UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-51653

DealerTrack Holdings, Inc.

(Exact name of Registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		52-2336218 (I.R.S. Employer Identification Number)
1111 Marcus Ave., Suite M04
Lake Success, NY		11042
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (516) 734-3600

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 31, 2009, 40,301,971 shares of the registrant’s common stock were outstanding.

 

 

DEALERTRACK HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED June 30, 2009

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Consolidated Balance Sheets (unaudited)			3
Consolidated Statements of Operations (unaudited)			4
Consolidated Statements of Cash Flows (unaudited)			5
Notes to Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 4. Submission of Matters to a Vote of Security Holders			31
Item 6. Exhibits			31
Signature			32
EX 31.1: CERTIFICATION
EX 31.2: CERTIFICATION
EX 32.1: CERTIFICATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DEALERTRACK HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS
(unaudited)

		June 30,				December 31,
		2009				2008
		(In thousands, except share
		and per share amounts)
ASSETS
Current assets
Cash and cash equivalents		$	178,254			$	155,456
Short-term investments			1,108				43,350
Accounts receivable, net of allowances of $2,968 and $1,848 at June 30, 2009 and December 31, 2008, respectively			19,729				18,462
Prepaid expenses and other current assets			13,932				9,624
Deferred tax assets			2,270				2,195
Restricted cash			28				142
Total current assets			215,321				229,229
Long-term investments			3,964				4,392
Property and equipment, net			14,350				13,448
Software and web site developments costs, net			16,560				12,705
Intangible assets, net			50,899				44,405
Goodwill			131,084				114,886
Restricted cash			250				250
Deferred taxes and other long-term assets			21,326				17,900
Total assets		$	453,754			$	437,215
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	3,934			$	4,488
Accrued compensation and benefits			10,300				7,850
Accrued other			12,366				11,385
Deferred revenues			5,213				5,609
Due to acquirees			600				1,740
Capital leases payable			359				360
Total current liabilities			32,772				31,432
Capital leases payable — long-term			272				454
Due to acquirees — long-term			—				682
Deferred tax liabilities — long-term			5,016				2,477
Deferred revenue and other long-term liabilities			5,975				5,950
Total liabilities			44,035				40,995
Commitments and contingencies (Note 17)
Stockholders’ equity
Preferred stock, $0.01 par value: 10,000,000 shares authorized and no shares issued and outstanding at June 30, 2009 and December 31, 2008			—				—
Common stock, $0.01 par value: 175,000,000 shares authorized; 43,333,994 shares issued and 40,296,894 shares outstanding at June 30, 2009; and 175,000,000 shares authorized; 42,841,737 shares issued and 39,833,616 shares outstanding at December 31, 2008			433				428
Treasury stock, at cost, 3,037,100 shares and 3,008,121 shares at June 30, 2009 and December 31, 2008, respectively			(50,395	)			(50,061	)
Additional paid-in capital			442,521				428,771
Deferred stock-based compensation (APB 25)			(41	)			(446	)
Accumulated other comprehensive income			381				(2,730	)
Retained earnings			16,820				20,258
Total stockholders’ equity			409,719				396,220
Total liabilities and stockholders’ equity		$	453,754			$	437,215

The accompanying notes are an integral part of these consolidated financial statements.

DEALERTRACK HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(In thousands, except share and								(In thousands, except share and
		per share amounts)								per share amounts)
Revenue
Net revenue		$	57,870			$	63,181			$	113,570			$	127,489
Operating costs and expenses
Cost of revenue (1)			28,852				27,879				57,973				56,491
Product development (1)			3,514				3,084				7,646				6,226
Selling, general and administrative (1)			25,280				28,010				57,598				57,742
Total operating costs and expenses			57,646				58,973				123,217				120,459
Income (loss) from operations			224				4,208				(9,647	)			7,030
Interest income			341				1,145				743				2,708
Other income			2				—				52				—
Interest expense			(76	)			(74	)			(126	)			(166	)
Realized gain on securities			930				—				1,393				—
Income (loss) before benefit (provision) for income taxes			1,421				5,279				(7,585	)			9,572
Benefit (provision) for income taxes, net			766				(2,213	)			4,147				(4,168	)
Net income (loss)		$	2,187			$	3,066			$	(3,438	)		$	5,404
Basic net income (loss) per share applicable to common stockholders (2)		$	0.05			$	0.07			$	(0.09	)		$	0.13
Diluted net income (loss) per share applicable to common stockholders (2)		$	0.05			$	0.07			$	(0.09	)		$	0.12
Weighted average shares outstanding (2)			39,499,313				41,505,451				39,298,637				41,569,417
Weighted average shares outstanding assuming dilution (2)			40,458,174				42,609,342				39,298,637				42,704,862

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009 (3)				2008
Cost of revenue		$	634			$	599			$	1,247			$	1,213
Product development			199				181				408				358
Selling, general and administrative			2,573				2,754				9,157				5,424

The accompanying notes are an integral part of these consolidated financial statements.

DEALERTRACK HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

		Six Months Ended June 30,
		2009				2008
		(In thousands)
Cash flows from operating activities
Net (loss) income		$	(3,438	)		$	5,404
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Depreciation and amortization			17,888				20,208
Deferred tax benefit			(3,675	)			(1,135	)
Stock-based compensation expense			10,812				6,995
Provision for doubtful accounts and sales credits			4,749				3,572
(Gain) loss on sale of property and equipment			(167	)			1
Amortization of bond premium			56				18
Amortization of deferred interest			70				103
Non cash deferred compensation			150				125
Amortization of bank financing costs			—				31
Stock-based compensation windfall tax benefit			(1,508	)			(290	)
Realized gain on securities			(1,393	)			—
Changes in operating assets and liabilities, net of effects of acquisitions
Trade accounts receivable			(5,850	)			(4,248	)
Prepaid expenses and other current assets			(3,858	)			(1,844	)
Accounts payable and accrued expenses			4,761				(6,527	)
Deferred revenue and other current liabilities			250				1,499
Other long-term liabilities			(55	)			543
Deferred rent			79				360
Other long-term assets			(228	)			(519	)
Net cash provided by operating activities			18,643				24,296
Cash flows from investing activities
Capital expenditures			(3,239	)			(2,991	)
Other restricted cash			114				—
Purchase of investments			—				(144,084	)
Sale of investments			44,569				264,912
Capitalized software and web site development costs			(6,327	)			(4,410	)
Proceeds from sale of property and equipment			78				2
Payment for acquisition of businesses and intangible assets, net of acquired cash			(34,621	)			(2,358	)
Net cash provided by investing activities			574				111,071
Cash flows from financing activities
Principal payments on capital lease obligations			(184	)			(554	)
Proceeds from the exercise of employee stock options			1,641				797
Proceeds from employee stock purchase plan			525				1,094
Purchase of treasury stock			(334	)			(19,131	)
Principal payments on notes payable			(423	)			—
Stock-based compensation windfall tax benefit			1,508				290
Net cash provided by (used in) financing activities			2,733				(17,504	)
Net increase in cash and cash equivalents			21,950				117,863
Effect of exchange rate changes on cash and cash equivalents			848				(389	)
Cash, beginning of period			155,456				50,564
Cash, end of period		$	178,254			$	168,038
Supplemental disclosure
Cash paid for:
Income taxes		$	3,087			$	4,846
Interest			29				84
Non-cash investing and financing activities:
Asset sale through note receivable			500				—
Accrued capitalized hardware, software and fixed assets			1,413				505
Goodwill adjustment			(12	)			—
Deferred compensation reversal to equity			150				125

The accompanying notes are an integral part of these consolidated financial statements.

