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 March 31, 2010




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 M04Lake
      Success, NY, 11042(Address
      of principal executive offices, including zip
  code)





(516)
734-3600


Registrant’s
telephone number, including area code




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 Website, 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 þ




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
April 30, 2010, 40,303,825 shares of the registrant’s common stock were
outstanding.







DEALERTRACK
HOLDINGS, INC.


FORM
10-Q


FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2010




TABLE
OF CONTENTS


PagePART
      I. FINANCIAL INFORMATION
                    
                    3Item 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
                    
                    26Item 4.
      Controls and Procedures
                    
                    26PART
      II. OTHER INFORMATION
                    
                    26Item 1.
      Legal Proceedings
                    
                    26Item 1A.
      Risk Factors
                    
                    27Item 2.
      Unregistered Sales of Equity Securities and Use of
Proceeds
                    
                    27Item 6.
      Exhibits
                    
                    28Signature
                    
                    28EX-31.1:
      CERTIFICATIONEX-31.2:
      CERTIFICATIONEX-32.1:
      CERTIFICATION


2




PART
I. FINANCIAL INFORMATION




Item 1. Financial
Statements




DEALERTRACK
HOLDINGS, INC.




CONSOLIDATED
BALANCE SHEETS


(unaudited)





March 31,
                                
                                
                                December 31,2010
                                
                                
                                2009(In thousands, except shareand per share amounts)ASSETSCurrent
      assetsCash
      and cash equivalents
                                
                                $
                                183,210
                                
                                
                                $
                                197,509Short-term
      investments
                                
                                
                                69
                                
                                
                                
                                1,484Accounts
      receivable, net of allowances of $2,433 and $2,677 as of March 31, 2010
      and December 31, 2009, respectively
                                
                                
                                21,208
                                
                                
                                
                                17,478Prepaid
      expenses and other current assets
                                
                                
                                12,949
                                
                                
                                
                                6,844Deferred
      tax assets
                                
                                
                                18,610
                                
                                
                                
                                2,776Total
      current assets
                                
                                
                                236,046
                                
                                
                                
                                226,091Long-term
      investments
                                
                                
                                3,975
                                
                                
                                
                                3,971Property
      and equipment, net
                                
                                
                                15,345
                                
                                
                                
                                13,514Software
      and website developments costs, net
                                
                                
                                22,565
                                
                                
                                
                                21,158Intangible
      assets, net
                                
                                
                                37,589
                                
                                
                                
                                41,604Goodwill
                                
                                
                                135,667
                                
                                
                                
                                134,747Deferred
      tax assets — long-term
                                
                                
                                16,431
                                
                                
                                
                                29,699Other
      long-term assets
                                
                                
                                14,749
                                
                                
                                
                                1,543Total
      assets
                                
                                $
                                482,367
                                
                                
                                $
                                472,327LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                                
                                $
                                4,699
                                
                                
                                $
                                3,919Accrued
      compensation and benefits
                                
                                
                                5,452
                                
                                
                                
                                11,717Accrued
      liabilities — other
                                
                                
                                26,048
                                
                                
                                
                                11,324Deferred
      revenues
                                
                                
                                4,929
                                
                                
                                
                                4,992Due
      to acquirees
                                
                                
                                723
                                
                                
                                
                                1,820Capital
      leases payable
                                
                                
                                518
                                
                                
                                
                                425Total
      current liabilities
                                
                                
                                42,369
                                
                                
                                
                                34,197Capital
      leases payable — long-term
                                
                                
                                352
                                
                                
                                
                                281Deferred
      tax liabilities — long-term
                                
                                
                                11,330
                                
                                
                                
                                11,083Deferred
      revenues — long-term
                                
                                
                                3,540
                                
                                
                                
                                3,299Other
      long-term liabilities
                                
                                
                                2,559
                                
                                
                                
                                2,581Total
      liabilities
                                
                                
                                60,150
                                
                                
                                
                                51,441Commitments and
      contingencies (Note 13)Stockholders’
      equityPreferred
      stock, $0.01 par value: 10,000,000 shares authorized and no shares issued
      and outstanding as of March 31, 2010 and December 31,
      2009
                                
                                
                                —
                                
                                
                                
                                —Common
      stock, $0.01 par value: 175,000,000 shares authorized; 43,349,416 shares
      issued and 40,277,295 shares outstanding as of March 31, 2010; and
      175,000,000 shares authorized; 43,469,945 shares issued and 40,430,330
      shares outstanding as of December 31, 2009
                                
                                
                                434
                                
                                
                                
                                435Treasury
      stock, at cost, 3,072,121 shares and 3,039,615 shares as of March 31, 2010
      and December 31, 2009, respectively
                                
                                
                                (51,030
                                )
                                
                                
                                (50,440
                                )Additional
      paid-in capital
                                
                                
                                452,353
                                
                                
                                
                                448,816Accumulated
      other comprehensive income
                                
                                
                                6,987
                                
                                
                                
                                6,151Retained
      earnings
                                
                                
                                13,473
                                
                                
                                
                                15,924Total
      stockholders’ equity
                                
                                
                                422,217
                                
                                
                                
                                420,886Total
      liabilities and stockholders’ equity
                                
                                $
                                482,367
                                
                                
                                $
                                472,327




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


3




DEALERTRACK
HOLDINGS, INC.




CONSOLIDATED
STATEMENTS OF OPERATIONS


(unaudited)





Three Months Ended March 31,2010
                                      
                                      2009(In thousands, except share andper share amounts)Revenue:Net
      revenue
                                      
                                      $
                                      56,785
                                      
                                      
                                      $
                                      55,700Operating
      expenses:Cost
      of revenue (1)
                                      
                                      
                                      30,717
                                      
                                      
                                      
                                      29,121Product
      development (1)
                                      
                                      
                                      3,598
                                      
                                      
                                      
                                      4,132Selling,
      general and administrative (1)
                                      
                                      
                                      27,408
                                      
                                      
                                      
                                      32,318Total
      operating expenses
                                      
                                      
                                      61,723
                                      
                                      
                                      
                                      65,571Loss
      from operations
                                      
                                      
                                      (4,938
                                      )
                                      
                                      
                                      (9,871
                                      )Interest
      income
                                      
                                      
                                      126
                                      
                                      
                                      
                                      402Interest
      expense
                                      
                                      
                                      (59
                                      )
                                      
                                      
                                      (50
                                      )Other
      income
                                      
                                      
                                      624
                                      
                                      
                                      
                                      50Realized
      gain on securities
                                      
                                      
                                      582
                                      
                                      
                                      
                                      463Loss
      before benefit for income taxes
                                      
                                      
                                      (3,665
                                      )
                                      
                                      
                                      (9,006
                                      )Benefit
      for income taxes, net
                                      
                                      
                                      1,214
                                      
                                      
                                      
                                      3,381Net
      loss
                                      
                                      $
                                      (2,451
                                      )
                                      
                                      $
                                      (5,625
                                      )Basic
      net loss per share
                                      
                                      $
                                      (0.06
                                      )
                                      
                                      $
                                      (0.14
                                      )Diluted
      net loss per share
                                      
                                      $
                                      (0.06
                                      )
                                      
                                      $
                                      (0.14
                                      )Weighted
      average common stock outstanding (basic)
                                      
                                      
                                      40,154,275
                                      
                                      
                                      
                                      39,095,730Weighted
      average common stock outstanding (diluted)
                                      
                                      
                                      40,154,275
                                      
                                      
                                      
                                      39,095,730







(1)
              Stock-based
      compensation expense recorded for the three months ended March 31, 2010
      and 2009 was classified as
follows:





Three Months Ended March 31,2010
                
                
                2009 (2)Cost
      of revenue
                
                $
                403
                
                
                $
                613Product
      development
                
                
                151
                
                
                
                210Selling,
      general and administrative
                
                
                2,188
                
                
                
                6,583





(2)
              Included
      in stock-based compensation expense for the three months ended March 31,
      2009 was $3.9 million of stock-based compensation expense related to the
      realignment of our workforce and business on January 5, 2009, which was
      primarily allocated to selling, general and administrative
      expenses.




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


4




DEALERTRACK
HOLDINGS, INC.




CONSOLIDATED
STATEMENTS OF CASH FLOWS


(unaudited)





Three Months Ended March 31,2010
                  
                  
                  2009(In thousands)Operating
      Activities:Net
      loss
                  
                  $
                  (2,451
                  )
                  
                  $
                  (5,625
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  9,240
                  
                  
                  
                  8,775Deferred
      tax provision (benefit)
                  
                  
                  13,372
                  
                  
                  
                  (3,359
                  )Stock-based
      compensation expense
                  
                  
                  2,742
                  
                  
                  
                  7,406Provision
      for doubtful accounts and sales credits
                  
                  
                  1,463
                  
                  
                  
                  2,458Gain
      on sale of property and equipment
                  
                  
                  —
                  
                  
                  
                  (166
                  )Amortization
      of bond premium
                  
                  
                  —
                  
                  
                  
                  40Amortization
      of deferred interest
                  
                  
                  41
                  
                  
                  
                  34Deferred
      compensation
                  
                  
                  —
                  
                  
                  
                  75Stock-based
      compensation windfall tax benefit
                  
                  
                  (629
                  )
                  
                  
                  (829
                  )Realized
      gain on securities
                  
                  
                  (582
                  )
                  
                  
                  (463
                  )Changes
      in operating assets and liabilities, net of effects of
      acquisitions:Accounts
      receivable
                  
                  
                  (5,004
                  )
                  
                  
                  (5,415
                  )Prepaid
      expenses and other current assets
                  
                  
                  (18,016
                  )
                  
                  
                  (3,977
                  )Accounts
      payable and accrued expenses
                  
                  
                  5,219
                  
                  
                  
                  259Deferred
      revenue
                  
                  
                  (69
                  )
                  
                  
                  371Other
      long-term liabilities
                  
                  
                  184
                  
                  
                  
                  (336
                  )Deferred
      rent
                  
                  
                  30
                  
                  
                  
                  41Other
      long-term assets
                  
                  
                  (13,206
                  )
                  
                  
                  (448
                  )Net
      cash used in operating activities
                  
                  
                  (7,666
                  )
                  
                  
                  (1,159
                  )Investing
      Activities:Capital
      expenditures
                  
                  
                  (2,527
                  )
                  
                  
                  (1,273
                  )Restricted
      cash
                  
                  
                  —
                  
                  
                  
