Dealertrack accelerates as it supplies software for rebounding car dealers

The Long Island company that has benefited most from the sharp rebound of the auto industry does not sell cars. Rather, it sells software.

Dealertrack Technologies Inc. has more than doubled its annual revenue, to $481.5 million, since auto sales bottomed out in 2009, steadily expanding its array of programs for car dealers to process loan applications, track inventory and perform umpteen other tasks.

Now the Lake Success company is poised to grow even faster. This month Dealertrack closed on the biggest acquisition in its 13-year history, paying nearly $1 billion to buy Dealer.com, a Burlington, Vt., company that specializes in dealer websites and online marketing. Dealertrack says the move will boost its 2014 sales to more than $800 million and bring the company closer to its ultimate goal: moving automotive retailing from the showroom to the Internet.

"We want to transform the process of buying a car," chief executive Mark O'Neil said in an interview. "We want to deliver 'click to buy.' "

An unassuming rise

Yet for all its high-tech success, Dealertrack has maintained a low profile outside automotive circles. It's rarely -- if ever -- cited by local officials pushing to build a network of software companies on Long Island. And while nearly everyone who has bought a car in the last decade has crossed paths with Dealertrack's software, many may not even recognize the name.

That's largely because the company's software operates behind the scenes, discreetly automating mundane tasks for dealerships, saving them time, paperwork and money.

So while Dealertrack, which employs about 3,500 people nationwide, may lack the glitz and buzz of other tech companies, it has quietly boomed into one of Long Island's largest corporations, with a stock market value of $2.2 billion.

Dealertrack, however, isn't fully in control of its destiny. The company's continued success hinges, in part, on the success of the auto industry.

If car sales fall, Dealertrack is apt to slip, too, analysts say. The company learned that the hard way in 2009, when the recession sent U.S. car sales plunging to a 27-year low and hundreds of dealers went belly up. In turn, Dealertrack's annual revenue fell for the first time ever, slipping 7 percent.

But car sales have been rebounding ever since. And this year analysts are forecasting national sales to rise above 16 million vehicles for the first time since 2007.

That bodes well for Dealertrack. Its stock has surged 69 percent in the past year, closing Friday at $49.28. And analysts say the company seems poised to accelerate even faster.

"Dealertrack has really positioned itself to be instrumental in taking car dealers into a much more Internet-focused future," said Mitchell Bartlett, an analyst for Craig-Hallum, a Minneapolis research firm.

The art of auto dealing

Car dealerships are hypercompetitive and complex businesses that do far more than sell cars. They help customers line up financing, coordinate insurance, register vehicles and titles with the state -- and run full-service repair shops. The paperwork is staggering. And margins are thin.

"There is a constant drive to automate," said Brad Miller of the National Automobile Dealers Association.

Dealers began using software decades ago. But the trend has erupted since the recession. The demand has fueled a booming software market, crowded with players large and small. Two of the most dominant are payroll data giant ADP and Reynolds and Reynolds, which both specialize in multifaceted administrative programs called dealer management systems. Dealertrack, meanwhile, has long been the leading maker of software to process car loan applications.

But after years of acquisitions and building new programs, Dealertrack is emerging as one of the few companies offering software for nearly every step of buying and selling cars.

Replacing the fax machine

Some startups are born in garages. Others arise from banks.

Dealertrack traces its origins to 2000, when the dot-com boom was peaking and investment banks looked to startups for opportunity. JPMorgan Chase had an in-house venture-capital arm -- LabMorgan -- that financed a project to automate the way banks process auto loan applications.

At the time, dealers asked customers to fill out credit applications, which they faxed to multiple banks. Then they waited for the bank to pick up the fax and crunch the numbers. It took hours, even days.

The software developed at LabMorgan changed everything. Instead of paper applications, dealers filled out online forms, which banks processed automatically. It took minutes. Dealertrack was born.

"We replaced the fax machine," said Eric Jacobs, who first worked with Dealertrack as an outside lawyer and is now the company's chief financial and administrative officer.

JPMorgan launched the company in early 2001 as a joint venture with Wells Fargo & Co. and AmeriCredit Corp., setting up shop in the Chase building in Garden City.

Dealertrack, which began with about 12 employees, made money by charging fees every time dealers processed loan applications on its software.

Within the first few years, more than 15,000 dealers were using the system. In 2005, O'Neil, who began his career at Intel Corp., took the reins and guided Dealertrack through its initial public offering.

Today, Dealertrack is headquartered in a former Grumman Aerospace Corp. plant on Marcus Boulevard, which bustles with more than 400 people. The company also has offices in Dallas; Sacramento, Calif.; Salt Lake City; Burlington and several other cities.

The Long Island headquarters puts Dealertrack in direct competition for engineering talent with Google, Facebook and other tech giants that have opened offices in New York City. Dealertrack -- which plans to hire about 200 people this year, including about 105 on Long Island -- holds regular "tech meetups" in Manhattan to recruit talent. And to retain people, the one-time quasi-banking startup has thrown away its dress code and, in some offices, forsaken cubicles for couches with laptop docking stations.

Beyond credit apps

Under O'Neil, Dealertrack has acquired more than 25 companies and developed a string of programs in-house to expand far beyond its financing software. The company now offers dealers programs to track inventory, register vehicles and titles, verify customers' identification, administer liens and more.

"They have done a really great job of diversifying," said Gary Prestopino, an analyst for Barrington Research Associates of Chicago.

Perhaps no previous acquisition will have the impact of Dealer.com. Dealertrack financed the $1 billion purchase with a combination of stock and cash, adding $575 million in debt to its balance sheet. Moody's has said the outlook for its rating on the company's debt is stable.

Dealer.com operates more than 7,000 dealer websites and has technology to push Dealertrack deep into the lucrative realm of online advertising. The move could also protect the company from the volatility of car sales. Most of Dealertrack's revenue is still based on the number of times dealers use its software. So when car sales increase, so does Dealertrack revenue.

But over the years, the company has built a series of products that it sells via monthly subscription. Those sales aren't tied to individual transactions. So they are less vulnerable to the ups and downs of auto sales.

Last year, 38 percent of Dealertrack sales were from subscription products. With the addition of Dealer.com, subscriptions could account for nearly half of total sales.

So even if car sales fall, O'Neil argues, Dealertrack can continue to grow as its customers look for ways to become more efficient. "When the market slows, dealers typically look for ways to cut expenses," he said. "That tends to grow the software business."

Company officials said they aren't concerned about Dealertrack's having a low profile. ("We are not a big hype company," O'Neil said.) The company's growing sales, however, have attracted offers from other states to relocate its headquarters.

So far Dealertrack has demurred. O'Neil said the company is loyal to the team on Long Island. It's negotiating to move into a new, larger headquarters near its Lake Success facility. And the company is working with state and Nassau County officials on a package of tax incentives to stay and grow here.

"I would anticipate that we are going to have a long-term relationship with the state of New York and the county of Nassau," O'Neil said. "It makes sense to stay."