Cliff Banks - The Banks Report

2015 NADA Report: Section 2 – Vendor Analysis

This is Section Two of our post 2015 NADA Report. In this section, we evaluate the leading vendors — primarily those in the technology space. Companies covered in this section include CDK Global; DealerTrack Technologies; Cox Automotive; Reynolds and Reynolds; Dominion Dealer Solutions.

  • Section Three will cover Cars.com; DealerSocket; Solera Holdings and ELeadOne.
  • Section Four will provide shorter analysis of smaller firms on The Banks Report 2015 Watch List.
  • Section Five of the report will analyze the leading trends this year.

 2015 NADA Report: Section One – Vendor Acquisition Activity

We begin this section with an overview of each company; then follow up with a recap of the product announcements each firm made during or leading up to NADA. We conclude each company section with our perspective of their outlook for 2015.

The Banks Report does not provide endorsements of companies or solutions. Positive comments, as a result, do not represent endorsements. TBR tries to provide an accurate and fair evaluation of each company’s strategy; solutions; along with its challenges and market strengths and opportunities. 

CDK Global

Overview. CDK is about five months into its life as a public company, since being spun off from ADP in October of 2014. It recently reported its second quarter financials (CDK’s fiscal year ends June 30). Revenue increased 7% while adjusted net earnings jumped 36% (excluding costs associated with the October spin off).

Meanwhile, the company reported 5% increase in DMS penetration — U.S. and international combined. Revenues from digital marketing also increased 17% for the quarter while pre-tax earnings doubled with pre-tax margins expanding by 500 basis points.

The stock has performed incredibly well opening trading on October 1 at about $31 a share, dropping to $25 two weeks later, and then climbing as high as $48 a share recently. Much of the activity likely is being driven by activist investors Scott Ferguson of Sachem Capital and Jeffrey Tannenbaum of Fir Tree Capital. The Banks Report has covered their activity in detail — Why are Activist Investors Targeting CDK? 

We have more insight below into what effect the investor activity will have over the next year but first let’s look at some of the key product announcements CDK made during NADA. The company released 140 different new solutions and product upgrades. We’ve highlighted just a few that we believe to be significant enhancing dealership operations and/or the customer relationship.

Product Announcements

1. Dealer Data Exchange (DDX). This is a pilot program CDK has designed to give dealers more visibility of what data is flowing out of their DMS and to whom its going. Phase two will provide dealers ability to control which third parties and manufacturers have access to their data. The program is being run CDK’s data group at DMI (Digital Motorworks). Dealers currently using the CDK Drive DMS will be invited to participate in the pilot program. There should be a full roll out sometime in the spring of this year.

It’s hard not to view DDX as a response to DealerVault, although CDK officials push back against that characterization saying the company has been developing DDX for a while. DealerVault is a fairly new company launched by Steve Cottrell (who also owns Authenticom, a data extraction firm). It claims to provide dealers the ability to lock down the DMS and control which outside companies have access and control what data they receive.

It’s a solution that’s needed but the DDX announcement does reveal a potential market vulnerability for DealerVault — the DMS firms can roll out their own similar solutions. However, one question is how does DDX differ from the certified integration programs CDK rolled out several years ago (while it was ADP Dealer Services Group)? Apparently, DDX is going to provide dealers with much more control and a much better window into what data is being accessed — two key areas some of CDK’s bigger dealer customers have been pushing for. We see this as an important announcement because data security is becoming one of automotive retail’s biggest issues (Dealerships are Key in Upcoming Cyber Wars).

It’s also important because it might indicate that CDK is going to be a much tougher company for third party vendors to deal with. For more than a year, DMS consultants and numerous vendors have observed — complained might be a better word — that CDK is becoming more difficult than Reynolds and Reynolds in allowing outside firms to integrate into its DMS. We are hearing about a potential change in strategy with how DMI will interact with Reynolds and Reynolds customers. 

Whether DDX will be a key solution moving forward will most likely be determined the answers to the following four questions:

  • How much support does CDK actually put into the initiative?
  • Is it a real solution or is it something CDK quickly put together to counteract what DealerVault is pushing?
  • Will OEMs push back against dealers wanting to limit their access to the data? OEMs keep pushing for more access, while dealers see that as a potential threat to their business.
  • What will DDX’s business model be? Will CDK charge dealers, or vendors, or both? Don’t be surprised if CDK determines this is a profit generator.

