U.S. Markets open in 2 hrs 7 mins

CDK Global Inc (CDK) Q2 2019 Earnings Conference Call Transcript

Motley Fool Transcribers, The Motley Fool
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

CDK Global Inc  (NASDAQ: CDK)
Q2 2019 Earnings Conference Call
Feb. 05, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the CDK Global Second Quarter Fiscal 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to introduce your host for this conference call, Ms. Katie Coleman, Senior Director of Investor Relations. You may begin.

Katie Coleman -- Senior Director Investor Relations

Thank you. Good morning, and thank you for joining us for our second quarter fiscal 2019 earnings call and webcast. Joining me on today's call are Brian Krzanich, CEO; and Joe Tautges, CFO. A few items before we get started. Throughout today's call unless otherwise noted, all references to financial amounts are on a non-GAAP adjusted basis and for purposes of comparability, all results and year-over-year comparisons are presented in accordance with ASC 605.

Reconciliations of the adjusted amount to the most directly comparable GAAP amounts are included in this morning's press release and are available in the Investor Relations section of our website. I would also like to remind everyone that remarks made during this conference call will contain forward-looking statements. These statements involve risks and uncertainties, including the risks detailed in our filings with the SEC, which could cause actual results to differ materially from those set forth in the forward-looking statements. And finally, we anticipate filing our Form 10-Q later today.

With that, it's my pleasure to turn the call over to Brian.

Brian Krzanich -- Chief Executive Officer

Thanks Katie, and good morning, everyone. I'm excited to report our second quarter results to you today as well as update you on the strategic initiatives that are critical to continuing the strong momentum we saw this quarter. Q2 was a record quarter on both the top and bottom line. Starting with revenue, we saw total company growth of 7% and 9% growth in core auto software. We are encouraged by this performance and we'll continue to build on this momentum with the many revenue initiatives we have in the pipeline that I'll discuss further in a moment.

Growth was largely attributable to a strong quarter in our retail sales North America's business, which grew 12% as a result of the ELEAD acquisition and growth acceleration in key layered applications. Rounding out core auto software, our international business grew 1% on constant currency basis, we are executing on a number of opportunities that will accelerate growth in International as we head into the next fiscal year. Moving to the bottom line total company EBITDA and EPS grew 12% and 15% respectively, we're especially proud of this performance because it was achieved while we continue to make investments in key growth areas like implementation, Drive Flex and Fortellis.

During my first 90 days, I've spent time listening to our customers and employees to better understand and build our strategy moving forward. CDK exist to provide great automotive ownership experiences to our dealers, OEMs and their customers, and we do this by delivering world-class software, support and data insights. Our strategy centers on three key areas, first shoring up our core business by providing world-class customer support and solutions at levels never before experienced by CDK customers. Second, driving innovation, with new revolutionary products like Drive Flex and Fortellis. And lastly, using our data abilities to provide key insights that allow our customers to grow and be more profitable.

I want to be clear that Joe and I and the entire leadership team here at CDK are committed to delivering this strategy and growing revenue at a rates faster than spending and this is key to the strategy and delivering true value to our shareholders. We share these things with a dealer community at this past month at the NADA Show, the premier annual expo for franchised new car dealerships. It is my first time attending the conference that was astonished by the level of excitement surrounding recent developments at CDK.

As a company, our number one focus is improving customer satisfaction, to facilitate this we have continued to deliver enhancements to our dealers experiences during key milestones of their relationship with CDK. As you will recall, we've increased our implementation capacity this year. We will also be investing further in the post implementation support team and our customer success organization during the second half of the fiscal year, as part of the customer success enhancements and to improve our customer support levels we've extended our hours of availability by 30% to better correspond with dealers' peak car selling hours, especially those outside of the standard workweek and this change will improve sales efficiency for many dealers who have high volumes during nights and weekends.

We are also launching a customer success Dashboard that links dealership performance, KPI's to usage of our software. The dashboard will help dealers manage and improve their business while giving us the opportunity to clearly demonstrate the value of our products in enabling their success. Improving customer satisfaction is a holistic effort and we're confident in the many changes we're making. The feedback we received at NADA and the early signs of success we've seen in our results have indicated to us, we're on the right track. Our retention of at-risk customers improved 20% in the past two months versus the first five months of the fiscal year. The sign that our customer satisfaction efforts are beginning to materialize in the results. While this is only a couple of months worth of data, the trend is encouraging as we double down on our many customer oriented initiatives.

Now, let me turn to our product and innovation initiatives. As we mentioned in previous calls, the acquisition of ELEAD dramatically strengthened our portfolio of layered applications, specifically within our front office applications, which include CRM. Many of our integration activities are focused on rationalizing our front office portfolios through a best-of-breed effort.

One example of this is that we recently completed the integration of the ELEAD CRM to our Connected Store offering which enables dealers to synchronize the online to in-store car buying and selling experience. We're also intent on distilling best practices for sales and retention across our combined company. As we've previously shared strengthening our front office portfolio allows us to develop richer and deeper relationships across our customer base of approximately 9,000 auto sites. We also have the opportunity to expand our reach beyond these sites by deploying a DMS agnostic approach focused on selling layered applications such as CRM, Connected Store and service to be approximately a 11,000 non-CDK auto sites in North America. The ELEAD has a very strong sales team that has built on selling to all franchised dealerships, successfully executing this go-to-market strategy can effectively double the reach for many of our layered applications.

