price of $37.37, therefore there was no impact
to diluted earnings per share.
For the three and nine months ended September
30, 2013 and 2012, the average share price did not exceed the warrant strike price of $46.18, therefore there was no additional
impact to our diluted earnings per share calculations.
11. Business Combinations
Casey & Casey NPS, Inc. Acquisition
On April 1, 2013, we completed the acquisition
of the net assets of Casey & Casey NPS, Inc. (doing business as “Auto Title Express”) (Casey & Casey) for $21.3
million in cash, reflective of final working capital adjustments.
Casey & Casey is Louisiana’s first
electronic general public license tag agency and the largest provider of electronic vehicle registration, lien and title services,
among other related services, in the state. This acquisition expands our transaction business and further strengthens our relationships
with dealers and lenders. Casey & Casey is now part of our Processing solution.
We expensed approximately $0.4 million of
professional fees associated with the acquisition for the nine months ended September 30, 2013.
This business combination was accounted
for under the acquisition method of accounting, resulting in the total purchase price being allocated to the assets acquired and
liabilities assumed according to their fair values at the date of acquisition as follows (in thousands):
Current assets
|
|
$
|
5,633
|
|
Property and equipment
|
|
|
32
|
|
Non-current assets
|
|
|
15
|
|
Intangible assets
|
|
|
11,990
|
|
Goodwill
|
|
|
9,029
|
|
|
|
|
|
|
Total assets acquired
|
|
|
26,699
|
|
Total liabilities assumed
|
|
|
(5,387
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
21,312
|
|
Goodwill represents the excess of the purchase
price over the fair values of the acquired net tangible and intangible assets. In accordance with the provisions of FASB ASC 350,
goodwill is not amortized but will be tested for impairment at least annually. The allocated value of goodwill primarily relates
to the acquired workforce, as well as the anticipated synergies resulting from combining Casey & Casey with our current products
and processes. Both the acquired goodwill and intangible assets are deductible for tax purposes.
The amounts
allocated
to acquired intangible assets, and their associated weighted-average useful lives which were determined based on the period which
the assets are expected to contribute directly or indirectly to our future cash flows, consist of the following:
|
|
|
|
|
Weighted-Average
|
|
|
Amount
|
|
|
Useful Life
|
|
|
(In thousands)
|
|
|
(Years)
|
Customer relationships
|
|
$
|
6,000
|
|
|
9
|
Technology
|
|
|
1,900
|
|
|
4
|
Trade names
|
|
|
1,900
|
|
|
10
|
State DMV relationships
|
|
|
1,600
|
|
|
8
|
Non-compete agreement
|
|
|
590
|
|
|
6
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
11,990
|
|
|
|
The results of Casey & Casey were included
in our consolidated statement of operations from the date of acquisition. Casey & Casey revenue, which is primarily transaction-based,
was $4.5 million from the date of acquisition through September 30, 2013. We are unable to provide Casey & Casey earnings since
the date of acquisition as we do not have stand-alone earnings reporting for that business.
Unaudited Pro Forma Summary of Operations
The accompanying unaudited pro forma summary
represents our consolidated results of operations as if the contribution of the net assets of Chrome to the Chrome Data Solutions
joint venture and the acquisitions of CentralDispatch and ClickMotive had been completed as of January 1, 2011, and the acquisition
of Casey & Casey had been completed as of January 1, 2012. The unaudited pro forma financial results for 2013 reflect the results
for the three and nine months ended September 30, 2013, as well as the effects of the pro forma adjustments for the stated transactions
in 2013. The unaudited pro forma financial results for 2012 reflect the results for the three and nine months ended September 30,
2012, as well as the effects of the pro forma adjustments for the stated transactions in both 2013 and 2012. Pro forma results
of operations for the November 1, 2012 acquisition of the assets of Ford’s iCONNECT DMS have not been presented because they
are not material to the consolidated statement of operations.
The unaudited pro forma financial information
includes the accounting effects of the business combinations, including adjustments to the amortization of intangible assets, professional
fees associated with the transactions, and compensation expense related to amounts to be paid for continued employment. The unaudited
pro forma information does not necessarily reflect the actual results that would have been achieved, nor is necessarily indicative
of our future consolidated results.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands, except per share data)
|
|
Net revenue
|
|
$
|
124,582
|
|
|
$
|
106,103
|
|
|
$
|
357,466
|
|
|
$
|
310,257
|
|
Net income (loss)
|
|
|
5,676
|
|
|
|
(1,327
|
)
|
|
|
9,748
|
|
|
|
24,181
|
|
Basic net income (loss) per share
|
|
|
0.13
|
|
|
|
(0.03
|
)
|
|
|
0.22
|
|
|
|
0.57
|
|
Diluted net income (loss) per share
|
|
|
0.12
|
|
|
|
(0.03
|
)
|
|
|
0.22
|
|
|
|
0.55
|
|
12. Net Income (Loss) Per Share
Basic earnings per share is calculated by
dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per
share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding, assuming dilution,
during the period. The diluted earnings per share calculation assumes (i) all stock options which are in the money are exercised
at the beginning of the period, (ii) if applicable, unvested awards that are considered to be contingently issuable shares because
they contain either a performance or market condition will be included in diluted earnings per share if dilutive and if their conditions
have (a) been satisfied at the reporting date or (b) would have been satisfied if the reporting date was the end of the contingency
period, and (iii) if applicable, potential
common shares which may be
issued to satisfy the conversion spread value of our senior convertible notes.
The
number of shares included in the denominator of diluted earnings per share relating to our senior convertible notes is calculated
by dividing the conversion spread value by the average share price of our common stock during the period. The conversion spread
value is the value that would be delivered to investors based on the terms of the notes, at the assumed conversion date.
The following table sets forth the computation
of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2013 and 2012 (in thousands,
except per share amounts):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,795
|
|
|
$
|
(2,931
|
)
|
|
$
|
9,600
|
|
|
$
|
19,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding (basic)
|
|
|
43,796
|
|
|
|
42,661
|
|
|
|
43,509
|
|
|
|
42,413
|
|
Common equivalent shares from options to purchase common stock and restricted common stock units
|
|
|
1,673
|
|
|
|
—
|
|
|
|
1,600
|
|
|
|
1,496
|
|
Potential common shares related to convertible senior notes
|
|
|
288
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding (diluted)
|
|
|
45,757
|
|
|
|
42,661
|
|
|
|
45,109
|
|
|
|
43,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.13
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.22
|
|
|
$
|
0.47
|
|
Diluted net income (loss) per share
|
|
$
|
0.13
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.21
|
|
|
$
|
0.45
|
|
The following is a summary of the weighted
shares outstanding during the respective periods that have been excluded from the diluted net income (loss) per share calculation
because the effect would have been antidilutive (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
47
|
|
|
|
3,942
|
|
|
|
384
|
|
|
|
655
|
|
Restricted stock units
|
|
|
1
|
|
|
|
957
|
|
|
|
5
|
|
|
|
239
|
|
Performance stock units
|
|
|
—
|
|
|
|
234
|
|
|
|
50
|
|
|
|
—
|
|
Senior convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total antidilutive awards
|
|
|
48
|
|
|
|
5,133
|
|
|
|
439
|
|
|
|
894
|
|
In regards to our senior convertible notes,
it is our intent to settle the par value of the notes in cash, and we expect to have the liquidity to do so. As a result, there
is no potential impact to diluted earnings per share unless the average share price of our common stock for the respective periods
exceeds the conversion price of $37.37, with additional dilution if the average share price exceeds the warrant strike price of
$46.18.
During the three months ended September
30, 2013, the average share price of our common stock exceeded the conversion price of the notes, which resulted in additional
dilution of 0.3 million shares to our diluted earnings per share calculation for the three months ended September 30, 2013. For
the nine months ended September 30, 2013, the average share price of our common stock did not exceed the conversion price of $37.37,
therefore there was no impact to diluted earnings per share.
For the three and nine months ended September
30, 2012, the average share price of our common stock did not exceed the conversion price of $37.37, therefore there was no impact
to diluted earnings per share.
For the three and nine months ended September
30, 2013 and 2012, the average share price did not exceed the warrant strike price of $46.18, therefore there was no additional
impact to our diluted earnings per share calculations.
13. Stock-Based Compensation Expense
Stock-based compensation is measured at
the grant date, based on the fair value of the award, and recognized as an expense over the requisite service period, net of an
estimated forfeiture rate. We currently have three types of stock-based compensation awards: stock options, restricted stock units
and performance stock units. For further information, see Notes 2 and 14 included in our Annual Report on Form 10-K for the year
ended December 31, 2012.
The following summarizes stock-based compensation
expense by expense category for the three and nine months ended September 30, 2013 and 2012 (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Cost of revenue
|
|
$
|
661
|
|
|
$
|
603
|
|
|
$
|
2,139
|
|
|
$
|
1,828
|
|
Product development
|
|
|
182
|
|
|
|
169
|
|
|
|
545
|
|
|
|
589
|
|
Selling, general and administrative
|
|
|
2,760
|
|
|
|
2,718
|
|
|
|
8,045
|
|
|
|
7,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
3,603
|
|
|
$
|
3,490
|
|
|
$
|
10,729
|
|
|
$
|
10,202
|
|
14. Income Taxes
We file a consolidated U.S. income tax return
and tax returns in various state and local jurisdictions. Certain of our subsidiaries also file income tax returns in Canada. The
Canadian Revenue Agency is reviewing our 2009 and 2010 tax return filings. The Internal Revenue Service has concluded a review
of our consolidated federal income tax returns through December 31, 2007 and is currently reviewing our consolidated federal income
tax returns for 2009, 2010 and 2011. New York has concluded their review of our 2006 (amended) and 2007 state tax returns and is
currently reviewing our 2008 and 2009 state returns. California has concluded their review of our amended returns filed for 2004,
2005 and 2006. In addition, we are appealing Pennsylvania’s
assessment to our 2007, 2008 and 2009 tax return filings. All of our other significant taxing jurisdictions are closed for years
prior to 2008.