2. Audience Management. This is a big step in the evolution of personalization of advertising and goes far beyond retargeting of online display ads. It’s being rolled out by CDK’s Digital Marketing Group (formerly the Cobalt Group), and lets dealers personalize both online ads and website content. The content dynamically changes based on who’s viewing it. Personalized landing pages, personalized incentives and personalized pricing across multiple devices are some of the early advantages the solution provides.

3. Cash Management. The industry finally is starting to see some of the back office benefits that technology can provide. This is a paperless cash management solution to streamline payables and receivables at the dealership. Dealerships using the CDK Drive DMS are now able to — through CDK epPayments — accept online and mobile payments with Apple Pay, Google Wallet and PayPal. The solution also is integrated with CDK’s Service Edge mobile application, letting customers receive a text/email invoice notification, pay the service balance online via their secure digital wallet and arrange their vehicle pickup time.

Meanwhile, CDK ePayments is integrated with account payables applications providing “no touch” invoice processing and automates tasks like general ledger coding, approval of invoices and payment to vendors.

4. Texting and Service. Other product enhancements (of 140 announced by CDK at NADA) include bi-directional texting capabilities through CDK’s telephony system and online service pricing guides allowing customers to build part of the repair orders online. The texting solution captures all of the customer information along with the texts and integrates that information into the CRM tool.

The service pricing guide enhancement is intriguing because it could be a significant tool as dealers seek to differentiate their service departments from independent repair shops, and even, other dealership service departments. The solution positions CDK nicely to be competitive in the service department — but it will need to add more solutions to the mix to be a real player. (Reynolds and Reynolds has a service pricing guide also — at some point we’ll see these occupy prime real estate on dealership websites).

CDK Global’s 2015 Outlook

1. Activist Investors. This is a challenge that likely will not go away in the short term future. Sources inside CDK indicate the relationship to this point has been friendly but we also have sources in the investment community that believe Scott Ferguson and Jeffrey Tannenbaum are preparing for a proxy fight to gain board seats this fall.

As we outlined in our earlier story about the investors, they believe they can move CDK profit margins to a level similar to those of Reynolds and Reynolds. Reynolds is a private company but its financials from a couple of years ago have been floating around the investment community since KKR made a $5.2 billion offer in January of 2013.

Already, the activists’ influence is being felt. CDK’s board is taking steps to avoid what several observers believe could be a proxy fight for seats this fall. It’s all about returning value to the shareholders.

  • Authorized a share buy back program of 10 million shares to be implemented through 2018.
  • Will choose an outside consulting firm to conduct a company-wide review for the purposes of improving profitability. We’ll be hearing more over the next several months what some of these strategic moves entail.
  • Within the next several weeks, CDK will host an analyst day to provide more insight into the company’s solutions along with its plans to grow the business.
  • Will pay a regular quarterly cash dividend of $0.12 per share on March 27, 2015.

CDK has approximately $402 million on the balance sheet that it plans to use for acquisitions and to fund the share buyback plan.

It’s anyone’s guess how this plays out. CDK remains — and will continue to be — one of the leading vendors in the automotive retail space. CDK is a $2 billion company and has a strong position in the DMS and digital marketing arenas. It also has a majority of the top 100 dealer groups using its DMS. 

The management team has its strengths. It knows the market well and has built what clearly is globally the leading technology vendor in automotive retail. 

If the activists end up forcing a management change, short term that likely will be good for investors. But we’re not sure that will be a positive for customers. The focus will be on returning value to the shareholder and not necessarily what’s best for dealers. This will be a story that plays out well into 2016. But we should have a pretty good handle by the end of this year on the direction it takes. 

2. Potential Acquisitions. There aren’t many areas in which a large acquisition makes sense for CDK. It needs a decent CRM solution. For years, the company has struggled with its CRM application. Admittedly, this is anecdotal evidence, but 15 years of conversations with CDK (ADP) customers reinforce the perception that it lacks a viable CRM solution.

The challenge is a lack of potential acquisition targets. Vista Equity Partners recently took a majority position with DealerSocket, the industry’s CRM market leader. VinSolutions is owned by Cox Automotive.

