##### Table of Contents



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
 For the quarterly period ended September 30, 2008
 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
    
    11042Lake Success, NY
    
    (Zip Code)(Address of principal executive offices)
 (516) 734-3600
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



DEALERTRACK HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements


3Consolidated Balance Sheets (unaudited)


3Consolidated Statements of Operations (unaudited)


4Consolidated Statements of Cash Flows (unaudited)


5Notes to Consolidated Financial Statements (unaudited)


6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations


15Item 3. Quantitative and Qualitative Disclosures About Market Risk


24Item 4. Controls and Procedures


24PART II. OTHER INFORMATIONItem 1. Legal Proceedings


25Item 1A. Risk Factors


26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


26Item 6. Exhibits


27Signature


28EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATION
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 DEALERTRACK HOLDINGS, INC.
 
 CONSOLIDATED BALANCE SHEETS
(unaudited)
 September 30,
    
    
    December 31,2008
    
    
    2007(In thousands, except shareand per share amounts)ASSETSCurrent assetsCash and cash equivalents
    
    $
    135,304
    
    
    $
    50,564Short-term investments
    
    
    58,956
    
    
    
    169,580Accounts receivable, net of allowances of
$4,862 and $2,615 at September 30, 2008 and
December 31, 2007, respectively
    
    
    25,356
    
    
    
    26,957Prepaid expenses and other current assets
    
    
    8,180
    
    
    
    7,305Deferred tax assets
    
    
    2,420
    
    
    
    3,827Restricted cash
    
    
    30
    
    
    
    Total current assets
    
    
    230,246
    
    
    
    258,233Long-term investments
    
    
    5,486
    
    
    
    Property and equipment, net
    
    
    14,061
    
    
    
    12,792Software and web site developments costs, net
    
    
    13,024
    
    
    
    10,771Intangible assets, net
    
    
    50,016
    
    
    
    69,528Goodwill
    
    
    116,672
    
    
    
    117,702Restricted cash
    
    
    250
    
    
    
    540Deferred taxes and other long-term assets
    
    
    17,623
    
    
    
    13,360Total assets
    
    $
    447,378
    
    
    $
    482,926LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    2,196
    
    
    $
    4,762Accrued compensation and benefits
    
    
    9,169
    
    
    
    12,527Accrued other
    
    
    13,491
    
    
    
    11,387Deferred revenue
    
    
    4,995
    
    
    
    4,016Due to acquirees
    
    
    606
    
    
    
    2,251Capital leases payable
    
    
    372
    
    
    
    480Total current liabilities
    
    
    30,829
    
    
    
    35,423Capital leases payable  long-term
    
    
    537
    
    
    
    1,076Due to acquirees  long-term
    
    
    641
    
    
    
    1,280Deferred tax liabilities  long-term
    
    
    3,245
    
    
    
    2,800Deferred revenue and other long-term liabilities
    
    
    6,681
    
    
    
    3,985Total liabilities
    
    
    41,933
    
    
    
    44,564Commitments and contingencies (Note 17)Stockholders equityPreferred stock, $0.01 par value: 10,000,000
shares authorized and no shares issued and
outstanding at September 30, 2008 and
December 31, 2007
    
    
    
    
    
    
    Common stock, $0.01 par value: 175,000,000
shares authorized; 42,793,221 shares issued
and 40,191,272 shares outstanding at
September 30, 2008; and 175,000,000 shares
authorized; 42,556,925 shares issued and
42,552,723 shares outstanding at December 31,
2007
    
    
    428
    
    
    
    426Treasury stock, at cost, 2,601,949 shares and
4,202 shares at September 30, 2008 and
December 31, 2007, respectively
    
    
    (44,958
    )
    
    
    (139
    )Additional paid-in capital
    
    
    425,154
    
    
    
    413,428Deferred stock-based compensation (APB 25)
    
    
    (804
    )
    
    
    (2,056
    )Accumulated other comprehensive income
    
    
    4,302
    
    
    
    8,181Retained earnings
    
    
    21,323
    
    
    
    18,522Total stockholders equity
    
    
    405,445
    
    
    
    438,362Total liabilities and stockholders equity
    
    $
    447,378
    
    
    $
    482,926
  3




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DEALERTRACK HOLDINGS, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except share and
    
    
    (In thousands, except share andper share amounts)
    
    
    per share amounts)RevenueNet revenue
    
    $
    60,525
    
    
    $
    62,871
    
    
    $
    188,014
    
    
    $
    173,103Operating costs and expensesCost of revenue(1)
    
    
    27,940
    
    
    