The total liability recorded for uncertain
tax positions that would affect our effective tax rate upon resolution of the uncertain tax position, as of September 30, 2013
and December 31, 2012, was $0.4 million and $0.5 million, respectively.
Interest and penalties, if any, related
to tax positions taken in our tax returns are recorded in interest expense and general and administrative expenses, respectively,
in our consolidated statement of operations. As of both September 30, 2013 and December 31, 2012, accrued interest and penalties
related to tax positions taken on our tax returns was approximately $0.1 million.
The net provision from income taxes for
the three months ended September 30, 2013 consisted of $0.1 million of federal income tax benefit, $1.1 million of state income
tax benefit and $1.2 million of tax expense for our Canadian subsidiary.
The net provision from income taxes for
the nine months ended September 30, 2013 of $0.8 million consisted of $0.8 million of federal income tax benefit, $1.1 million
of state income tax benefit and $2.7 million of tax expense for our Canadian subsidiary.
15. Commitments and Contingencies
Contingencies
We are a party to a variety of agreements
pursuant to which we may be obligated to indemnify the other party with respect to breach of contract, infringement and other matters.
Typically, these obligations arise in the context of agreements entered into by us, under which we customarily agree to hold the
other party harmless against losses arising from breaches of representations, warranties and/or covenants. In these circumstances,
payment by us is generally conditioned on the other party making a claim pursuant to the procedures specified in the particular
agreement, which procedures typically allow us to challenge the other party’s claims. Further, our obligations under these
agreements may be limited to indemnification of third-party claims only and limited in terms of time and/or amount. In some instances,
we may have recourse against third parties for certain payments made by us.
It is not possible to predict the maximum
potential amount of future payments under these or similar agreements due to the conditional nature of our obligations and the
unique facts and circumstances involved in each particular agreement. To date, we have not been required to make any material payments.
We believe that if we were to incur a loss in any of these matters, it is not probable that such loss would have a material effect
on our business or financial condition.
Retail Sales Tax
On
an
ongoing basis, various tax jurisdictions in the United States conduct reviews or audits regarding the sales taxability
of our products. Historically, we have been able to respond to their inquiries without significant additional sales tax liability
imposed. However, in the event we are unsuccessful in responding to future inquiries, additional sales tax liabilities may be incurred.
If we are obligated to charge sales tax for certain products, we believe our contractual arrangements with our customers obligate
them to pay all sales taxes that are levied or imposed by any taxing authority. We currently have $0.9 million of pending assessments
in one state. In June 2013, an administrative hearing was held on this matter and a decision upholding the original assessment
was issued in August 2013. This decision is not considered a final ruling. In September 2013, we filed a complaint with the state
tax court requesting that the decision be vacated.
As of September 30, 2013, we have not accrued
any amounts related to this assessment
as we believe that our position on this matter is correct
.
We have estimated that potential additional assessments of $0.7 million may exist for periods subsequent to the assessment period
based upon a calculation consistent with the pending assessment.
We are not able to estimate an amount
for penalties due, if any
.
Service Credits
Under the terms of the purchase agreement
with the seller of the AAX business, the parent company of the seller was granted the right to service credits of $2.5 million,
which were to be applied against fees that were charged in connection with their purchase of certain future products or services
of Dealertrack. These service credits were to expire on December 31, 2015. The service credits were recorded as a reduction in
revenue as they were utilized. For the nine months ended September 30, 2013, we recorded contra revenue related to the service
credits of $0.6 million. For the three and nine months ended September 30, 2012, we recorded contra revenue related to the service
credits of $0.3 million and $0.7 million, respectively. As of September 30, 2013, none of the service credits remain.
Strategic Agreements
In February 2013, we announced an exclusive,
long-term partnership agreement with American Honda Finance Corporation (AHFC). As part of this agreement, Dealertrack and AHFC
will design and develop a solution with a strategic focus on streamlining the vehicle sales and finance process while improving
the overall customer buying experience. The workflow solution is expected to rollout in multiple phases with the first phase to
launch in 2014.
As part of the agreement, Dealertrack has agreed
to reimburse AHFC up to $11.0 million of qualified expenses on an as incurred basis, in connection with development, implementation,
and integration of the solution over the first three years of the agreement. These payments will be recorded as deferred costs
and will be recognized as a reduction of revenue (contra-revenue) over the term of the agreement.
Employment Agreements
Pursuant to employment or severance agreements
with certain employees, we have a commitment to pay severance of approximately $6.4 million as of September 30, 2013, in the event
of termination without cause, as defined in the agreements, as well as certain potential gross-up payments to the extent any such
severance payment would constitute an excess parachute payment under the Internal Revenue Code. Additionally, in the event of termination
without cause due to a change in control, we would also have a commitment to pay additional severance of $2.4 million as of September
30, 2013.
Legal Proceedings
From time to time, we are a party to litigation
matters arising in connection with the normal course of business, none of which is expected to have a material adverse effect on
us. In addition to the litigation matters arising in connection with the normal course of our business, we are party to the litigation
described below.
DealerTrack,
Inc. v. Finance Express et al., CV-06-2335; DealerTrack, Inc. v. RouteOne and Finance Express et al., CV-06-6864; and
DealerTrack, Inc. v. RouteOne and Finance Express et al., CV-07-215
On April 18, 2006, we filed a Complaint
and Demand for Jury Trial against David Huber, Finance Express LLC (Finance Express), and three of their unnamed dealer customers
in the United States District Court for the Central District of California, Civil Action No. CV-06-2335 AG (FMOx). The complaint
sought declaratory and injunctive relief, as well as damages, against the defendants for infringement of the U.S. Patent No. 5,878,403
(the ’403 Patent) and 6,587,841 (the ’841 Patent). Finance Express denied infringement and challenged the validity
and enforceability of the patents-in-suit.
On October 27, 2006, we filed a Complaint
and Demand for Jury Trial against RouteOne LLC (RouteOne), David Huber and Finance Express in the United States District Court
for the Central District of California, Civil Action No. CV-06-6864 (SJF). The complaint sought declaratory and injunctive
relief as well as damages against the defendants for infringement of the ’403 Patent and the ’841 Patent. On November 28,
2006 and December 4, 2006, respectively, defendants RouteOne, David Huber and Finance Express filed their answers. The defendants
denied infringement and challenged the validity and enforceability of the patents-in-suit.
On February 20, 2007, we filed a Complaint
and Demand for Jury Trial against RouteOne, David Huber and Finance Express in the United States District Court for the Central
District of California, Civil Action No. CV-07-215 (CWx). The complaint sought declaratory and injunctive relief as well as
damages against the defendants for infringement of U.S. Patent No. 7,181,427 (the ’427 Patent). On April 13,
2007 and April 17, 2007, respectively, defendants RouteOne, David Huber and Finance Express filed their answers. The defendants
denied infringement and challenged the validity and enforceability of the ’427 Patent.
The DealerTrack, Inc. v. Finance Express
et al., CV-06-2335 action, the DealerTrack Inc. v. RouteOne and Finance Express et al., CV-06-6864 action and the DealerTrack v.
RouteOne and Finance Express et al., CV-07-215 action, described above, were consolidated by the court. A hearing on claims construction,
referred to as a “
Markman
” hearing, was held on September 25, 2007. Fact and expert discovery and motions
for summary judgment have substantially been completed.
On July 21, 2008 and September 30,
2008, the court issued summary judgment orders disposing of certain issues and preserving other issues for trial.
On July 8, 2009, the court held Claims
1-4 on the ‘427 Patent were invalid for failure to comply with a standard required by the recently decided case in the Court
of Appeals of the Federal Circuit of In re Bilski. On August 11, 2009, the court entered into a judgment granting summary judgment
for the defendants.
On September 8, 2009, Dealertrack filed
a notice of appeal in the United States Court of Appeals for the Federal Circuit in regards to the finding of non-infringement
of the ‘841 Patent, the invalidity of the ‘427 Patent, and the claim construction order to the extent that it was relied
upon to find the judgments of non-infringement and invalidity. The defendants also appealed certain findings of the District
Court. On May 5, 2011, oral arguments on the appeal were held. On January 20, 2012, the Court of Appeals released its decision. The
decision reinstated Dealertrack's infringement action against RouteOne and Finance Express on four claims of the '841 patent, found
that claims 14, 16 and 17 of the ‘841 Patent were invalid for indefiniteness and upheld the District Court’s decision
regarding the invalidity of certain claims of the ‘427 patent. The case was remanded to the district court for further proceedings.
On October 1, 2012, we entered into to a
Settlement Agreement with RouteOne which resulted in the dismissal of RouteOne from the case. The case against Finance Express
remains.
We believe that the potential liability
from this litigation will not have a material effect on our financial position, results of operations or cash flows when resolved
in a future period.
16. Segment Information
The segment information provided in the
table below is being reported consistent with our method of internal reporting. Operating segments are defined as components of
an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker reviews information
at a consolidated level, as such we have one reportable segment. For enterprise-wide disclosure, we are organized primarily on
the basis of service lines.
Revenue earned in Canada for both the three
and nine months ended September 30, 2013 was approximately 10% of our total net revenue. Revenue earned in Canada for the three
and nine months ended September 30, 2012 was approximately 11% and 10%, respectively, of our total net revenue. Long-lived assets
in Canada were $41.6 million and $44.8 million as of September 30, 2013 and December 31, 2012, respectively.
Supplemental disclosure of revenue by service
type for the three and nine months ended September 30, 2013 and 2012 is as follows (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Transaction services revenue
|
|
$
|
73,514
|
|
|
$
|
58,789
|
|
|
$
|
206,523
|
|
|
$
|
170,422
|
|
Subscription services revenue
|
|
|
45,223
|
|
|
|
35,723
|
|
|
|
132,624
|
|
|
|
102,936
|
|
Other
|
|
|
5,845
|
|
|
|
4,572
|
|
|
|
16,276
|
|
|
|
13,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
124,582
|
|
|
$
|
99,084
|
|
|
$
|
355,423
|
|
|
$
|
287,097
|
|
17. Revolving Credit Facility
We have a $125.0 million credit facility
which is available for general corporate purposes (including capital expenditures and investments), subject to certain conditions.