ELead1One might make the most sense. It has significant market share and does have good solutions. It’s state of the art call center would be nice to have — especially as managing phone traffic effectively becomes even more important for dealers. Just because it makes sense, though, doesn’t mean owner Hugh Hathcock needs to — or will sell.

CDK could go the DME Automotive route. DME’s focus is on service retention, and that’s an area vendors see as critical today. And the fact is, CRM is about service retention. DME has a strong platform with a strong customer base, and seems to be positioned nicely in its space. Meanwhile, AutoLoop has come on strong in the last year, so that’s an outside possibility.

CDK does not need a DMS, nor does it need a website company. So we think a CRM-related deal is the path to take. We would be surprised if something doesn’t happen sometime this year.

Meanwhile, industry sources tell us CDK has been shopping Dealix (which includes Autotegrity, a company CDK/ADP reportedly paid nearly $95 million for a couple of years ago).  Dealix is part of CDK’s digital marketing solution. It’s essentially a third-party lead provider. Autotegrity’s role is to drive more online leads to dealerships by using search engine marketing tactics. This part of the business has become increasingly more difficult over the last couple of years.

3. Pressure on Digital Marketing. For years, CDK’s digital marketing division (formerly Cobalt) enjoyed exclusive relationships with as many as five OEMs — General Motors, Lexus, Volkswagen, Hyundai and BMW. The relationships meant CDK was the exclusive website provider to the dealerships representing those brands.

Three of the five have since opened their doors to other vendors in recent months. CDK still has the exclusive relationships with GM and Lexus. But the trend today is for OEMs to provide their dealers with a choice of vendors. CDK will definitely lose some of its business this year just because of that changing dynamic. It’s an area investors need to keep an eye on. Despite the challenges, it appears to be growing. There were reports recently that the group is hiring as many as 100 people for its Detroit office.

DealerTrack

Overview

Dealertrack’s shares are starting to come under pressure as the company announced its 2014 earnings recently and projected lower than expected guidance for 2015. Analysts anticipated projections of $1.83 per share on sales of $1.02 billion. DealerTrack instead forecasted profits of $1.39 to $1.48 a share from sales ranging from $1.08 billion to $1.1 billion. It’s share price dropped about 8% following the projection and is now trading just above $39, down from its 52-week high of $48.

More than $1 billion in acquisitions in the last 12 months coupled with aggressive initiatives in development and integration have eaten into the company’s profitability and investors are starting to get antsy.

Chairman and CEO Mark O’Neil has tried to temper expectations for the last year during earnings calls saying the company would not start to see a payoff till later this year and even into next year.

DealerTrack has all the pieces it needs. There won’t be any large deals this year, although, the company might buy a tuck in piece in the $5 to $10 million range. Meanwhile, it has to continue to execute and generating value from what has been an aggressive acquisition strategy the last several years.

Acquisition of incadea

DealerTrack’s big news came a few weeks prior to NADA when it confirmed it was buying European-based DMS firm incadea for $190.3 million. The company has operations in 87 countries servicing 2,500 dealerships and 70,000 end users. Many of those are the result of acquisitions of smaller, local firms.

Incadea should be familiar to those in the dealership management system world. It was founded in 2000 and was acquired by Reynolds and Reynolds in 2003. Following Bob Brockman’s acquisition of Reynolds in late 2006, Reynolds sold incadea back to a group started by its original founder, Peter Wenger. It was then acquired by the Real Consulting Group based in Greece and taken public in 2012 on the London stock exchange AIM. Once the acquisition is complete, DealerTrack will take the company private.

The acquisition gives DealerTrack an immediate and viable international presence beyond Canada. Incadea has performed well the last several months winning seven of eight contracts it was invited to bid on. The eighth was an opportunity incadea declined to pursue. One of those includes winning the Ford contract in China — a market with huge potential.

The move should pay off here in the states also, as it probably will change — likely enhance — the nature of the conversations DealerTrack has with OEMs regarding DMS activity. It acquired Arkona, a smaller DMS vendor,a few years ago. It’s made some headway since, but probably ranks fourth behind CDK, Reynolds and Reynolds and AutoSoft in marketshare. Nevertheless, DealerTrack is becoming a more serious player in the DMS space in the U.S. and is in the conversation as dealer’s DMS contracts near the end of their term. It may have the opportunity to gain significant share the next couple of years depending on how CDK’s dance with the activist investors plays out. But word on the street is that DealerTrack will have to make significant investments in upgrading its current DMS — which is pretty old.