DEALERTRACK HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Business Description

DealerTrack Holdings, Inc. is a leading provider of on-demand software and data solutions for the automotive retail industry in the United States. Utilizing the Internet, we have built a network connecting automotive dealers with banks, finance companies, credit unions and other financing sources, and other service and information providers, such as aftermarket providers and the major credit reporting agencies. We have established a network of active relationships in the United States, which as of June 30, 2009, consisted of approximately 18,000 dealers, over 750 financing sources and many other service and information providers to the automotive retail industry. We consider a financing source to be active in our network as of a date if it has accepted credit application data electronically from dealers in the DealerTrack network in that month, including financing sources visible to dealers through drop down menus. Our credit application processing product enables dealers to automate and accelerate the indirect automotive financing process by increasing the speed of communications between these dealers and their financing sources. We have leveraged our leading market position in credit application processing to address other inefficiencies in the automotive retail industry value chain. We believe our proven network provides a competitive advantage for distribution of our software and data solutions. Our dealership management system (DMS) and integrated subscription-based software solutions enable our dealer customers to manage their dealership and operations, compare various financing and leasing options and programs, sell insurance and other aftermarket products, analyze inventory, document compliance with certain laws and execute financing contracts electronically. We have also created efficiencies for financing source customers by providing a comprehensive digital and electronic contracting solution. In addition, we offer data and other products and services to various industry participants, including lease residual value and automobile configuration data.

2. Basis of Presentation

The accompanying unaudited consolidated financial statements as of June 30, 2009 and for the three and six months ended June 30, 2009 and 2008 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required for a complete set of financial statements in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting only of normal and recurring adjustments, considered necessary for a fair statement have been included in the accompanying unaudited consolidated financial statements. All intercompany transactions and balances have been eliminated in consolidation. Operating results for the three and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2009. The December 31, 2008 balance sheet information has been derived from the audited 2008 consolidated financial statements, but does not include all disclosures required for a complete set of financial statements in accordance with accounting principles generally accepted in the United States of America. For further information, please refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission (SEC) on February 24, 2009 and amended on April 30, 2009.

3. Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (SFAS No. 168). With the issuance of SFAS No. 168, the FASB Accounting Standards Codification (Codification) becomes the single source of authoritative U.S. accounting and reporting standards applicable for all nongovernmental entities, with the exception of guidance issued by the Securities and Exchange Commission (SEC). The Codification does not change current U.S. GAAP, but changes the referencing of financial standards, and is intended to simplify user access to authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and is effective for our third quarter of 2009. At that time, all references made to U.S. GAAP will use the new Codification numbering system prescribed by the FASB. We are currently evaluating the impact that this statement will have on our consolidated financial statements. However, as SFAS No. 168 is not intended to change or alter existing U.S. GAAP, it is not expected to have any impact on our consolidated financial position or results of operations.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS No. 167). SFAS No. 167 modifies how a company determines when it is required to consolidate an entity and is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS No. 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS no. 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS No. 167 is effective for fiscal years beginning after November 15, 2009. We are currently evaluating the impact that this statement will have on our consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165). SFAS No. 165 establishes principles and standards related to the accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued. The provisions of this statement are effective for interim or annual periods ending after June 15, 2009. The adoption of this statement did not have a material impact on our consolidated financial statements.

4. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Inputs used to measure fair value are prioritized into a three-level fair value hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:

	•		Level 1 — Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
	•		Level 2 — Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
	•		Level 3 — Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

We have segregated all financial assets that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.

Assets measured at fair value on a recurring basis include the following as of June 30, 2009 (in thousands):

		Quoted				Significant
		Prices in				Other				Significant
		Active				Observable				Unobservable
		Markets				Inputs				Inputs				June 30,
		(Level 1)				(Level 2)				(Level 3)				2009
Cash equivalents (1)		$	132,980			$	—			$	—			$	132,980
Short-term investments (2)			1,108				—				—				1,108
Long-term investments (3)			—				—				3,964				3,964
Total		$	134,088			$	—			$	3,964			$	138,052

The change in the carrying amount of Level 3 investments for the six months ended June 30, 2009 is as follows (in thousands):

Balance as of January 1, 2009		$	1,550
Reclassification from Level 2 investments to Level 3 investments			1,360
Realized gain on securities included in the statement of operations			716
Unrealized gain on securities recorded in other comprehensive income			338
Balance as of June 30, 2009		$	3,964

5. Net Income (Loss) per Share

Effective January 1, 2009, we adopted FSP No. EITF 03-6-1. All prior-periods earnings per share data presented have been adjusted retroactively to conform with the provision of the FSP. The FSP addresses whether instruments granted in stock-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. Our nonvested restricted common stock, which includes our long-term incentive equity awards, are considered participating securities since the share-based awards contain a non-forfeitable right to dividends irrespective of whether the awards ultimately vest and, therefore, have been included in the denominator of both the basic and diluted earnings per share calculations. FSP No. EITF 03-6-1 did not have a significant impact on our historical earnings per share calculations. Basic earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding, assuming dilution, during the period.

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except share and per share amounts):

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
						(2)								(2)
Numerator:
Net income (loss)		$	2,187			$	3,066			$	(3,438	)		$	5,404
Net income allocated to participating securities under two-class method			(33	)			(64	)			—				(112	)
Net income (loss) applicable to common stockholders		$	2,154			$	3,002			$	(3,438	)		$	5,292
Denominator:
Weighted average common stock outstanding (basic)			39,499,313				41,505,451				39,298,637				41,569,417
Common equivalent shares from options to purchase common stock and restricted common stock units (1)			958,861				1,103,891				—				1,135,445
Weighted average common stock outstanding (diluted)			40,458,174				42,609,342				39,298,637				42,704,862
Basic net income (loss) per share		$	0.05			$	0.07			$	(0.09	)		$	0.13
Diluted net income (loss) per share		$	0.05			$	0.07			$	(0.09	)		$	0.12

The following is a summary of the weighted shares outstanding during the respective periods that have been excluded from the diluted net income (loss) per share calculation because the effect would have been antidilutive:

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
						(2)								(2)
Stock options			2,905,849				2,335,898				4,883,287				2,202,333
Restricted stock units			8,816				—				577,781				—
Total antidilutive awards			2,914,665				2,335,898				5,461,068				2,202,233

6. Comprehensive Income (Loss)

The components of comprehensive income (loss) were as follows (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
Net income (loss)		$	2,187			$	3,066			$	(3,438	)		$	5,404
Foreign currency translation adjustments			3,856				406				2,541				(1,633	)
Unrealized gain (loss) on available for sale securities			809				(56	)			570				(342	)
Total comprehensive income (loss)		$	6,852			$	3,416			$	(327	)		$	3,429

For the three and six months ended June 30, 2009 and 2008, the foreign currency translation adjustment primarily represents the effect on translating the intangibles and goodwill related to an acquisition in Canada.

