CDK Global reported (https://tinyurl.com/y5438fzj) after the market closed on 2 November 2020 it earned $0.46 per diluted share in the quarter that ended on 30 September 2020, down 31% percent from earnings of $0.67 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP).
CDK Global is a leading provider of specialized technology services to automobile dealers and related firms. The services help dealers with buying, selling, financing, insuring, repairing, and maintaining vehicles. Automatic Data Processing spun out CDK, a former division, as an independent, publicly traded company in October 2014. In 2018, CDK Global hired Brian Krzanich, Intel's former boss, as its president and chief executive officer. In September 2018, CDK acquired ELEAD1ONE for $500 million to obtain automotive customer relationship management and call-center tools. In April 2020, CDK sold its Digital Marketing business to Ansira Partners.
Adjusted earnings, a non-GAAP figure, rose 4% to $0.82 per share from $0.79 one year earlier, a percent change much better than seen with the GAAP figures. Adjusted earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits. However, caution is warranted when analyzing these figures because management has considerable leeway in choosing which GAAP-required items to exclude.
The principal exclusions contributing to the $0.36 per share difference in the latest quarter between GAAP earnings and Adjusted earnings were: Legal and other expenses related to regulatory and competition matters [$0.11 per share], Stock-based compensation [$0.10 per share], and Restructuring and related costs [$0.16 per share].
Adjusted earnings of $0.82 per share in the latest quarter significantly beat the $0.67 average ("consensus") of estimates made by Wall Street analysts. See https://tinyurl.com/yyvgks8h for CDK's earnings record and forecasts.
Stock market traders did not have much of a reaction to CDK's latest earnings. The price of the company's shares was nearly unchanged.
Looking deeper into the GAAP results, "top-line" revenue in the September 2020 quarter totaled $494 million, about the same as last year. The North America business was responsible for 84% of overall revenue, and this unit's revenue fell by 1.0% compared to the year-earlier result. The International business contributed 16% of revenue, and this unit's revenue grew by 3.9%.
The gross margin weakened from 50.0% of revenue to 46.9%, a sign that CDK sold its output and services at less profitable prices relative to production costs. Sales, general, and administrative expenses increased from 21.8% to 22.7% of quarterly revenue, which shows the company spent more per dollar of sales on other operational costs, such as marketing. The effective income tax rate rose by 6.7% to 31.4%, which had a negative effect on net income.
CDK's operating activities generated $100 million in cash during the last quarter, up 38.1% from $72 million in the year-earlier period. The cash flow delta was, therefore, much better than the change in earnings. Notable uses for cash included $18 million to pay dividends to shareholders, and $22 million to acquire property, plant and capital equipment.
Free cash flow over the last 12 months totaled $312 million, or $2.55 per share using the latest share count. At the current market price per share of $44.03, this translates into a decent Free Cash Flow Yield of 5.8%.
The accompanying charts illustrate several trends in CDK Global's financial results, taken from data in regulatory filings. The text and the charts are intended to provide some limited historical context for readers interested in the company’s finances. No investment advice is provided, and no investment offer of any kind is made or solicited. The accuracy of the information presented is not guaranteed, and readers are encouraged to independently verify all data.
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