Meanwhile, being a global player also will enhance the investor relations. Being well-positioned in China to leverage the opportunities in a potentially huge market never hurts.

That’s the positive spin — and while true, there are significant challenges internationally waiting for DealerTrack, a fact that CDK’s Kerridge and Reynolds and Reynolds have already learned.

Building a DMS that can be dropped into different international markets is near impossible. Even in Europe, what works in France does not work in Germany. Each local market practically requires its own DMS. And people in Europe tell us it’s more complicated than merely changing the language templates on the DMS. Government regulations, dealership processes, customer interactions — each market is different.

Part of incadea’s strategy in recent years has been to work with local partners in specific markets — France being one example. There, incadea chose to work with an existing partner while closing down its subsidiary in that market. In other cases, incadea has acquired local companies instead of opening subsidiary offices in the local market.

Look for DealerTrack to focus on a couple of key markets — China, Latin America, India. We’ll see whether that includes a play in Australia, whose automotive manufacturing industry has cratered but has an active and hungry dealer market. Whether that means incadea exits less profitable markets overseas remains to be seen. Although, manufacturers seem to want to work with vendors who can provide a DMS across various markets.

Following the incadea announcement, DealerTrack did announce it is “exiting” the Canadian market. One of the reasons DealerTrack is changing its Canadian strategy is because the DMS it inherited when it assumed the Ford business a couple of years ago provides little flexibility — any tweaks require significant changes to be made at the database level — costly and time consuming efforts. DealerTrack has less than 150 dealer clients in Canada and many of those are smaller dealers. In short, it’s not a profitable market for DealerTrack.

While some observers have criticized the Canadian move, it’s the right strategy for DealerTrack. Deploy resources to markets that have more upside, both from a share and profitability perspective, while possibly preparing to reenter Canada at a later date with a more flexible system.

One other note, DealerTrack will not look to bring incadea to the U.S market.

 NADA Announcements

Mobile eContract Review and Signing:  DealerTrack adds mobile capability to its eContracting sign and review solution. It will work on iPad and Android tablets. Dealers no longer need tethered signature pads expensive installed display pads that confine dealers and their buyers to the F&I office.

While eContracting over all has a ways to go still — even after more than 10 years of industry development, it is gaining traction. Dealertrack has processed more than three million eContracts over the last several years.

Digital Retailing App: The new app should provide dealers direct mobile access to website leads, inventory and finance data, and the ability for consumers to submit credit applications directly from the showroom floor. It’s another tool designed to streamline the in-store buying process while reducing the time required for customers to be in the showroom.

F&I Presentation on Websites:  ProtectionDriver lets shoppers evaluate F&I options on the dealer’s website during the early stages of the shopping process. Having access to F&I product information on the website will help consumers better understand how they can protect their vehicle, all while helping to save time in the showroom. ProtectionDriver settings are controlled by the dealer to maximize product penetration and deal profitability.

Service Check-In App: This is part of the ASR Pro (now DealerTrack Service Pro) acquisition DealerTrack made several months ago. The app lets advisors  check in customers at their vehicle, review and recover previously declined services.

Inventory+ Mobile: Just released, this app replaces DealerTrack’s current TrueTarget mobile app. Essentially, everything available to dealers on the desktop Inventory+ solution is now available on a mobile device:

  • Real-time push notifications
  • Access Buy and Sell lists
  • Launch vehicles to multi-platform listings
  • Switch quickly between dealerships on one screen
  • Review inventory health
  • View CARFAX® history reports
  • All appraisal books on one screen
  • Coming soon for iPad and Android devices

DealerTrack’s 2015 Outlook

  1. More focus on international markets, certainly with China and Latin America — along with a possible move into Australia to fill the vacuum resulting from Kerridge pulling out. Although, in the recent call with analysts, O’Neil did not include Australia as one of the regions it’s looking at for incadea.
  2. Maybe another acquisition in the service/fixed operations arena. This could be a company to supplement what ASR Pro provided along with strengthening marketshare in that segment. Acquisition of a service retention marketing firm also is possible.
  3. Additional solutions on the Dealer.com websites focused on building out the digital transaction at the dealership.
  4. Continued integration — especially on the CRM front. Insiders have said the integration is about 20% completed.
  5. Dealer.com is already benefiting from increased access with certain OEMs such as Hyundai as CDK (Cobalt) websites lose their exclusive relationships with some OEMs.
  6. Chairman and CEO Mark O’Neil has been candid with investors and analysts saying the company likely won’t start seeing the profit benefit from the numerous moves it’s made recently until 2016 or 2017. DealerTrack has invested millions in building out the integration points for its numerous solutions. The question is going to be in the execution — can they pull it all together?