7. Stock-Based Compensation Expense

We have four types of stock-based compensation programs: stock options, restricted common stock, restricted stock units and an employee stock purchase plan (ESPP). For further information see Notes 2 and 13 included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC February 24, 2009 and amended April 30, 2009.

The following summarizes stock-based compensation expense recognized for the three and six months ended June 30, 2009 and 2008 (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
Stock options		$	1,858			$	2,083			$	7,190			$	4,013
Restricted common stock			1,080				1,378				2,684				2,789
Restricted stock units			468				—				878				—
ESPP			—				73				60				193
Total stock-based compensation expense		$	3,406			$	3,534			$	10,812			$	6,995

Stock-based compensation expense recognized for the three months ended June 30, 2009 was $3.4 million, of which $3.2 million was in accordance with SFAS 123(R) and $0.2 million was in accordance with APB 25. Stock-based compensation expense recognized for the three months ended June 30, 2008 was $3.5 million, of which $3.1 million was in accordance with SFAS 123(R) and $0.4 million in accordance with APB 25.

Stock-based compensation expense recognized for the six months ended June 30, 2009 was $10.8 million, of which $10.5 million was in accordance with FAS 123(R) and $0.3 million in accordance with APB 25. Included in the stock-based compensation expense for the six months ended June 30, 2009 was $3.9 million of stock-based compensation expense related to the realignment of our workforce and business on January 5, 2009. For further information about the realignment of our workforce and business see Note 18. Stock-based compensation expense recognized for the six months ended June 30, 2008 was $7.0 million, of which $6.2 million was in accordance with FAS 123(R) and $0.8 million in accordance with APB 25.

Included in the stock-based compensation expense for restricted common stock for the three and six months ended June 30, 2009 was approximately $0.3 million and $0.3 million, respectively, related to the long-term incentive equity awards after the reversal of expense related to cancellations. Included in the stock-based compensation expense for restricted common stock for the three and six months ended June 30, 2008 was $0.4 million and $0.7 million, respectively, related to the long-term incentive equity awards. Refer to Note 15 for further information regarding our long-term incentive equity awards.

8. Business Combinations

AAX Acquisition

On January 23, 2009, we acquired the AAX ^® suite of inventory management solutions and other assets, including without limitation all of the capital stock of AAX (collectively, AAX), from JM Dealer Services, Inc., a subsidiary of JM Family Enterprises, Inc. (seller), for a purchase price of $30.9 million, (net of a purchase price adjustment of $1.7 million, which is discussed below). We expensed approximately $0.5 million of professional fees associated with this acquisition during the six months ended June 30, 2009 which is classified in selling, general and administrative expenses.

This acquisition was recorded under the purchase method of accounting, resulting in the total purchase price being allocated to the assets acquired and liabilities assumed according to their estimated fair values at the date of acquisition as follows (in thousands):

Current assets		$	489
Property and equipment			1,035
Intangible assets			16,639
Goodwill			15,283
Total assets acquired			33,446
Total liabilities assumed			(2,571	)
Net assets acquired		$	30,875

The liabilities assumed includes a $2.3 million deferred tax liability that relates primarily to the future amortization of certain acquired intangibles.

We allocated the amounts of intangible assets and goodwill based on fair value as follows: approximately $7.4 million of the purchase price has been allocated to customer contracts (weighted-average useful life is 6.5 years), $6.2 million to acquired technology and database (weighted-average useful life is 4.2 years), $2.0 million to the AAX trade name (seven year useful life), and $1.0 million to a non-compete agreement (four year useful life). The useful life for each of the above acquired long-term intangible assets was determined based on the period which the asset is expected to contribute directly or indirectly to our future cash flows. We recorded approximately $15.3 million in goodwill, which represents the remainder of the excess of the purchase price over the fair value of the net assets acquired. The allocated value of goodwill primarily relates to the acquired workforce and the anticipated synergies resulting from combining AAX with our current inventory solution. $13.0 million of the goodwill recorded is deductible for tax purposes.

Certain acquired intangibles in our AAX acquisition are being amortized using an accelerated method of amortization. In determining amortization expense under our accelerated method for any given period, we calculate the expected cash flows for that period that were used in determining the acquired value of the asset and divide that amount by the total expected cash flows over the estimated life of the asset. We multiply that percentage by the initial carrying value of the asset to arrive at the amortization expense for that period. Based on the nature of the asset and how the asset is valued in purchase accounting, we believe that this method better approximates the distribution of cash flows generated by the acquired intangible asset. We will continue to use the straight line method for certain intangible assets if there is no better pattern in which the asset’s economic benefits are consumed or otherwise used up.

The results of AAX were included in our consolidated statement of operations from the date of acquisition. AAX revenue since the date of acquisition was $8.4 million. We are unable to provide AAX earnings since acquisition since we do not have stand alone earnings reporting for AAX.

Other AAX deal terms

Service Credits

A condition of the purchase agreement gives the seller the right to service credits of $2.5 million, which may be applied against fees that are charged in connection with their purchase of any future products or services of DealerTrack. These service credits expire on January 23, 2013. No revenue will be recorded for services provided under the service credits.

Purchase Price Adjustment

A condition of the purchase agreement provides that the seller and its affiliates will reimburse the Company for certain lost tax deductions due to the structuring of the transaction. The purchase price adjustment is not finalized, however, approximately $1.7 million has been recorded as a receivable in purchase accounting which reflects our best estimate of the lost tax deduction.

There is a contingency in the purchase arrangement that could require the seller to reimburse purchase price to DealerTrack if certain customers cancel their subscriptions based on certain factors. We believe the probability for this contingency to occur to be remote. As such, no value was ascribed to this contingency in purchase accounting. The contingency period ends October 31, 2009.

Unaudited Pro Forma Summary of Operations

The accompanying unaudited pro forma summary presents our consolidated results of operations as if the acquisition of AAX had been completed as of the beginning of each period presented. The pro forma information does not necessarily reflect the actual results that would have been achieved, nor is it necessarily indicative of our future consolidated results.