Our obligations under the credit facility are guaranteed by certain of our existing and future subsidiaries and secured by substantially
all of the assets of the company and such subsidiaries. The credit facility matures on March 1, 2017. For further information,
see Note 18 included in our Annual Report on Form 10-K for the year ended December 31, 2012.
Debt issuance costs associated with the
credit facility amortized to interest expense for the three and nine months ended September 30, 2013 were $0.1 million and $0.3
million, respectively. Debt issuance costs associated with the credit facility amortized to interest expense for the three and
nine months ended September 30, 2012 were $0.1 million and $0.3 million, respectively. As of September 30, 2013, there was $1.5
million of debt issuance costs remaining to be amortized to interest expense. Interest expense related to the commitment fee for
the three and nine months ended September 30, 2013 was $0.1 million and $0.3 million, respectively. Interest expense related to
the commitment fee for the three and nine months ended September 30, 2012 was $0.1 million and $0.3 million, respectively.
As of September 30, 2013, we had no amounts
outstanding under our credit facility and were in compliance with all restrictive covenants and financial ratios.
18. Subsequent Events
Customer Focused Marketing, Inc. Acquisition
On October 1, 2013, we completed the acquisition
of substantially all of the assets of Customer Focused Marketing, Inc. (CFM) for $13.0 million in cash, subject to working capital
adjustments subsequent to closing. CFM provides customer relationship management (CRM) and marketing services to automotive dealers
across the United States.
We expensed approximately $0.3 million and
$0.5 million of professional fees associated with the acquisition in the three and nine months ended September 30, 2013, respectively.
We are in the process of finalizing the
fair value assessment for the acquired assets and liabilities, which is expected to be completed during the fourth quarter of 2013.
Based upon the preliminary valuation, we expect to recognize approximately $5 million of intangibles and $7 million of goodwill
as part of the allocation of purchase price. Both the acquired goodwill and intangible assets are deductible for tax purposes.
VINtek, Inc. Acquisition
On October 1, 2013, we completed the acquisition
of VINtek, Inc. (VINtek) for $49.4 million in cash with a $4.0 million promissory note to be paid within 18 months of closing.
The purchase price is subject to working capital adjustments subsequent to closing. VINtek is a provider of automotive collateral
management, electronic lien and title (ELT) and consumer automotive finance processing services.
We expensed approximately $1.0 million and
$1.3 million of professional fees associated with the acquisition in the three and nine months ended September 30, 2013, respectively.
We are in the process of finalizing the
fair value assessment for the acquired assets and liabilities, which is expected to be completed during the fourth quarter of 2013.
Based upon the preliminary valuation, we expect to recognize approximately $32 million of intangibles and $18 million of goodwill
as part of the allocation of purchase price. Neither the acquired goodwill and intangible assets are deductible for tax purposes.
Item 2.
Management’s Discussion and
Analysis of Financial Condition and Results of Operations
You should read the following discussion
and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements. Certain
statements in this Quarterly Report on
Form 10-Q
are “forward-looking statements” within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act). These statements involve a number of risks, uncertainties and other factors that could cause our actual results,
performance or achievements to be materially different from any future results, performance or achievements expressed or implied
by these forward-looking statements. Factors that could materially affect such forward-looking statements can be found in the sections
entitled “Risk Factors” in Part II, Item 1A in this Quarterly Report on
Form 10-Q, as well as Part I, Item 1A
in our Annual Report on
Form 10-K
for the year ended December 31, 2012 filed with the SEC on February 26, 2013. Investors
are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue
reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date hereof and
we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances except
as required by law.
Overview
Dealertrack’s web-based software solutions
and services enhance efficiency and profitability for all major segments of the automotive retail industry, including dealers,
lenders, OEMs, third-party retailers, agents and aftermarket providers. Dealertrack operates the largest online credit application
networks in the United States and Canada. We believe Dealertrack delivers the industry’s most comprehensive solution set
for automotive retailers, including:
|
·
|
Dealer Management solutions, which provide independent and franchised dealers with a powerful dealer management system (DMS)
featuring easy-to-use tools and real-time data access to enhance their efficiency;
|
|
·
|
Sales and F&I solutions, which allow dealers to streamline the in-store and online sales processes as they structure deals
from a single integrated platform;
|
|
·
|
Inventory solutions, which deliver vehicle inventory management and transportation offerings to help dealers accelerate used-vehicle
turn rates and assist with the facilitation of vehicle delivery;
|
|
·
|
Processing solutions, which include online motor vehicle registration, lien and titling applications and services, and collateral
management services; and
|
|
·
|
Interactive solutions, which deliver digital marketing and website offerings to assist dealers in achieving higher lead conversion
rates by helping optimize the maximum amount of shoppers to their websites.
|
Executive Summary
Below are selected highlights of operations for the three months
ended September 30, 2013:
|
·
|
Revenue for the three months ended September 30, 2013 was $124.6 million, an increase of $25.5 million from the three months
ended September 30, 2012.
|
|
·
|
Net income for the three months ended September 30, 2013 was $5.8 million as compared to a net loss of $(2.9) million for the
three months ended September 30, 2012. The net loss for the three months ended September 30, 2012 was negatively impacted by a
$3.3 million non-cash charge (net of taxes) from a fair value adjustment to a warrant.
|
Below are selected highlights of operations for the nine months
ended September 30, 2013:
|
·
|
On April 1, 2013,
we completed the acquisition of the net assets of Casey & Casey NPS, Inc.
(doing business as "Auto Title Express") (Casey & Casey) for $21.3 million in cash,
reflective of final working
capital adjustments.
Casey & Casey is Louisiana's first electronic general public license tag agency
and the largest provider of electronic vehicle registration, lien and title services, among other related services, in the state
.
|
|
·
|
Revenue for the nine months ended September 30, 2013 was $355.4 million, an increase of $68.3 million from the nine months
ended September 30, 2012.
|
|
·
|
Net income for the nine months ended September 30, 2013 was $9.6 million as compared to $20.0 million for the nine months ended
September 30, 2012. Net income for the nine months ended September 30, 2012 was positively impacted by $15.9 million (net of tax)
from a non-cash gain related to the contribution of Chrome to the Chrome Data Solutions joint venture and a $3.4 million gain (net
of taxes) from the sale of certain Chrome branded assets that were not contributed to the Chrome Data joint venture, and negatively
impacted by a $3.9 million non-cash charge (net of taxes) from a fair value adjustment to a warrant.
|
On October 1, 2013, we completed the acquisitions
of CFM and VINtek. For further information, please refer to Note 18 in the accompanying notes to the consolidated financial statements
included in this Quarterly Report on Form 10-Q.
Non-GAAP Financial Measures and Other Business Statistics
We monitor our business performance using
a number of measures that are not found in our consolidated financial statements. These measures include the number of active dealers
and lenders, active lender to dealership relationships in the Dealertrack network, the number of transactions processed, average
transaction price, transaction revenue per car sold, the number of subscribing dealers in the Dealertrack network, and the average
monthly subscription revenue per subscribing dealership. We believe that improvements in these metrics will result in improvements
in our financial performance over time.
The following table consists of our non-GAAP
financial measures and certain other business statistics that management continually monitors (amounts in thousands are GAAP net
income (loss), adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA), adjusted net income,
capital expenditure data and transactions processed):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
GAAP net income (loss)
|
|
$
|
5,795
|
|
|
$
|
(2,931
|
)
|
|
$
|
9,600
|
|
|
$
|
19,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures and Other Business Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (non-GAAP) (1)
|
|
$
|
32,589
|
|
|
$
|
27,044
|
|
|
$
|
89,653
|
|
|
$
|
71,500
|
|
Adjusted net income (non-GAAP) (1)
|
|
$
|
17,646
|
|
|
$
|
12,455
|
|
|
$
|
46,708
|
|
|
$
|
35,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, software and website development costs
|
|
$
|
11,070
|
|
|
$
|
9,157
|
|
|
$
|
40,372
|
|
|
$
|
24,809
|
|
Active dealers in our U.S. network as of end of the period (2)
|
|
|
20,238
|
|
|
|
19,107
|
|
|
|
20,238
|
|
|
|
19,107
|
|
Active lenders in our U.S. network as of end of the period (3)
|
|
|
1,378
|
|
|
|
1,237
|
|
|
|
1,378
|
|
|
|
1,237
|
|
Active lender to dealer relationships as of end of the period (4)
|
|
|
191,548
|
|
|
|
178,809
|
|
|
|
191,548
|
|
|
|
178,809
|
|
Transactions processed (5)
|
|
|
27,172
|
|
|
|
22,738
|
|
|
|
77,454
|
|
|
|
67,051
|
|
Average transaction price (6)
|
|
$
|
2.74
|
|
|
$
|
2.63
|
|
|
$
|
2.71
|
|
|
$
|
2.59
|
|
Transaction revenue per car sold (7)
|
|
$
|
7.70
|
|
|
$
|
6.47
|
|
|
$
|
7.92
|
|
|
$
|
6.88
|
|
Subscribing dealers in U.S. and Canada as of end of the period (8)
|
|
|
18,255
|
|
|
|
16,421
|
|
|
|
18,255
|
|
|
|
16,421
|
|
Average monthly subscription revenue per subscribing dealership (9)
|
|
$
|
758
|
|
|
$
|
694
|
|
|
$
|
751
|
|
|
$
|
693
|
|
|
(1)
|
Adjusted EBITDA is a non-GAAP financial measure that represents GAAP net income (loss) excluding
interest, taxes, depreciation and amortization expenses, stock-based compensation, contra-revenue and certain items, as applicable,
such as: impairment charges, restructuring charges, impact of acquisition-related activity (including contingent consideration
changes, compensation expense, basis difference amortization, and professional service fees), realized gains on sales of previously
impaired securities, gains or losses on sales or disposals of subsidiaries and other assets, rebranding expenses and certain other
non-recurring items.
|
Adjusted net income is a non-GAAP financial measure
that represents GAAP net income (loss) excluding stock-based compensation expense, the amortization of acquired identifiable intangibles,
contra-revenue, and certain items, as applicable, such as: impairment charges, restructuring charges, impact of acquisition-related
activity (including contingent consideration changes, compensation expense, basis difference amortization, and professional service
fees), realized gains on sales of previously impaired securities, gains or losses on sales or disposals of subsidiaries and other
assets, adjustments to deferred tax asset valuation allowances, non-cash interest expense, rebranding expenses and certain other
non-recurring items. These adjustments to net income (loss), which are shown before taxes, are adjusted for their tax impact at
their applicable statutory rates.