Cox Automotive

Cox Automotive is part of the Cox Enterprises family and generates an estimated $5 billion of the company’s approximate $17 billion annual revenue.  Other than a few captive finance firms, Cox Automotive is the biggest vendor in the automotive retail space.

AutoTrader, Kelley Blue Book, VinSolutions, NextGear Capital, Manheim, vAuto are just some of the brands housed under the Cox umbrella today. It’s a global company with holdings in Brazil, China, Europe, Australia, New Zealand and Thailand.

In the last five years, the company has engaged in an aggressive acquisition strategy picking up nearly 10 companies.

Cox is privately held so obtaining a perspective on its finances is near impossible. But clearly, it has a financial war chest with which it can add whatever it deems necessary.

Meanwhile, the company has its hands in nearly every aspect of automotive retail. It has shown a willingness to move into areas that other companies wouldn’t give a second look to. A couple examples include NextGear Capital which began offering floorplan financing for new car dealers last year. And, Manheim which is piloting a program with Uber, making vehicles available for purchase to Uber drivers. The company also invested in a ride sharing program late last year in California.

Product Announcements  

 1. MakeMyDeal. This is Cox’s first foray into actual online retailing (KBB and AutoTrader are more online marketing). The solution will be incorporated into the vehicle display page on a dealership website. The customer can begin the buying process using MakeMyDeal by offering a possible purchase price, provide information regarding the trade and how they will pay for the vehicle. The platform came out of an idea lab Cox started a while ago. It’s just a first step for the company in building out a solution that allows customers to conduct the entire transaction online.

2. Subprime Booking Module. The module is part of vAuto’s Provision solution launched at the 2014 NADA convention. The tool is designed to provide intelligence to dealers on how specific vehicles line up with their subprime initiatives:

  • Determine the subprime potential of every auction or trade-in appraisal
  • Verify multiple lenders’ criteria against any appraisal at once
  • Arm sales teams with available subprime inventory to efficiently match customers to the right cars early in the sales process.

VinConnect Mobile. This tool provides mobile access to the dealership’s CRM (VinSolutions).

  • Customer I.D. scanner: Dealers can scan a shopper’s driver’s license right from their smartphone to quickly and accurately capture customer information. The scanner initiates new records, checks for duplicate contacts in the database and allows immediate updates to stored information.
  •  Mobile call tracking: VinConnect Mobile records and logs all outbound customer calls to holistically track the sales process, all with a dealer’s existing phone system. Calls made from a personal mobile device still come from the dealership phone number.
  •  Vehicle-of-interest scanner: Dealers can scan the VIN of any vehicle to easily capture the customer’s vehicle of choice — right on the lot — helping to speed up the sales process.

Cox Automotive 2015 Outlook

Acquisitions. Industry chatter is that Cox has at least two deals pending, one large and one that is significantly smaller. So we’ll see if they pull the trigger.

Depending on what happens in the next couple of months with the VinSolutions website platform will determine whether Cox moves ahead with acquiring another website firm.

Last year’s experiment with giving Haystak the responsibility for building a new responsive website platform doesn’t appear to have worked. For the last several months, VinSolutions has been driving the development with an update on its progress scheduled for dealers later this month.

Depending on whether VinSolutions can develop the right platform will likely be the determining factor into whether Cox decides to acquire another website vendor later this year. Stay tuned on this one — at some point, Cox (Vin) will get the website strategy righted.

Meanwhile, we believe the long term play for Cox is to acquire a DMS vendor. Although, CEO Sandy Schwartz said it wasn’t on the shopping list when asked about the possibility during the Automotive News Retail Summit held just before NADA in San Francisco. If it’s not now, it will be.