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
		(in thousands, except share and								(in thousands, except share and
		per share amounts)								per share amounts)
		(Unaudited)								(Unaudited)
Net revenue		$	57,870			$	69,679			$	115,153			$	140,398
Net income (loss)		$	2,187			$	1,870			$	(3,664	)		$	2,613
Basic net income (loss) per share applicable to common stockholders		$	0.05			$	0.04			$	(0.09	)		$	0.06
Diluted net income (loss) per share applicable to common stockholders		$	0.05			$	0.04			$	(0.09	)		$	0.06

Curomax Acquisition

On February 1, 2007, we completed the purchase of all of the outstanding shares of Curomax Corporation and its subsidiaries (Curomax) pursuant to a shares purchase agreement, made as of January 16, 2007, for an adjusted cash purchase price of approximately $40.7 million (including estimated direct acquisition and restructuring costs of approximately $1.6 million). Under the terms of the shares purchase agreement, we had future contingent payment obligations of approximately $1.8 million in cash to be paid out based upon the achievement of certain operational objectives over the subsequent twenty-four months. As of December 31, 2008, we determined that certain operational conditions had been met and as such, recorded a liability of approximately $1.8 million. The additional consideration of $1.8 million was paid in the first quarter of 2009 and was recorded as goodwill.

9. Stock Repurchase Program

On March 18, 2008, our board of directors approved a stock repurchase program under which we were authorized to spend up to $75.0 million to repurchase shares of our common stock. The stock repurchase program expired on March 31, 2009. From inception of the program through its expiration, we repurchased approximately 3.0 million shares of common stock for an aggregate price of approximately $49.8 million. There were no repurchases during 2009.

10. Property and Equipment

Property and equipment are recorded at cost and consist of the following (dollars in thousands):

		Estimated
		Useful Life				June 30,				December 31,
		(Years)				2009				2008
Computer equipment			3-5			$	21,531			$	20,431
Office equipment			5				3,209				2,896
Furniture and fixtures			5				3,241				3,068
Leasehold improvements			5-11				3,051				1,233
Total property and equipment, gross							31,032				27,628
Less: Accumulated depreciation and amortization							(16,682	)			(14,180	)
Total property and equipment, net						$	14,350			$	13,448

Depreciation and amortization expense related to property and equipment for the three months ended June 30, 2009 and 2008 was $1.8 million and $1.4 million, respectively. Depreciation and amortization expense for the six months ended June 30, 2009 and 2008 was $3.5 million and $2.8 million, respectively. Depreciation and amortization are calculated on a straight line basis over the estimated useful life of the asset.

11. Intangible Assets

Intangible assets principally are comprised of customer contracts, database, trade names, technology, and non-competition agreements. The amortization expense relating to intangible assets is recorded as a cost of revenue. The gross book value, accumulated amortization and amortization periods of the intangible assets were as follows (dollars in thousands):

		June 30, 2009								December 31, 2008
		Gross								Gross								Amortization
		Book				Accumulated				Book				Accumulated				Period
		Value				Amortization				Value				Amortization				(Years)
Customer contracts		$	39,869			$	(20,410	)		$	33,673			$	(17,289	)			2-7
Database			13,825				(9,881	)			13,333				(8,818	)			3-6
Trade names			12,510				(6,239	)			10,500				(5,469	)			5-10
Technology			27,170				(8,520	)			22,684				(7,209	)			1-5
Non-compete agreement			7,805				(5,230	)			10,697				(7,697	)			2-5
Total		$	101,179			$	(50,280	)		$	90,887			$	(46,482	)

Amortization expense related to intangibles for the three months ended June 30, 2009 and 2008 was $5.1 million and $6.5 million, respectively. Amortization expense for the six months ended June 30, 2009 and 2008 was $10.4 million and $14.1 million, respectively. Amortization expense that will be charged to income for the remaining period of 2009, based on the June 30, 2009 book value, is approximately $10.0 million.

Amortization expense that will be charged to income for the subsequent five years and thereafter is estimated, based on the June 30, 2009 book value, to be $18.8 million in 2010, $10.3 million in 2011, $5.5 million in 2012, $3.4 million in 2013, $2.0 million in 2014 and thereafter $0.9 million.

12. Goodwill

The change in carrying amount of goodwill for the six months ended June 30, 2009 is as follows (in thousands):

Balance as of January 1, 2009		$	114,886
Acquisition of AAX (see Note 8)			15,283
Impact of change in Canadian dollar exchange rate			1,127
Exit from SCS business (See Note 19)			(200	)
Other			(12	)
Balance as of June 30, 2009		$	131,084

The adoption of SFAS No. 141R on January 1, 2009 did not impact our reporting unit conclusion discussed in Note 2 to our Annual Report on the 10-K for the year ended December 31, 2008, filed with the SEC on February 24, 2009 and amended on April 30, 2009.

13. Other Accrued Liabilities

Following is a summary of the components of other accrued liabilities (in thousands):

		June 30,				December 31,
		2009				2008
Revenue share		$	2,006			$	1,700
Customer deposits			2,645				2,749
Sales taxes			1,475				1,511
Severance			1,475				34
Software licenses			752				1,341
Professional fees			1,559				1,158
Accrued Curomax contingent consideration (Note 8)			—				1,837
Other			2,454				1,055
Total other accrued liabilities		$	12,366			$	11,385

14. Income Taxes

We file a consolidated U.S. income tax return and tax returns in various state and local jurisdictions. One subsidiary also files income tax returns in Canada. The Internal Revenue Service (IRS) has concluded a review of our consolidated federal income tax return for the periods ended December 31, 2006 and December 31, 2007 with no income tax adjustments. The IRS completed an examination of DealerTrack Systems, Inc. (f/k/a Arkona, Inc.) for the period ended March 31, 2006 (pre-acquisition) period. The federal audit was concluded with no income tax adjustments. All of our other significant taxing jurisdictions are closed for years prior to 2005.

The total liability for uncertain tax positions recorded in our balance sheet in accrued other liabilities as of June 30, 2009 and December 31, 2008, was $0.9 million and $0.5 million, respectively.

Interest and penalties, if any, related to tax positions taken in our tax returns are recorded in interest expense and general and administrative expenses, respectively, in our consolidated statement of operations. As of June 30, 2009 and December 31, 2008, we have accrued interest and penalties related to tax positions taken on our tax returns of approximately $66,000 and $38,000, respectively.

15. Long-Term Incentive Equity Awards

During 2006 and 2007, the compensation committee of the board of directors granted long-term performance equity awards (under the 2005 Incentive Award Plan) consisting of 460,000 shares of restricted common stock (net of cancellations) to certain executive officers and other employees. Each individual’s award was allocated 50% to achieving earnings before interest, taxes, depreciation and amortization, as adjusted to reflect any future acquisitions (EBITDA Performance Award) and 50% to the market value of our common stock (Market Value Award). The awards are earned upon our achievement of EBITDA and market-based targets for the fiscal years 2007, 2008 and 2009, but will not vest unless the grantee remains continuously employed in active service until January 31, 2010. If an EBITDA Performance Award or Market Value Award is not earned in an earlier year, it can be earned upon achievement of that target in a subsequent year. The awards will accelerate in full upon a change in control, if any. During the six months ended June 30, 2009, 91,667 shares of long-term performance equity awards were cancelled and the vesting of 38,333 shares of long-term performance equity awards were accelerated, due to the departure of certain executive officers in connection with the realignment of our workforce and business as discussed in Note 18. For the six months ended June 30, 2009, we reversed approximately $0.4 million of stock-based compensation expense related to the cancelled shares and recorded stock-based compensation expense of approximately $0.2 million related to the accelerated shares.