    27,678
    
    
    
    84,431
    
    
    
    73,136Product development(1)
    
    
    2,875
    
    
    
    2,761
    
    
    
    9,101
    
    
    
    7,422Selling, general and administrative(1)
    
    
    26,654
    
    
    
    25,598
    
    
    
    84,396
    
    
    
    69,159Total operating costs and expenses
    
    
    57,469
    
    
    
    56,037
    
    
    
    177,928
    
    
    
    149,717Income from operations
    
    
    3,056
    
    
    
    6,834
    
    
    
    10,086
    
    
    
    23,386Interest income
    
    
    1,105
    
    
    
    991
    
    
    
    3,813
    
    
    
    3,742Other income
    
    
    142
    
    
    
    
    
    
    
    142
    
    
    
    Interest expense
    
    
    (87
    )
    
    
    (96
    )
    
    
    (253
    )
    
    
    (231
    )Impairment of auction rate securities (Note 4)
    
    
    (5,664
    )
    
    
    
    
    
    
    (5,664
    )
    
    
    (Loss) income before provision for income taxes
    
    
    (1,448
    )
    
    
    7,729
    
    
    
    8,124
    
    
    
    26,897Provision for income taxes, net
    
    
    (1,155
    )
    
    
    (3,217
    )
    
    
    (5,323
    )
    
    
    (11,276
    )Net (loss) income
    
    $
    (2,603
    )
    
    $
    4,512
    
    
    $
    2,801
    
    
    $
    15,621Basic net (loss) income per share
    
    $
    (0.07
    )
    
    $
    0.12
    
    
    $
    0.07
    
    
    $
    0.40Diluted net (loss) income per share
    
    $
    (0.07
    )
    
    $
    0.11
    
    
    $
    0.07
    
    
    $
    0.38Weighted average shares outstanding
    
    
    39,769,990
    
    
    
    39,058,863
    
    
    
    40,965,118
    
    
    
    38,810,710Weighted average shares outstanding assuming
dilution
    
    
    39,769,990
    
    
    
    40,840,688
    
    
    
    42,235,175
    
    
    
    40,579,093(1)   Stock-based compensation expense recorded for the three and nine months ended September 30, 2008 and 2007
was classified as follows:Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    
    2007Cost of revenue
    
    $
    615
    
    
    $
    548
    
    
    $
    1,828
    
    
    $
    1,438Product development
    
    
    182
    
    
    
    161
    
    
    
    540
    
    
    
    450Selling, general and administrative
    
    
    2,636
    
    
    
    2,704
    
    
    
    8,060
    
    
    
    6,100
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DEALERTRACK HOLDINGS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Nine Months Ended September 30,2008
    
    
    2007(In thousands)Cash flows from operating activitiesNet income
    
    $
    2,801
    
    
    $
    15,621Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization
    
    
    29,387
    
    
    
    27,644Deferred tax benefit
    
    
    (1,866
    )
    
    
    (5,025
    )Stock-based compensation expense
    
    
    10,428
    
    
    
    7,988Provision for doubtful accounts and sales credits
    
    
    5,980
    
    
    
    3,939Loss on sale of property and equipment
    
    
    
    
    
    
    16Amortization of bond premium
    
    
    84
    
    
    
    Amortization of deferred interest
    
    
    145
    
    
    
    137Deferred compensation
    
    
    189
    
    
    
    219Amortization of bank financing costs
    
    
    31
    
    
    
    91Stock-based compensation windfall tax benefit
    
    
    (355
    )
    
    
    (6,190
    )Impairment of auction rate securities
    
    
    5,664
    
    
    
    Changes in operating assets and liabilities, net of effects of acquisitionsTrade accounts receivable
    
    
    (4,564
    )
    
    
    (13,921
    )Prepaid expenses and other current assets
    
    
    (991
    )
    
    
    (232
    )Accounts payable and accrued expenses
    
    
    (5,629
    )
    
    
    2,872Deferred revenue and other current liabilities
    
    
    997
    
    
    
    337Other long-term liabilities
    
    
    2,106
    
    
    
    (123
    )Deferred rent
    
    
    420
    
    
    
    71Other long-term assets
    
    
    (497
    )
    
    
    (301
    )Net cash provided by operating activities
    
    
    44,330
    
    
    
    33,143Cash flows from investing activitiesCapital expenditures
    
    
    (4,909
    )
    
    
    (4,339
    )Other restricted cash
    
    
    260
    
    
    
    Purchase of investments
    
    
    (549,158
    )
    
    
    (257,275
    )Sale of investments
    
    
    648,337
    
    
    