                  114Sale
      of investments
                  
                  
                  —
                  
                  
                  
                  31,300Capitalized
      software and website development costs
                  
                  
                  (2,244
                  )
                  
                  
                  (3,050
                  )Proceeds
      from sale of property and equipment
                  
                  
                  —
                  
                  
                  
                  71Payment
      for acquisition of businesses and intangible assets, net of acquired
      cash
                  
                  
                  (2,278
                  )
                  
                  
                  (33,808
                  )Net
      cash used in investing activities
                  
                  
                  (7,049
                  )
                  
                  
                  (6,646
                  )Financing
      Activities:Principal
      payments on capital lease obligations
                  
                  
                  (126
                  )
                  
                  
                  (92
                  )Proceeds
      from the exercise of employee stock options
                  
                  
                  97
                  
                  
                  
                  935Proceeds
      from employee stock purchase plan
                  
                  
                  236
                  
                  
                  
                  342Purchase
      of treasury stock
                  
                  
                  (590
                  )
                  
                  
                  (325
                  )Principal
      payments on notes payable
                  
                  
                  —
                  
                  
                  
                  (212
                  )Stock-based
      compensation windfall tax benefit
                  
                  
                  629
                  
                  
                  
                  829Net
      cash provided by financing activities
                  
                  
                  246
                  
                  
                  
                  1,477Net
      decrease in cash and cash equivalents
                  
                  
                  (14,469
                  )
                  
                  
                  (6,328
                  )Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  170
                  
                  
                  
                  (472
                  )Cash
      and cash equivalents, beginning of period
                  
                  
                  197,509
                  
                  
                  
                  155,456Cash
      and cash equivalents, end of period
                  
                  $
                  183,210
                  
                  
                  $
                  148,656Supplemental
      disclosure:Cash
      paid for:Income
      taxes
                  
                  $
                  2,536
                  
                  
                  $
                  2,173Interest
                  
                  
                  18
                  
                  
                  
                  16Non-cash
      investing and financing activities:Accrued
      capitalized hardware, software and fixed assets
                  
                  
                  1,843
                  
                  
                  
                  873Receivable
      for sale of securities
                  
                  
                  1,419
                  
                  
                  
                  —Assets
      acquired under capital lease
                  
                  
                  289
                  
                  
                  
                  —Capitalized
      stock-based compensation
                  
                  
                  18
                  
                  
                  
                  38Asset
      sale through note receivable
                  
                  
                  —
                  
                  
                  
                  500Deferred
      compensation reversal to equity
                  
                  
                  —
                  
                  
                  
                  75




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


5




DEALERTRACK
HOLDINGS, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)




1.
Business Description




DealerTrack’s
intuitive and high-value software solutions enhance efficiency and profitability
for all major segments of the automotive retail industry, including dealers,
lenders, OEM’s, agents and aftermarket providers. We believe our solution set
for dealers is the industry’s most comprehensive. DealerTrack operates the
industry’s largest online credit application network, connecting approximately
17,000 dealers with approximately 850 lenders. Our dealer management system
(DMS) provides dealers with easy-to-use tools and real-time data access that
will streamline any automotive business. Dealers using DealerTrack AAX get
inventory management tools and services needed to accelerate turns and increase
profit. Our sales and finance & insurance (F&I) solution enables dealers
to streamline the entire sales process, quickly structuring all types of deals
from a single integrated platform. DealerTrack’s compliance solution helps
dealers meet legal and regulatory requirements and protect their hard-earned
assets. DealerTrack’s family of companies also includes data and consulting
services providers, ALG and Chrome Systems.




2.
Basis of Presentation




The
accompanying unaudited consolidated financial statements for the three months
ended March 31, 2010 and 2009 have been prepared in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do
not necessarily include all information and footnotes necessary for a fair
presentation of its consolidated financial position, results of operations and
cash flows in accordance with accounting principles generally accepted in the
United States (GAAP). The December 31, 2009 balance sheet information has been
derived from the audited financial statements at that date but does not include
all disclosures required by GAAP.




In
the opinion of management, the unaudited financial information for the interim
periods presented reflects all adjustments, which are normal and recurring,
necessary for a fair presentation of a statement of results of operations,
financial position and cash flows. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2009, filed with the Securities and Exchange Commission (SEC) on
February 24, 2010. Operating results for the three months ended March 31, 2010
are not necessarily indicative of the results that may be expected for the full
year ending December 31, 2010.




The
preparation of financial statements in conformity with GAAP require management
to make estimates and assumptions that affect the reported amounts and the
disclosures of contingent amounts in our financial statements and the
accompanying notes. Actual results could differ from those
estimates.




3.
Recent Accounting Pronouncements




In
January 2010, the Financial Accounting Standards Board (FASB) issued guidance to
amend the disclosure requirements related to recurring and nonrecurring fair
value measurements. The guidance requires new disclosures for significant
transfers in and out of Level 1 and Level 2 fair value measurements and to
provide a gross presentation of the activities, including purchases, sales,
issuances, and settlements, within the Level 3 rollforward. The guidance also
clarifies existing fair value disclosures about the level of disaggregation and
about inputs and valuation techniques used to measure fair value. The new
disclosure requirements are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about the Level 3
rollforward, which are effective for fiscal years beginning after December 15,
2010. The adoption of the new disclosure requirements applicable for our first
quarter of 2010 did not have a material impact on our consolidated financial
statements. We do not expect the full adoption of the guidance to have a
material impact on our fair value measurement disclosures.




In
October 2009, the FASB issued Revenue Recognition guidance around
Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging
Issues Task Force. This guidance modifies the fair value requirements of Revenue
Recognition-Multiple Element Arrangements by allowing the use of the “best
estimate of selling price” in addition to VSOE and VOE (now referred to as
third-party evidence or TPE) for determining the selling price of a deliverable.
A vendor is now required to use its best estimate of the selling price when VSOE
or TPE of the selling price cannot be determined. In addition, the residual
method of allocating arrangement consideration is no longer permitted.  The
final consensus is effective for fiscal years beginning after June 15,
2010. Companies have the option of adopting the guidance retrospectively or
prospectively for new or materially modified agreements.  Early adoption is
permitted as of the beginning of an entity’s fiscal year.  We have adopted
the provisions of this standard prospectively as of January 1, 2010, which did
not have a material impact on our consolidated financial
statements.




In
June 2009, the FASB issued a new standard which modified 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.  This new standard requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity and also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. This standard is effective for fiscal years
beginning after November 15, 2009. We have adopted the provisions of this
standard as of January 1, 2010, which did not have a material impact on our
consolidated financial statements.


6




4. Fair Value
Measurements




Fair
value is defined as the exit price, or the amount that would be received to sell
an asset or paid to transfer a 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 value 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 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.




Financial
assets measured at fair value on a recurring basis include the following as of
March 31, 2010 and December 31, 2009 (in thousands):





As of March 31, 2010
                        
                        Quoted Prices in
                          Active Markets
                          (Level 1)
                        
                        
                        Significant Other
                          Observable
                          Inputs
                          (Level 2)
                        
                        
                        Significant
                          Unobservable
                          Inputs
                          (Level 3)
                        
                        
                        March 31,
                          2010Cash
      equivalents (1)
                        
                        $
                        158,209
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        158,209Short-term
      investments (3)
                        
                        
                        69
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        69Long-term
      investments (4)
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        3,975
                        
                        
                        
                        3,975Total
                        
                        $
                        158,278
                        
                        
                        $
                        —
                        
                        
                        $
                        3,975
                        
                        
                        $
                        162,253





As of December 31,
      2009
                                      
                                      Quoted Prices in
                                        Active Markets
                                        (Level 1)
                                      
                                      
                                      Significant Other
                                        Observable
                                        Inputs
                                        (Level 2)
                                      
                                      
                                      Significant
                                        Unobservable
                                        Inputs
                                        (Level 3)
                                      
                                      
                                      December 31,
                                        2009Cash
      equivalents (1) (2)
                                      
                                      $
                                      163,615
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      163,615Short-term
      investments (3)
                                      
                                      
                                      1,484
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,484Long-term
      investments (4)
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      3,971
                                      
                                      
                                      
                                      3,971Total
                                      
                                      $
                                      165,099
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      3,971
                                      
                                      
                                      $
                                      169,070





(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 cash equivalents of
      approximately $163.6 million as of December 31, 2009 has been revised from
      $127.6 million as previously disclosed in the fair value measurement
      footnote in our Annual Report on Form 10-K for the year ended
      December 31, 2009 filed with the SEC on February 24, 2010 to reflect
      the inclusion of a money market account held at December 31, 2009 that was
      incorrectly omitted from our original disclosure. Amounts classified as
      cash and cash equivalents on our audited balance sheet at December 31,
      2009 were correctly stated.





(3)
              As of March 31, 2010 and December
      31, 2009, Level 1 short-term investments include investments in
      tax-advantaged preferred securities, for which we determined fair value
      based on the quoted market prices of the underlying securities. During the
      three months ended March 31, 2010, we sold a portion of our Level 1
      investments in tax-advantaged preferred securities for approximately $1.4
      million and recorded a realized gain in the statement of operations of
      approximately $0.6
million.


7





(4)
              Level 3
      long-term investments as of both March 31, 2010 and December 31, 2009
      include a $1.6 million, or 0.3% of total assets, auction rate security
      (ARS) invested in a tax-exempt state government obligation that was valued
      at par. Our intent is not to hold the ARS invested in tax-exempt state
      government obligations to maturity, but rather to use the interest reset
      feature to provide liquidity. However, should the marketplace auctions
      continue to fail we may hold the security to maturity. We have classified
      this as long-term due to the maturity date of the security being September
      2011, coupled with ongoing failed auctions in the
    marketplace.





Level 3
      long-term investments as of both March 31, 2010 and December 31, 2009 also
      include a $2.4 million, or 0.5% of total assets, tax-advantaged preferred
      stock of a financial institution. It is uncertain whether we will be able
      to liquidate these securities within the next twelve months; as such we
      have classified them as long-term on our consolidated balance sheets. Due
      to the lack of observable market quotes we utilized 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.