As the integration continues we are learning more each day about the ELEAD account management practices that have led to the high levels of customer retention and identifying opportunities to adopt these practices in other parts of the business. This directly complements our focus for the broader CDK organization on improving satisfaction and retention.

Moving to the areas of innovation, I couldn't be happier with the progress made this quarter, we made tangible progress on the development of Drive Flex. Our next generation DMS solution, which makes us very optimistic about its future, both for the 1-site and 2-site segments of dealerships where we seeing higher attrition as well as for the broader DMS market.

Drive Flex is a development represents a milestone, not only for CDK, but for the auto industry at large. In our view it's the most technologically advanced DMS and it has been engineered to improve usability through our modernize architecture, reduce training time through a refreshed and intuitive user interface and enhanced data availability with the OEM integrations required to run our franchise with auto dealerships.

Drive Flex is now in use and the early reaction has been positive. Dealers have provided feedback that they're able to jump right in with practically no training. They like the simplicity of the workflows, which will make them more productive and efficient and allow them to spend more time with the customer instead of in front of that screen. In the second half, we are accelerating our efforts and allocating more resources to Drive Flex in order to expedite further development and it's ramp in the more dealerships.

Now, moving onto Fortellis, we're betting on the future of automotive to technology being one that is built on openness and broad-based innovation rather than one of siloed data and top down innovation as has historically been the case. With open API management capabilities a secure, scalable infrastructure and modules, such as an app store, Fortellis will allow us to deliver an entire marketplace of new tools to dealerships and OEM's by giving developers and third party technology companies access to innovate on the back of our platform. The Fortellis marketplace is now live and API's are currently being consumed, we held our first ever Developer Day at NADA, which had over 60 attendees from across the globe, including dealers, OEM's and independent software vendors both large and small, there were three APIs and one solution published during the event.

Our partnership with Lyft and Sirius XM are some of the more notable early use cases and we believe there are many more that can and will be developed on the platform. We are excited as ever about Fortellis is long-term value proposition, both for CDK and the automotive ecosystem as a whole, will continue to provide periodic updates as the platform matures.

That concludes our highlights from NADA and the quarter. And before I pass it off to Joe. I want to emphasize how excited I am about our growth opportunities and the strategies we're employing to realize them. The results this quarter are exciting and they give us confidence, we're doing the right things. The leadership team and I are committed to the growth framework, we've laid out previously, all while ensuring we make necessary investments to enable long-term sustainable growth. While continuing to grow revenue faster than spending.

And with that, I'll turn it over to Joe.

Joe Tautges -- Executive Vice President and Chief Financial Officer

Thank you, Brian. Good morning, everyone. I'm encouraged by the results in the quarter and the momentum we're seeing in revenue, profit and cash flow growth. Our current execution along with our accelerated progress in our innovation pipeline gives me confidence that we're on track to sustainably deliver the long-term growth targets we previously provided. As I get into the results, I want to remind everyone that we have adopted ASC 606 on a modified retrospective basis. As previously discussed because of the lack of prior year data under ASC 606, all references to year-over-year comparisons will be provided under ASC 605.

Core auto software revenue growth accelerated this quarter growing 9% growth in core auto came primarily from Retail Solutions, North America, which recorded double-digit growth driven by the revenue from the ELEAD and progress its acquisitions as well as strong performance in key application areas including doc cloud and service. We were happy to see advertising outperform relative to our internal expectations though it was down 8%. We were encouraged by our ability to partner with our OEM customers to mitigate the revenue headwinds that we've seen in the segment.

Our company profit was also highlight as EBITDA and EPS grew 12% and 15% respectively. We achieved this growth while investing and expanded implementation capacity and accelerated development effort for Drive Flex and strategic revenue initiatives in International, all while integrating and accelerating revenue growth in the ELEAD business. Now, onto the detailed results for the quarter. On an ASC 606 basis, total company revenues were $590 million. Core auto software revenues were $520 million. EBITDA was $222 million resulting in a margin of 37.6%. Our effective tax rate was 24.1% and diluted earnings per share was $0.98. On an ASC 605 basis, total company revenues were $600 million, equivalent to 7% and 8% growth year-over-year on a reported and constant currency basis respectively.

Core auto software revenues were $530 million growing 9% and 10% on a reported and constant currency basis respectively. Growth was driven by an increase in revenue per site in North America and International as well as recent acquisitions, both of which were partially offset by losses and decline in revenue and selected non-recurring revenue streams, such as consulting.

Total company EBITDA dollars grew 12% to $229 million and margins expanded 180 basis points year-over-year to 38.1%. Margin expansion as a result of scale on revenue growth and the continued business transformation efforts, offset partially by changes in revenue mix caused by the recent acquisitions. Our effective tax rate was 24.2% for the quarter, diluted EPS was up 15% year-over-year to $1.02. Growth was driven by benefits from operating margin expansion and lower average share count due to buybacks, which were partially offset by increased interest expense.