    328,665Capitalized software and web site development costs
    
    
    (6,797
    )
    
    
    (4,402
    )Proceeds from sale of property and equipment
    
    
    2
    
    
    
    8Payment for net assets acquired, net of acquired cash
    
    
    (3,489
    )
    
    
    (109,423
    )Net cash provided by (used in) investing activities
    
    
    84,246
    
    
    
    (46,766
    )Cash flows from financing activitiesPrincipal payments on capital lease obligations
    
    
    (648
    )
    
    
    (113
    )Proceeds from the exercise of employee stock options
    
    
    905
    
    
    
    3,494Proceeds from employee stock purchase plan
    
    
    1,429
    
    
    
    1,305Purchase of treasury stock
    
    
    (44,820
    )
    
    
    (62
    )Principal payments on notes payable
    
    
    
    
    
    
    (316
    )Stock-based compensation windfall tax benefit
    
    
    355
    
    
    
    6,190Net cash (used in) provided by financing activities
    
    
    (42,779
    )
    
    
    10,498Net increase (decrease) in cash and cash equivalents
    
    
    85,797
    
    
    
    (3,125
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (1,057
    )
    
    
    941Cash, beginning of period
    
    
    50,564
    
    
    
    47,080Cash, end of period
    
    $
    135,304
    
    
    $
    44,896Supplemental disclosureCash paid for:Income taxes
    
    $
    6,600
    
    
    $
    14,018Interest
    
    
    105
    
    
    
    94Non-cash investing and financing activities:Accrued capitalized hardware, software and fixed assets
    
    
    1,815
    
    
    
    479Goodwill adjustment
    
    
    1,651
    
    
    
    72Deferred compensation reversal to equity
    
    
    189
    
    
    
    285
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DEALERTRACK HOLDINGS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 1. Business Description
  2. Basis of Presentation
  3. Recent Accounting Pronouncements
 Determination of the Useful Life of
Intangible Assets
 Effective Date of FASB Statement 157
 The
Fair Value Option for Financial Assets and Financial Liabilities
 6




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4. Fair Value Measurements
 Fair Value Measurements
 
    
    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.
   Quoted Prices in
    
    
    Significant Other
    
    
    Significant
    
    
    Total CarryingActive Markets
    
    
    Observable Inputs
    
    
    Unobservable Inputs
    
    
    Value at(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    September 30, 2008Cash equivalents (1)
    
    $
    53,308
    
    
    $
    
    
    
    $
    
    
    
    $
    53,308Short-term
investments (2)(3)
    
    
    57,056
    
    
    
    
    
    
    
    1,900
    
    
    
    58,956Long-term
investments (4)
    
    
    
    
    
    
    
    
    
    
    5,486
    
    
    
    5,486Total
    
    $
    110,364
    
    
    $
    
    
    
    $
    7,386
    
    
    $
    117,750
 
 (1)
    
    Cash equivalents consist primarily of money market funds with original maturity dates
of three months or less, for which we determine fair value through quoted market prices.(2)
    
    Level 1 short-term investments consist primarily of corporate
bonds and municipal
notes with maturity dates of one year or less, for which we determine fair value
through quoted market prices.(3)
    
    Level 3 short-term investments consist primarily of auction
rate securities that are invested in tax-exempt state government
obligations and universities that were liquidated at par subsequent
to September 30, 2008.(4)
    
    Long-term investments consist of $1.6 million of auction rate securities (ARS) that are
invested in tax-exempt state government obligations and $3.9 million of ARS invested in
tax-advantaged preferred stock trust securities. The preferred stock
securities are trusts in which there are underlying preferred stocks
of financial institutions. We classify investment securities as
available for sale, and as a result, report the investments at fair value. ARS have
long-term underlying maturities, but have interest rates that are
reset every six months
or less. Our intent is not to hold the $1.6 million ARS that are invested in tax-exempt
state government obligations to maturity, but rather to use the interest rate reset feature
to provide liquidity as necessary. In addition, as of September 30, 2008, due to the
uncertainty of whether we will be able to liquidate these securities within the next twelve
months we have classified them as long-term on our consolidated balance sheets. The $3.9
million of ARS funds invested in tax-advantaged preferred stock trust securities are
associated with failed auctions and amounts will not be accessible until a successful
auction occurs, a buyer is found outside the auction process or the trust dissolves and
distributes the underlying securities. Our investment in these securities generally
provides higher interest rates than money market and other cash equivalent investments. Due
to the lack of observable market quotes on our ARS portfolio due to failed auctions within
the industry, we utilize valuation models that rely exclusively on Level 3 inputs including
those that are based on expected cash flow streams, including assessments of counterparty
credit quality, default risk underlying the security, discount rates and overall capital
market liquidity. We measured the fair value of these ARS as of September 30, 2008, and
determined that the valuation of our ARS invested in preferred stock trust securities had
significantly declined from the previously reported amounts. As a result, we reduced the
fair value of the investments in the preferred stock trusts from $9.6 million to $3.9
million and recorded an other-than-temporary impairment charge of $5.7 million for the
three months ended September 30, 2008. Included in our preferred stock trusts ARS portfolio is a
trust for which the underlying investment is a Freddie Mac preferred stock that was
significantly impaired and is no longer paying interest. 7