Adjusted EBITDA and adjusted net income are presented
because management believes that they provide additional information with respect to the performance of our fundamental business
activities and are also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable
companies. We rely on adjusted EBITDA and adjusted net income as primary measures to review and assess the operating performance
of our company and management team in connection with our executive compensation plan incentive payments.
Adjusted EBITDA and adjusted
net income have limitations as analytical tools and you should not consider them in isolation from, or as a substitute for, analysis
of our results as reported under GAAP. Some of these limitations are:
|
•
|
Adjusted EBITDA and adjusted net income do not reflect our cash expenditures or future requirements
for capital expenditures or contractual commitments;
|
|
•
|
Adjusted EBITDA and adjusted net income do not reflect changes in, or cash requirements for,
our working capital needs;
|
|
•
|
Although depreciation and amortization are non-cash charges, the assets being depreciated and
amortized will often have to be replaced in the future, and adjusted EBITDA and adjusted net income do not reflect any cash requirements
for such replacements;
|
|
•
|
Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we
exclude it from adjusted net income and adjusted EBITDA when evaluating our ongoing performance for a particular period;
|
|
•
|
Adjusted EBITDA and adjusted net income do not reflect the impact of certain charges or gains resulting from matters we consider
not to be indicative of our ongoing operations; and
|
|
•
|
Other companies may calculate adjusted EBITDA and adjusted net income differently than we do,
limiting its usefulness as a comparative measure.
|
Because of these limitations, adjusted EBITDA and
adjusted net income should not be considered as measures of discretionary cash available to us to invest in the growth of our business.
We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA and adjusted net income
only as supplements to our GAAP results. Adjusted EBITDA and adjusted net income are measures of our performance that are not required
by, or presented in accordance with, GAAP. Adjusted EBITDA and adjusted net income are not measurements of our financial performance
under GAAP and should not be considered as alternatives to net income, operating income or any other performance measures derived
in accordance with GAAP or as alternatives to cash flow from operating activities as a measure of our liquidity.
The following table sets forth the reconciliation
of adjusted EBITDA, a non-GAAP financial measure, from net income (loss), our most directly comparable financial measure, in accordance
with GAAP (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
GAAP net income (loss)
|
|
$
|
5,795
|
|
|
$
|
(2,931
|
)
|
|
$
|
9,600
|
|
|
$
|
19,955
|
|
Interest income
|
|
|
(171
|
)
|
|
|
(181
|
)
|
|
|
(412
|
)
|
|
|
(595
|
)
|
Interest expense – cash
|
|
|
852
|
|
|
|
984
|
|
|
|
2,895
|
|
|
|
2,426
|
|
Interest expense – non-cash (10)
|
|
|
2,377
|
|
|
|
2,230
|
|
|
|
7,043
|
|
|
|
5,153
|
|
Provision for income taxes, net
|
|
|
22
|
|
|
|
488
|
|
|
|
755
|
|
|
|
13,320
|
|
Depreciation of property and equipment and amortization of capitalized software and website costs
|
|
|
8,331
|
|
|
|
5,780
|
|
|
|
22,077
|
|
|
|
17,175
|
|
Amortization of acquired identifiable intangibles
|
|
|
7,761
|
|
|
|
6,952
|
|
|
|
22,836
|
|
|
|
20,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (non-GAAP)
|
|
|
24,967
|
|
|
|
13,322
|
|
|
|
64,794
|
|
|
|
77,918
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
3,603
|
|
|
|
3,490
|
|
|
|
10,729
|
|
|
|
10,202
|
|
Contra-revenue (11)
|
|
|
1,069
|
|
|
|
1,092
|
|
|
|
3,804
|
|
|
|
3,190
|
|
Acquisition-related and other professional fees
|
|
|
1,365
|
|
|
|
1,385
|
|
|
|
2,421
|
|
|
|
2,122
|
|
Acquisition-related contingent consideration changes and compensation expense, net (12)
|
|
|
57
|
|
|
|
445
|
|
|
|
686
|
|
|
|
403
|
|
Integration and other related costs
|
|
|
1,023
|
|
|
|
483
|
|
|
|
3,389
|
|
|
|
704
|
|
Gain on disposal of subsidiary and sale of other assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(33,193
|
)
|
Amortization of equity method investment basis difference (13)
|
|
|
706
|
|
|
|
996
|
|
|
|
2,118
|
|
|
|
2,989
|
|
Rebranding expense
|
|
|
155
|
|
|
|
521
|
|
|
|
2,068
|
|
|
|
855
|
|
Realized gain on sale of previously impaired securities (non-taxable)
|
|
|
(356
|
)
|
|
|
—
|
|
|
|
(356
|
)
|
|
|
—
|
|
Change in fair value of warrant
|
|
|
—
|
|
|
|
5,310
|
|
|
|
—
|
|
|
|
6,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (non-GAAP)
|
|
$
|
32,589
|
|
|
$
|
27,044
|
|
|
$
|
89,653
|
|
|
$
|
71,500
|
|
The following table sets forth the reconciliation
of adjusted net income, a non-GAAP financial measure, from net income (loss), our most directly comparable financial measure in
accordance with GAAP (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
GAAP net income (loss)
|
|
$
|
5,795
|
|
|
$
|
(2,931
|
)
|
|
$
|
9,600
|
|
|
$
|
19,955
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense – non-cash (not tax-impacted) (10)
|
|
|
2,377
|
|
|
|
2,230
|
|
|
|
7,043
|
|
|
|
5,153
|
|
Amortization of acquired identifiable intangibles
|
|
|
7,761
|
|
|
|
6,952
|
|
|
|
22,836
|
|
|
|
20,484
|
|
Stock-based compensation
|
|
|
3,603
|
|
|
|
3,490
|
|
|
|
10,729
|
|
|
|
10,202
|
|
Contra-revenue (11)
|
|
|
1,069
|
|
|
|
1,092
|
|
|
|
3,804
|
|
|
|
3,190
|
|
Gain on disposal of subsidiary and sale of other assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(33,193
|
)
|
Acquisition-related and other professional fees
|
|
|
1,365
|
|
|
|
1,385
|
|
|
|
2,421
|
|
|
|
2,122
|
|
Acquisition-related contingent consideration changes and compensation expense, net (12)
|
|
|
57
|
|
|
|
445
|
|
|
|
686
|
|
|
|
403
|
|
Integration and other related costs
|
|
|
1,023
|
|
|
|
536
|
|
|
|
3,632
|
|
|
|
757
|
|
Rebranding expense
|
|
|
155
|
|
|
|
521
|
|
|
|
2,068
|
|
|
|
855
|
|
Amortization of equity method investment basis difference (13)
|
|
|
706
|
|
|
|
996
|
|
|
|
2,118
|
|
|
|
2,989
|
|
Realized gain on sale of previously impaired securities (non-taxable)
|
|
|
(356
|
)
|
|
|
—
|
|
|
|
(356
|
)
|
|
|
—
|
|
Accelerated depreciation of certain technology assets (14)
|
|
|
—
|
|
|
|
75
|
|
|
|
—
|
|
|
|
1,004
|
|
Change in fair value of warrant
|
|
|
—
|
|
|
|
5,310
|
|
|
|
—
|
|
|
|
6,310
|
|
Amended state tax returns impact (non-taxable)
|
|
|
(75
|
)
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
—
|
|
Tax impact of adjustments (15)
|
|
|
(5,834
|
)
|
|
|
(7,646
|
)
|
|
|
(17,854
|
)
|
|
|
(4,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (non-GAAP)
|
|
$
|
17,646
|
|
|
$
|
12,455
|
|
|
$
|
46,708
|
|
|
$
|
35,396
|
|
|
(2)
|
We consider a dealer to be active in our U.S. network as of a date if the dealer completed at
least one revenue-generating credit application processing transaction using the U.S. Dealertrack network during the most recently
ended calendar month. The number of active U.S. dealers is based on the number of dealer accounts as communicated by lenders on
the U.S. Dealertrack network.
|
|
(3)
|
We consider a lender to be active in our U.S. network as of a date if it is accepting credit
application data electronically from U.S. dealers in the U.S. Dealertrack network.
|
|
(4)
|
Each lender to dealer relationship represents a pair between an active U.S. lender and an active U.S. dealer at the end of
a given period.
|
|
(5)
|
Represents revenue-generating transactions processed in the U.S. Dealertrack, Dealertrack Aftermarket Services, Dealertrack
Processing Solutions and Dealertrack Canada networks at the end of a given period.
|
|
(6)
|
Represents the average revenue earned per transaction processed in the U.S. Dealertrack, Dealertrack
Aftermarket Services, Dealertrack Processing Solutions and Dealertrack Canada networks during a given period. Revenue used in the
calculation adds back (excludes) transaction related contra-revenue.
|
|
(7)
|
Represents transaction services revenue divided by our estimate of total new and used car sales for the period in the U.S.
and Canada. Revenue used in this calculation adds back (excludes) transaction related contra-revenue.
|
|
(8)
|
Represents the number of dealerships in the U.S. and Canada with one or more active subscriptions at the end of a given period.
