Monday, May 18, 2009

Auto Dealer Closures a Negative for DealerTrack

Mark O’Neil, chairman and chief executive of DealerTrack Holdings (TRAK-$13.54), said on the first-quarter earnings call he expected the provider of sales and finance on-demand software for the automotive retail industry to post a net loss of between $(7.0) million and $(5.5) million in 2009 on revenue of between $232 million and $238 million. The reality of accelerated dealership closures in the U.S. announced by Chrysler and Generals Motors, in our opinion, will lead to a revised downward guidance in sales and corresponding income, as cost containment initiatives are unlikely to offset subscription cancellations.

Transaction services revenue fell 37 percent to $24.0 million, primarily due to a decline in auto loan applications. Subscription services revenue increased 25 percent to $27.9 million, helped by a seven percent increase in member dealers (to 14,646) and a 16 percent climb in average monthly spend per subscriber (to $635).

At the end of first quarter, DealerTrack had 736 financing sources in its network, a net gain of three members from year-end. Despite the slow pace of enrollment, O’Neil said on the call that he still believes the company could add some 100 new lenders in 2009. Stability in the credit markets and an increase in the number of lender-members should boost transaction volumes. However, alternative financing sources, such as
RouteOne and Open Dealer Exchange [a joint venture from ADP and Reynolds & Reynolds] could present competitive headwinds in the loan origination business.

The company has yet to quantify the effect Chrysler’s shut down of 25 percent of its 3,200 U.S. dealers and GM’s closure of about 2,600 of its 6,200 domestic dealerships will have on subscription sales [including the percent contribution from recurring fees]. At March 31, more than 55 percent of Chrysler dealers and 52 percent of GM dealers had subscriptions for one or more DealerTrack products.

Although the number of active dealers on the network impacts the number of lender –to- dealer relationships, O’Neil insists that transaction volume will not necessarily be impacted by a decline in the number of lenders, declaring: “Our data shows that while consumers may shop at more than one dealership for a car, they generally apply for credit at only one.”

Until a definitive picture emerges on the financial impact resulting from subscription cancellations, we prefer to avoid the purchase of DealerTrack shares.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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