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We reviewed the ARS portfolio for impairment in accordance with FAS 1151 and FAS
1241,The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investmentsand Staff Accounting Bulletin Topic 5M Other-Than-Temporary Impairment of
Certain Investments in Debt and Equity Securities,to determine the classification of the
impairment as temporary or other-than-temporary. A temporary impairment charge results in
an unrealized loss being recorded in the other comprehensive income component of
shareholders equity. It occurs if a loss in an investment is determined to be temporary in
nature and we have the ability and intent to hold the investment until a recovery in market
value takes place. Such an unrealized loss does not reduce our net income for the applicable
accounting period because the loss is not viewed as other-than-temporary. An impairment
charge is recorded against earnings to the extent we determine that there is a loss of fair
value that is other-than-temporary. We have determined that the significant reduction in fair
value related to our preferred stock trusts ARS was otherthantemporary and we recorded an
impairment charge in our consolidated statements of operations based on a variety of factors,
including the significant decline in fair value indicated for the individual investments and
the adverse market conditions impacting ARS. Based on our available cash and other
investments, we do not currently anticipate that the lack of liquidity caused by failed
auctions will have a material adverse effect on our operating cash flows or will affect our
ability to operate our business as usual. The valuation of our ARS portfolio is subject to
uncertainties that are difficult to predict and we may be required to further reduce the
carrying value of these securities, which would result in an additional loss being recognized
in our statement of operations, which could be material.  Balance as of January 1, 2008
    
    $
    Reclassification from Level 1 investments to Level 3 investments
    
    
    169,580Net sales of auction rate securities
    
    
    (156,530
    )Other-than-temporary impairment included in net (loss) income
    
    
    (5,664
    )Balance as of September 30, 2008
    
    $
    7,386
 5. Net (Loss) Income per Share
 Earnings per Share .
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net (loss) income
    
    $
    (2,603
    )
    
    $
    4,512
    
    
    $
    2,801
    
    
    $
    15,621Denominator:Weighted average common stock
outstanding (basic)
    
    
    39,769,990
    
    
    
    39,058,863
    
    
    
    40,965,118
    
    
    
    38,810,710Common equivalent shares from
options to purchase common stock
and restricted common stock (1)
    
    
    
    
    
    
    1,781,825
    
    
    
    1,270,057
    
    
    
    1,768,383Weighted average common stock
outstanding (diluted)
    
    
    39,769,990
    
    
    
    40,840,688
    
    
    
    42,235,175
    
    
    
    40,579,093Basic net (loss) income per share
    
    $
    (0.07
    )
    
    $
    0.12
    
    
    $
    0.07
    
    
    $
    0.40Diluted net (loss) income per share
    
    $
    (0.07
    )
    
    $
    0.11
    
    
    $
    0.07
    
    
    $
    0.38(1) In accordance with SFAS No. 128, for the three and nine months ended
September 30, 2008 and September 30, 2007, we have excluded 393,333
and 295,000 contingently issuable shares, respectively, from diluted
weighted average common stock outstanding as their contingent
conditions (a) have not been satisfied at the reporting date nor (b)
would have been satisfied if the reporting date was the end of the
contingency period (Refer to Note 16 for further information).The following is a summary of the weighted shares outstanding during the respective periods
that have been excluded from the diluted net (loss) income per share calculation because the effect
would have been antidilutive:Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    
    2007Stock options
    
    
    4,717,993
    
    
    
    627,346
    
    
    
    2,233,700
    
    
    
    489,804Restricted common stock
    
    
    502,939
    
    
    
    63,707
    
    
    
    185,045
    
    
    
    22,788Total antidilutive awards
    
    
    5,220,932
    
    
    
    691,053
    
    
    
    2,418,745
    
    
    
    512,592
 8




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##### Table of Contents



6. Comprehensive (Loss) Income
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net (loss) income
    
    $
    (2,603
    )
    