A
reconciliation of the beginning and ending balances for Level 3 investments as
of March 31, 2010 and December 31, 2009, is as follows (in
thousands):


Balance
      as of January 1, 2009
                      
                      $
                      1,550Reclassification
      from Level 2 investments to Level 3 investments (5)
                      
                      
                      1,360Realized
      gain on securities included in the statement of operations
    (5)
                      
                      
                      716Unrealized
      gain on securities recorded in other comprehensive income
    (5)
                      
                      
                      345Balance
      as of December 31, 2009
                      
                      
                      3,971Unrealized
      gain on securities recorded in other comprehensive income
    (5)
                      
                      
                      4Balance
      as of March 31, 2010
                      
                      $
                      3,975





(5)
              During
      2009 our investments in Level 2 ARS invested in certain tax-advantaged
      preferred stock trusts held as of January 1, 2009 dissolved and the
      trustees distributed the underlying preferred stock investments. As a
      result of these dissolutions we measured the fair value of the Level 3
      long-term tax-advantaged preferred stock on the distribution date and
      determined that the value increased from $1.4 million as of December 31,
      2008 to $2.1 million on the distribution date and as a result we recorded
      a realized gain in the statement of operations of $0.7 million. Subsequent
      to the trust dissolution we re-measured the fair value on December 31,
      2009 and March 31, 2010 and determined that the value had increased and
      recorded a gain in other comprehensive income of $0.3 million and
      approximately $4,000, respectively. The total value of the tax-advantaged
      preferred stock of a financial institution included in the $4.0 million of
      Level 3 long-term investments as of both December 31, 2009 and March 31,
      2010 is approximately $2.4
million.




5.
Net Loss Per Share




We
compute net loss per share in accordance with FASB ASC Topic 260, “Earnings Per Share” (ASC
Topic 260). Under ASC Topic 260, basic earnings per share is calculated by
dividing net (loss) income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated by
dividing net income by the weighted average number of common shares outstanding,
assuming dilution, during the period. The diluted earnings per share calculation
assumes (i) all stock options which are in the money are exercised at the
beginning of the period and (ii) if applicable, unvested awards that are
considered to be contingently issuable shares because they contain either a
performance or market condition will be included in diluted earnings per share
if dilutive and if their conditions have (a) been satisfied at the reporting
date or (b) would have been satisfied if the reporting date was the end of the
contingency period.




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





Three Months Ended March 31,2010
                    
                    
                    2009Numerator:Net
      loss
                    
                    $
                    (2,451
                    )
                    
                    $
                    (5,625
                    )Denominator:Weighted
      average common stock outstanding (basic)
                    
                    
                    40,154,275
                    
                    
                    
                    39,095,730Common
      equivalent shares from options to purchase common stock, restricted common
      stock units, and performance stock units
                    
                    
                    —
                    
                    
                    
                    —Weighted
      average common stock outstanding (diluted)
                    
                    
                    40,154,275
                    
                    
                    
                    39,095,730Basic
      and diluted net loss per share
                    
                    $
                    (0.06
                    )
                    
                    $
                    (0.14
                    )


8





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





Three Months Ended March 31,2010
                  
                  
                  2009Stock
      options
                  
                  
                  4,628,996
                  
                  
                  
                  4,982,840Restricted
      stock units
                  
                  
                  665,677
                  
                  
                  
                  475,938Performance
      stock units
                  
                  
                  13,275
                  
                  
                  
                  —Total
      antidilutive awards
                  
                  
                  5,307,948
                  
                  
                  
                  5,458,778




6.
Comprehensive Loss




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





Three Months Ended March 31,2010
                            
                            
                            2009Net
      loss
                            
                            $
                            (2,451
                            )
                            
                            $
                            (5,625
                            )Foreign
      currency translation adjustments
                            
                            
                            1,410
                            
                            
                            
                            (1,315
                            )Unrealized
      loss on available for sale securities
                            
                            
                            (574
                            )
                            
                            
                            (239
                            )Total
      comprehensive loss
                            
                            $
                            (1,615
                            )
                            
                            $
                            (7,179
                            )




For
the three months ended March 31, 2010 and 2009, 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 five types of stock-based compensation: stock options, restricted common
stock, restricted stock units, performance stock units and common stock issued
under an employee stock purchase plan (ESPP). For further information see Notes
2 and 11 included in our Annual Report on Form 10-K for the year ended
December 31, 2009 filed with the SEC on February 24, 2010.




The
following summarizes stock-based compensation expense recognized for the three
months ended March 31, 2010 and 2009 (in thousands):


Three Months Ended March 31,2010
                  
                  
                  2009 (4)Stock
      options
                  
                  $
                  1,473
                  
                  
                  $
                  5,332Restricted
      common stock (1)
                  
                  
                  566
                  
                  
                  
                  1,604Restricted
      stock units
                  
                  
                  665
                  
                  
                  
                  410Performance
      stock units (2)
                  
                  
                  38
                  
                  
                  
                  —ESPP
      (3)
                  
                  
                  —
                  
                  
                  
                  60Total
      stock-based compensation expense
                  
                  $
                  2,742
                  
                  
                  $
                  7,406





(1)
            The
      expense recorded to restricted common stock includes expense related to
      the EBITDA Performance Award and the Market Value Award granted under the
      Long-Term Incentive Plan (LTIP) for the three months ended March 31, 2010
      and 2009 as follows (in thousands):





Three Months Ended March 31,2010
                        
                        
                        2009EBITDA
      Performance Award
                        
                        $
                        40
                        
                        
                        $
                        120Market
      Value Award
                        
                        
                        45
                        
                        
                        
                        (106
                        )Total
                        
                        $
                        85
                        
                        
                        $
                        14




For
further information about EBITDA Performance Award and Market Value Award,
please refer to Note 11 included in our Annual Report on Form 10-K for the year
ended December 31, 2009 filed with the SEC on February 24,
2010.


9




(2)
            Expense
      relates to 129,860 performance stock units (PSU’s) granted on March 9,
      2010 to certain executives of the company. The actual number of PSU’s to
      be delivered is subject to adjustment ranging from 0% (threshold) to
      137.5% (maximum) based solely upon the achievement of certain performance
      targets and other vesting conditions. Each individual’s award was
      allocated 50% to achieving adjusted net income (ANI) targets for the year
      ended December 31, 2010 (ANI Performance Award) and 50% to the total
      shareholder return (TSR) of our common stock as compared to other
      companies in the NASDAQ Internet Index in the aggregate for the fiscal
      years 2010, 2011, and 2012 (TSR Award). The awards will be earned based
      upon our achievement of ANI and TSR targets, but will not vest unless the
      grantee remains continuously employed in active service until January 31,
      2013. In addition, the PSU’s are subject to forfeiture if the company’s
      performance goals are not achieved. The awards are subject to acceleration
      in full if an executive is terminated without cause, or resigns for good
      reason within twelve months of a change in control. We have valued the ANI
      Performance Award and the TSR Award using the Black-Scholes and Monte
      Carlo valuation pricing models, respectively. The total fair value of the
      ANI Performance Award, based on the number of awards expected to vest, was
      $0.9 million, which we began expensing during the first quarter of 2010 as
      it was deemed probable that we will achieve a portion of the ANI targets
      for 2010. The total fair value of the TSR Award was $1.1 million, 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 in the event the TSR Award targets are
      not achieved. The expense recorded for PSU’s includes expense related to
      the ANI Performance Award and the TSR Award for the three months ended
      March 31, 2010 as follows (in
thousands):





ANI
      Performance Award
                    
                    $
                    13TSR
      Award
                    
                    
                    25Total
                    
                    $
                    38





(3)
            On
      April 1, 2009, the discount on the purchase price of shares of common
      stock under the ESPP was reduced from 15% to 5%. As such, we are no longer
      required to record stock-based compensation expense for the
      discount.




(4)
            Included
      in stock-based compensation expense for the three months ended March 31,
      2009 was $3.9 million of stock-based compensation expense related to the
      realignment of our workforce and business on January 5,
    2009.




8.
Property and Equipment




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





EstimatedUseful Life
                  
                  
                  March 31,
                  
                  
                  December 31,(Years)
                  
                  
                  2010
                  
                  
                  2009Computer
      equipment
                  
                  
                  3 –
      5
                  
                  
                  $
                  25,868
                  
                  
                  $
                  22,662Office
      equipment
                  
                  
                  5
                  
                  
                  
                  3,640
                  
                  
                  
                  3,550Furniture
      and fixtures
                  
                  
                  5
                  
                  
                  
                  3,362
                  
                  
                  
                  3,343Leasehold
      improvements
                  
                  
                  5-11
                  
                  
                  
                  3,228
                  
                  
                  
                  3,188Total
      property and equipment, gross
                  
                  
                  
                  
                  
                  
                  36,098
                  
                  
                  
                  32,743Less:
      Accumulated depreciation and amortization
                  
                  
                  
                  
                  
                  
                  (20,753
                  )
                  
                  
                  (19,229
                  )Total
      property and equipment, net
                  
                  
                  
                  
                  
                  $
                  15,345
                  
                  
                  $
                  13,514




Depreciation
and amortization expense related to property and equipment for the three months
ended March 31, 2010 and 2009 was $1.9 million and $1.7 million,
respectively.


10




9.
Intangible Assets




The
gross book value, accumulated amortization and amortization periods of the
intangible assets were as follows (dollars in thousands):





March 31, 2010
                  
                  
                  December 31, 2009Gross
                  
                  
                  
                  
                  
                  
                  Gross
                  
                  
                  
                  
                  
                  
                  AmortizationBook
                  
                  
                  Accumulated
                  
                  
                  Book
                  
                  
                  Accumulated
                  
                  
                  PeriodValue
                  
                  
                  Amortization
                  
                  
                  Value
                  
                  
                  Amortization
                  
                  
                  (Years)Customer
      contracts
                  
                  $
                  41,497
                  
                  
                  $
                  (27,678
                  )
                  
                  $
                  40,352
                  
                  
                  $
                  (24,769
                  )
                  
                  
                  2-7Database
                  
                  
                  13,825
                  
                  
                  
                  (11,477
                  )
                  
                  
                  13,825
                  
                  
                  
                  (10,945
                  )
                  
                  
                  3-6Trade
      names
                  
                  
                  12,599
                  
                  
                  
                  (7,281
                  )
                  
                  
                  12,510
                  
                  
                  
                  (6,924
                  )
                  
                  
                  2-10Technology
                  
                  
                  27,585
                  
                  
                  
                  (12,454
                  )
                  
                  
                  27,170
                  
                  
                  
                  (11,110
                  )
                  
                  
                  1-5Non-compete
      agreement
                  
                  
                  6,585
                  
                  
                  
                  (5,612
                  )
                  
                  
                  6,585
                  
                  
                  
                  (5,090
                  )
                  
                  
                  3-5Total
                  
                  $
                  102,091
                  
                  
                  $
                  (64,502
                  )
                  
                  $
                  100,442
                  
                  
                  $
                  (58,838
                  )




Amortization
expense related to intangibles for the three months ended March 31, 2010 and
2009 was $5.2 million and $5.3 million, respectively.