Reynolds and Reynolds

Overview

Reynolds and Reynolds has been fairly quiet the last couple of years giving the perception that it’s not really focused on growth. Don’t be fooled. It’s reportedly the most profitable company in the space (its margins are what’s driving the activist investor activity at CDK). Meanwhile, the company has been quietly adding the pieces that dealerships will need to be competitive in the near future. Nevertheless, it is a love/hate relationship with dealers — they either love Reynolds or hate it.

It rebuilt its DMS platform culminating in the Ignite product in 2011. In 2010 Reynolds started changing its focus to more of a retail perspective building out the engine for its Retail Management System. It likely will be another two years before RMS is fully developed.

RMS is designed to help dealers become better retailers and that includes increasing the profitability of each customer. The latter is a message that seems to have crystallized at the NADA convention this year. As profit margins continue to compress Reynolds says its intent on helping dealers find new ways to grow profitability. Two solutions executives are raving about (and have been the last few years) are docuPAD, its F&I selling solution, and Add On Auto, a solution that helps dealers sell accessories.

  1. More than 50,000 vehicle transactions went through the docuPAD solution in December according to Reynolds and Reynolds. Meanwhile, its data shows dealers are making an additional $200 per copy in F&I profit while increasing average gross by 40% per car. The solution does put Reynolds in a position to move closer to offering a true online transaction piece. Create an online docuPAD module for its websites and couple its new ReyPay with the strong documents business it has — there are possibilities.
  2. Reynolds and Reynolds acquired the Add On Autos piece a couple of years ago to help dealers create another profit stream. Accessories is a big business — nine out of ten customers spend more than $40 billion a year on accessories according to SEMA’s data. And most of those purchases come within the first 90 days after the vehicle purchase. Dealers get less than 5% of that business, however.

Reynolds surveyed 150 dealers last year (measuring the first six months of 2014). Admittedly, these were dealers           using its Add On Autos solution — but the stats are intriguing (Keep in mind, though, this is for the first six months of 2014 – and it’s also Reynolds data):

  • Accessory sales 400% higher compared to the average dealer
  • More than $33 million in accessories sold
  • $19 million in profit ($126,666 per dealer)
  • Sold accessories to 55% of their customers

Product Announcements

Aptus Websites: The perception in the market is that Naked Lime, Reynolds marketing company, had exited the website business. Instead, it was developing a new website platform it is calling Aptus — Latin for “adapt,” which is supposed to indicate that the new sites are able to provide the right content on the right device to the right customer.

The sites are 100% adaptive and employ numerous mobile widgets which provides dealers with a simple drag and drop process for editing purposes. The platform also allows dealers to maintain one URL across all their stores to drive better search engine optimization. It’s not a “mobile first” strategy, but more of an integrated strat

The website arena is an area the company has lost significant ground in during the last few years. Look for Reynolds and Reynolds/Naked Lime to begin a much more aggressive sales approach in that space — probably in the second quarter of this year. They have serious ground to make up — including its credibility in this area.

ReyPay:  ReyPAY is an electronic payment process solution for dealers. It includes secured credit transactions with point-to-point encryption that meets new credit processing rules and adds safeguards for consumers’ personal data.

It provides customers with secure payment options in-store, online, over the phone, and on mobile devices using applications such as Apple Pay. ReyPay should provide better efficiency while relieving bottlenecks in the dealership’s cashier area, especially in service and parts. It will also reduce processing errors.

The back-end payment processing for ReyPAY will be handled by OpenEdge, the Integrated Solutions division of Global Payments Inc.

Mobile Used Vehicle Management: It works on either Apple or Android devices and lets the used car manager or other personnel manage the department while mobile. It’s part of the Reynolds Management System and integrates with the DMS.

  • Mobile alerts that notify dealership personnel of appraisal requests sent from other Reynolds Retail Management System applications, such as Contact Management or Desking.
  • Mobile capabilities that enable dealership staff to appraise vehicles from anywhere and quickly book out vehicles at auction using the app on a smartphone or tablet.
  • Ability for dealership personnel to send a completed vehicle appraisal from a mobile device to others in the dealership immediately so they can take the next steps with the customer in working the deal within Reynolds Desking or the DMS.