    $
    4,512
    
    
    $
    2,801
    
    
    $
    15,621Foreign currency translation adjustments
    
    
    (2,114
    )
    
    
    2,840
    
    
    
    (3,747
    )
    
    
    7,753Unrealized loss on available-for-sale securities
    
    
    210
    
    
    
    
    
    
    
    (132
    )
    
    
    Total comprehensive (loss) income
    
    $
    (4,507
    )
    
    $
    7,352
    
    
    $
    (1,078
    )
    
    $
    23,374
  7. Stock-Based Compensation Expense
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Stock options
    
    $
    2,114
    
    
    $
    2,068
    
    
    $
    6,127
    
    
    $
    4,766Restricted common stock
    
    
    1,260
    
    
    
    1,260
    
    
    
    4,049
    
    
    
    2,992ESPP
    
    
    59
    
    
    
    85
    
    
    
    252
    
    
    
    230Total stock-based compensation expense
    
    $
    3,433
    
    
    $
    3,413
    
    
    $
    10,428
    
    
    $
    7,988
    8. Curomax Acquisition
  9. Stock Repurchase Program
  9




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##### Table of Contents



10. Related Party Transactions
  11. Property and Equipment
  EstimatedUseful Life
    
    
    September 30,
    
    
    December 31,(Years)
    
    
    2008
    
    
    2007Computer equipment
    
    
    3
    
    
    $
    19,318
    
    
    $
    16,719Office equipment
    
    
    5
    
    
    
    3,294
    
    
    
    2,189Furniture and fixtures
    
    
    5
    
    
    
    3,080
    
    
    
    2,840Leasehold improvements
    
    
    5-11
    
    
    
    1,220
    
    
    
    992Total property and equipment, gross
    
    
    
    
    
    
    26,912
    
    
    
    22,740Less: Accumulated depreciation and amortization
    
    
    
    
    
    
    (12,851
    )
    
    
    (9,948
    )Total property and equipment, net
    
    
    
    
    
    $
    14,061
    
    
    $
    12,792
  12. Intangible Assets
  September 30, 2008
    
    
    December 31, 2007Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    AmortizationBook
    
    
    Accumulated
    
    
    Book
    
    
    Accumulated
    
    
    PeriodValue
    
    
    Amortization
    
    
    Value
    
    
    Amortization
    
    
    (Years)Customer contracts
    
    $
    36,009
    
    
    $
    (16,028
    )
    
    $
    41,569
    
    
    $
    (14,789
    )
    
    
    2-4Database
    
    
    13,333
    
    
    
    (8,327
    )
    
    
    16,433
    
    
    
    (9,577
    )
    
    
    3-6Trade names
    
    
    10,500
    
    
    
    (5,216
    )
    
    
    10,500
    
    
    
    (4,460
    )
    
    
    5-10Patents/technology
    
    
    19,799
    
    
    
    (6,242
    )
    
    
    35,212
    
    
    
    (16,618
    )
    
    
    2-5Non-compete agreement
    
    
    11,247
    
    
    
    (7,187
    )
    
    
    14,062
    
    
    
    (6,214
    )
    
    
    1-5Partner agreements
    
    
    4,400
    
    
    
    (2,272
    )
    
    
    4,400
    
    
    
    (1,029
    )
    
    
    5Other
    
    
    
    
    
    
    
    
    
    
    900
    
    
    
    (861
    )
    
    
    5Total
    
    $
    95,288
    
    
    $
    (45,272
    )
    
    $
    123,076
    
    
    $
    (53,548
    )
    10




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##### Table of Contents



13. Goodwill
  Balance as of January 1, 2008
    
    $
    117,702Impact of change in Canadian dollar exchange rate
    
    
    (1,619
    )Contingent consideration (Note 8)
    
    
    1,651Other
    
    
    (1,062
    )Balance as of September 30, 2008
    
    $
    116,672
 14. Other Accrued Liabilities
  September 30,
    
    
    December 31,2008
    
    
    2007Customer deposits
    
    $
    2,753
    
    
    $
    2,773Revenue share
    
    
    2,592
    
    
    
    1,196Professional fees
    
    
    2,095
    
    
    
    1,462Accrued contingent consideration (Note 8)
    
    
    1,651
    
    
    
    Taxes
    
    
    1,590
    
    
    
    3,379Public company costs
    
    
    209
    
    
    
    174Software licenses
    
    
    823
    
    
    
    1,212Severance
    
    
    
    
    
    
    271Other
    
    
    1,778
    
    
    