Amortization
expense that will be charged to income for the remaining period of 2010 is $14.3
million and for each of the subsequent five years is estimated, based on the
March 31, 2010 book value, as follows (in thousands):


2011
                
                $
                10,7782012
                
                
                5,6492013
                
                
                3,5912014
                
                
                2,1892015
                
                
                1,089Total
                
                $
                23,296




10.
Goodwill




The
change in carrying amount of goodwill for the three months ended March 31, 2010
is as follows (in thousands):


Balance
      as of January 1, 2010
                
                $
                134,747Impact
      of change in Canadian dollar exchange rate
                
                
                761Other
                
                
                159Balance
      as of March 31, 2010
                
                $
                135,667




11.
Accrued Liabilities - Other




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





March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009GMAC
      strategic agreement fee (Note 16)
                  
                  $
                  15,000
                  
                  
                  $
                  —Customer
      deposits
                  
                  
                  2,356
                  
                  
                  
                  2,357Revenue
      share
                  
                  
                  1,783
                  
                  
                  
                  1,284Professional
      fees
                  
                  
                  1,559
                  
                  
                  
                  2,280Software
      licenses
                  
                  
                  1,204
                  
                  
                  
                  1,325Sales
      taxes
                  
                  
                  934
                  
                  
                  
                  883Other
                  
                  
                  3,212
                  
                  
                  
                  3,195Total
      accrued liabilities - other
                  
                  $
                  26,048
                  
                  
                  $
                  11,324


11




12.
Income Taxes




We
file a consolidated US income tax return and tax returns in various state and
local jurisdictions. Certain of our subsidiaries also file income tax returns in
Canada. The New York State Department of Revenue has initiated a review of our
combined New York State income tax returns for the periods ended December 31,
2006 and December 31, 2007. No adjustments have been proposed which would
require us to book a reserve at this time. During 2009 the Internal Revenue
Service (IRS) concluded a review of our consolidated federal income tax returns
for the periods ended December 31, 2006 and December 31, 2007 with no income tax
adjustments. In 2009 the IRS also 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 2006.




The total
liability for uncertain tax positions recorded in our balance sheet in accrued
other liabilities as of March 31, 2010 and December 31, 2009, was $0.9 million
and $0.8 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 both
March 31, 2010 and December 31, 2009, accrued interest and penalties related to
tax positions taken on our tax returns is approximately $47,000.




13.
Commitments and Contingencies




Commitments




Purchase
Commitment




On March
31, 2010, we entered into an equipment and software purchase agreement with a
vendor. Under the terms of the agreement, we are committed to purchasing certain
equipment and software totaling approximately $5.4 million in 2010 and an
additional $2.7 million in 2011. Both commitments are non-cancellable, however,
we have not accepted title or risk of loss of any of the aforementioned
equipment or software as of March 31, 2010.




ERP Agreement




During
April 2010, we entered into an agreement with an ERP provider to purchase
certain software licenses, computer equipment, and implementation consulting
services.  The estimated capital expenditures in 2010 related to the ERP
project are expected to be approximately $5.0 million.




Contingencies




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 material 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.




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 lender 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.


12


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 have completed the discovery process and we expect this matter
will be heard by the Superior Court in 2010. We have not accrued any related
sales tax liability for the period subsequent to May 31, 2003 for these
lender 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 lender
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 $5.3 million (CAD) to $5.9 million (CAD), including
penalties and interest.




AAX
Service Credit




Under the
terms of the purchase agreement with AAX ® the seller was granted 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. As of March 31,
2010, none of the service credits have been utilized by the seller. Subsequent
to March 31, 2010, approximately $0.1 million of the service credits were
utilized.




ASM
Contingent Purchase Price




Under the
terms of the merger agreement with AutoStyleMart, Inc., we have a future
contingent payment obligation of up to $11.0 million based upon the
achievement of certain operational targets from February 2008 through February
2011. As of December 31, 2009, we determined that certain operational conditions
were probable of being achieved and recorded a liability of $1.0
million.  The $1.0 million was deemed compensation for services, as
payment was also contingent on certain former stockholders remaining employees
or consultants of DealerTrack for a certain period. The $1.0 million of
additional consideration was paid in the first quarter of 2010. As of March 31,
2010, it has been determined that achievement of the operational targets related
to the remaining $10.0 million in contingent payment obligations is not yet
probable. Any amounts deemed probable in the future will also be recorded as
compensation expense. We will assess the probability of the achievement of the
operational targets on a quarterly basis.




ALG
Additional Consideration




In
connection with the purchase of Automotive Lease Guide on May 25, 2005, we have
a contractual agreement with the seller to pay an additional $0.8 million per
year for 2006 through 2010.




Employment
Agreements




Pursuant to employment or severance agreements with
certain employees, we had a commitment to pay severance of approximately
$4.6 million as of March 31, 2010, 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 $2.0 million as of March 31, 2010, if there is
a change in control.




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.
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 U.S. Patent No. 5,878,403 (the ’403 Patent)
Patent and the 6,587,841 (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 the ’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 LLC (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.


13




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.  On August 11, 2009, the court entered into a judgment granting
summary judgment.  On September 8 , 2009, DealerTrack filed a notice of
appeal in the United States Court of Appeals for the Federal Circuit in regards
to the finding of non-infringement of patent 6,587,841, the invalidity of patent
7,181,427, and the claim construction order to the extent that it was relied
upon to find the judgments of non-infringement and invalidity. On October 29,
2009, the Federal Circuit granted a motion to stay briefing until the
disposition of In re Bilski.
  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.
  14. 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 months ended March 31, 2010 and 2009 is approximately 12%
and 9%, of our total revenue, respectively.
  Supplemental
disclosure of revenue by service type is as follows (in thousands):
 Three Months Ended March 31,2010
                    
                    
                    2009Transaction
      services revenue
                    
                    $
                    22,870
                    
                    
                    $
                    24,041Subscription
      services revenue
                    
                    
                    29,728
                    
                    
                    
                    27,943Other
                    
                    
                    4,187
                    
                    
                    
                    3,716Total
      net revenue
                    
                    $
                    56,785
                    
                    
                    $
                    55,700
 
 15.
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 and will continue to be
funded through owner contributions and ongoing operations. DealerTrack recorded
a gain of approximately $0.2 million upon sale which was classified as a contra
expense in selling, general and administrative expenses for the twelve months
ended December 31, 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 March 31, 2010, DealerTrack’s maximum exposure is
approximately $0.5million. As of March 31, 2010, we have
recorded a long-term receivable ofapproximately $0.4million, 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 ASC Topic
810, “Consolidations,”,
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.  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, and has the power to direct the activities of
the VIE that most significantly impact the VIE’s economic performance. We have
determined that we are not the primary beneficiary of the newly formed entity
described above as we do not have any board or management representation or the
ability to direct or control the operations of the SCS entity 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.
  14





16.
Strategic Agreement with General Motors Acceptance Corportion
(GMAC)





On
February 10, 2010, DealerTrack entered into a strategic relationship with GMAC.
Under the terms of the agreement, GMAC will be listed as a financing option on
the DealerTrack credit application processing network and DealerTrack has agreed
to make a one-time payment to GMAC of $15.0 million payable upon GMAC becoming
available to substantially all dealers that it does business with who are on the
DealerTrack U.S. network. As of March 31, 2010 we accrued $15.0 million as a
current liability as it was deemed probable this contingency will be resolved
within a year. The one-time $15.0 million payment will be recorded as a
reduction to revenue over the period of expected benefit of approximately five
years. GMAC will be available to General Motors and Chrysler dealers, as well as
dealers of other manufacturers that GMAC elects to do business with. GMAC will
continue to accept credit applications through the RouteOne system.





17.
Settlement with Service Provider





During
the three months ended March 31, 2010 we received a settlement of approximately
$0.4 million related to the cancellation of a services agreement from our eDocs
business, which has been recorded to other income in the statement of
operations.




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,
2009 filed with the SEC on February 24, 2010 . 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’s
intuitive and high-value software solutions enhance efficiency and profitability
for all major segments of the automotive retail industry, including dealers,
lenders, OEM’s, agents and aftermarket providers. We believe our solution set
for dealers is the industry’s most comprehensive. DealerTrack operates the
industry’s largest online credit application network, connecting approximately
17,000 dealers with approximately 850 lenders. Our dealer management system
(DMS) provides dealers with easy-to-use tools and real-time data access that
will streamline any automotive business. Dealers using DealerTrack AAX get
inventory management tools and services needed to accelerate turns and increase
profit. Our sales and finance & insurance (F&I) solution enables dealers
to streamline the entire sales process, quickly structuring all types of deals
from a single integrated platform. DealerTrack’s compliance solution helps
dealers meet legal and regulatory requirements and protect their hard-earned
assets. DealerTrack’s family of companies also includes data and consulting
services providers, ALG and Chrome Systems.





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 ALG, Inc., Chrome Systems, Inc., DealerTrack Aftermarket
Services, Inc., DealerTrack AAX, 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, lenders, and active lender to dealership relationships
in the DealerTrack network, the number of subscribing dealers in the DealerTrack
network, the number of transactions processed, the average transaction price 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 statement of operations 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
non-GAAP financial measures and other business statistics as a measure of
operating performance in addition to net income (loss) and the other measures
included in our consolidated financial statements.