We valued the EBITDA Performance Award and the Market Value Award using the Black-Scholes and binomial lattice-based valuation pricing models, respectively. The total fair value of the entire EBITDA Performance Award is $6.0 million (prior to estimated forfeitures), of which, in January 2007, we began expensing on a straight-line basis the amount associated with the 2007 award as it was deemed probable that the threshold for the year ending December 31, 2007 would be met. The EBITDA target for 2007 was achieved. As of June 30, 2009, we have not begun to expense the EBITDA Performance Awards for 2008 and 2009 as it has not been deemed probable that the targets will be achieved. We will continue to evaluate the probability of achieving the targets on a quarterly basis. The total value of the entire Market Value Award is $2.5 million (including estimated forfeitures), which is expensed on a straight-line basis from the date of grant over the applicable service period. As long as the service condition is satisfied, the expense is not reversed, even if the market conditions are not satisfied. In connection with the realignment of our workforce on January 5, 2009 we reversed approximately $0.3 million and $0.1 million in stock-based compensation expense related to the Market Value Award and EBITDA Performance Award, respectively.

The expense recorded related to the EBITDA Performance Award and the Market Value Award for the three and six months ended June 30, 2009 and 2008 is as follows (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
EBITDA Performance Award		$	118			$	167			$	238			$	334
Market Value Award			149				187				43				374
Total		$	267			$	354			$	281			$	708

The EBITDA Performance Award and Market Value Award expense is included in restricted common stock in the stock-based compensation expense table in Note 7.

16. Commitments and Contingencies

Retail Sales Tax

The Ontario Ministry of Revenue (the Ministry) has conducted a retail sales tax field audit on the financial records of our Canadian subsidiary, DealerTrack Canada, Inc. (formerly known as DealerAccess Canada, Inc.), for the period from March 1, 2001 through May 31, 2003. We received a formal assessment from the Ministry indicating unpaid Ontario retail sales tax totaling approximately $0.2 million, plus interest. Although we are disputing the Ministry’s findings, the assessment, including interest, has been paid in order to avoid potential future interest and penalties.

As part of the purchase agreement dated December 31, 2003 between us and Bank of Montreal for the purchase of 100% of the issued and outstanding capital stock of DealerAccess, Inc., Bank of Montreal agreed to indemnify us specifically for this potential liability for all sales tax periods prior to January 1, 2004. The potential sales tax liability for the period covered by this indemnification is now closed due to the statutory expiration of the periods open for audit by the Ministry. To date, all amounts paid to the Ministry by us for this assessment have been reimbursed by the Bank of Montreal under this indemnity.

We undertook a comprehensive review of the audit findings of the Ministry using external tax experts. Our position has been that our financing source revenue transactions are not subject to Ontario retail sales tax. We filed a formal Notice of Objection with the Ministry on December 12, 2005. We received a letter dated November 2, 2007 from an appeals officer of the Ministry stating that the assessment was, in his opinion, properly raised and his intention was to recommend his confirmation to senior management of the Ministry. The officer agreed, however, to defer his recommendation for a period of thirty business days to enable us to submit any additional information not yet provided. We submitted additional information to the Ministry to support our position that the services are not subject to sales tax.

We received a letter dated December 21, 2007 from the Ministry stating that no change should be made to the appeals officer’s opinion. The letter further stated that we had ninety days from the date of the letter to file a Notice of Appeal with the Superior Court of Justice. A Notice of Appeal was filed on our behalf on March 18, 2008 to challenge the assessment because we did not believe these services are subject to sales tax. On December 15, 2008, the Ministry filed its response to our Notice of Appeal. The response reiterates the Ministry’s position that the transactions are subject to Ontario retail sales tax. The parties are completing the discovery process and we expect this matter will be heard by the Superior Court in late 2009 or early 2010. We have not accrued any related sales tax liability for the period subsequent to May 31, 2003 for these financing source revenue transactions. This appeal is supported by the financial institutions whose source revenue transactions were subject to the assessment. These financial institutions have agreed to participate in the cost of the litigation.

In the event we are obligated to charge sales tax for this type of transaction, we believe this Canadian subsidiary’s contractual arrangements with its financing source customers obligate these customers to pay all sales taxes that are levied or imposed by any taxing authority by reason of the transactions contemplated under the particular contractual arrangement. In the event of any failure to pay such amounts by our customers, we would be required to pay the obligation, which could range from $4.9 million (CAD) to $5.4 million (CAD), including penalties and interest.

Commitments

Pursuant to employment or severance agreements with certain employees, we had a commitment to pay severance of approximately $4.2 million as of June 30, 2009, in the event of termination without cause, as defined in the agreements, as well as certain potential gross-up payments to the extent any such severance payment would constitute an excess parachute payment under the Internal Revenue Code. We also have a commitment to pay additional severance of $1.9 million as of June 30, 2009, if there is a change in control.

We are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party with respect to breach of contract, infringement and other matters. Typically, these obligations arise in the context of agreements entered into by us, under which we customarily agree to hold the other party harmless against losses arising from breaches of representations, warranties and/or covenants. In these circumstances, payment by us is generally conditioned on the other party making a claim pursuant to the procedures specified in the particular agreement, which procedures typically allow us to challenge the other party’s claims. Further, our obligations under these agreements may be limited to indemnification of third-party claims only and limited in terms of time and/or amount. In some instances, we may have recourse against third parties for certain payments made by us.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. To date, we have not been required to make any significant payments. We believe that if we were to incur a loss in any of these matters, it is not probable that such loss would have a material effect on our business or financial condition.

Legal Proceedings

From time to time, we are a party to litigation matters arising in connection with the normal course of our business, none of which is expected to have a material adverse effect on us. In addition to the litigation matters arising in connection with the normal course of our business, we are party to the litigation described below.

DealerTrack Inc. v. RouteOne LLC

On January 28, 2004, we filed a Complaint and Demand for Jury Trial against RouteOne LLC (“RouteOne”) in the United States District Court for the Eastern District of New York, Civil Action No. CV 04-322 (SJF). The complaint sought injunctive relief as well as damages against RouteOne for infringement of two patents owned by us: U.S. Patent No. 6,587,841 (the “’841 Patent”) and U.S. Patent No. 5,878,403 (the “’403 Patent”). These patents relate to computer implemented automated credit application analysis and decision routing inventions. The complaint also sought relief for RouteOne’s acts of copyright infringement, circumvention of technological measures and common law fraud and unfair competition.

The court approved a joint stipulation of dismissal with respect to this action. Pursuant to the joint stipulation, the patent count was dismissed without prejudice to be pursued as part of the below consolidated actions and all other counts were dismissed with prejudice.