    920Total other accrued liabilities
    
    $
    13,491
    
    
    $
    11,387
 15. Income Taxes
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109 or FIN 48
   16. Long-Term Incentive Equity Awards
  11




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007EBITDA Performance Award
    
    $
    166
    
    
    $
    162
    
    
    $
    500
    
    
    $
    459Market Value Award
    
    
    187
    
    
    
    184
    
    
    
    561
    
    
    
    529Total
    
    $
    353
    
    
    $
    346
    
    
    $
    1,061
    
    
    $
    988
  17. Commitments and Contingencies
 Retail Sales Tax
      12




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##### Table of Contents



Commitments
     Legal Proceedings
  DealerTrack Inc. v. RouteOne LLC
   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
     13




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##### Table of Contents



Markman
  Markman Ruling
     18. Segment Information
 Disclosures about Segments of an Enterprise and Related
Information
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Transaction services revenue
    
    $
    33,007
    
    
    $
    39,096
    
    
    $
    107,495
    
    
    $
    111,982Subscription services revenue
    
    
    23,797
    
    
    
    20,378
    
    
    
    69,060
    
    
    
    53,591Other
    
    
    3,721
    
    
    
    3,397
    
    
    
    11,459
    
    
    
    7,530Total net revenue
    
    $
    60,525
    
    
    $
    62,871
    
    
    $
    188,014
    
    
    $
    173,103
 19. Credit Facility
  20. Second Amended and Restated DealerTrack Holdings, Inc. 2005 Incentive Award Plan
  21. Subsequent Event
  14




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##### Table of Contents



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, 2007 filed with the SEC on February 28, 2008. 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
    15




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##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    
    2007EBITDA and Other Business Statistics:EBITDA (1)(6)
    
    $
    6,713
    
    
    $
    17,534
    
    
    $
    33,951
    
    
    $
    51,030Capital expenditures, software and web site development costs
    
    $
    5,627
    
    
    $
    3,520
    
    
    $
    13,568
    
    
    $
    9,220Active dealers in our network as of end of the period (2)
    
    
    21,001
    
    
    
    22,551
    
    
    
    21,001
    
    
    
    22,551Active financing sources in our network as of end of period (3)
    
    
    706
    
    
    
    495
    
    
    
    706
    
    
    
    495Transactions processed (4)
    
    
    19,219
    
    
    
    23,810
    
    
    
    65,359
    
    
    
    70,033Product subscriptions (5)
    
    
    33,123
    
    
    
    27,469
    
    
    
    33,123
    
    
    
    27,469
 
 (1)
    
    EBITDA represents net income before interest (income) expense, taxes,
depreciation and amortization. We present EBITDA because we believe
that EBITDA provides useful information with respect to the
performance of our fundamental business activities and is also
frequently used by securities analysts, investors and other interested
parties in the evaluation of comparable companies. We rely on EBITDA
as a primary measure to review and assess the operating performance of
our company and management team in connection with our executive
compensation plan incentive payments.EBITDA has limitations as an analytical tool and you should not consider it in isolation, or as
a substitute for analysis of our results as reported under Generally Accepted Accounting
Principles (GAAP). Some of these limitations are: 
    
    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.
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007GAAP net (loss) income
    
    $
    (2,603
    )
    
    $
    4,512
    
    
    $
    2,801
    
    
    $
    15,621Interest income
    
    
    (1,105
    )
    
    
    (991
    )
    
    
    (3,813
    )
    
    
    (3,742
    )Interest expense
    
    
    87
    
    
    
    96
    
    
    
    253
    
    
    
    231Provision for income taxes
    
    
    1,155
    
    
    
    3,217
    
    
    
    5,323
    
    
    
    11,276Depreciation of property and equipment and
amortization of capitalized software and website
costs
    
    
    3,704
    
    
    
    2,686
    
    
    
    9,785
    
    
    
    7,391Amortization of acquired identifiable intangibles
    
    
    5,475
    
    
    
    8,014
    
    
    
    19,602
    
    
    
    20,253EBITDA (Non-GAAP) (6)
    
    $
    6,713
    
    
    $
    17,534
    
    
    $
    33,951
    
    
    $
    51,030
 
 (2)
    
    We consider a dealer to be active as of a date if the dealer completed at least one revenue-generating credit application
processing transaction using the DealerTrack network during the most recently ended calendar month.(3)
    
    We consider a financing source to be active in our network as of a date if it is accepting credit application data
electronically from dealers in the DealerTrack network, including financing sources visible to dealers through drop down
menus.(4)
    