15




The
following is a table consisting of non-GAAP financial measures and certain other
business statistics that management is continually monitoring (amounts in
thousands, are adjusted EBITDA, adjusted net income, capital expenditure data
and transactions processed):





Three Months Ended March 31,2010
                
                
                2009Non-GAAP
      Financial Measures and Other Business Statistics:Adjusted
      EBITDA (Non-GAAP) (1)
                
                $
                4,942
                
                
                $
                6,077Adjusted
      net income (Non-GAAP) (1)
                
                $
                2,065
                
                
                $
                3,822Capital
      expenditures, software and website development costs
                
                $
                6,920
                
                
                $
                5,234Active
      dealers in our network as of end of the period (2)
                
                
                16,860
                
                
                
                18,998Active
      lenders in our network as of end of period (3)
                
                
                847
                
                
                
                736Active
      lender to dealer relationships (4)
                
                
                127,724
                
                
                
                134,475Subscribing
      dealers in our network as of end of the period (5)
                
                
                13,705
                
                
                
                14,646Transactions
      processed (6)
                
                
                11,841
                
                
                
                14,327Average
      transaction price (7)
                
                $
                1.93
                
                
                $
                1.68Average
      monthly subscription revenue per subscribing dealership (8)
                
                $
                719
                
                
                $
                635




(1)
              Adjusted EBITDA is a non-GAAP
      financial measure that represents GAAP net (loss) income excluding
      interest, taxes, depreciation and amortization expenses, GMAC
      contra-revenue and may exclude certain items such as: impairment charges,
      restructuring charges, acquisition-related earn-out compensation expense
      and professional service fees, or realized gains or (losses) on
      securities. Adjusted net income is a non-GAAP financial measure that
      represents GAAP net (loss) income excluding stock-based compensation
      expense, the amortization of acquired identifiable intangibles, GMAC
      contra-revenue and may also exclude certain items, such as: impairment
      charges, restructuring charges, acquisition-related earn-out compensation
      expense and professional service fees, or realized gains or (losses) on
      securities. These adjustments, which are shown before taxes, are adjusted
      for their tax impact. Adjusted EBITDA and adjusted net income are
      presented because management believes they provide additional 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
      adjusted EBITDA and adjusted net income 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.
 
 Adjusted
EBITDA and adjusted net income have limitations as an analytical tool and you
should not consider them in isolation from, or as a substitute for analysis
of our results as reported under GAAP. Some of these limitations
are:
 
 •
              Adjusted EBITDA and adjusted net
      income do not reflect our cash expenditures or future requirements for
      capital expenditures or contractual
  commitments;
 
 •
              Adjusted EBITDA and adjusted net
      income do not reflect changes in, or cash requirements for, our working
      capital needs;
 
 •
              Although depreciation and
      amortization are non-cash charges, the assets being depreciated and
      amortized will often have to be replaced in the future, and adjusted
      EBITDA and adjusted net income do not reflect any cash requirements for
      such replacements;
 
 •
              Non-cash
      compensation is and will remain a key element of our overall long-term
      incentive compensation package, although we exclude it as an expense when
      evaluating our ongoing performance for a particular
  period;
 
 •
              Adjusted
      EBITDA and adjusted net income do not reflect the impact of certain
      charges or gains resulting from matters we consider not to be indicative
      of our ongoing operations; and
 
 •
              Other companies may calculate
      adjusted EBITDA and adjusted net income differently than we do, limiting
      its usefulness as a comparative
measure.
  Because
of these limitations, adjusted EBITDA and adjusted net income should not be
considered as measures 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 adjusted EBITDA, and adjusted net income
only as supplements to our GAAP results. Adjusted EBITDA and adjusted net income
are measures of our performance that are not required by, or presented in
accordance with, GAAP. Adjusted EBITDA and adjusted net income are not a
measurements 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.


16




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





Three Months Ended March 31,2010
                          
                          
                          2009GAAP
      net loss
                          
                          $
                          (2,451
                          )
                          
                          $
                          (5,625
                          )Interest
      income
                          
                          
                          (126
                          )
                          
                          
                          (402
                          )Interest
      expense
                          
                          
                          59
                          
                          
                          
                          50Benefit
      for income taxes
                          
                          
                          (1,214
                          )
                          
                          
                          (3,381
                          )Depreciation
      of property and equipment and amortization of capitalized software and
      website costs
                          
                          
                          4,006
                          
                          
                          
                          3,443Amortization
      of acquired identifiable intangibles
                          
                          
                          5,234
                          
                          
                          
                          5,286EBITDA
      (Non-GAAP)
                          
                          
                          5,508
                          
                          
                          
                          (629
                          )Adjustments:Restructuring
      costs (including amounts related to stock-based
    compensation)
                          
                          
                          —
                          
                          
                          
                          6,731Acquisition
      related professional fees
                          
                          
                          16
                          
                          
                          
                          438Realized
      gain on securities
                          
                          
                          (582
                          )
                          
                          
                          (463
                          )Adjusted
      EBITDA (Non-GAAP)
                          
                          $
                          4,942
                          
                          
                          $
                          6,077




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





Three Months Ended March 31,2010
                
                
                2009GAAP
      net loss
                
                $
                (2,451
                )
                
                $
                (5,625
                )Adjustments:Amortization
      of acquired identifiable intangibles
                
                
                5,234
                
                
                
                5,286Restructuring
      costs (including amounts related to stock-based
    compensation)
                
                
                —
                
                
                
                6,731Acquisition
      related professional fees
                
                
                16
                
                
                
                438Realized
      gain on securities (non-taxable)
                
                
                (582
                )
                
                
                (463
                )Stock-based
      compensation (excluding restructuring costs)
                
                
                2,742
                
                
                
                3,515Tax
      impact of adjustments (9)
                
                
                (2,894
                )
                
                
                (6,060
                )Adjusted
      net income (Non-GAAP)
                
                $
                2,065
                
                
                $
                3,822





(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 lender to be active in our DealerTrack network as of a date if
      it is accepting credit application data electronically from U.S dealers in
      the DealerTrack network.




(4)
            Each
      lender to dealer relationship represents a pair between an active U.S.
      lender and an active U.S. dealer.




(5)
            Represents
      the number of dealerships with one or more active subscriptions on the
      DealerTrack or DealerTrack Canada networks at the end of a given
      period.




(6)
            Represents
      revenue-generating transactions processed in the DealerTrack, DealerTrack
      Digital Services and DealerTrack Canada networks at the end of a given
      period.




(7)
            Represents
      the average revenue earned per transaction processed in the DealerTrack,
      DealerTrack Digital Services and DealerTrack Canada networks during a
      given period.




(8)
            Represents
      net subscription revenue divided by average subscribing dealers for a
      given period in the DealerTrack and DealerTrack Canada
      networks.




(9)
            The
      tax impact of adjustments for the three months ended March 31, 2010 are
      based on a U.S. effective tax rate of 36.8% applied to taxable adjustments
      other than amortization of acquired identifiable intangibles, which is
      based on a blended effective tax rate of 35.9%. The tax impact of
      adjustments for the three months ended March 31, 2009 are based on a U.S.
      effective tax rate of 38.3% applied to taxable adjustments other than
      amortization of acquired identifiable intangibles, which is based on a
      blended effective tax rate of
37.2%.




17




Revenue





Transaction Services Revenue.
Transaction services revenue consists of revenue earned from our lender
customers for each credit application or contract that dealers submit to them.
We also earn transaction services revenue from lender 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. Our 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 and start up fees from our DMS solution, shipping commissions
earned from our digital contract business and consulting and analytical revenue
earned from ALG.




Operating
Expenses




Cost of Revenue. Cost of
revenue primarily consists of expenses related to running our network
infrastructure (including Internet connectivity, hosting expenses, and data
storage), amortization expense on acquired intangible assets, capitalized
software and website development costs, 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 and direct
costs (printing, binding, and delivery) associated with our residual value
guides. Cost of revenue also includes hardware costs associated with our DMS
product offering, and compensation, related benefits and travel expenses
associated with DMS installation personnel.




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.




Fair
Value Measurements




Fair
value is defined as the exit price, or the amount that would be received to sell
an asset or paid to transfer a 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 value 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 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.




18




Financial
assets measured at fair value on a recurring basis include the following as of
March 31, 2010 and December 31, 2009 (in thousands):





As of March 31, 2010
                        
                        Quoted Prices in
                          Active Markets
                          (Level 1)
                        
                        
                        Significant Other
                          Observable
                          Inputs
                          (Level 2)
                        
                        
                        Significant
                          Unobservable
                          Inputs
                          (Level 3)
                        
                        
                        March 31,
                          2010Cash
      equivalents (1)
                        
                        $
                        158,209
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        158,209Short-term
      investments (3)
                        
                        
                        69
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        69Long-term
      investments (4)
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        3,975
                        
                        
                        
                        3,975Total
                        
                        $
                        158,278
                        
                        
                        $
                        —
                        
                        
                        $
                        3,975
                        
                        
                        $
                        162,253





As of December 31, 2009
                        
                        Quoted Prices in
                          Active Markets
                          (Level 1)
                        
                        
                        Significant Other
                          Observable
                          Inputs
                          (Level 2)
                        
                        
                        Significant
                          Unobservable
                          Inputs
                          (Level 3)
                        
                        
                        December 31,
                          2009Cash
      equivalents (1) (2)
                        
                        $
                        163,615
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        163,615Short-term
      investments (3)
                        
                        
                        1,484
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,484Long-term
      investments (4)
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        3,971
                        
                        
                        
                        3,971Total
                        
                        $
                        165,099
                        
                        
                        $
                        —
                        
                        
                        $
                        3,971
                        
                        
                        $
                        169,070




(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 cash equivalents of approximately $163.6 million as of December 31, 2009
      has been revised from $127.6 million as previously disclosed in the fair
      value measurement footnote in our Annual Report on Form 10-K for the year
      ended December 31, 2009 filed with the SEC on February 24, 2010 to
      reflect the inclusion of a money market account held at December 31,
      2009 that was incorrectly omitted from our original disclosure.
      Amounts classified as cash and cash equivalents on our audited balance
      sheet at December 31, 2009 were correctly
  stated.




(3)
            As of March 31, 2010 and December
      31, 2009, Level 1 short-term investments include investments in
      tax-advantaged preferred securities, for which we determined fair value
      based on the quoted market prices of the underlying securities. During the
      three months ended March 31, 2010, we sold a portion of our Level 1
      investments in tax-advantaged preferred securities for approximately $1.4
      million and recorded a realized gain in the statement of operations of
      approximately $0.6 million.




(4)
            Level 3
      long-term investments as of both March 31, 2010 and December 31, 2009
      include a $1.6 million, or 0.3% of total assets, auction rate security
      (ARS) invested in a tax-exempt state government obligation that was valued
      at par. Our intent is not to hold the ARS invested in tax-exempt state
      government obligations to maturity, but rather to use the interest reset
      feature to provide liquidity. However, should the marketplace auctions
      continue to fail we may hold the security to maturity. We have classified
      this as long-term due to the maturity date of the security being September
      2011, coupled with ongoing failed auctions in the
    marketplace.