Now turning to segment results. Under ASC 606, the Retail Solutions North America segment recorded $448 million in revenue. Pretax income was $191 million resulting in a margin of 42.7%. Under ASC 605, our Retail Solutions North America segment revenues were $445 million growing 12% on both a reported and constant currency basis. Subscription revenues were up 10% driven by the ELEAD acquisition and high single-digit increases to revenues from three-plus auto site groups, both of which were partially offset by low single-digit revenue declines from one-to-two-site groups.

Transaction revenues declined 2%, largely in line with the 1.4% decline in SAAR this quarter. Other revenues were up 45%, primarily due to the inclusion of revenue from recent acquisitions, partially offset by lower hardware, consulting and other revenues. North America auto sites were down 32 sites sequentially to 8,888 sites or down 2% year-over-year, declines in auto sites continue to be driven by loss activity within one-to-two site groups, partially offset by site growth in the three-plus site segment. Pretax income was $185 million and margins contracted 120 basis points to 41.5%. Margin interaction was caused by a shift in revenue mix from acquisitions, partially offset by benefits from operating leverage on subscription revenue growth and benefits from the business transformation plan.

Moving on to International. Under ASC 606, the segment recorded $72 million in revenue. Pretax income was $10 million resulting in a margin of 13.5%. Under ASC 605, international revenues were $85 million. Revenue declined 3% year-over-year on a reported basis and increased 1% on a constant currency basis. Both was driven primarily from increased revenue per site of 8%, offset by lower revenues related to the previously disclosed customer loss in China and lower onetime revenues.

International sites were down 26 sequentially to 13,167 sites or down 3% year-over-year. Declines in auto sites are attributable to the loss of the China customer and dealer consolidation. We will continue to experience year-over-year growth comparability headwinds in the third quarter, we remain confident that international growth will normalize to a trajectory in line with what we've communicated previously for the segment. Our backlog is promising and we continue to execute our new revenue initiatives that will start to come online during the second half of this fiscal year. Pretax income was $22 million, as margins contracted 70 basis points to 26.4%. Margin contraction was caused by adverse changes in revenue mix and investments relating to strategic growth initiatives, partially offset by scale from the increased recurring revenues and benefits from the business transformation plan.

Now, Advertising North America results. On an ASC 606 basis, the segment recorded $71 million in revenue. Pretax income was $9 million resulting in a margin of 13.2%. Under ASC 605, advertising revenue was $71 million, a decline of 8% year-over-year. This decline was driven by reduced advertising revenue across all three customer cares. Pretax income came in at $10 million as margins improved 50 basis points to 13.7%. Margin expansion was the result of benefits from the transformation plan, partially offset by a shift in revenue mix. As we look at budget levels for the second half of our fiscal year, we expect advertising revenue growth to perform in line with the guidance we provided on the Q4 earnings call.

Our cash balance was $229 million of which $182 million is held outside of the United States. First half free cash flow was $155 million, an increase of 47% year-over-year primarily driven by increased earnings, adjusted for non-cash items and improved working capital. We returned $279 million to shareholders through a combination of dividends and share repurchases in the quarter, and $760 million in calendar 2018. We ended the quarter at 3.1 times net debt to adjusted EBITDA slightly above our previously communicated range of 2.5 times to 3 times leverage ratio. We expect to continue executing our capital return program with the goal of returning $750 million to $1 billion to shareholders through a combination of dividends and share buybacks in calendar year 2019, while staying within our range of 2.5 times to 3 times net debt to adjusted EBITDA.

Now, I'll provide an update on our guidance for the fiscal year. As we are now two quarters of the way through the year and have been able to refine our ASC 606 forecast models. We will only be updating our 606 guidance going forward. We are maintaining our revenue guidance range of $2.32 billion to $2.35 billion, despite adverse foreign exchange impacts. We are also maintaining our previously provided EBITDA dollar range of $860 million to $895 million, and we expect to be at the higher end of our EPS guidance range of $3.70 to $3.80. Finally, we are maintaining our previous tax guidance range rate range of 25% to 26%. The details of our guidance ranges are included in today's press release and in the Investor Relations section of our website.

In summary, we're pleased with the quarter, both in terms of financial performance and the progress we're making in our innovation pipeline and customer success efforts that serve as our foundation to achieving our long-term growth targets. As we head into the second half, we are confident in our ability to continue delivering strong financial performance as we ramp up investment in these key areas.

I'll now turn the call back over to the operator, and we'll be happy to take your questions.

Questions and Answers:

Operator

(Operator Instruction). Our first question comes from Brian Essex with Morgan Stanley.

Brian Essex -- Morgan Stanley -- Analyst

Hi, good morning and thank you for taking my question. I guess, I'll hit this one upfront just because I've had so much inquiry on it over the past few days, but Brian and Joe, I'm sure you saw the speculation in the news last week regarding CDk and Cars.com, is there any way you can address perhaps how that may or may not be an opportunity or perhaps provide a framework around your disciplined for potential transactions. How you anticipate growing both organically and inorganically and what investors can expect with regard to that.

Brian Krzanich -- Chief Executive Officer

Sure, I can start, this is Brian and then I'll let Joe jump in. First, clearly, we can never comment directly on rumors and speculation. So, on that specific one we just, there's no real comment, but maybe we just talk about our general view on acquisitions. First, acquisitions really have to be clearly a strategic either that you're filling in gaps in your product portfolio. There is a long-term strategic shift in the industry you believe that acquisition can give you unique technology, our leadership and so that's the first thing is really understanding the strategy behind an acquisition.

