What CDK Investors Missed Asking on the Q3-2020 Call

On May 5th, 2020, CDK Global held its Third Quarter Fiscal 2020 Earnings call. CEO Brian Krzanich (BK) and CFO Joe Tautges laid out:

• CDK keeps growing in site count and revenue (North America sites up by 12 over 2019 Q3; Q3 2020 revenue at $516 mil. up by 3% year-over-year)
• Drive Flex is certified for 5 OEMs with around “two dozen” installations and 100+ sales
• CDK supports its dealers with financial relief on their existing obligations, and with free support for selected add-on solutions like Digital Retailing
• CDK adjusted its 2020 Fiscal Year guidance from $2,000 – $2.050 to $1,915 – $1,965 (in mil.)

Here is what CDK investors missed asking on the Q3-2020 call:

1. What is the impact of COVID-19 on the OEM certification of CDK Drive Flex and the OEM API migration to Fortellis?

If my memory serves me correctly, Brian Krzanich’s goal was to certify the CDK Drive Flex Dealership Management System for all major OEMs within a year. It is fair to say more time will pass before all of the 30+ manufacturers currently selling light vehicles in the US and Canada, will integrate with Drive Flex. Also, don’t forget about the OEM interfaces for heavy-duty trucks and equipment, power sport, marina, etc. In the general scheme of things, all DMS vendors have to deal with the same OEM bottleneck. But for CDK this becomes a sensitive topic for two reasons:

• 75% of all CDK dealers have 3+ more sites. Many dealership groups diversify their business, not only regionally, but also with different franchises. So, CDK’s core target group needs a DMS that is certified for multiple OEMs. That makes it essential to quickly obtain all OEM certifications to allow for broader adoption of Drive Flex.

• CDK is revisiting its strategy on third-party integrations (and associated interface fees). As more and more partner APIs move to Fortellis, the question arises if OEM interfaces will transfer to the Fortellis platform for Drive Flex as well? Brian Krzanich mentioned two examples of current OEM Fortellis projects. One related to connected car information (potentially for preventive maintenance and service work) and one for a near-real-time inventory feed (possibly for inventory forecast and floor planning).

However, if OEMs decide to postpone investments in their dealer APIs due to COVID-19, then that would impact CDK’s future revenue on both Drive Flex and Fortellis.

2. What is the outlook for Fortellis concerning its adoption among CDK-competitors and the general CDK dispute with state lawmakers over dealer data and sharing?

Per Brian Krzanich, CDK continues making progress with Fortellis. For instance, they are now at 38 APIs and 7 million Fortellis transactions to date (May 2020). Built In recently reported that Fortellis hosted 24 apps and 27 active APIs (April 2020). Besides, at the 2020 NADA in Las Vegas, CDK announced a partnership with Microsoft to integrate GitHub and Power Apps into Fortellis. In layman’s terms, CDK is trying to make it easier for the automotive dealer community to build APIs and applications on Fortellis.

Conflict of Fortellis’ Interests?

However, the more significant challenge seems to be how to overcome apprehension from CDK’s competitors to join. Why would the 700+ DealerTech companies join a CDK-run agnostic integration platform? Why would they not instead support an independent data collaboration program like MotiveRetail, Authenticom, SIS, or Oxlo? Cox Automotive’s announcement to jump on the Fortellis wagon came at an interesting time. That’s when both companies settled their lawsuit over CDK’s unfair business practices (associated with the CDK integration program). Since then, Fortellis announced the formation of an Advisory Council as a governing body to remove some of the skepticism. And yet, it is doubtful it would make a big difference. After all, Fortellis remains a CDK-owned entity serving up revenue to CDK’s shareholders. Fortellis is in the business of making money, and not a nonprofit and dues-paying organization like STAR.

State Regulation Favors Open Dealer Data Sharing

Additionally, some significant state decisions are outstanding on how to build a fair legislative framework around dealership data ownership and sharing. Arizona appears to take the most dealer-friendly stand. For instance, Arizona is requesting the removal of any (major) constrains and even fees associated with dealer data sharing. How will the disputes with Arizona (and other states) over dealer data interface practices affect Fortellis?

3. How does CDK drive innovation with ~5% R&D spending while rewriting its DMS platform, integrating layered apps, and re-inventing its DMS integration program?

In the core of CDK’s solution roadmap is Drive Flex, which morphed from a failed-AutoMate-acquisition replacement for the lower end to the DMS of the future for ALL dealer segments. Drive Flex is not an extension or enhancement package for CDK Drive, Dash, or the Autoline DMS. Drive Flex is a complete rewrite with new code, modern database architecture, and data structure (this is crucial for BK’s AI ambitions). For that reason, CDK has to program all OEM interfaces again for currently available and new integration points (e.g., vehicle data), as mentioned above.

Integrate Drive Flex with CDK Layered Apps

Additionally, CDK has to integrate all existing layered applications with the new Drive Flex DMS platform. Brian Krzanich commented on the status of CDK’s Drive Flex and the Elead CRM in the Q3 investor call. The integration with Drive Flex and the alignment of user experience and workflows, however, does not only apply to Elead. It affects all other layered applications. That includes the CDK Payroll Plus (Premier), Document Cloud, Service(Edge), Electronic Repair Order (ERO), Lot Manager, Connected Store, and many more.

Big Ambitions With Small Budget?

All-in-all – CDK Global is going through a significant change organizationally and technologically. Drive Flex requires the company to touch the entire dealer technology stack. For example, software, database, OEM certifications, partner interfaces, layered app integrations, and more. Furthermore, Brian Krzanich described transitioning to a new ERP for better dealer billing and process improvement. Naturally, it surprises that R&D spending had dropped from 6.4% in 2018 to only 4.2% in 2019 [2019 10K]. In times of COVID-19, cash preservation is indispensable. Nevertheless, considering the immense scope of the recode projects, healthy funding becomes an indicator of the speed-to-market and payback period. It is not unusual for SaaS companies to develop their software solutions with R&D spendings beyond 25% of revenue. In comparison, Cox Automotive as the biggest CDK competitor spent $350 mil. in September 2019 buying a piece of Rivian. That is 3X of the CDK R&D budget of $100 mil.