Subscriptions to Dealertrack CentralDispatch have been excluded as their customers include brokers and carriers in addition to
dealers.
|
|
(9)
|
Represents subscription services revenue divided by average subscribing dealers for a given period in the U.S. and Canada.
Revenue used in the calculation adds back (excludes) subscription related contra-revenue. In addition, subscribing dealers and
subscription services revenue from Dealertrack CentralDispatch have been excluded from the calculation as a majority of these customers
are not dealers.
|
|
(10)
|
Represents interest expense relating to the amortization of deferred financing costs and debt discount in connection with the
senior convertible notes and revolving credit facility.
|
|
(11)
|
For further information, please refer to Note 15 in the accompanying notes to the consolidated financial statements included
in this Quarterly Report on Form 10-Q and Note 15 and Note 17 in the notes to the consolidated financial statements included in
our Annual Report on Form 10-K for the year ended December 31, 2012.
|
|
(12)
|
Represents the change in the acquisition-related contingent consideration from the eCarList and ClickMotive acquisitions and
other additional acquisition-related compensation charges.
|
|
(13)
|
Represents amortization of the basis difference between the book basis of the Chrome assets contributed to the Chrome Data
Solutions joint venture and the fair value of the investment in Chrome Data Solutions.
|
|
(14)
|
Represents the accelerated depreciation of certain technology assets due to the discontinuation of those projects.
|
|
(15)
|
The tax impact of adjustments for the three and nine months ended September 30, 2013 are based on a U.S. statutory tax rate
of 37.2% applied to taxable adjustments other than amortization of acquired identifiable intangibles and stock-based compensation
expense, which are based on a blended tax rate of 37.1% and 36.8%, respectively, for the three months ended September 30, 2013,
and 37.1% and 36.8%, respectively, for the nine months ended September 30, 2013. The tax impact of adjustments for the three and
nine months ended September 30, 2012 are based on a U.S. statutory tax rate of 38.2% applied to taxable adjustments other than
amortization of acquired identifiable intangibles and stock-based compensation expense, which are based on a blended tax rate of
38.1% and 37.6%, respectively, for the three months ended September 30, 2012, and 38.1% and 37.6%, respectively, for the nine months
ended September 30, 2012.
|
Revenue
Transaction
Services Revenue.
Transaction services revenue consists of revenue earned from our lender customers for each credit application
or contract that dealers submit to them. In addition, we earn transaction services revenue from lender customers for each financing
contract executed via our electronic contracting and digital contract processing solutions as well as from lender customers for
collateral management transactions
.
We also earn
transaction services revenue from dealers or other service and information providers, such as aftermarket providers and credit
report providers, for each fee-bearing product accessed by dealers. This includes transaction services revenue for
completion
of on-line registrations with department of motor vehicles, completion of inventory appraisals, and accessing of credit reports.
Subscription Services Revenue.
Subscription
services revenue consists of revenue earned from our dealers and other customers (typically on a monthly basis) for use of our
subscription or license-based products and services. Our subscription services enable dealers and other customers to manage their
dealership data and operations, compare various financing and leasing options and programs, sell insurance and other aftermarket
products, analyze, merchandise, and transport inventory and execute financing contracts electronically.
Other Revenue.
Other revenue consists
of revenue primarily earned through forms programming, data conversion, hardware and equipment sales from our Dealer Management
solution, shipping fees and commissions earned from our digital contract business. Training fees are also included in other revenue.
Operating Expenses
Cost of Revenue.
Cost of revenue
primarily consists of expenses related to running our network infrastructure (including Internet connectivity, hosting expenses,
and data storage), amortization expense on acquired intangible assets, capitalized software and website development costs, compensation
and related benefits for network and technology development personnel, amounts paid to third parties pursuant to contracts under
which (i) a portion of certain revenue is owed to those third parties (revenue share) or, (ii) fees are due on the number of transactions
processed and direct costs for data licenses. Cost of revenue also includes hardware costs associated with our DMS product offering,
and compensation, related benefits and travel expenses associated with DMS installation personnel, compensation and related benefits
associated with strategic inventory consulting personnel, compensation and related benefits, and temporary labor associated with
personnel who process transactions for our digital contract, collateral management, and registration and titling solutions, and
advertising expenses associated with certain of our search and media product offerings.
Product Development Expenses.
Product
development expenses consist primarily of compensation and related benefits, consulting fees and other operating expenses associated
with our product development departments. The product development departments perform research and development, in addition to
enhancing and maintaining existing products.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses consist primarily of compensation and related benefits, facility costs, professional
services fees for our sales, marketing, customer service and administrative functions, and public company costs.
We allocate overhead such as occupancy and
telecommunications charges, and depreciation expense, based on headcount, as we believe this to be the most accurate measure. As
a result, a portion of general overhead expenses are reflected in each operating expense category.
Acquisitions
On April 1, 2013, we completed
the acquisition of the net assets of Casey & Casey for $21.3 million in cash, reflective of final working capital adjustments
.
For further information, please refer to Note 11 in the accompanying notes to the consolidated financial statements
included in this Quarterly Report on Form 10-Q.
On October 1, 2013, we completed
the acquisition of substantially all of the assets of CFM for $13.0 million in cash, subject to working capital adjustments subsequent
to closing. For further information, please refer to Note 18 in the accompanying notes to the consolidated financial statements
included in this Quarterly Report on Form 10-Q.
On October 1, 2013, we completed
the acquisition of VINtek for $49.4 million in cash with a $4.0 million promissory note to be paid within 18 months of closing.
This acquisition is subject to working capital adjustments subsequent to closing. For further information, please refer to Note
18 in the accompanying notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q.
Fair Value Measurements
We have segregated all financial
assets that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based
on the inputs used to determine the fair value at the measurement date.
A reconciliation of the beginning and ending
balances of the contingent consideration, a Level 3 liability, is as follows (in thousands):
Balance as of December 31, 2012
|
|
$
|
(1,000
|
)
|
Change in fair value of contingent consideration
|
|
|
500
|
|
|
|
|
|
|
Balance as of September 30, 2013
|
|
$
|
(500
|
)
|
In connection with our October 1, 2012 acquisition
of ClickMotive, a portion of the purchase price included contingent consideration that is payable in the first quarter of 2014
based upon the achievement of certain performance targets in 2013. The fair value of the contingent consideration is determined
based upon probability-weighted revenue forecasts for the underlying period. The contingent consideration is revalued each reporting
period, until settled, with the resulting gains and losses recorded in the consolidated statements of operations. We estimated
the fair value of the contingent consideration as of September 30, 2013 to be $0.5 million. We recorded income of $0.5 million
for the nine months ended September 30, 2013 as a result of the decrease in the estimated settlement of the contingent consideration
from the estimated amount of $1.0 million as of December 31, 2012.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis
of our financial condition and results of our operations is based on our consolidated financial statements, which have been prepared
in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments
that affect the amounts reported for assets, liabilities, revenue, expenses and the disclosure of contingent liabilities.
Our critical accounting policies are those
that we believe are both important to the portrayal of our financial condition and results of operations and that involve difficult,
subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently
uncertain. The estimates are based on historical experience and on various assumptions about the ultimate outcome of future events.
Our actual results may differ from these estimates. Management believes there have been no material changes to the critical accounting
policies discussed in the section entitled “Management Discussion and Analysis of Financial Condition and Results of Operations”
in our Annual Report on Form 10-K for the year ended December 31, 2012, except as set forth below.
Stock-Based Compensation Expense and Assumptions
Expected Life
As of January 1, 2013, we determine the
expected life of any issued stock-based awards based upon our historical exercise
patterns
and the period of time that the awards are expected to be outstanding
. Previously, due to our limited public company history,
the expected life was determined based upon the experience of similar entities whose shares are publicly-traded.
Net Income (Loss) Per Share
Basic earnings per share is calculated by
dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per
share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding, assuming dilution,
during the period. The diluted earnings per share calculation assumes (i) all stock options which are in the money are exercised
at the beginning of the period, (ii) if applicable, unvested awards that are considered to be contingently issuable shares because
they contain either a performance or market condition will be included in diluted earnings per share if dilutive and if their conditions
have (a) been satisfied at the reporting date or (b) would have been satisfied if the reporting date was the end of the contingency
period, and (iii) if applicable, potential
common shares which may be
issued to satisfy the conversion spread value of our senior convertible notes.
The
number of shares included in the denominator of diluted earnings per share relating to our senior convertible notes is calculated
by dividing the conversion spread value by the average share price of our common stock during the period. The conversion spread
value is the value that would be delivered to investors based on the terms of the notes, at the assumed conversion date.