And then clearly, there has to be a near-term or relatively quickly positive return on invested capital from a shareholder perspective, and just -- in the near term. We just completed last summer, the ELEAD acquisition, it's going great as you saw from the earnings call, and we're really focused on doing a great job of integrating and growing that, we believe we've already demonstrated. We can grow the ELEAD business quite a bit faster. So we're really focused on that plus just the opportunities in our core auto software with Drive Flex and Fortellis and that's where we're really focused right now.

Brian Essex -- Morgan Stanley -- Analyst

Got it. What about from ---

Brian Krzanich -- Chief Executive Officer

Joe add something.

Joe Tautges -- Executive Vice President and Chief Financial Officer

Yeah, Brian just what I would add is, it's important for us to have a balanced capital return program and as you heard in my prepared remarks today, we reiterated $752 billion in calendar 2019. And we look forward, as part of our year-end earnings call for giving an update on how we think about that beyond calendar 2019, but having a balanced our profile with returning capital to our shareholders, while investing in the right strategic acquisitions that match the financial profile, particularly as we look at our core auto software business is important to us.

Brian Essex -- Morgan Stanley -- Analyst

Got it. That's very helpful. And then maybe if you could touch on ELEADS real quick, how much growth in the period was organic versus inorganic and maybe how you think about the contribution of ELEADS to the top line?

Brian Krzanich -- Chief Executive Officer

Yeah, thanks. So listen, we're really excited, we were off to a very strong start with the ELEADS business significantly over performing particularly on the top line versus our business case and then what we have thought about in terms of new unit sales. When you look at the revenue, it becomes quite difficult to start -- to parse it out, given the approach that we're taking, meaning we have stopped at this point selling our CRM. We are converting clients within our portfolio as well. And then there's other revenues between the two companies that now get eliminated. So, quite frankly, we don't -- we don't pull that out separately. And we're just pleased with having them into our portfolio and very focused on integrating and building on the momentum and the strong sales quarter, that team has had this quarter.

Brian Essex -- Morgan Stanley -- Analyst

Great. All right, I will hop back in the queue. Thank you.

Brian Krzanich -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Ian Zaffino from Oppenheimer.

Ian Zaffino -- Oppenheimer -- Analyst

Hi, great, thank you very much. The very good detail on the call, I am just kind of keen into one of the terms you used about at risk dealerships, how are you defining basically -- who is at risk? Who is not? How are you determining that and if you were to kind of look at the whole portfolio. What portion is "at risk" and also as far as your retention levels of those at risk. Where do you see that basically proving to, because you mentioned that you've seen some pretty good improvement there. Thanks.

Brian Krzanich -- Chief Executive Officer

Sure. Again, it's Brian I can start and then Joe can add input. I think the way we're looking at it, especially now is every dealership that comes up for contract renewal or their contracts coming to completion whether there was one that signed up for a two-year contract two years ago or one that signed up for five years, five years ago or even the ones that are going months to months. We look at each one of those now and -- one of the focus shifts we've done is, every one of those is at risk to some extent, right. And we are there -- out there, trying to earn their business. I think there are some that are -- we -- just started to identify that are uniquely at risk, maybe they are identified to us that, they are considering other options, or they are part of the two-year contract efforts that was put in place two years ago that are coming up, those are relatively short-term contracts that locked in those dealers, two years ago, but are now coming up, and so we're starting to identify where our most likely at risk but there -- the way I had the organization really focusing right now, is that every partner, every dealer is an at-risk dealer and we need to treat them as such and really focus on better customer support and care. So that's how we're really looking at it now. Anything else Joe.

Ian Zaffino -- Oppenheimer -- Analyst

Okay.

Joe Tautges -- Executive Vice President and Chief Financial Officer

No, I mean -- I would add is that the efforts in the push are really paying off with auto sites being where they are at the 8,888 sites and you start to look at next quarter year-over-year comparison just gets much more reflective of the stability that we expect to see, and so when you look at the last three quarters and especially some of the leading indicators Brian, discussed in his prepared remarks, we have more work to do and we'll continue to do that and we think we're making the right -- spend in the right time, at the right efforts to make a difference.

Ian Zaffino -- Oppenheimer -- Analyst

Okay, thanks. And then just a follow-up on Fortellis, can you touch on that a little bit as far as what you're seeing as far as activity there potential to bring more -- more customers onto that platform, I know you had a couple of big contracts now with Lyft and Sirius XM as well. So what else are you seeing as far as activity there and what would be the pace of ramp up that we should be expecting. Thanks.

Brian Krzanich -- Chief Executive Officer

Sure. Maybe I should spend a couple of minutes just explaining what Fortellis is and why some of the strategic shifts. We've made in the last couple of months are important to it, and then give you a little bit of where do we see it going from here. First, Fortellis you can think of it as simply, a way for software, whether it's layered application or DMS so, to work through an interchange that allows through APIs various levels of software to exchange data and operate that. So you could have a service layered app connecting to somebody's DMS and it's exchanging data about when was the car bought, and who the owner is, and what service has been done in the past and all of those kinds of things. There's a set of APIs that make a standard, very simple way for data to be exchanged across that.