    Represents revenue-generating transactions processed in the DealerTrack, DealerTrack Digital Services and DealerTrack
Canada networks at the end of a given period. The second quarter transaction volume has been revised upwards by 1,204,000
transactions from the number previously reported.(5)
    
    Represents revenue-generating subscriptions in the DealerTrack and DealerTrack Canada networks at the end of a given period.(6)
    
    Included in EBITDA for the three and nine months ended September 30, 2008, is an impairment charge of $5.7 million, related
to the significant decline in certain auction rate securities. Refer to Note 4 in the accompanying notes to the
consolidated financial statements included in this Quarterly Report on From 10-Q for further information regarding the
impairment charge. 16




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##### Table of Contents



Revenue
 Transaction Services Revenue.
 Subscription Services Revenue.
 Cost of Revenue and Operating Expenses
 Cost of Revenue.
 Product Development Expenses.
 Selling, General and Administrative Expenses.
  Critical Accounting Policies and Estimates
   17




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##### Table of Contents



Impairment of auction rate securities
 The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments Other-Than-Temporary Impairment of Certain Investments in Debt and Equity Securities,
   Results of Operations
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    
    2007(% of net revenue)
    
    (% of net revenue)Consolidated Statements of Operations Data:Net revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating costs and expenses:Cost of revenue
    
    
    46.1
    
    
    
    44.0
    
    
    
    44.9
    
    
    
    42.2Product development
    
    
    4.8
    
    
    
    4.4
    
    
    
    4.9
    
    
    
    4.3Selling, general and administrative
    
    
    44.0
    
    
    
    40.7
    
    
    
    44.9
    
    
    
    40.0Total operating costs and expenses
    
    
    94.9
    
    
    
    89.1
    
    
    
    94.7
    
    
    
    86.5Income from operations
    
    
    5.1
    
    
    
    10.9
    
    
    
    5.3
    
    
    
    13.5Interest income
    
    
    1.8
    
    
    
    1.6
    
    
    
    2.0
    
    
    
    2.1Other income
    
    
    0.2
    
    
    
    
    
    
    
    0.1
    
    
    
    Interest expense
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (0.1
    )Impairment on auction rate securities
    
    
    (9.4
    )
    
    
    
    
    
    
    (3.0
    )
    
    
    (Loss) income before provision for income taxes
    
    
    (2.4
    )
    
    
    12.3
    
    
    
    4.3
    
    
    
    15.5Provision for income taxes
    
    
    (1.9
    )
    
    
    (5.1
    )
    
    
    (2.8
    )
    
    
    (6.5
    )Net (loss) income
    
    
    (4.3)
    %
    
    
    7.2
    %
    
    
    1.5
    %
    
    
    9.0
    %
 18




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##### Table of Contents



Three Months Ended September 30, 2008 and 2007
 Revenue
 Three Months EndedSeptember 30,2008
    
    
    2007Transaction services revenue
    
    $
    33,007
    
    
    $
    39,096Subscription services revenue
    
    
    23,797
    
    
    
    20,378Other
    
    
    3,721
    
    
    
    3,397Total net revenue
    
    $
    60,525
    
    
    $
    62,871
  Transaction Services Revenue.
 Subscription Services Revenue.
 Cost of Revenue and Operating Expenses
 Three Months EndedSeptember 30,2008
    
    
    2007Cost of revenue
    
    $
    27,940
    
    
    $
    27,678Product development
    
    
    2,875
    
    
    
    2,761Selling, general and administrative
    
    
    26,654
    
    
    
    25,598Total cost of revenue and operating expenses
    
    $
    57,469
    
    
    $
    56,037
 Cost of Revenue.
 Product Development Expenses.
 Selling, General and Administrative Expenses.
 19




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##### Table of Contents



Impairment of auction rate securities
 Three Months EndedSeptember 30,2008
    
    2007Impairment of auction rate securities
    
    $
    (5,664
    )
    
    $
    We measured the fair value of our auction rate securities as of September 30, 2008, and
determined that the valuation of certain of our auction rate securities had significantly declined
from the previously reported amounts. As a result we recognized a $5.7 million impairment charge
for the three months ended September 30, 2008. Refer to Note 4 in the accompanying notes to the
consolidated financial statements included in this Quarterly Report on Form 10-Q for further
information regarding the impairment charge.Provision for Income TaxesThree Months EndedSeptember 30,2008
    
    2007Provision for income taxes, net
    
    $
    (1,155
    )
    
    $
    (3,217
    )
  Nine Months Ended September 30, 2008 and 2007
 Revenue
 Nine Months EndedSeptember 30,2008
    