Reynolds and Reynolds 2015 Outlook

On the acquisition front, look for Reynolds to be conservative, much like it has been the last several years. It will likely make three to four smaller deals, mainly for companies that complement its current products. Probably a firm that provides some type of marketing services that can be integrated into Naked Lime and possibly something that will help it on the service side.

Also, based on the conversations at NADA it’s likely looking for solutions that can directly impact dealership profitability. It’s focus is going to be building out the Retail Management System (which is about two years away from full development). Look for a more aggressive push on its website business

Whether Reynolds itself is a candidate to be acquired — anything is possible. Two years ago, it turned down a $5.2 billion offer from KKR. If something were to happen, it likely would be an investment firm looking to take it public and would take significantly more than $5.2 billion. But we have no indication the company is on the market at this point. Nor was it two years ago, when rumors were flying that the company was for sale. We believe that was driven by interested buyers, not by Reynolds putting itself on the market.

Dominion Dealer Solutions

 Overview

Dominion is another company that stays fairly quiet but has put together a suite of products that serve numerous areas in the dealership. It’s parent company, Dominion Enterprises, is part of the Landmark Media Enterprises family, headquartered in Norfolk, VA. It’s a private company, so a financial picture is difficult to obtain. TBR estimates Dominion Dealer Solutions revenue to be north of $100 million.

The CEO and primary owner, Frank Batten Jr., is a well-known Norfolk business man. His father ran the company for several years, including growing the Weather Channel into a multi-billion business.

Batten tried selling Landmark (including Dominion) in 2008 but could not find a buyer due to the failing credit markets at the time (It’s important to note that Cox also tried selling AutoTrader a few months later but took it off the market for the same reason).

Batten, however, has sold several pieces of the Landmark family in recent years — Weather Channel for $3.5 billion in 2008; three of its daily newspapers since 2013 — two were sold to Berkshire Hathaway; two of its local TV stations, one in which the deal was closed last month.

These sales are important because it seems to indicate that Batten is dismantling the company by selling it in pieces. But he clearly does not have to sell, so he can afford to wait for terms agreeable to him. Nevertheless, don’t be surprised if a deal is announced for Dominion Enterprises at some point over the next year or two. The challenge that makes a deal more difficult, though, is that Dominion Enterprises includes several business lines not related to automotive.

Depending on the buyer, Dominion Dealer Solutions might have to be spun off separately. A sales price likely would range between $600 to $700 million putting it out of the range of most other vendors.

The most likely buyer would be a private equity firm, but thinking outside the box, TrueCar may need to make a big play this year. The likely price is out of its reach, but Scott Painter knows how to get investors on board. (Similar models have been successful in automotive — AutoTrader did it in 2009 when it convinced Providence Equity Partners to invest in its acquisition strategy. Providence made a lot of money on that deal.)

Another potential industry buyer could be Cars.com. The second half of this year, it will have a sizable financial war chest and with its handcuffs finally off following its purchase by Gannett Cos., this could be an intriguing play. But Carl Icahn’s activist play with Gannett likely will have to play itself out first before any major moves of this nature are made.

To be clear, TBR has not heard of any discussions involving TrueCar or Cars.com along these lines,  making this a purely speculative discussion. But the next couple of years could be interesting for Dominion. 

Product Announcements

Dominion’s Online Advertising Platform: The new platform lets dealers target customers searching for similar products with specific offers. The platform also searches for customers currently in buying cycles and converts them to dealership prospects.  Services include fully-managed, campaign-based search marketing, pre-roll video display advertising and inventory-specific search marketing.

A key feature of the platform is ability to leverage social media to communicate a dealership’s primary brand or marketing messages to customers.   The platform creates custom web pages for conversion — not mirrored web pages — regardless of which website vendor the dealer selects.

Market Center Digital Dashboard: This is a single login portal that lets dealers view metrics across key digital marketing channels, including any combination of responsive websites, inventory management, reputation management, and social media management platforms.

The Dashboard features data from and access to the Dominion Inventory Manager, Prime Response reputation and social media management software, and analytics for Dominion Responsive Websites. The company says it should be able to include additional digital marketing metrics from email, newsletters and paid search engine marketing sometime in the next few months.