DealerTrack, Inc. v. Finance Express et al., CV-06-2335;

DealerTrack Inc. v. RouteOne and Finance Express et al., CV-06-6864; and

DealerTrack Inc. v. RouteOne and Finance Express et al., CV-07-215

On April 18, 2006, we filed a Complaint and Demand for Jury Trial against David Huber, Finance Express LLC (“Finance Express”), and three of their unnamed dealer customers in the United States District Court for the Central District of California, Civil Action No. CV-06-2335 AG (FMOx). The complaint sought declaratory and injunctive relief, as well as damages, against the defendants for infringement of the ’403 Patent and the ’841 Patent. Finance Express denied infringement and challenged the validity and enforceability of the patents-in-suit.

On October 27, 2006, we filed a Complaint and Demand for Jury Trial against RouteOne, David Huber and Finance Express in the United States District Court for the Central District of California, Civil Action No. CV-06-6864 (SJF). The complaint sought declaratory and injunctive relief as well as damages against the defendants for infringement of the ’403 Patent and ’841 Patent. On November 28, 2006 and December 4, 2006, respectively, defendants RouteOne, David Huber and Finance Express filed their answers. The defendants denied infringement and challenged the validity and enforceability of the patents-in-suit.

On February 20, 2007, we filed a Complaint and Demand for Jury Trial against RouteOne, David Huber and Finance Express in the United States District Court for the Central District of California, Civil Action No. CV-07-215 (CWx). The complaint sought declaratory and injunctive relief as well as damages against the defendants for infringement of U.S. Patent No. 7,181,427 (the “’427 Patent”). On April 13, 2007 and April 17, 2007, respectively, defendants RouteOne, David Huber and Finance Express filed their answers. The defendants denied infringement and challenged the validity and enforceability of the ’427 Patent.

The DealerTrack, Inc. v. Finance Express et al., CV-06-2335 action, the DealerTrack Inc. v. RouteOne and Finance Express et al., CV-06-6864 action and the DealerTrack v. RouteOne and Finance Express et al., CV-07-215 action, described above, were consolidated by the court. A hearing on claims construction, referred to as a “Markman” hearing, was held on September 25, 2007. Fact and expert discovery and motions for summary judgment have substantially been completed.

On July 21, 2008 and September 30, 2008, the court issued summary judgment orders disposing of certain issues and preserving other issues for trial.

On July 8, 2009, the court held Claims 1-4 of DealerTrack’s patent 7,181,427 was invalid for failure to comply with a standard required by the recently decided case in the Court of Appeals of the Federal Circuit of In re Bilski. A stipulation is expected to be entered into dismissing all remaining claims in the case so as to clear the way for an appeal.

We believe that the potential liability from all current litigations will not have a material effect on our financial position or results of operations when resolved in a future period.

17. Segment Information

The segment information provided in the table below is being reported consistent with our method of internal reporting. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker reviews information at a consolidated level, as such we have one reportable segment. For enterprise-wide disclosure, we are organized primarily on the basis of service lines. Revenue earned outside of the United States for the three and six months ended June 30, 2009 is approximately 12% and 10%, of our total revenue, respectively. Revenue earned outside of the United States for the three and six months ended June 30, 2008 was approximately 11% and 12% of our total revenue, respectively.

Supplemental disclosure of revenue by service type is as follows (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
Transaction services revenue		$	24,645			$	36,321			$	48,686			$	74,488
Subscription services revenue			29,028				22,877				56,971				45,263
Other			4,197				3,983				7,913				7,738
Total net revenue		$	57,870			$	63,181			$	113,570			$	127,489

18. Realignment of Workforce and Business

On January 5, 2009, we announced a realignment of our workforce and business aimed at sharpening our focus on high growth opportunities and to reflect current market conditions. To do this, we reduced our workforce by approximately 90 people, or 8% of our total employees, including several executive and senior-level positions. As a result of the realignment, we expensed total restructuring costs during the six months ended June 30, 2009 of approximately $6.7 million, including approximately $3.9 million of net non-cash compensation expense. The expenses associated with these charges are reflected in operating costs and expenses in our consolidated statement of operations.

The table below sets forth the significant cash components and activity under the restructuring program for the three months ended June 30, 2009 (in thousands):

		Balance as of												Balance as of
		January 1, 2009				Charges				Cash Payments				June 30, 2009
Severance		$	—			$	2,689			$	1,389			$	1,300
Other benefits			—				149				149				—
Total		$	—			$	2,838			$	1,538			$	1,300

As of June 30, 2009, the remaining liability of $1.3 million represents the severance payments for three executives that were terminated. Pursuant to the severance agreements for these executives, the remaining liability is expected to be paid on the six month anniversary of their termination dates which will be during the third quarter of 2009.

19. Exit from SCS Business

On February 14, 2009, DealerTrack exited its SCS business in a transaction with a former senior executive of the company who left the organization in January 2009 as part of the realignment of our workforce. The SCS business, which accounted for approximately $1.9 million of revenue in 2008, is an administration system used by aftermarket providers as their back-end origination solution. The SCS entity was funded through owner contributions and through ongoing operations. DealerTrack recorded a gain of approximately $0.2 million upon sale which is classified as a contra expense in selling, general and administrative expenses for the six months ended June 30, 2009.

If the purchaser of the business goes through a change of control prior to February 14, 2014, we can earn up to $2.0 million in contingent purchase price from this transaction. If the purchaser does not undergo a change of control by February 14, 2014, the purchaser will pay DealerTrack a one time payment of $0.5 million. These contingent payments accrue interest at an annual compound interest rate of 12 month LIBOR plus 3%. As of June 30, 2009, DealerTrack’s maximum exposure is approximately $0.4 million. As of June 30, 2009, we have recorded a long-term receivable of approximately $0.4 million, which represents the present value of the expected future contingent payments.

The newly formed company is a variable interest entity (VIE), as defined in FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN 46R), which provides a framework for identifying VIEs and determining when a company should include the assets, liabilities, non controlling interests and results of activities of a VIE in its consolidated financial statements. In accordance with FIN 46R, the primary beneficiary is the party that consolidates a VIE based on its assessment that it will absorb a majority of the expected losses or expected residual returns of the entity, or both. We have determined that we are not the primary beneficiary of the newly formed entity described above and, therefore, have not included the assets and liabilities or results of operations in our consolidated financial statements. The significant assumptions and judgments used in determining whether we are the primary beneficiary included the fair value of the note receivable from the SCS entity and the fair value of the SCS entity. Unfavorable changes to the fair values could result in consolidation of the SCS entity. We will assess the need for consolidation on a quarterly basis.

20. 401(k) Plan

Our 401(k) plan covers substantially all employees meeting certain age requirements in accordance with section 401(k) of the Internal Revenue Code. Under the provisions of the 401(k) plan, we have the ability to make matching contributions equal to a percentage of the employee’s voluntary contribution, as well as an additional matching contribution at year end and a nonelective contribution. Effective April 1, 2009, we discontinued new matching contributions to the plan, but may elect to make a contribution at year end.