    
    2007Transaction services revenue
    
    $
    107,495
    
    
    $
    111,982Subscription services revenue
    
    
    69,060
    
    
    
    53,591Other
    
    
    11,459
    
    
    
    7,530Total net revenue
    
    $
    188,014
    
    
    $
    173,103
  20




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##### Table of Contents



Transaction Services Revenue.
 Subscription Services Revenue.
 Other Revenue.
 Cost of Revenue and Operating Expenses
 Nine Months EndedSeptember 30,2008
    
    
    2007Cost of revenue
    
    $
    84,431
    
    
    $
    73,136Product development
    
    
    9,101
    
    
    
    7,422Selling, general and administrative
    
    
    84,396
    
    
    
    69,159Total cost of revenue and operating expenses
    
    $
    177,928
    
    
    $
    149,717
 Cost of Revenue.
 Product Development Expenses.
 Selling, General and Administrative Expenses.
 21




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##### Table of Contents



Impairment of auction rate securities
 Nine Months EndedSeptember 30,2008
    
    2007Impairment of auction rate securities
    
    $
    (5,664
    )
    
    $
    
  Provision for Income Taxes
 Nine Months EndedSeptember 30,2008
    
    2007Provision for income taxes, net
    
    $
    (5,323
    )
    
    $
    (11,276
    )
  Liquidity and Capital Resources
     22




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##### Table of Contents



Nine Months EndedSeptember 30,2008
    
    2007Net cash provided by operating activities
    
    $
    44,330
    
    
    $
    33,143Net cash provided by (used in) investing activities
    
    $
    84,246
    
    
    $
    (46,766
    )Net cash (used in) provided by financing activities
    
    $
    (42,779
    )
    
    $
    10,498
 Operating Activities
  Investing Activities
  Financing Activities
  Contractual Obligations
  Off-Balance Sheet Arrangements
  23




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##### Table of Contents



Industry Trends
  Effects of Inflation
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Exposure
  Interest Rate Exposure
   
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  24




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  DealerTrack Inc. v. RouteOne LLC
   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
     Markman
  Markman Ruling
     25




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##### Table of Contents



Item 1A. Risk Factors
  Funds associated with certain of our auction rate securities may not be accessible for in excess of
12 months and our auction rate securities may experience an other than temporary decline in value,
which would adversely affect our income.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Purchases of Equity Securities by the Issuer
   Total
    
    
    MaximumNumber of
    
    
    NumberShares
    
    
    of SharesPurchased
    
    
    ThatTotal
    
    
    Average
    
    
    as Part of
    
    
    May Yet beNumber
    
    
    Price
    
    
    Publicly
    
    
    Purchasedof Shares
    
    
    Paid per
    
    
    Announced
    
    
    Under thePeriod
    
    Purchased
    
    
    Share
    
    
    Program
    
    
    ProgramJuly 2008
    
    
    1,005,716
    
    
    $
    14.84
    
    
    
    1,005,716
    
    
    
    (1
    )August 2008
    
    
    175,508
    
    
    $
    17.47
    
    
    
    175,000
    
    
    
    (1
    )September 2008
    
    
    420,000
    
    
    $
    18.33
    
    
    
    420,000
    
    
    
    (1
    )Total
    
    
    1,601,224
 
 (1)
    
    As of September 30, 2008, an additional $30.3 million of our common stock may still be
purchased under the repurchase program. 26




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##### Table of Contents



Item 6. Exhibits
 ExhibitNumber
    
    Description of Document31.1
    
    Certification of Mark F. ONeil, Chairman, President and Chief
Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Robert J. Cox III, Senior Vice President, Chief
Financial Officer and Treasurer, pursuant to Rule 13a-14(a)and
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certifications of Mark F. ONeil, Chairman, President and Chief
Executive Officer, and Robert J. Cox III, Senior Vice President,
Chief Financial Officer and Treasurer, pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 27




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##### Table of Contents



SIGNATURE
  DealerTrack Holdings, Inc.
(Registrant)Date: November 6, 2008
    /s/ Robert J. Cox IIIRobert J. Cox IIISenior Vice President, Chief Financial Officer
and Treasurer

(Principal Financial and Accounting Officer) 28




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document31.1
    
    Certification of Mark F. ONeil, Chairman, President and Chief
Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Robert J. Cox III, Senior Vice President, Chief
Financial Officer and Treasurer, pursuant to Rule 13a-14(a)and
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certifications of Mark F. ONeil, Chairman, President and Chief
Executive Officer, and Robert J. Cox III, Senior Vice President,
Chief Financial Officer and Treasurer, pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 29