Results of Operations
The following table sets forth, for the periods indicated, the
consolidated statements of operations:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
$ Amount
|
|
|
% of Net
Revenue
|
|
|
$ Amount
|
|
|
% of Net
Revenue
|
|
|
$ Amount
|
|
|
% of Net
Revenue
|
|
|
$ Amount
|
|
|
% of Net
Revenue
|
|
|
|
(In thousands, except percentages)
|
|
|
(In thousands, except percentages)
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
124,582
|
|
|
|
100
|
%
|
|
$
|
99,084
|
|
|
|
100
|
%
|
|
$
|
355,423
|
|
|
|
100
|
%
|
|
$
|
287,097
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
70,199
|
|
|
|
56
|
%
|
|
|
55,475
|
|
|
|
56
|
%
|
|
|
200,974
|
|
|
|
57
|
%
|
|
|
162,337
|
|
|
|
57
|
%
|
Product development
|
|
|
3,952
|
|
|
|
3
|
%
|
|
|
2,874
|
|
|
|
3
|
%
|
|
|
11,646
|
|
|
|
3
|
%
|
|
|
8,812
|
|
|
|
3
|
%
|
Selling, general and administrative
|
|
|
43,519
|
|
|
|
35
|
%
|
|
|
35,307
|
|
|
|
36
|
%
|
|
|
127,511
|
|
|
|
36
|
%
|
|
|
103,502
|
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
117,670
|
|
|
|
94
|
%
|
|
|
93,656
|
|
|
|
95
|
%
|
|
|
340,131
|
|
|
|
96
|
%
|
|
|
274,651
|
|
|
|
96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,912
|
|
|
|
6
|
%
|
|
|
5,428
|
|
|
|
5
|
%
|
|
|
15,292
|
|
|
|
4
|
%
|
|
|
12,446
|
|
|
|
4
|
%
|
Interest income
|
|
|
171
|
|
|
|
—
|
%
|
|
|
181
|
|
|
|
—
|
%
|
|
|
412
|
|
|
|
—
|
%
|
|
|
595
|
|
|
|
—
|
%
|
Interest expense
|
|
|
(3,229
|
)
|
|
|
(3
|
)%
|
|
|
(3,214
|
)
|
|
|
(3
|
)%
|
|
|
(9,938
|
)
|
|
|
(3
|
)%
|
|
|
(7,579
|
)
|
|
|
(2
|
)%
|
Other income (expense), net
|
|
|
419
|
|
|
|
—
|
%
|
|
|
(5,267
|
)
|
|
|
(5
|
)%
|
|
|
547
|
|
|
|
—
|
%
|
|
|
(6,117
|
)
|
|
|
(2
|
)%
|
Gain on disposal of subsidiary and sale of other assets
|
|
|
—
|
|
|
|
—
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
33,193
|
|
|
|
12
|
%
|
Earnings from equity method investment, net
|
|
|
1,544
|
|
|
|
2
|
%
|
|
|
429
|
|
|
|
1
|
%
|
|
|
4,042
|
|
|
|
2
|
%
|
|
|
737
|
|
|
|
—
|
%
|
Income (loss) before provision for income taxes, net
|
|
|
5,817
|
|
|
|
5
|
%
|
|
|
(2,443
|
)
|
|
|
(2
|
)%
|
|
|
10,355
|
|
|
|
3
|
%
|
|
|
33,275
|
|
|
|
12
|
%
|
Provision for income taxes, net
|
|
|
(22
|
)
|
|
|
—
|
%
|
|
|
(488
|
)
|
|
|
(1
|
)%
|
|
|
(755
|
)
|
|
|
—
|
%
|
|
|
(13,320
|
)
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,795
|
|
|
|
5
|
%
|
|
$
|
(2,931
|
)
|
|
|
(3
|
)%
|
|
$
|
9,600
|
|
|
|
3
|
%
|
|
$
|
19,955
|
|
|
|
7
|
%
|
Three Months Ended September 30, 2013 and 2012
Revenue
|
|
Three Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Transaction services revenue
|
|
$
|
73,514
|
|
|
$
|
58,789
|
|
|
$
|
14,725
|
|
|
|
25
|
%
|
Subscription services revenue
|
|
|
45,223
|
|
|
|
35,723
|
|
|
|
9,500
|
|
|
|
27
|
%
|
Other
|
|
|
5,845
|
|
|
|
4,572
|
|
|
|
1,273
|
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
124,582
|
|
|
$
|
99,084
|
|
|
$
|
25,498
|
|
|
|
26
|
%
|
Transaction
Services Revenue.
The increase in transaction services revenue is primarily due to an increase in automobile sales,
increased application activity, and improving credit availability. These industry trends had a positive impact on the following
changes in our key business metrics.
|
|
Three Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
Amount
|
|
|
Percent
|
|
Average transaction price (1)
|
|
$
|
2.74
|
|
|
$
|
2.63
|
|
|
$
|
0.11
|
|
|
|
4
|
%
|
Transaction revenue per car sold
|
|
$
|
7.70
|
|
|
$
|
6.47
|
|
|
$
|
1.23
|
|
|
|
19
|
%
|
Active lenders in our U.S. network as of end of the period
|
|
|
1,378
|
|
|
|
1,237
|
|
|
|
141
|
|
|
|
11
|
%
|
Active lender to dealer relationships as of end of the period
|
|
|
191,548
|
|
|
|
178,809
|
|
|
|
12,739
|
|
|
|
7
|
%
|
Transactions processed (in thousands, except percentages)
|
|
|
27,172
|
|
|
|
22,738
|
|
|
|
4,434
|
|
|
|
20
|
%
|
(1) - Revenue used in the calculation adds back (excludes) contra
revenue.
Our average transaction
price and the total number of transactions processed increased 4% and 20%, respectively, which resulted in an increase in revenue
of $3.0 million and $11.7 million, respectively. Contributing factors to the increase in average transaction price and the total
number of transactions processed included increases of 11% in active lender customers in our U.S. Dealertrack network and a 7%
increase in our active lender to dealer relationships, as well as an increase in car sales volumes. While new lender customers
are generally lower transaction volume customers, they have higher average prices per transaction. Additional volumes at Dealertrack
Processing solutions, which are at a higher average price than our other transactions, also contributed to the increase. The increase
in our number of lender to dealer relationships was attributable to more active dealers, more active lenders on our U.S. network,
and an increase in the average number of lenders that dealers use. In addition, expanded use across our range of transaction products
increased our transaction revenue per car sold. The Casey & Casey acquisition also contributed $2.2 million to transaction
services revenue for the three months ended September 30, 2013.
Subscription
Services Revenue.
The increase in subscription services revenue is primarily a result of additional subscription
services revenue from the acquisitions of CentralDispatch on August 1, 2012 and ClickMotive on October 1, 2012, as well as organic
growth. The net increase in subscription services revenue was a result of the following changes in our key business metrics.
|
|
Three Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
Amount
|
|
|
Percent
|
|
Average monthly subscription revenue per subscribing dealership (1)(2)
|
|
$
|
758
|
|
|
$
|
694
|
|
|
$
|
64
|
|
|
|
9
|
%
|
Subscribing dealers in U.S. and Canada as of end of the period (2)
|
|
|
18,255
|
|
|
|
16,421
|
|
|
|
1,834
|
|
|
|
11
|
%
|
(1) - Revenue used in the calculation adds back (excludes)
contra revenue.
|
|
(2) - Subscribing dealers and subscription revenue from Dealertrack
CentralDispatch have been excluded from the calculation as a majority of these customers are not dealers.
|
|
Our average monthly
subscription revenue per subscribing dealer and the number of subscribing dealers increased 9% and 11%, respectively. Dealertrack
CentralDispatch and the acquisition of ClickMotive contributed $9.0 million in total to subscription services revenue for the three
months ended September 30, 2013. The combined Dealertrack CentralDispatch and ClickMotive acquired quarterly subscription services
revenue upon acquisition was $6.8 million. For the three months ended September 30, 2012, Dealertrack CentralDispatch had subscription
services revenue of $1.7 million. In addition, we had continued success in selling DMS and Sales and F&I products, including
our ability to cross sell those solutions to existing customers, which increased the average monthly spend per subscribing dealer.
Other Revenue.
The increase
in other revenue is primarily from our Dealer Management solution.
Operating Expenses
|
|
Three Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Cost of revenue
|
|
$
|
70,199
|
|
|
$
|
55,475
|
|
|
$
|
14,724
|
|
|
|
27
|
%
|
Product development
|
|
|
3,952
|
|
|
|
2,874
|
|
|
|
1,078
|
|
|
|
38
|
%
|
Selling, general and administrative
|
|
|
43,519
|
|
|
|
35,307
|
|
|
|
8,212
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
117,670
|
|
|
$
|
93,656
|
|
|
$
|
24,014
|
|
|
|
26
|
%
|
Cost of Revenue.
The increase was
primarily the result of $4.7 million of additional compensation and related benefit costs primarily due to additional team members,
including those from the acquisitions of Casey & Casey, CentralDispatch and ClickMotive, and $3.0 million in additional technology
expenses, including technology consulting and other related expenses.
There were also increases of $1.7 million
in direct cost of revenue for our Processing solutions (volume related), $1.0 million of direct cost of revenue for ClickMotive
(acquired in October 2012), and $0.4 million of direct cost of revenue for DMS. Other increases included $1.9 million of amortization
of software development costs, $0.9 million of intangible amortization expense, and $0.4 million of occupancy and telecom costs.
The increase in intangible amortization expense is primarily a result of additional acquired intangibles from acquisitions.
Product Development Expenses.
The
increase was primarily the result of an increase of $1.0 million in compensation and related benefit costs primarily due to additional
team members, including those from acquisitions.
Selling, General and Administrative
Expenses.
The increase was primarily the result of $4.7 million of additional compensation and related benefit costs, primarily
due to additional team members, including those from acquisitions.
There were also increases of
$0.8 million in recruiting and relocation, $0.6 million in travel and related costs, $0.4 million of general and
administrative costs of acquired entities (Casey
& Casey and ClickMotive), $0.4 million of marketing expenses, $0.2
million in professional fees (including acquisition and integration costs), $0.2 million in occupancy and telecom costs
(primarily acquisition-related), and $0.2 million in depreciation expense.
Interest
Expense
|
|
Three Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Interest expense
|
|
$
|
(3,229
|
)
|
|
$
|
(3,214
|
)
|
|
$
|
(15
|
)
|
|
|
0
|
%
|
Interest expense related to the convertible
notes for the three months ended September 30, 2013 consisted of coupon interest of $0.8 million, amortization of debt discount
of $2.0 million, and amortization of debt issuance costs of $0.2 million. Interest expense related to our revolving credit facility
for the three months ended September 30, 2013 consisted of commitment fees of $0.1 million and amortization of debt issuance costs
of $0.1 million.