What's -- we've really done in the last quarter or so is, one, maybe diagnostic and saying whether it's our DMS or whether it's other people's DMS, whether it's our layered app other layered apps, third party layered apps they're all going to be open and enable to use Fortellis through an interchange data. So it's truly meant to be an open platform. And then we made initiation fee whether you want to post an API to it because you have a layered app or a DMS or whether you want to use by one of our APIs within your system there -- there is no charge for getting access to those API's or producing those API's on to the system. So we lowered the cost barrier to entry into the Fortellis system.

As you said, we've got some, some big partnerships going already. The whole idea of this is that all the dealers are dealing with -- their average deal has up to 14 different pieces of software that are using to operate their dealership, but right now, all those connections are point to point, right. And I have to make each one of those connections using an interchange like Fortellis and make a connection onetime and anyone of those other 14 pieces software can access that data and so it's much more efficient for everybody to push data around and have access to that data. That's really the driver that people are using for it. Also because it's opened an agnostic, if I post -- if I'm a third party layered app, I post to it. It should work and no matter who's DMS I want to use as long as that DMS is connected to Fortellis. So again, it makes it a much simpler and much more efficient for people to get their software out into the industry and into the marketplace.

And so we look at this, you saw we did a developer day, I think of it like a Hackathon at NADA the attendance was great, people were actually posting. We had our both third parties in there, we had people from all over the world attending, we had some of our competitors attending. We signed up for the next one, the next ones in New York. It's all already already oversubscribed. So we're seeing a lot of interest in developers already signing up. We have about 170 users, -- our 700 users, excuse me -- are using the system already.

And so we think -- if this is -- it's going to take time to continue to grow this ecosystem, think of it as an ecosystem or building, and we need more and more DMS to sign up to it. We need to post more and more of our own APIs internally, so that people kind of access to more and more of our connections, both on our layered apps and our DMS, and we need to get more and more independent software providers to really post their applications as well into this, but both between our partner programs and these developer data's that we're doing. We think we're going to see quite a bit of growth over the next year.

And I think this is going to take -- I don't see this as being something like Drive Flex that's going to dramatically change things in the next year or so. I look at -- this one is something that's two, three, four years in the making, but in the long-term could provide quite a bit of shift in change in how the dealership ecosystem operates. And so that's the way I'd like you to think about Fortellis from that standpoint.

Ian Zaffino -- Oppenheimer -- Analyst

Great, thank you very much.

Operator

The next question comes from Rayna Kumar with Evercore ISI.

Rayna Kumar -- Evercore ISI -- Analyst

Good morning, thanks for taking my question. On January 21, you sent us a letter to customers highlighting acceleration of the investments with Drive Flex and Fortellis and improvement in the service model, which is really echoing your commentary today. How will you balance these investments with margin expansion?

Brian Krzanich -- Chief Executive Officer

Sure, this is Brian. I'll start and then Joe, I think especially is going to want to jump in on this one. One is, you see that where the company is focused on growth, we've talked about retention of our dealerships, better. So we believe we're already are on a path to growth. So that growth can now fuel some level of spending and we committed to grow revenue and earnings as faster than our spending. But, I just want to touch it up kind of like how did we think about this? We are going to go spend more on Drive Flex and Fortellis, that's not hundreds and hundreds of engineers -- adding 10 or 20 engineers to a program like Drive Flex is enough to accelerate by several months or several quarters. The rest of the build out to Drive Flex -- so we're talking about 10s, building up to maybe 100 or so engineers to really grow this business. This not a massive build out.

And then when we talk about increasing our service hours in our service, changing the service hours doesn't necessarily mean we're going to get more calls and need more service or call people. What we need to do is shift to hours. So if we get X number of calls per month, but many of those calls would have been made on Saturday night when the dealerships trying to close that last deal and our normal hours were out, that call waited until Monday morning. Now, we're going to answer that call on Saturday night, it's the same number of calls we're shifting -- going to be shifting people's hours more. So we're going to try and do that one without adding headcount for example.

So lot of this is just working smarter, not actually adding a ton. We do think we're going to need in order to -- what you're seeing is faster growth in the ELEAD -- we're going to build out Drive Flex faster. So things like install, will add headcount, but that turns into revenue in a relatively quick basis. And so we are going to add that directly in correlation to the revenue growth, that's the install delivers as a result, and that's long-term revenue growth. And so we think those are good investments from that standpoint. So I think install is going to be the place where we'll probably add the most headcount. But again, that will be at the rate that's commensurate with the revenue growth due to the install.

Joe Tautges -- Executive Vice President and Chief Financial Officer

Yeah, and Rayna, what I would add is as Brian said in his prepared remarks. It's really Brian's job, mine and the entire leadership team's job to strike that balance between making sure we're being prudent and balancing and bringing on the investment with the revenue growth in, like Brian said, we've got the momentum at the moment and then we're going to lean into it. I think, I would tell you that this can be variable quarter-to-quarter. And so I wouldn't sit here and say, boy next quarter will be exactly this or that because there certainly is a lag for when the revenue comes online. The encouraging part about this business model is, we have such visibility into our backlog and what we need to install in the revenue that's there. And so it's an attractive opportunity, it's a good position to be in and we will carefully balance it.