21. Employee Stock Purchase Plan

Effective April 1, 2009, we reduced the discount under the ESPP plan from 15% to 5% of the fair market value of the shares on the last day of the offering period.

22. Third Amended and Restated 2005 Incentive Award Plan

On June 17, 2009, our stockholders approved a proposal to amend our Second Amended and Restated Incentive Award Plan (2005 Plan) to, among other things, increase the aggregate number of shares authorized for issuance under the 2005 Plan by 4,855,847 shares. After giving effect to these additional shares there is an aggregate of 14,105,847 shares of common stock that have been reserved for issuance pursuant to the 2005 Plan. As of June 30, 2009, 5,231,227 shares were available for future issuance.

Our stockholders also approved a proposal to amend our 2005 Plan to allow for a one-time stock option exchange program. Exchange ratios will be designed to make the grant of the new options accounting expense neutral. On August 7, 2009, the Company commenced a tender offer to its employees (excluding executive officers and members of the board of directors) to exchange outstanding options to purchase shares of the Company’s common stock granted prior to August 7, 2008, that have an exercise price per share greater than $22.82 for a lesser number of new options to purchase shares of the Company’s common stock with an exercise price equal to the closing price of the Company’s common stock on the Nasdaq Global Select Market on the date of grant, subject to certain conditions.

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements. Certain statements in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements involve a number of risks, uncertainties and other factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that could materially affect such forward-looking statements can be found in the sections entitled “Risk Factors” in Part II, Item 1A. in this Quarterly Report on Form 10-Q and in Part I, Item 1A. in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on February 24, 2009 and amended on April 30, 2009. Investors are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date hereof and we will undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

Overview

DealerTrack is a leading provider of on-demand software and data solutions for the automotive retail industry in the United States. Utilizing the Internet, we have built a network connecting automotive dealers with banks, finance companies, credit unions and other financing sources, and other service and information providers, such as aftermarket providers and the major credit reporting agencies. We have established a network of active relationships in the United States, which as of June 30, 2009 consisted of approximately 18,000 automotive dealers, and over 750 financing sources and many other service and information providers to the automotive retail industry. We consider a financing source to be active in our network as of a date if it has accepted credit application data electronically from dealers in the DealerTrack network in that month, including financing sources visible to dealers through drop down menus. Our credit application processing product enables dealers to automate and accelerate the indirect automotive financing process by increasing the speed of communications between these dealers and their financing sources. We have leveraged our leading market position in credit application processing to address other inefficiencies in the automotive retail industry value chain. We believe our proven network provides a competitive advantage for distribution of our software and data solutions. Our dealership management system (DMS) and integrated subscription-based software solutions enable our dealer customers to manage their dealership and operations, compare various financing and leasing options and programs, sell insurance and other aftermarket products, analyze inventory, document compliance with certain laws and execute financing contracts electronically. We have also created efficiencies for financing source customers by providing a comprehensive digital and electronic contracting solution. In addition, we offer data and other products and services to various industry participants, including lease residual value and automobile configuration data.

We are a Delaware corporation formed in August 2001. We are organized as a holding company and conduct a substantial amount of our business through our subsidiaries, including Automotive Lease Guide (alg), Inc., Chrome Systems, Inc., DealerTrack AAX, Inc., DealerTrack Aftermarket Services, Inc., DealerTrack Canada, Inc., DealerTrack Digital Services, Inc., DealerTrack, Inc., and DealerTrack Systems, Inc.

We monitor our performance as a business using a number of measures that are not found in our consolidated financial statements. These measures include the number of active dealers, financing sources, and active lender to dealership relationships in the DealerTrack network, the number of transactions processed, the average transaction and subscription prices and the average monthly subscription revenue per subscribing dealership. We believe that improvements in these metrics will result in improvements in our financial performance over time. We also view the acquisition and successful integration of acquired companies as important milestones in the growth of our business as these acquired companies bring new products to our customers and expand our technological capabilities. We believe that successful acquisitions will also lead to improvements in our financial performance over time. In the near term, however, the purchase accounting treatment of acquisitions can have a negative impact on our net income as the depreciation and amortization expenses associated with acquired assets, as well as particular intangibles (which tend to have a relatively short useful life), can be substantial in the first several years following an acquisition. As a result, we monitor our EBITDA and other business statistics as a measure of operating performance in addition to net income and the other measures included in our consolidated financial statements.

The following is a table consisting of EBITDA and certain other business statistics that management uses to monitor our business (amounts in thousands, include EBITDA, capital expenditure data and transactions processed):

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
EBITDA and Other Business Statistics:
EBITDA (1)		$	10,315			$	13,894			$	9,686			$	27,238
Capital expenditures, software and web site development costs		$	5,819			$	5,027			$	11,053			$	7,941
Active dealers in our network as of end of the period (2)			18,047				21,735				18,047				21,735
Active financing sources in our network as of end of period (3)			755				659				755				659
Active lender to dealer relationships (4)			123,885				195,886				123,885				195,886
Subscribing dealers in our network as of end of the period (5)			14,115				13,957				14,115				13,957
Transactions processed (6)			13,157				22,251				27,484				46,140
Average transaction price (7)		$	1.87			$	1.63			$	1.78			$	1.62
Average monthly subscription revenue per subscribing dealership (8)		$	686			$	546			$	673			$	541

	•		EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
	•		EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
	•		EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;
	•		Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and

	•		Other companies may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.
			Because of these limitations, EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only supplementally. EBITDA is a measure of our performance that is not required by, or presented in accordance with, GAAP. EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our liquidity.

The following table sets forth the reconciliation of EBITDA, a non-GAAP financial measure, to net income (loss), our most directly comparable financial measure in accordance with GAAP (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
GAAP net income (loss)		$	2,187			$	3,066			$	(3,438	)		$	5,404
Interest income			(341	)			(1,145	)			(743	)			(2,708	)
Interest expense			76				74				126				166
(Benefit) provision for income taxes			(766	)			2,213				(4,147	)			4,168
Depreciation of property and equipment and amortization of capitalized software and website costs			4,023				3,185				7,466				6,081
Amortization of acquired identifiable intangibles			5,136				6,501				10,422				14,127
EBITDA (Non-GAAP)		$	10,315			$	13,894			$	9,686			$	27,238

Revenue

Transaction Services Revenue. Transaction services revenue consists of revenue earned from our financing source customers for each credit application or contract that dealers submit to them. We also earn transaction services revenue from financing source customers for each financing contract executed via our electronic contracting and digital contract processing solutions, as well as for any portfolio residual value analyses we perform for them. We also earn transaction services revenue from dealers or other service and information providers, such as aftermarket providers, accessory providers, and credit report providers, for each fee-bearing product accessed by dealers.