Other Income (Expense), net
|
|
Three Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Other income (expense), net
|
|
$
|
419
|
|
|
$
|
(5,267
|
)
|
|
$
|
5,686
|
|
|
|
(108
|
)%
|
The increase in other income (expense),
net is primarily due to a $5.3 million decrease in the estimated value of our warrant in TrueCar during the three months ended
September 30, 2012. The three months ended September 30, 2013 includes $0.4 million of realized gains on the sale of marketable
securities.
Earnings from Equity Method Investment,
Net
|
|
Three Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Earnings from equity method investment, net
|
|
$
|
1,544
|
|
|
$
|
429
|
|
|
$
|
1,115
|
|
|
|
260
|
%
|
The net earnings from the Chrome Data Solutions
joint venture for the three months ended September 30, 2013 consisted of our 50% share of the joint venture net income of $2.2
million, which was reduced by approximately $0.7 million of basis difference amortization. The net earnings for the three months
ended September 30, 2012 consisted of our 50% share of the joint venture net income of $1.4 million, which was reduced by approximately
$1.0 million of basis difference amortization.
Provision for Income Taxes, Net
|
|
Three Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Provision for income taxes, net
|
|
$
|
(22
|
)
|
|
$
|
(488
|
)
|
|
$
|
466
|
|
|
|
(95
|
)%
|
The net provision
for income taxes for the three months ended September 30, 2013 consisted of $0.1 million of federal income tax benefit, $1.1 million
of state income tax benefit and $1.2 million of tax expense for our Canadian subsidiary. The federal income tax benefit includes
a $0.3 million benefit from research and development credits.
The net provision
for income taxes for the three months ended September 30, 2012 of $0.5 million consisted of $1.7 million of federal income tax
benefit, $1.2 million of state income tax expense and $1.0 million of tax expense for our Canadian subsidiary. Tax expense for
our U.S. subsidiaries for the three months ended September 30, 2012 was reduced by a $2.0 million benefit on the change in value
of our warrant in TrueCar.
Our effective
tax rate for the three months ended September 30, 2013 is 0.4% compared with (19.9)% for the three months ended September 30, 2012.
Nine Months Ended September 30,
2013 and 2012
Revenue
|
|
Nine Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Transaction services revenue
|
|
$
|
206,523
|
|
|
$
|
170,422
|
|
|
$
|
36,101
|
|
|
|
21
|
%
|
Subscription services revenue
|
|
|
132,624
|
|
|
|
102,936
|
|
|
|
29,688
|
|
|
|
29
|
%
|
Other
|
|
|
16,276
|
|
|
|
13,739
|
|
|
|
2,537
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
355,423
|
|
|
$
|
287,097
|
|
|
$
|
68,326
|
|
|
|
24
|
%
|
Transaction
Services Revenue.
The increase in transaction services revenue is primarily due to an increase in automobile sales, increased
application activity, and improving credit availability. These industry trends had a positive impact on the following changes in
our key business metrics.
|
|
Nine Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
Amount
|
|
|
Percent
|
|
Average transaction price (1)
|
|
$
|
2.71
|
|
|
$
|
2.59
|
|
|
$
|
0.12
|
|
|
|
5
|
%
|
Transaction revenue per car sold
|
|
$
|
7.92
|
|
|
$
|
6.88
|
|
|
$
|
1.04
|
|
|
|
15
|
%
|
Active lenders in our U.S. network as of end of the period
|
|
|
1,378
|
|
|
|
1,237
|
|
|
|
141
|
|
|
|
11
|
%
|
Active lender to dealer relationships as of end of the period
|
|
|
191,548
|
|
|
|
178,809
|
|
|
|
12,739
|
|
|
|
7
|
%
|
Transactions processed (in thousands, except percentages)
|
|
|
77,454
|
|
|
|
67,051
|
|
|
|
10,403
|
|
|
|
16
|
%
|
(1) - Revenue used in the calculation adds back (excludes) contra
revenue.
Our average transaction
price and the total number of transactions processed increased 5% and 16%, respectively, which resulted in an increase in revenue
of $9.8 million and $26.9 million, respectively, offset by additional contra-revenue of $0.6 million. Contributing factors to the
increase in average transaction price and the total number of transactions processed included increases of 11% in active lender
customers in our U.S. Dealertrack network and a 7% increase in our active lender to dealer relationships, as well as an increase
in car sales volumes. While new lender customers are generally lower transaction volume customers, they have higher average prices
per transaction. Additional volumes at Dealertrack Processing solutions, which are at a higher average price than our other transactions,
also contributed to the increase. The increase in our number of lender to dealer relationships was attributable to more active
dealers, more active lenders on our U.S. network, and an increase in the average number of lenders that dealers use. In addition,
expanded use across our range of transaction products increased our transaction revenue per car sold. The Casey & Casey acquisition
also contributed $4.3 million to transaction services revenue for the nine months ended September 30, 2013.
Subscription
Services Revenue.
The increase in subscription services revenue is primarily a result of additional subscription services
revenue from the acquisitions of CentralDispatch on August 1, 2012 and ClickMotive on October 1, 2012 as well as organic growth.
The net increase in subscription services revenue was a result of the following changes in our key business metrics.
|
|
Nine Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
Amount
|
|
|
Percent
|
|
Average monthly subscription revenue per subscribing dealership (1)(2)
|
|
$
|
751
|
|
|
$
|
693
|
|
|
$
|
58
|
|
|
|
8
|
%
|
Subscribing dealers in U.S. and Canada as of end of the period (2)
|
|
|
18,255
|
|
|
|
16,421
|
|
|
|
1,834
|
|
|
|
11
|
%
|
(1) - Revenue used in the calculation adds back (excludes) contra
revenue.
|
|
(2) - Subscribing dealers and subscription revenue from Dealertrack
CentralDispatch have been excluded from the calculation as a majority of these customers are not dealers.
|
|
Our average monthly
subscription revenue per subscribing dealer and the number of subscribing dealers increased 8% and 11%, respectively. Dealertrack
CentralDispatch and the acquisition of ClickMotive contributed $25.7 million in total to subscription services revenue for the
nine months ended September 30, 2013. The combined Dealertrack CentralDispatch and ClickMotive acquired quarterly subscription
services revenue upon acquisition was $6.8 million ($20.4 million for the nine months). For the nine months ended September 30,
2012, Dealertrack CentralDispatch had subscription services revenue of $1.7 million. In addition, we had continued success in selling
DMS and Sales and F&I products, including our ability to cross sell those solutions to existing customers, which increased
the average monthly spend per subscribing dealer.
Other Revenue.
The increase
in other revenue is primarily from our Dealer Management solution.
Operating Expenses
|
|
Nine Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Cost of revenue
|
|
$
|
200,974
|
|
|
$
|
162,337
|
|
|
$
|
38,637
|
|
|
|
24
|
%
|
Product development
|
|
|
11,646
|
|
|
|
8,812
|
|
|
|
2,834
|
|
|
|
32
|
%
|
Selling, general and administrative
|
|
|
127,511
|
|
|
|
103,502
|
|
|
|
24,009
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
340,131
|
|
|
$
|
274,651
|
|
|
$
|
65,480
|
|
|
|
24
|
%
|
Cost of Revenue.
The increase was primarily the result of $11.4 million of additional compensation and related benefit costs
primarily due to additional team members from the acquisitions of Casey & Casey, CentralDispatch, and ClickMotive, and $8.7
million in additional technology expenses, including technology consulting and other related expenses.
There were also
increases of $4.5 million of direct cost of revenue for our Processing solutions (volume related), $3.1 million of direct cost
of revenue for ClickMotive (acquired in October 2012), and $1.0 million of direct cost of revenue for DMS. Other increases included
$4.0 million of amortization of software development costs, $2.5 million of intangible amortization expense, $1.5 million in occupancy
and telecom costs, and $0.9 million in depreciation expense. The increase in intangible amortization expense is primarily a result
of additional acquired intangibles from acquisitions. The additional occupancy and telecom costs are a result of incremental team
members and facilities, including those from acquisitions, as well as $0.3 million of rent acceleration as a result of vacating
the former ClickMotive office space.
Product Development
Expenses.
The increase was primarily the result of an increase of $2.6 million in compensation and related benefit costs primarily
due to additional team members, including those from acquisitions
.
Selling, General and Administrative
Expenses.
The increase was primarily the result of an increase of $14.7 million in compensation and related benefit costs primarily
due to additional team members, including those from acquisitions.
There were additional increases of
$1.6 million in marketing and rebranding, $1.2 million in travel and related costs, $1.1 million in professional fees
(including acquisition and integration costs), $1.0 million in occupancy and telecom costs (primarily acquisition-related),
$0.9 million of general and administrative costs of acquired entities (Casey & Casey and ClickMotive), $0.7 million in
recruiting and relocation, and $0.6 million in depreciation. These increases were offset by two prior period items that net
to an additional $0.6 million of expense for the nine months ended September 30, 2012, $1.0 million in accelerated
depreciation for discontinued technology and incremental contingent consideration reduction of $0.4 million.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Interest expense
|
|
$
|
(9,938
|
)
|
|
$
|
(7,579
|
)
|
|
$
|
(2,359
|
)
|
|
|
31
|
%
|
Interest expense related to the convertible
notes for the nine months ended September 30, 2013 consisted of coupon interest of $2.3 million, amortization of debt discount
of $6.0 million, and amortization of debt issuance costs of $0.7 million. Interest expense related to our revolving credit facility
for the nine months ended September 30, 2013 consisted of commitment fees of $0.3 million and amortization of debt issuance costs
of $0.3 million.
Other Income (Expense), Net
|
|
Nine Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Other income (expense), net
|
|
$
|
547
|
|
|
$
|
(6,117
|
)
|
|
$
|
6,664
|
|
|
|
(109
|
)%
|
The increase in other
income (expense), net is primarily due to a $6.3 million decrease in the value of our warrant in TrueCar during the nine months
ended September 30, 2012. The nine months ended September 30, 2013 includes $0.4 million of realized gains on the sale of marketable
securities.