Rayna Kumar -- Evercore ISI -- Analyst

Great. That's very helpful detail. If you could just walk us through your plans to return to growth in advertising. How and when will you return to growth and where do you stand with General Motors?

Brian Krzanich -- Chief Executive Officer

Sure. Let's start with the second part of that question first and just where do we stand with General Motors. Our relationship with General Motors continues to be quite good. And both in advertising and websites, we continue to have a great relationship and provide most of the services to General Motors in both cases. They did announce that on Web services, there were going to open up to more suppliers. We welcome that, we are going to continue to provide great service and we think as we continue to make improvements in our web services, we will continue to be a key player there as well. And then advertising is highly variable and you saw last quarter, advertising was quite good and work -- continuing to be careful on the investment side and amortizing, and managing where we think advertising long-term is headed relative to our investments in that space.

Joe Tautges -- Executive Vice President and Chief Financial Officer

Yeah. And then as you look at the first part of your question Rayna. What I would say is, we are quite happy with how the quarter came out and the work that the advertising team is doing. And as you look at the second half, we certainly will continue to face some headwinds around the spending levels. Longer term, we're seeing progress right now where the team has made some investments to make the tech much more available to other OEMs and we're seeing traction with that. We've got some of our first wins this quarter, particularly in the local market association space. And so, our focus has been a diversification of the business and an improving the trajectory, and I think we'll see -- we'll continue to see progress over the longer term and stability and return to growth is what we expect out of the team.

Rayna Kumar -- Evercore ISI -- Analyst

Great. One final question from me. Can you just walk us through your migration time line for on-boarding customers to Drive Flex? What are the key milestones we should be looking out for?

Brian Krzanich -- Chief Executive Officer

Sure. I can start this and see who else wants to jump in. With Drive Flex, we have, you can kind of think of this is that -- what you have to do is go through OEM by OEM and what you do is, you first get OEM certification and what -- what you're really doing is making sure that all the financial reporting out of the dealership is accurate and reliable back up to the OEMs and you go by OEM, and so what we've got right now is GM, small like single-digit dealership levels. So one, two, three rooftops, we will then go to the next OEM, which will be Ford, and at the same time, work our way GM into multi-large number, Drive Flex has the ability to do -- because it's a digital platform, web-based. We've actually run Drive Flex literally at 30,000 feet from airplane using a tablet to make sure that it's truly something that is modern and can be used anywhere. We'll go to Ford and then also GM multi-stores and it can go to infinite number of stores and we'll work our way through our target and part of the acceleration dollars beside what's to done with the majority of the OEMs, by the end of this year through certifications. We will be ramping during that time. We have two dealers up in operational right now and we have -- I think about 40 orders on backlog right now already and out of NADA, a lot of interest and we're putting together our plan now and that's going to be a large part of our installs.

I think you'll see conversions of Drive Flex taking, if you take a look at the 9,000 dealers we have, it could take three years or four years before we get through that number of dealers, but I think we'll start seeing an acceleration as we come through this calendar year and by the back half of 2019 calendar. We should be at a run rate that carries us through the rest of the time period and that's probably going to be, a couple hundred a quarter kind of run rate.

Rayana, we've got unfortunately keep moving along. Thank you for your questions. Operator, next questions.

Operator

And next question comes from Matt Pfau with William Blair.

Matthew Pfau -- William Blair -- Analyst

Hey guys, thanks for taking my questions. You -- wanted to hit on the commentary earlier about ELEADS and the out performance in the quarter. Maybe just some more detail in terms of where that out performance came from has -- the reception within your own customer base has been better than expected or I guess are you seeing more traction with customers of competing DMS systems with ELEADS and, then perhaps you anticipated.

Brian Krzanich -- Chief Executive Officer

So I can start and again Joe can jump in probably with more detail, I'd say it's -- it's relatively 50-50 in that we're seeing better growth in non-CDK's DNS providers or sites and we are seeing great growth in the CDK sites, Joe talked to you about, we've stopped selling our CRM solution and selling the ELEAD solution and so we're seeing really very strong growth on both sides and I wouldn't say that one side is particularly stronger than the other, what you're seeing is larger sales force, a larger company backing, people are very confident that the technology can continue to be invested in and that you also seeing, starting to link it to some of our other front office applications.

Then one other things we look at is, this is a way, an entry points because they had such good relationships and so many relationships and other DMS. It's a great way for our layered apps to work into non-CDK DMS as well -- as we link these together. So we look at this is a great opportunity and we're out with the sales group saying, look, it should be an opportunity in both directions, so CDK DMS and non-CDK DMS and not only the ELEAD but time some of our other layered apps together with the ELEAD application to allow us to sell even more into those other DMS.

Matthew Pfau -- William Blair -- Analyst

Got it. And then last one for me, it seems like in terms of the initial reception and pipeline for Drive Flex, pretty positive on that. It wouldn't -- when do you think we could start to, early impact from Drive Flex is going to be enough to turn the tide here with the one-to-two site dealers and make that perhaps become neutral to the positive contributor to site count. Thanks.