Mobile Showroom: This is a tablet application for Dominion’s CRM tool, DominionCMX.  The app includes:

  • A proprietary algorithm to match consumers with vehicles in the dealer’s inventory
  • VIN scan for quick entry of the consumer’s Vehicle of Interest or Trade-In
  • Ability to scan the consumer’s driver’s license and update the buyer information immediately within the CRM

Soft Credit Pulls for Deal Activator: This lets dealers pull financial data pertaining to potential trade-in vehicles that were not purchased at their dealership. This new process gives dealers the same extensive financial data required to do equity calculations that have previously been limited to vehicles originally bought from the dealership. (Deal Activator is Dominion’s equity mining tool. An interesting read of its patent dispute with Auto Alert: Auto Alert Patent Dispute Has Big Implications)

Deal Activator Mobile App: This solution should speed up the buying process for customers while providing key information to dealership personnel while on the lot. Entering a customer’s name and phone number or scanning a vehicle VIN gives users an instant equity evaluation for that customer, with a recommended list of replacement vehicles from the dealer’s inventory.  Each vehicle match displays the potential new deal structure using current manufacturer incentives.

Department & Content Specific Reviews: With the integration of Prime Response’s reputation and social media management tools, dealerships using Dominion’s Responsive Websites can display content-specific reviews via website pages or snippets in real time. The type of reviews shown varies according to the dealership’s preference, but can include vehicle model, dealership staff or department reviews. The reviews can be filtered by star ratings, source, or relevant keywords which can appear on any page on the website.

Cross Sell Interactive Integration with Dominion Inventory Manager: With this integration Cross-Sell Interactive provides customizable dashboard widgets, unlimited user-defined charts or graphs, market-based vehicle sales data, DMV title registration data, and the ability to track specific makes, models and custom segments. Actual market-specific data eliminates guesswork at the dealership by providing access to flexible and instant local sales data, as well as top lien holders that are specific to a dealership’s market.

Dominion Dealer Solutions 2015 Outlook

TBR has three questions about Dominion this year:

1. Can Dominion force itself into the discussion with the top level vendors — Reynolds and Reynolds, CDK, Cox Automotive or DealerTrack? The truth is, Dominion has built an impressive suite of products, but none are market leading. In discussions of major vendors, it does take effort to remember to include Dominion.

The company is visible participating in numerous industry events; markets itself well and has an active voice in social media. Not a criticism, but an observation: Dominion’s senior leadership stays behind the scenes and that’s one of the main reasons Dominion may lack that one aspect that could provide it with a more forceful, or dynamic personality. Dominion’s Dealer Solutions Robert Berndt gives the occasional interview, but he stays fairly quiet. The same goes for Jack Ross, Dominion Enterprises’ president.

Neither Ross or Berndt sit on industry panels or are known for speaking at industry events. They probably take their cues from Landmark’s CEO, Frank Batten, who likewise is fairly quiet. It’s an important part of the discussion because it provides a window into the personality of a company like Dominion and its potential strategy.

2. A second question involves Dominion’s DMS strategy. It’s a two-pronged approach: Dominion Access and Dominion DMX.

Access is based on the Automotive Computer Systems DMS platform it acquired in 2011. At the time, ACS had 400 dealership customers. it’s a windows-based system targeting small to medium size stores.

Dominion DMX is newer — launched in December 2012, or at least, introduced in December 2012. Dominion developed the Microsoft Dynamics AX-based system for medium to larger dealerships. It’s worked closely with Microsoft in the development of the new product.

The market challenges are many. CDK and Reynolds still dominate with nearly 80% of all the marketshare. Microsoft tried to enter the market in 2006 but got nowhere. The reality is, hearing Microsoft’s name attached to a DMS engenders a “Been there, done that,” response. Dominion has a huge mountain to climb in proving the DMX value and that it can play with the big boys.

On the other hand, although it’s highly unlikely, DMX could be on the forefront of newer solutions that ultimately disrupt the DMS space.

3. A third area is potential acquisitions. Dominion, in recent years, has slowed its acquisition pace considerably. The focus has been on building integration among its many solutions. Based on recent history, we would be surprised to see Dominion make a deal.

However, Landmark certainly has the cash and the ability to raise funds for a large deal, but based on our perspective outlined in the Overview, we think it’s more likely Dominion is sold.

Still, Dominion could — and perhaps should — make a play in the service space — as other companies also are looking to do.

 

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