Subscription Services Revenue. Subscription services revenue consists of revenue earned from our customers (typically on a monthly basis) for use of our subscription or license-based products and services. Some of these subscription services enable dealer customers to manage their dealership data and operations, compare various financing and leasing options and programs, sell insurance and other aftermarket products, analyze inventory, and execute financing contracts electronically.

Other Revenue. Other revenue consists of revenue primarily earned through forms programming, data conversion and training of our DMS solution suite, shipping commissions earned from our digital contract business and consulting and analytical revenue earned from ALG.

Cost of Revenue and Operating Expenses

Cost of Revenue. Cost of revenue primarily consists of expenses related to running our network infrastructure (including Internet connectivity and data storage), amortization expense on acquired intangible assets, compensation and related benefits for network and technology development personnel, amounts paid to third parties pursuant to contracts under which a portion of certain revenue is owed to those third parties (revenue share) and direct costs for data licenses, direct costs (printing, binding, and delivery) associated with our residual value guides, forms programming, data conversion, training, and hardware costs associated with our DMS product offering, allocated overhead and amortization associated with capitalization of software.

Product Development Expenses. Product development expenses consist primarily of compensation and related benefits, consulting fees and other operating expenses associated with our product development departments. The product development departments perform research and development, as well as enhance and maintain existing products.

Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of compensation and related benefits, facility costs and professional services fees for our sales, marketing, customer service and administrative functions.

We allocate overhead such as occupancy and telecommunications charges, and depreciation expense based on headcount, as we believe this to be the most accurate measure. As a result, a portion of general overhead expenses is reflected in our cost of revenue and each operating expense category.

We allocated the restructuring costs related to our January 5, 2009 realignment of our workforce and business to the appropriate cost of revenue and operating expense categories based on each of the terminated employees respective functions. For further information, please refer to Note 18 in the accompanying notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Inputs used to measure fair value are prioritized into a three-level fair value hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:

	•		Level 1 — Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
	•		Level 2 — Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
	•		Level 3 — Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

We have segregated all financial assets that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.

Assets measured at fair value on a recurring basis include the following as of June 30, 2009 (in thousands):

		Quoted				Significant
		Prices in				Other				Significant
		Active				Observable				Unobservable
		Markets				Inputs				Inputs				June 30,
		(Level 1)				(Level 2)				(Level 3)				2009
Cash equivalents (1)		$	132,980			$	—			$	—			$	132,980
Short-term investments (2)			1,108				—				—				1,108
Long-term investments (3)			—				—				3,964				3,964
Total		$	134,088			$	—			$	3,964			$	138,052

The change in the carrying amount of Level 3 investments for the six months ended June 30, 2009 is as follows (in thousands):

Balance as of January 1, 2009		$	1,550
Reclassification from Level 2 investments to Level 3 investments			1,360
Realized gain on securities included in the statement of operations			716
Unrealized gain on securities recorded in other comprehensive income			338
Balance as of June 30, 2009		$	3,964

Realignment of Workforce and Business

On January 5, 2009, we announced a realignment of our workforce and business aimed at sharpening our focus on high growth opportunities and to reflect current market conditions. To do this, we reduced our workforce by approximately 90 people, or 8% of our total employees, including several executive and senior-level positions. As a result of the realignment, we expensed total restructuring costs during the six months ended June 30, 2009 of approximately $6.7 million, including approximately $3.9 million of net non-cash compensation expense. The expenses associated with these charges are reflected in operating costs and expenses in our consolidated statement of operations.

The table below sets forth the significant cash components and activity under the restructuring program for the three months ended June 30, 2009 (in thousands):

		Balance as of												Balance as of
		January 1, 2009				Charges				Cash Payments				June 30, 2009
Severance		$	—			$	2,689			$	1,389			$	1,300
Other benefits			—				149				149				—
Total		$	—			$	2,838			$	1,538			$	1,300

As of June 30, 2009, the remaining liability of $1.3 million represents the severance payments for three executives that were terminated. Pursuant to the severance agreements for these executives, the remaining liability is expected to be paid on the six month anniversary of their termination dates which will be during the third quarter of 2009.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the amounts reported for assets, liabilities, revenue, expenses and the disclosure of contingent liabilities.

Our critical accounting policies are those that we believe are both important to the portrayal of our financial condition and results of operations and that involve difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The estimates are based on historical experience and on various assumptions about the ultimate outcome of future events. Our actual results may differ from these estimates if unforeseen events occur or should the assumptions used in the estimation process differ from actual results. Management believes there have been no material changes during the three and six months ended June 30, 2009, except as noted below, to the critical accounting policies discussed in the section entitled “Management Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on February 24, 2009 and amended on April 30, 2009.

In December 2007, the FASB issued SFAS No. 141R which replaced SFAS No. 141. SFAS No. 141R retains the fundamental requirements of SFAS No. 141, but revises certain principles, including the definition of a business combination, the recognition and measurement of assets acquired and liabilities assumed in a business combination, the accounting for goodwill, and financial statement disclosure. We have adopted the provisions of SFAS No. 141R as of January 1, 2009. For further information about the adoption of the provisions of SFAS No. 141R refer to Note 8 in the accompanying notes to the consolidated financial statements included in this Quarterly Report on From 10-Q.

Results of Operations

The following table sets forth, for the periods indicated, the selected consolidated statements of operations:

		Three Months June 30,																Six Months June 30,
		2009								2008								2009								2008
						% of Net								% of Net								% of Net								% of Net
		$ Amount				Revenue				$ Amount				Revenue				$ Amount				Revenue				$ Amount				Revenue
		(In thousands, except percentages)																(In thousands, except percentages)
Consolidated Statements of Operations Data:
Net revenue		$	57,870				100.0	%		$	63,181				100.0	%		$	113,570				100.0	%		$	127,489				100.0	%
Operating costs and expenses:
Cost of revenue			28,852				49.9				27,879				44.1				57,973				51.0				56,491				44.3
Product development			3,514				6.1				3,084				4.9				7,646				6.7				6,226				4.9
Selling, general and administrative			25,280				43.6				28,010				44.3				57,598				50.8				57,742				45.3
Total operating costs and expenses			57,646				99.6				58,973				93.3				123,217				108.5				120,459				94.5
Income (loss) from operations			224				0.4				4,208				6.7				(9,647	)			(8.5	)			7,030				5.5
Interest income			341				0.6				1,145				1.8				743				0.7				2,708				2.1
Other income, net			2				—				—				—				52				—				—				—
Interest expense			(76	)			(0.1	)			(74	)			(0.1	)			(126	)			(0.1	)			(166	)			(0.1	)
Realized gain on securities			930				1.6				—				—				1,393				1.2				—				—
Income (loss) before benefit (provision) for income taxes			1,421				2.5				5,279				8.4				(7,585	)			(6.7	)			9,572				7.5
Benefit (provision) for income taxes, net			766				1.3				(2,213	)			(3.5	)			4,147				3.7				(4,168	)			(3.3	)
Net income (loss)		$	2,187				3.8	%		$	3,066				4.9	%		$	(3,438	)			(3.0	)%		$	5,404				4.2	%