Brian Krzanich -- Chief Executive Officer

So, I'll tell you -- so any idea is probably a great example. We had two display stations or demo stations set up on Drive Flex by the secondary, and to open up a third because it was so much interest and there were so big of aligned behind those two demo stations, just around Drive Flex. So the interest is definitely there, I think again it's going to take us a bit of time to get our ramp up and some of the other OEMs. I think as you go into the second half of this calendar year, so it will be second half calendar year '19 or first half fiscal year '20. I think that's when you'll see Drive Flex start materially shift the numbers, both in our sites and our revenue, and it's going to take a little bit of time like that to get momentum going in our installs and some of the other OEMs on those certification list.

Matthew Pfau -- William Blair -- Analyst

Got it. That's it for me. Thanks a lot guys.

Operator

Our next question comes from Gary Prestopino with Barrington Research.

Gary Prestopino -- Barrington Research -- Analyst

Hi, good morning, everyone. Hey Joe, could you just -- trying to write this down. Could you talk about what your growth insights, year-over-year was on the two-plus point in the -- what was the decline year-over-year, on the one to two point?

Joe Tautges -- Executive Vice President and Chief Financial Officer

Yeah. So we are -- I don't think we disclosed the site count, so we do disclose is the revenue, so the revenue three-plus. Locations grew high single-digit and the performance in the one-to-two segment declined, the low-single digits. And so the question, we just got, I think you're starting to see -- so Drive Flex is a really important piece of it, but all the other things that, Brian had in his open letter to customers around customer service, around customer success and really the focus on retention and how much our sales teams, our account management teams are focused on and they're just doing a great job and we're seeing those efforts really starting to pay-off and I think if you start to look through the second half, you'll continue to see more stability across the portfolio and then Drive Flex should be additive to that as we start to get that rolled out.

Gary Prestopino -- Barrington Research -- Analyst

Okay. And then -- with ELEADS, all right -- within your RSNA sites, your average revenue per site jumped pretty dramatically. So I would assume a lot of that as the impact of ELEADS, but in terms of your sites right now in the U.S. -- in North America, how many of them actually have a CRM application that you sell and is it -- I am trying to get an idea of just how much this company can proliferate through your base of sites in North America.

Joe Tautges -- Executive Vice President and Chief Financial Officer

Yeah, the several points I would touch on. You had talked about our revenue per site growth 10% this quarter, I don't want to walk away with this, thinking that the majority of that is ELEAD. We're seeing really good sales progress from our core business, and I don't think we've talked a lot about that yet in the Q&A, but we're really proud of the work that the sales team and the installation team has done in products like Service Edge, has done in places like dot-cloud. Our sales continued to be strong and that core base continues to contribute nicely to revenue per site in addition, ELEADS is additive and is doing well on top of that. So you're right, there is multiple components to that.

As we think about ELEAD, again there is meaningful opportunity within our portfolio to penetrate it and we've tried to be very thoughtful though, I mean there's just really strong demand within the 11,000 or so approximate dealerships that don't have our DMS. We're seeing the momentum as Brian said in his response continues there as well as now at our base two it and so we're doing the best we can do to add implementation capacity, we have a very full backlog, a robust pipeline and I think there is opportunity for time to come as we go drive the penetration and integrate the business.

Gary Prestopino -- Barrington Research -- Analyst

Okay. And then with Drive Flex when that first came out, my understanding was -- it was for a smaller dealership one to two point, it now seems like you're going to quote that into -- for we larger dealer space, I mean what upgrades do you have to do on the functionality to get it into the multi-site operator versus the one-to-two space, if any?

Brian Krzanich -- Chief Executive Officer

Sure. It's Drive Flex Gary. And yeah it's because of the way it is architected. It's a modern system with modular configuration, you really don't have to make that many changes in order to get into the larger number of sites. It's mostly getting, when you take a look at going into larger sites with more rooftops, they typically arm in one OEM, when you're talking about a dealership that may have 15 roof-sites -- rooftops and they may have four or five different OEMs that they support with that, all requiring, different types of reporting. And they want to aggregate that data together, so they can see the portfolio of their businesses and understand them.

So it's more about generating those modules than a lot of aggregation of the financials across several OEM system, but again that's because of the modular system that, that's simply going to add on a piece of software as a way to think about it. So it wasn't very hard for us to go and make it scalable to an infinite number of sites, is the way you can think about it. It really is designed, if you think about how modern system works, whereas dropdown menus, it's very intuitive, that's only Drive Flex is architected both on the user interface, but also how it's architected for the architect itself for the software developer. So, it didn't require a big investment on our part to do that.

Gary Prestopino -- Barrington Research -- Analyst

Okay. And then lastly. Brain, you mentioned some on the strategy talking about data analytics is, I think the third prong of the strategy. Do you currently have a product out there that helps, the dealers interpret their analytics or a data science team that is doing that through the dealers right now?

Brian Krzanich -- Chief Executive Officer

Sure. In fact, one of the most kind of enthusiastic discussions we had at NADA was the first substantiation of the Dealer Dashboard. The Dealer Dashboard comes from that data site and it's basically something we're going to start providing for free to dealers as part of our increased customer support and it is basically the first level of analytics that -- let them look at how they're using our software, how they're operating within their system. So for example, service line are their discrepancies in, how fast customers are going through service line. And all those result of, how they're using our products and can we provide more training or are there enhancements that are required or are there system issues itself. So the first substantiation of this analytics is already getting delivered to customers and they were very excited to see that.