Level 3
long-term investments as of March 31, 2010 and December 31, 2009 also include a
$2.4 million, or 0.5% of total assets, tax-advantaged preferred stock of a
financial institution. It is uncertain whether we will be able to liquidate
these securities within the next twelve months; as such we have classified them
as long-term on our consolidated balance sheets. Due to the lack of observable
market quotes we utilized 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.


19




A
reconciliation of the beginning and ending balances for Level 3 investments as
of March 31, 2010 and December 31, 2009, is as follows (in
thousands):





Balance
      as of January 1, 2009
                  
                  $
                  1,550Reclassification
      from Level 2 investments to Level 3 investments (5)
                  
                  
                  1,360Realized
      gain on securities included in the statement of operations
    (5)
                  
                  
                  716Unrealized
      gain on securities recorded in other comprehensive income
    (5)
                  
                  
                  345Balance
      as of December 31, 2009
                  
                  
                  3,971Unrealized
      gain on securities recorded in other comprehensive income
    (5)
                  
                  
                  4Balance
      as of March 31, 2010
                  
                  $
                  3,975





(5)
            During
      2009 our investments in Level 2 ARS invested in certain tax-advantaged
      preferred stock trusts held as of January 1, 2009 dissolved and the
      trustees distributed the underlying preferred stock investments. As a
      result of these dissolutions we measured the fair value of the Level 3
      long-term tax-advantaged preferred stock on the distribution date and
      determined that the value increased from $1.4 million as of December 31,
      2008 to $2.1 million on the distribution date and as a result we recorded
      a realized gain in the statement of operations of $0.7 million. Subsequent
      to the trust dissolution we re-measured the fair value on December 31,
      2009 and March 31, 2010 and determined that the value had increased and
      recorded a gain in other comprehensive income of $0.3 million and
      approximately $4,000, respectively.  The total value of the
      tax-advantaged preferred stock of a financial institution included in the
      $4.0 million of Level 3 long-term investments as of both December 31, 2009
      and March 31, 2010 is approximately $2.4
  million.




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 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, 2009, filed with the SEC on February 24, 2010, except as set forth
below.




In
October 2009, the FASB issued Revenue Recognition guidance around
Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging
Issues Task Force. This guidance modifies the fair value requirements of Revenue
Recognition-Multiple Element Arrangements by allowing the use of the “best
estimate of selling price” in addition to VSOE and VOE (now referred to as
third-party evidence or TPE) for determining the selling price of a deliverable.
A vendor is now required to use its best estimate of the selling price when VSOE
or TPE of the selling price cannot be determined. In addition, the residual
method of allocating arrangement consideration is no longer permitted.  The
final consensus is effective for fiscal years beginning after June 15,
2010. Companies have the option of adopting the guidance retrospectively or
prospectively for new or materially modified agreements.  Early adoption is
permitted as of the beginning of an entity’s fiscal year.  We have adopted
the provisions of this standard prospectively as of January 1, 2010, which did
not have a material impact on our consolidated financial
statements.


20




Results
of Operations




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





Three Months March 31,2010
                                                                        
                                                                        
                                                                        2009$ Amount
                                                                        
                                                                        % of Net
                                                                          Revenue
                                                                        
                                                                        
                                                                        $ Amount
                                                                        
                                                                        % of Net
                                                                          Revenue(In thousands, except percentages)Consolidated
      Statements of Operations Data:Net
      revenue
                                                                        
                                                                        $
                                                                        56,785
                                                                        
                                                                        100.0
                                                                        %
                                                                        
                                                                        $
                                                                        55,700
                                                                        
                                                                        100.0
                                                                        %Operating
      expenses:Cost
      of revenue
                                                                        
                                                                        
                                                                        30,717
                                                                        
                                                                        54.1
                                                                        
                                                                        
                                                                        
                                                                        29,121
                                                                        
                                                                        52.3Product
      development
                                                                        
                                                                        
                                                                        3,598
                                                                        
                                                                        6.3
                                                                        
                                                                        
                                                                        
                                                                        4,132
                                                                        
                                                                        7.4Selling,
      general and administrative
                                                                        
                                                                        
                                                                        27,408
                                                                        
                                                                        48.3
                                                                        
                                                                        
                                                                        
                                                                        32,318
                                                                        
                                                                        58.0Total
      operating expenses
                                                                        
                                                                        
                                                                        61,723
                                                                        
                                                                        108.7
                                                                        
                                                                        
                                                                        
                                                                        65,571
                                                                        
                                                                        117.7Loss
      from operations
                                                                        
                                                                        
                                                                        (4,938
                                                                        )
                                                                        (8.7
                                                                        )
                                                                        
                                                                        
                                                                        (9,871
                                                                        )
                                                                        (17.7
                                                                        )Interest
      income
                                                                        
                                                                        
                                                                        126
                                                                        
                                                                        0.2
                                                                        
                                                                        
                                                                        
                                                                        402
                                                                        
                                                                        0.7Interest
      expense
                                                                        
                                                                        
                                                                        (59
                                                                        )
                                                                        (0.1
                                                                        )
                                                                        
                                                                        
                                                                        (50
                                                                        )
                                                                        (0.1
                                                                        )Other
      income
                                                                        
                                                                        
                                                                        624
                                                                        
                                                                        1.1
                                                                        
                                                                        
                                                                        
                                                                        50
                                                                        
                                                                        0.1Realized
      gain on securities
                                                                        
                                                                        
                                                                        582
                                                                        
                                                                        1.0
                                                                        
                                                                        
                                                                        
                                                                        463
                                                                        
                                                                        0.8Loss
      before benefit for income taxes
                                                                        
                                                                        
                                                                        (3,665
                                                                        )
                                                                        (6.5
                                                                        )
                                                                        
                                                                        
                                                                        (9,006
                                                                        )
                                                                        (16.2
                                                                        )Benefit
      for income taxes, net
                                                                        
                                                                        
                                                                        1,214
                                                                        
                                                                        2.2
                                                                        
                                                                        
                                                                        
                                                                        3,381
                                                                        
                                                                        6.1Net
      loss
                                                                        
                                                                        $
                                                                        (2,451
                                                                        )
                                                                        4.3
                                                                        %
                                                                        
                                                                        $
                                                                        (5,625
                                                                        )
                                                                        (10.1
                                                                        )%




Three
Months Ended March 31, 2010 and 2009




Revenue





Three Months Ended March 31,2010
                      
                      
                      2009Transaction
      services revenue
                      
                      $
                      22,870
                      
                      
                      $
                      24,041Subscription
      services revenue
                      
                      
                      29,728
                      
                      
                      
                      27,943Other
                      
                      
                      4,187
                      
                      
                      
                      3,716Total
      net revenue
                      
                      $
                      56,785
                      
                      
                      $
                      55,700





Total net
revenue increased $1.1 million, or 2%, to $56.8 million for the three
months ended March 31, 2010 from $55.7 million for the three months ended
March 31, 2009.




Transaction Services Revenue.
  Transaction services revenue decreased $1.1 million, or 5%, to
$22.9 million for the three months ended March 31, 2010 from
$24.0 million for the three months ended March 31, 2009. The decrease was
primarily due to a 17% decline in the volume of transactions processed through
the DealerTrack network to 11.8 million for the three months ended March
31, 2010 from 14.3 million for the three months ended March 31, 2009, which
was impacted by the 5% decrease in our number of lender to dealer relationships
(LDRs) to 127,724, as of March 31, 2010, from 134,475, as of March 31, 2009. The
decrease in LDRs is primarily due to lenders exiting the auto financing market,
lenders limiting the number of dealers they lend through and dealership
closings. The 17% decrease in transaction volume resulted in a $4.2 million
reduction in revenue for the three months ended March 31, 2010. The relative
tightening of the credit markets together with the continual decline in vehicle
sales and captive lenders, and in particular captives not on the DealerTrack
network, increasing market share while independent finance companies and credit
unions lost share collectively, have meaningfully impacted our transaction
volume compared to historical levels. The revenue decline of $4.2 million
related to the decrease in transaction volume was partially offset by a
$3.0 million increase due to an increase in the average transaction price
to $1.93 for the three months ended March 31, 2010 from $1.68 for the three
months ended March 31, 2009. A contributing factor to the increase in average
transaction price was the 15% increase in lender customers active in our network
to 847 as of March 31, 2010 from 736 as of March 31, 2009. The additional 111
lender customers added are generally lower transaction volume customers with
higher price per application tiers.  Also, with overall lower
transaction volumes, our existing lenders were generally in a higher transaction
price tier.


21




Subscription Services
Revenue.   Subscription services revenue increased
$1.8 million, or 6%, to $29.7 million for the three months ended March
31, 2010 from $27.9 million for the three months ended March 31,
2009.  Subscription services revenue growth was due to a 13% increase
in the average monthly spend per subscribing dealer to $719 for the three months
ended March 31, 2010 from $635 for the three months ended March 31, 2009. The
increase in average monthly spend per subscribing dealer is primarily
attributable to the continued success of selling DMS and inventory management
solutions, including our ability to cross sell those solutions to existing
customers and by the cancellation of a disproportionate number of lower priced
subscriptions as dealerships consolidate or go out of business. These factors
contributed $1.7 million to the increase in subscription services revenue, which
includes $0.7 million related to acquired customers.





Other Revenue.
  Other revenue increased $0.5 million, or 13%, to
$4.2 million for the three months ended March 31, 2010 from
$3.7 million for the three months ended March 31, 2009.  The $0.5
million increase was primarily resulting from an approximately $0.7 million
increase in hardware revenue from our DMS business, an increase of $0.3 million
in shipping commissions from our eDocs solution, offset by a decrease of
$0.3 million in data services revenue, a
decrease of $0.1 million in DealerTrack Canada revenue and a decrease of $0.1
million in revenue associated with our SCS business which we exited in February
2009.