Gain on Disposal of Subsidiary and Sale of Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Gain on disposal of subsidiary and sale of other assets
|
|
$
|
—
|
|
|
$
|
33,193
|
|
|
$
|
(33,193
|
)
|
|
|
(100
|
)%
|
During the nine months ended September
30, 2012, we recorded a gain on the contribution of the net assets of Chrome to the Chrome Data Solutions joint venture in the
amount of $27.7 million and a gain of $5.5 million related to the sale of a Chrome-branded asset, which was not contributed to
the joint venture.
Earnings from Equity Method Investment, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Earnings from equity method investment, net
|
|
$
|
4,042
|
|
|
$
|
737
|
|
|
$
|
3,305
|
|
|
|
448
|
%
|
The net earnings from the Chrome Data Solutions
joint venture for the nine months ended September 30, 2013 consisted of our 50% share of the joint venture net income of $6.1 million,
which was reduced by approximately $2.1 million of basis difference amortization. The net earnings for the nine months ended September
30, 2012 consisted of our 50% share of the joint venture net income of $3.7 million, which was reduced by approximately $3.0 million
of basis difference amortization.
Provision for Income Taxes, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Provision for income taxes, net
|
|
$
|
(755
|
)
|
|
$
|
(13,320
|
)
|
|
$
|
12,565
|
|
|
|
(94
|
)%
|
The
net provision for income taxes for the nine months ended September 30, 2013 of $0.8 million consisted of $0.8 million of federal
income tax benefit, $1.1 million of state income tax benefit and $2.7 million of tax expense for our Canadian subsidiary. The state
income tax expense includes $0.2 million of deferred tax expense which resulted from a change in state apportionment due to the
acquisition of Casey & Casey. The federal income tax benefit includes a $0.7 million benefit from research and development
credits.
The
net provision for income taxes for the nine months ended September 30, 2012 of $13.3 million consisted of $9.2 million of federal
income tax expense, $1.7 million of state income tax expense and $2.4 million of tax expense for our Canadian subsidiary.
Our
effective tax rate for the nine months ended September 30, 2013 was 7.3% compared with 40.0% for the nine months ended September
30, 2012.
Included
in our tax expense for our U.S. and Canadian subsidiaries for the nine months ended September 30, 2012 was $2.8 million of income
tax provision as well as discrete items including $10.5 million on the gain recorded in conjunction with the contribution of the
net assets of Chrome for the investment in Chrome Data Solutions, $1.3 million of expense from the elimination of the Chrome deferred
tax assets and goodwill, income tax provision of $1.9 million on the gain recorded from the sale of a Chrome-branded asset net
of a reduction in valuation allowance resulting from the asset sale, and $2.4 million of benefit on the change in value of our
warrant in TrueCar. Excluding these items, our effective tax rate for the nine months ended September 30, 2012 would have been
32.5%.
Liquidity and Capital Resources
We expect that our liquidity requirements
will continue to be primarily for working capital, acquisitions, capital expenditures and general corporate purposes. Our capital
expenditures, software and website development costs for the nine months ended September 30, 2013 were $40.4 million, of which
$37.8 million was paid in cash.
As of September 30, 2013, we had $145.7 million
of cash and cash equivalents, $18.8 million in short-term marketable securities and $199.9 million in working capital, as
compared to $143.8 million of cash and cash equivalents, $34.0 million in short-term marketable securities, $4.4 million in long-term
marketable securities and $172.1 million in working capital as of December 31, 2012.
On
April 1, 2013, we acquired the nets assets of Casey & Casey for $21.3 million in cash
.
For
further information, please refer to Note 11 in the accompanying notes to the consolidated financial statements included in this
Quarterly Report on Form 10-Q.
In July 2013, a payment of $12.4 million
was made relating to interest and maturity of the note in connection with the purchase of eCarList, LLC in July 2011.
On October 1, 2013, we completed the acquisition
of substantially all of the assets of CFM for $13.0 million in cash, subject to working capital adjustments subsequent to closing.
For further information, please refer to Note 18 in the accompanying notes to the consolidated financial statements included in
this Quarterly Report on Form 10-Q.
On October 1, 2013, we completed the acquisition
of VINtek for $49.4 million in cash with a $4.0 million promissory note to be paid within 18 months of closing. This acquisition
is subject to working capital adjustments subsequent to closing. For further information, please refer to Note 18 in the accompanying
notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q.
We expect to have sufficient liquidity
to meet our short-term liquidity requirements (including capital expenditures and acquisitions) through working capital and net
cash flows from operations, cash on hand, investments in marketable securities and our credit facility.
The following table sets forth the cash
flow components for the following periods (in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
Net cash provided by operating activities
|
|
$
|
40,782
|
|
|
$
|
42,796
|
|
Net cash used in investing activities
|
|
$
|
(39,936
|
)
|
|
$
|
(145,747
|
)
|
Net cash provided by financing activities
|
|
$
|
1,588
|
|
|
$
|
187,115
|
|
Operating Activities
The decrease
in net cash provided by operations of $2.0 million is primarily due to non-cash items including a $33.2 million gain recorded
from the contribution of net assets of Chrome for our investment in Chrome Data Solutions during 2012, an increase in
depreciation and amortization of $7.3 million, additional amortization of debt issuances costs and debt discount of $1.8
million, the prior year change in warrant value of $6.3 million, and additional earnings from equity method investments of
$3.3 million. These increases were offset by a reduction in net income of $10.4 million, a decrease in deferred tax provision
of $10.2 million, and net
changes in operating assets and liabilities of $16.2 million,
primarily
in prepaid and other current assets.
The decrease of
$10.2 million in deferred tax provision was a result of the $0.9 million deferred tax benefit for the nine months ending September
30, 2013 as compared to a deferred tax provision of $9.3 million for the nine months ending September 30, 2012. The 2012 deferred
tax provision of $9.3 million includes $10.4 million of deferred tax expense on the gain from the contribution of the net assets
of Chrome and $1.2 million of deferred tax expense from the elimination of Chrome net deferred tax assets.
Investing Activities
The decrease in net cash used in investing
activities of $105.8 million is primarily the result of a decrease in purchases of marketable securities of $42.8 million, a decrease
in the payments for acquisitions of $52.9 million, and an increase in sales and maturities of marketable securities of $30.1 million.
These increases were offset by an increase in capital expenditures, software and website development costs of $16.3 million, $5.5
million of proceeds from the sale of a Chrome branded asset in 2012, and $1.8 million of cash which was included in the contribution
of the net assets of Chrome to the Chrome Data Solutions joint venture in the nine months ended September 30, 2012.
Financing Activities
The decrease in net cash provided by financing
activities of $185.5 million is due to the March 2012 issuance of our senior convertible notes of $200.0 million, net payment for
the call spread overlay of $14.2 million, the repayment of a note payable in 2013 of $11.4 million, and $7.7 million of debt issuance
costs paid in 2012 for the senior convertible notes and the amended credit facility. These decreases were offset by $2.1 million
of additional proceeds from the exercise of stock options and $1.4 million of additional windfall tax benefits in 2013.
Contractual Obligations
As
of September 30, 2013, there were no material changes in our contractual obligations as disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2012
, except as described under Note 15 in the accompanying notes to the
consolidated financial statements included in this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance
or special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or
for other contractually narrow or limited purposes.
Industry Trends
We are impacted by trends in both the automotive
retail industry and the credit finance markets. Our financial results are impacted by the number of dealers serviced and the number
of vehicles sold. The number of transactions processed through our network is impacted by the level of indirect financing and leasing
by our participating lender customers, special promotions by automobile manufacturers and the level of indirect financing and leasing
by captive finance companies not available in our network.
The industry has been impacted by a variety
of market disruptions. The number of franchise dealerships declined by approximately 2,300, or 11%, between 2008 and 2010 as a
result of the general economic environment and the bankruptcy and emergence of two major automobile manufacturers. In recent years,
the franchise dealership count has remained consistent at approximately 17,500 based on data from the National Automobile Dealers
Association. We do not anticipate a significant change in the number of franchise dealerships over the next few years. A reduction
in the number of automotive dealers reduces our opportunities to sell our subscription products.
The number of vehicles sold by dealerships
participating on our networks has grown each of the last three years, as the economic environment has recovered. Sales of new vehicles
have grown an average of 11% annually over this period, based on data from Automotive News. At this rate of growth, annual new
vehicles sales will reach pre-recession (prior to 2007) volume in 2014. The supply of used vehicles that are newer models is limited
compared to pre-recession levels due to the decline in new car sales, fleet purchases and leasing during the recession. The total
used vehicle supply will likely not increase until at least 2015 as the more recent increases in new vehicles sold start to be
traded in to dealerships or leases are returned. In addition, while total supply remains consistent, the used car market mix expects
to continue to change with a larger percentage of used vehicles being sold by franchised and independent dealers, and less through
private sales.
The number of lending relationships between
the various lenders and dealers available through our network continues to increase as the number of dealers has stabilized and
lenders are deploying more capital to auto finance. Reduced dealer rooftops and strengthening annual sales rates have resulted
in a general increase in profitability for dealers for the past few years. While increased profitability may be expected to increase
the number of subscriptions, the dealers need for solutions may not be as high as they were during more difficult economic periods,
in which certain offerings were essential to dealerships for maintaining liquidity.
Purchases of new automobiles are typically
discretionary for consumers and have been, and may continue to be, affected by negative trends in the economy, including the cost
of energy and gasoline, the availability and cost of credit, increased federal taxation, residential and commercial real estate
markets, reductions in business and consumer confidence, stock market volatility and increased unemployment
.
Effects of Inflation
Our monetary assets, consisting primarily
of cash and cash equivalents, receivables and long-term investments, and our non-monetary assets, consisting primarily of intangible
assets and goodwill, are not affected significantly by inflation. We believe that replacement costs of equipment, furniture and
leasehold improvements will not materially affect our operations. However, the rate of inflation affects our expenses, which may
not be readily recoverable in the prices of products and services we offer.