We are building out an analytics team. We're just starting, I'd say that effort -- and you'll see more and more those kinds of products and we'll always provide a good-better-best type of support mechanism, where it is a certain level of that just comes with being a CDK customer, but we will provide additional analytic levels all the way up to customer analytics for a reasonable fee to people as well. So that's kind of how we're thinking about this.

Joe Tautges -- Executive Vice President and Chief Financial Officer

Thanks for your question. We are going to move on to the next question.

Gary Prestopino -- Barrington Research -- Analyst

Okay, thank you.

Operator

The next question comes from Brian Essex with Morgan Stanley.

Brian Essex -- Morgan Stanley -- Analyst

Hi, thanks again for the follow-up. Yeah, just wanted to follow up on the dealer environment. Maybe if we could get a little bit of color of domestic versus international and -- I know you noted, there was some consolidation international markets. How much visibility do you have in any of those markets and maybe if you can give us a little bit of an understanding of the impact you called out China, but any other geographies specifically impacting that performance?

Brian Krzanich -- Chief Executive Officer

So I'm trying to make sure that's a pretty broad question. Perhaps, I can answer it. I'd tell you that we're in International, we're continuing to see, I'll call it greater Asia being the biggest growth opportunity. We are still good growth in Western and Eastern Europe as well, but I'd say if we're looking toward the future, we definitely see Asia, of course China and the rest of Southeast Asia as being growth centers. I think in the U.S., yeah, we continue to see some level of dealer consolidation occurring. I'd say it's kind of at a moderate level right now, but we know a lot of dealers when I'd go out and talk to especially the large dealership groups, they all looking constantly I'd say, are there good acquisitions out there and they're looking to consolidate further.

How much insight do we have a model but it says, we expect this many over the next few -- we know trying to model that, its so dealers specific, it's hard to do.

Joe Tautges -- Executive Vice President and Chief Financial Officer

And as we talked, the only thing out is as we've talked about in the past we over index our portfolio two-third of it is in those larger dealer spaces. So we will continue to enjoy some of the benefit, is that consolidation continues to happen.

Brian Essex -- Morgan Stanley -- Analyst

Okay. And then how much visibility would you have, when you're modeling our internal expectations? How much is based on your installed base? I guess in terms of growth, how much is based on your installed base versus incremental dealer adds?

Brian Krzanich -- Chief Executive Officer

Brian, I'm not sure, I follow the question, could you say that again?

Brian Essex -- Morgan Stanley -- Analyst

How much visibility do you have in your pipeline, as you're internally modeling out your expectations for the year, to have a better performance in the quarter than we expected but you held your guidance consistent with last quarter for the most part. What kind of visibility do you have into incremental dealer adds as opposed to incremental revenue based on penetration in the installed base?

Joe Tautges -- Executive Vice President and Chief Financial Officer

Yeah. We have good visibility. I want to be clear, I mean, listen, we're very happy with the quarter and you know, it's -- we want to be very balanced around the guidance. And so I thought you're definitely seeing us hold our guidance. Again that has advertising and it's got some FX stuff in it and so you do see strength in the topline and we're going be very balanced and there's a lot going on in the macroeconomic environment. And we will continue -- and we really look forward to updating you in future quarters on our performance. And we are pleased with the revenue outperformance in the quarter and we have good visibility into the second half and so -- yeah.

Brian Krzanich -- Chief Executive Officer

And longer term, you heard Joe and I, actually the whole team here is committed to growth, right. So our real growth mindset in delivering these new products, innovating better customer support. We believe those things will deliver growth. And so I -- look more at that long-term, we continue to believe, we will continue to grow both top and bottom line.

Brian Essex -- Morgan Stanley -- Analyst

Okay, thank you very much.

Brian Krzanich -- Chief Executive Officer

Thank you.

Operator

(Multiple Speaker) We don't have any further questions at this time.

Brian Krzanich -- Chief Executive Officer

Okay. I'd just like to say thanks everybody for joining us this morning. As I said at the onset of the call, I believe CDK is in a unique position to deliver to state-of-the-art software to the auto industry, which puts us in a great position to grow the business as we really capture that opportunity. And we enter the second half of the year focused on our fee strategy, encompassing our near and long-term objectives. And we are confident that the plans and the initiatives we have in place will allow us to execute and deliver the growth we've committed to you. And I look forward to speaking to you all again next quarter. And everybody have a great day.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Duration: 61 minutes

Call participants:

Katie Coleman -- Senior Director Investor Relations

Brian Krzanich -- Chief Executive Officer

Joe Tautges -- Executive Vice President and Chief Financial Officer

Brian Essex -- Morgan Stanley -- Analyst

Ian Zaffino -- Oppenheimer -- Analyst

Rayna Kumar -- Evercore ISI -- Analyst

Matthew Pfau -- William Blair -- Analyst

Gary Prestopino -- Barrington Research -- Analyst

More CDK analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

More From The Motley Fool

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.