Operating
Expenses





Three Months Ended March 31,2010
                
                
                2009Cost
      of revenue
                
                $
                30,717
                
                
                $
                29,121Product
      development
                
                
                3,598
                
                
                
                4,132Selling,
      general and administrative
                
                
                27,408
                
                
                
                32,318Total
      operating expenses
                
                $
                61,723
                
                
                $
                65,571





Cost of Revenue. Cost of
revenue increased $1.6 million, or 5%, to $30.7 million for the three
months ended March 31, 2010 from $29.1 million for the three months ended
March 31, 2009. The $1.6 million increase was primarily the result of
increased technology expense of $0.6 million, which includes hosting expenses,
technology support, and other consulting expenses, $0.7 million in travel
related to an increase in installations and hardware costs associated with our
DMS product offering, $0.7 million in third party costs related to our
compliance and inventory management solutions, $0.4 million in software
amortization and depreciation charges,  offset by a decrease in
revenue share of $0.3 million, a decrease in stock-based compensation expense of
$0.2 million, and a decrease in compensation and related benefit costs of
approximately $0.1 million primarily due to $0.4 million of severance and
benefit expense paid in the first quarter of 2009 resulting from the realignment
of our workforce and business on January 5, 2009, coupled with a decrease in
bonus and other discretionary compensation and offset by increases due to
headcount additions, commissions, the acquisition of AAX in January 2009, and an
increase in payroll and other taxes.





Product Development Expenses.
Product development expenses decreased $0.5 million, or 13%, to
$3.6 million for the three months ended March 31, 2010 from
$4.1 million for the three months ended March 31, 2009. The
$0.5 million decrease was primarily a result of decreased compensation and
related benefit costs of $0.4 million due primarily to $0.2 million of
severance and benefit expense in the first quarter of 2009 resulting from the
realignment of our workforce and business on January 5, 2009, coupled with a
decrease in bonus and other discretionary compensation and offset by an increase
in compensation and benefits due to headcount additions, the acquisition of AAX
in January 2009, and an increase in payroll and other taxes.





Selling, General and Administrative
Expenses.Selling, general and administrative expenses decreased
$4.9 million, or 15%, to $27.4 million for the three months ended
March 31, 2010 from $32.3 million for three months ended March 31, 2009.
The $4.9 million decrease in selling, general and administrative expenses
was primarily the result of a decrease of $4.4 million in stock-based
compensation expense primarily due to $3.9 million in increased stock-based
compensation expense in the first quarter of 2009 resulting from the realignment
of our workforce and business on January 5, 2009, a decrease of $0.5 million of
professional fees primarily due to an increase in deal-related costs resulting
from the acquisition of AAX in the first quarter of 2009, a decrease in
compensation and related benefit costs of approximately $0.2 million primarily
due to $2.2 million of severance and benefit expense paid in the first quarter
of 2009 resulting from the realignment of our workforce and business on January
5, 2009, coupled with a decrease in bonus and other discretionary compensation
and offset by an increase in compensation and benefits due to headcount
additions, the acquisition of AAX in January 2009, and an increase in payroll
and other taxes, a decrease in marketing expenses of $0.2 million due to
continued cost containment efforts, a decrease in general and administrative
expenses of $0.2 million primarily due to a decrease in bad debt expense, offset
by an increase of $0.4 million in travel related expenses, and an increase of
$0.1 million in recruiting and relocation expenses.


22


Interest
Income





Three Months Ended March 31,2010
                
                
                2009Interest
      income
                
                $
                126
                
                
                $
                402





Interest
income decreased $0.3 million to $0.1 million for the three months
ended March 31, 2010 from $0.4 million for the three months ended March 31,
2009. The $0.3 million decrease is primarily related to the decrease in our
weighted average interest rate to approximately 0.1% for the three months ended
March 31, 2010 from approximately 0.3% for the three months ended March 31,
2009.




Other
Income





Three Months Ended March 31,2010
                
                
                2009Other
      income
                
                $
                624
                
                
                $
                50




Other
income increased $0.5 million to $0.6 million for the three months ended March
31, 2010 from $0.1 million for the three months ended March 31, 2009. The $0.5
million increase is primarily due to a settlement of $0.4 million received
during the three months ended March 31, 2010 related to the cancellation of a
services agreement for our eDocs business.




Realized
Gain on Securities





Three Months Ended March 31,2010
                
                
                2009Realized
      gain on securities
                
                $
                582
                
                
                $
                463





During
the three months ended March 31, 2010, we sold a portion of our investments in
tax-advantaged preferred securities for approximately $1.4 million and recorded
a gain in the statement of operations of approximately $0.6 million. For the
three months ended March 31, 2009, we recorded a gain of $0.5 million on the
distribution of the underlying preferred stock instruments related to our ARS
invested in certain tax-advantaged preferred stock trusts. For further information
pleaserefer to Note 4 in the accompanying notes to the consolidated
financial statements included in this Quarterly Report on Form
10-Q.





Benefit
for Income Taxes, Net





Three Months Ended March 31,2010
                
                
                2009Benefit
      for income taxes, net
                
                $
                1,214
                
                
                $
                3,381





The
benefit for income taxes for the three months ended March 31, 2010 of
$1.2 million consisted primarily of $0.3 million of federal income tax
benefit and $1.5 million of state income tax benefit, offset by $0.6 million of
tax expense for our Canadian subsidiary. The benefit for income taxes for the
three months ended March 31, 2009 of $3.4 million consisted primarily of $3.7
million of federal tax expense and $0.1 of state income tax benefit, offset by
$0.4 million of tax expense for our Canadian subsidiary. Included in tax
expense for our Canadian subsidiary for the three months ended March 31, 2010
and 2009 is $0.3 million and $0.1 million, respectively, for a permanent item
relating to intangible amortization. These amounts have a 9.2% and 1.0 % impact
on the effective tax rate for the three months ended March 31, 2010 and 2009,
respectively. Our effective tax rate for the three months ended March 31, 2010
is 33.1% compared with 37.6% for the three months ended March 31,
2009.





In the
event that the future income streams that we currently project do not
materialize, we may be required to record a valuation allowance. Any increase in
a valuation allowance would result in a charge that would adversely impact our
operation performance.




Liquidity
and Capital Resources




Our
liquidity requirements will continue to be for working capital, acquisitions,
capital expenditures and general corporate purposes. Our capital expenditures,
software and website development costs for the three months ended March 31, 2010
were $6.9 million, of which $4.8 million was paid in cash. We expect to
finance our future liquidity needs through working capital and cash flows from
operations, however future acquisitions or other strategic initiatives may
require us to incur or seek additional financing.




As of
March 31, 2010, we had $183.2 million of cash and cash equivalents,
$0.1 million in short-term investments, $4.0 million in non-current
investments and $193.7 million in working capital, as compared to $197.5
million of cash and cash equivalents, $1.5 million in short-term investments,
$4.0 million in non-current investments and $191.9 million in working
capital as of December 31, 2009.


23




Reductions
in interest rates and changes in investments could materially impact our
interest income and may impact future reported operating results. An interest
rate fluctuation of 1% would have an effect of approximately $1.1 million, or
$0.03 per share, on future reported operating results.




Under the
terms of the merger agreement with AutoStyleMart, Inc., we have a future
contingent payment obligation of up to $11.0 million based upon the
achievement of certain operational targets from February 2008 through February
2011. As of December 31, 2009, we determined that certain operational conditions
were probable of being achieved and recorded a liability of $1.0
million.  The $1.0 million was deemed compensation for services, as
payment was also contingent on certain former stockholders remaining employees
or consultants of DealerTrack for a certain period. The $1.0 million of
additional consideration was paid in the first quarter of 2010. As of March 31,
2010, it has been determined that achievement of the operational targets related
to the remaining $10.0 million in contingent payment obligations is not yet
probable. Any amounts deemed probable in the future will also be recorded as
compensation expense. We will assess the probability of the achievement of the
operational targets on a quarterly basis.




In
connection with the purchase of Automotive Lease Guide (ALG) on May 25,
2005, we have a contractual agreement with the seller to pay an additional
$0.8 million per year for 2006 through 2010.




During
April 2010, we entered into an agreement with an ERP provider to purchase
certain software licenses, computer equipment, and implementation consulting
services.  The estimated capital expenditures in 2010 related to the ERP
project are expected to be approximately $5.0 million.




The
following table sets forth the cash flow components for the following periods
(in thousands):





Three Months Ended March 31,2010
                        
                        
                        2009Net
      cash used in operating activities
                        
                        $
                        (7,666
                        )
                        
                        $
                        (1,159
                        )Net
      cash used in investing activities
                        
                        $
                        (7,049
                        )
                        
                        $
                        (6,646
                        )Net
      cash provided by financing activities
                        
                        $
                        246
                        
                        
                        $
                        1,477




Operating
Activities




Net cash
used in operating activities of $7.7 million for the three months ended
March 31, 2010 was primarily attributable to a net loss of $2.5 million,
which includes depreciation and amortization of $9.2 million, stock-based
compensation expense of $2.7 million, an increase to the provision for
doubtful accounts and sales credits of $1.5 million, an increase in
accounts payable and accrued expenses of $5.2 million, and a deferred tax
provision of $13.4 million, partially offset by an increase in prepaid expenses
and other current assets of $18.0 million, an increase in accounts
receivable of $5.0 million due to an increase in transaction revenues, an
increase in other assets of $13.2 million, a gain of $0.6 million realized on
the sale of securities, and a stock-based compensation windfall tax benefit of
$0.6 million. Net cash used in operating activities of $1.2 million for the
three months ended March 31, 2009 was primarily attributable to a net loss of
$5.6 million, which includes depreciation and amortization of $8.8 million,
stock-based compensation expense of $7.4 million, an increase to the provision
for doubtful accounts and sales credits of $2.5 million, an increase to deferred
revenue and other current liabilities of $0.4 million, an increase in accounts
payable and accrued expenses of $0.3 million, partially offset by a deferred tax
benefit of $3.4 million, a gain of $0.5 million realized on the sale or
conversion of securities, a stock-based compensation windfall tax benefit of
$0.8 million, an increase in prepaid expenses and other current assets of $4.0
million, a decrease in other long-term liabilities of $0.3 million, and an
increase in accounts receivable of $5.4 million due to an increase in
subscription revenues and the acquisition of AAX.




Investing
Activities




Net cash
used in investing activities of $7.0 million for the three months ended
March 31, 2010 was primarily attributable to the payment for the acquisition of
intangible assets of $2.3 million, capital expenditures of $2.5 million,
and capitalized software and website development costs of $2.2 million. Net
cash used in investing activities of $6.6 million for the three months ended
March 31, 2009 was primarily attributable to the net sale of short-term
investments of $31.3 million offset by the payment for the acquisition of AAX
business and intangible assets of $30.9 million, the payment of the Curomax
additional purchase consideration of $1.8 million, the payment of the ALG
additional purchase consideration of $1.1 million, capital expenditures of $1.3
million, and capitalized software and website development costs of $3.1
million.




Financing
Activities




Net cash
provided by financing activities of $0.2 million for the three months ended
March 31, 2010 was primarily attributable to net proceeds received from the
exercise of employee stock options of $0.1 million, employee stock purchases
under our employee stock purchase plan of $0.2 million, and a stock-based
compensation windfall tax benefit of $0.6 million, partially offset by
payment for shares surrendered for taxes of $0.6 million related to restricted
common stock and restricted stock units vesting, and principal payments on
capital lease obligations of $0.1 million. Net cash provided by financing
activities of $1.5 million for the three months ended March 31, 2009 was
primarily attributable to net proceeds received from employee stock purchases
under our employee stock purchase plan of $0.3 million, the exercise of employee
stock options of $0.9 million and stock-based compensation windfall tax benefit
of $0.8 million, partially offset by payment for shares surrendered for taxes of
$0.3 million related to restricted stock vesting.


24


Contractual
Obligations




As of
March 31, 2010, there were no material changes in our contractual obligations as
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2009 filed with the SEC on February 24, 2010, except as set forth
below.





On
February 10, 2010, DealerTrack entered into a strategic relationship with GMAC.
Under the terms of the agreement, GMAC will be listed as a financing option on
the DealerTrack credit application processing network and DealerTrack has agreed
to make a one-time payment to GMAC of $15.0 million payable upon GMAC becoming
available to substantially all dealers that it does business with who are on the
DealerTrack U.S. network. As of March 31, 2010 we accrued $15.0 million as a
current liability as it was deemed probable this contingency will be resolved
within a year. The one-time $15.0 million payment will be recorded as a
reduction to revenue over of the period of expected benefit of approximately
five years. GMAC will be available to General Motors and Chrysler dealers, as
well as dealers of other manufacturers that GMAC elects to do business with.
GMAC will continue to accept credit applications through the RouteOne
system.




On March
31, 2010, we entered into an equipment and software purchase agreement with a
vendor. Under the terms of the agreement, we are committed to purchasing certain
equipment and software totaling approximately $5.4 million in 2010 and an
additional $2.7 million in 2011. Both commitments are non-cancellable, however,
we have not accepted title or risk of loss of any of the aforementioned
equipment or software as of March 31, 2010.




Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet arrangements or relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which are typically established
for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.




Industry
Trends





We are
impacted by trends in both the automotive industry and the credit finance
markets. Our financial results are impacted by trends in the number of dealers
serviced and the level of indirect financing and leasing by our participating
lender customers, special promotions by automobile manufacturers and the level
of indirect financing and leasing by captive finance companies not available in
our network. The United States and global economies are currently undergoing a
period of economic uncertainty, and the financing environment, automobile
industry and stock markets are experiencing high levels of volatility. The
relative tightening of the credit markets has caused a significant decline in
the number of lending relationships between the various lenders and dealers
available through our network as dealers and lenders have exited the market, as
well as reduced the total number of vehicles financed. Purchases of new
automobiles are typically discretionary for consumers and have been, and may
continue to be, affected by negative trends in the economy, including the cost
of energy and gasoline, the availability and cost of credit, the declining
residential and commercial real estate markets, reductions in business and
consumer confidence, stock market volatility and increased unemployment. 2008
and 2009 have been the worst years for selling vehicles since 1982 and while
automobile sales are expected to increase in 2010, they will remain low as
compared to historical levels. As a result of reduced car sales and the general
economic environment, two major automobile manufacturers, Chrysler and General
Motors have filed and emerged from bankruptcy in the past year. This has had a
significant impact on their franchised dealers both in terms of dealer closing
and the financial viability of their remaining dealers. Toyota has suffered
significant recalls that limited its ability to sell new vehicles for a period
of time and potentially decreased the value of Toyota used vehicles, whose
impact on its dealer base remains to be seen. Together, these factors have
meaningfully impacted our transaction volume and subscription cancellations
compared to historical levels. We expect to continue to experience challenges
due to the ongoing adverse outlook for the credit markets and automobile sales.
In addition, volatility in our stock price and declines in our market
capitalization could impair the carrying value of our goodwill and other
long-lived assets. As a result, we may be required to write off some of our
goodwill or long-lived assets if these conditions worsen for a period of
time.





Due to
the economic downturn, there has been continued automotive dealer consolidation
and the number of franchised automotive dealers declined in both 2008 and 2009
with further declines expected in 2010. General Motors (GM) and Chrysler have
stated that they notified approximately 1,124 and 789 dealers, respectively,
that one or more of their franchise licenses would be terminated. Recent federal
legislation has led GM and Chrysler to agree to reinstatement of some of these
dealers. As a result of these factors, we cannot predict the timing and impact
dealership reductions will have on our subscription revenue. The elimination by
GM and Chrysler dealers with subscription products has led to an increase in
cancellations and will most likely result in additional cancellations of those
subscriptions and corresponding loss of revenue. Further, a reduction in the
number of automotive dealers reduces the number of opportunities we have to sell
our subscription products. Additionally, dealers who close their businesses may
not pay the amounts owed to us, resulting in an increase in our bad debt
expense.




Effects
of Inflation




Our
monetary assets, consisting primarily of cash and cash equivalents, receivables
and long-term investments, and our non-monetary assets, consisting primarily of
intangible assets and goodwill, are not affected significantly by inflation. We
believe that replacement costs of equipment, furniture and leasehold
improvements will not materially affect our operations. However, the rate of
inflation affects our expenses, which may not be readily recoverable in the
prices of products and services we offer.


25




Item 3. Quantitative and
Qualitative Disclosures About Market Risk




Foreign
Currency Exposure




We only
have operations located in, and provide services to, customers in the United
States and Canada. Our earnings are affected by fluctuations in the value of the
U.S. dollar as compared with the Canadian dollar. Our exposure is mitigated, in
part, by the fact that we incur certain operating costs in the same foreign
currency in which revenue is denominated. The foreign currency exposure that
does exist is limited by the fact that the majority of transactions are paid
according to our standard payment terms, which are generally short-term in
nature.




Interest
Rate Exposure




As of
March 31, 2010, we had cash, cash equivalents, short-term investments and
long-term investments of $187.3 million invested in money market
instruments, municipal notes, tax-exempt state government obligations and tax
advantaged preferred securities. Such investments are subject to interest rate
and credit risk. Our general policy of investing in securities with original
maturities of three months or less minimizes our interest and credit
risk.




Reductions
in interest rates and changes in investments could materially impact our
interest income and may impact future reported operating results. An interest
rate fluctuation of 1% would have an effect of approximately $1.1 million, or
$0.03 per share, on future reported operating results.




Item 4. Controls and
Procedures




Disclosure
Controls and Procedures




We
carried out an evaluation under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act. In designing and evaluating our disclosure
controls and procedures, we and our management recognize that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. Based upon that evaluation, our
chief executive officer and chief financial officer have concluded that, as of
the end of the period covered by this Quarterly Report on Form 10-Q, our
disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is (i) recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms; and (ii) accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.




Changes
in Internal Control Over Financial Reporting




There
were no changes in our internal control over financial reporting during the
quarter ended March 31, 2010, which were identified in connection with
management’s evaluation required by paragraph (d) of Rule 13a-15 and 15d-15
under the Exchange Act, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.




PART
II. OTHER INFORMATION




Item 1. 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.
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 U.S. Patent No. 5,878,403 (the ’403 Patent)
Patent and the 6,587,841 (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 the ’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 LLC (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.


26




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.  On August 11, 2009, the court entered into a judgment granting
summary judgment.  On September 8 , 2009, DealerTrack filed a notice of
appeal in the United States Court of Appeals for the Federal Circuit in regards
to the finding of non-infringement of patent 6,587,841, the invalidity of patent
7,181,427, and the claim construction order to the extent that it was relied
upon to find the judgments of non-infringement and invalidity. On October 29,
2009, the Federal Circuit granted a motion to stay briefing until the
disposition of In re Bilski.




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.




Item 1A. Risk Factors




In addition to the other information set forth in this Quarterly Report on Form
10-Q, you should carefully consider the factors discussed in the section
entitled “Risk Factors” in Part I, Item 1A. of  our Annual
Report on Form 10-K for the year ended December 31, 2009, which was filed
with the SEC on February 24, 2010, that could materially affect our
business, financial condition or results of operations. The risks described in
that Annual Report on Form 10-K are not the only risks we face. Additional risks
and uncertainties not currently known to us or that we currently deem to be
immaterial may also materially adversely affect our business, financial
condition and/or results of operations. There has been no material changes in
our risk factors from those disclosed in our Annual Report on Form 10-K for the
year ended December 31, 2009 filed with the SEC on February 24,
2010.




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




Purchases
of Equity Securities by the Issuer




From time to time, in
connection with the vesting of restricted common stock under our incentive award
plans, we may receive shares of our common stock from certain restricted common
stockholders in consideration of the tax withholdings due upon the vesting of
restricted common stock.




The
following table sets forth the repurchases for the three months ended March 31,
2010:





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
                  
                  
                  ProgramJanuary
      2010
                  
                  
                  31,417
                  
                  
                  $
                  18.19
                  
                  
                  
                  n/a
                  
                  
                  
                  n/aFebruary
      2010
                  
                  
                  1,089
                  
                  
                  $
                  17.37
                  
                  
                  
                  n/a
                  
                  
                  
                  n/aMarch
      2010
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  n/a
                  
                  
                  
                  n/aTotal
                  
                  
                  32,506




27


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 Eric D. Jacobs, Senior Vice President, Chief Financial and
      Administrative Officer, 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
      Eric D. Jacobs, Senior Vice President, Chief Financial and Administrative
      Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of
  2002.




SIGNATURE




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.





DealerTrack
      Holdings, Inc.
                      (Registrant)Date:
      May 5, 2010
                    /s/
      Eric D. JacobsEric
      D. JacobsSenior
      Vice President, Chief Financial and
                      Administrative
      Officer
                      (Duly
      Authorized Officer and Principal Financial
                      Officer)




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 Eric D. Jacobs, Senior Vice President, Chief Financial and
      Administrative Officer, 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
      Eric D. Jacobs, Senior Vice President, Chief Financial and Administrative
      Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of
  2002.


28