##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 000-51653
 DealerTrack Holdings, Inc.
 (Exact name of Registrant as specified in its charter)
 Delaware
(State or other jurisdiction of incorporation or 
organization)
    
    52-2336218
(I.R.S. Employer Identification Number)1111 Marcus Ave., Suite M04
Lake Success, NY
(Address of principal executive offices)
    
    11042
(Zip Code)
 (516) 734-3600
 þ o
  Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o o þ




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##### 



DEALERTRACK HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008
 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
    
    
    22Item 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATION
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 6. Exhibits
    
    
    25Signature
    
    
    25EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATION
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 DEALERTRACK HOLDINGS, INC.
 
 CONSOLIDATED BALANCE SHEETS
(unaudited)
 June 30,
    
    
    December 31,2008
    
    
    2007(In thousands, except shareand per share amounts)ASSETSCurrent assetsCash and cash equivalents
    
    $
    168,038
    
    
    $
    50,564Short-term investments
    
    
    35,345
    
    
    
    169,580Accounts receivable, net of allowances of
$3,529 and $2,615 at June 30, 2008 and
December 31, 2007, respectively
    
    
    27,533
    
    
    
    26,957Prepaid expenses and other current assets
    
    
    9,135
    
    
    
    7,305Deferred tax assets
    
    
    3,475
    
    
    
    3,827Total current assets
    
    
    243,526
    
    
    
    258,233Long-term investments
    
    
    12,842
    
    
    
    Property and equipment, net
    
    
    13,329
    
    
    
    12,792Software and web site developments costs, net
    
    
    12,010
    
    
    
    10,771Intangible assets, net
    
    
    55,971
    
    
    
    69,528Goodwill
    
    
    116,098
    
    
    
    117,702Restricted cash
    
    
    540
    
    
    
    540Deferred taxes and other long-term assets
    
    
    15,745
    
    
    
    13,360Total assets
    
    $
    470,061
    
    
    $
    482,926LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    2,223
    
    
    $
    4,762Accrued compensation and benefits
    
    
    7,628
    
    
    
    12,527Accrued other
    
    
    11,532
    
    
    
    11,387Deferred revenue
    
    
    5,503
    
    
    
    4,016Due to acquirees
    
    
    1,735
    
    
    
    2,251Capital leases payable
    
    
    372
    
    
    
    480Total current liabilities
    
    
    28,993
    
    
    
    35,423Capital leases payable  long-term
    
    
    630
    
    
    
    1,076Due to acquirees  long-term
    
    
    600
    
    
    
    1,280Deferred tax liabilities  long-term
    
    
    3,172
    
    
    
    2,800Deferred revenue and other long-term liabilities
    
    
    4,886
    
    
    
    3,985Total liabilities
    
    
    38,281
    
    
    
    44,564Commitments and contingencies (Note 16)Stockholders equityPreferred stock, $0.01 par value: 10,000,000
shares authorized and no shares issued and
outstanding at June 30, 2008 and December 31,
2007
    
    
    
    
    
    
    Common stock, $0.01 par value: 175,000,000
shares authorized; 42,743,375 shares issued
and 41,742,650 shares outstanding at June 30,
2008; and 175,000,000 shares authorized;
42,556,925 shares issued and 42,552,723
shares outstanding at December 31, 2007
    
    
    427
    
    
    
    426Treasury stock, at cost, 1,000,725 shares and
4,202 shares at June 30, 2008 and December
31, 2007, respectively
    
    
    (19,270
    )
    
    
    (139
    )Additional paid-in capital
    
    
    421,722
    
    
    
    413,428Deferred stock-based compensation (APB 25)
    
    
    (1,232
    )
    
    
    (2,056
    )Accumulated other comprehensive income
    
    
    6,207
    
    
    
    8,181Retained earnings
    
    
    23,926
    
    
    
    18,522Total stockholders equity
    
    
    431,780
    
    
    
    438,362Total liabilities and stockholders equity
    
    $
    470,061
    
    
    $
    482,926
  3




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##### Table of Contents



DEALERTRACK HOLDINGS, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except share and
    
    
    (In thousands, except share andper share amounts)
    
    
    per share amounts)RevenueNet revenue
    
    $
    63,181
    
    
    $
    58,507
    
    
    $
    127,489
    
    
    $
    110,232Operating costs and expensesCost of revenue(1)
    
    
    27,879
    
    
    
    24,158
    
    
    
    56,491
    
    
    
    45,458Product development(1)
    
    
    3,084
    
    
    
    2,281
    
    
    
    6,226
    
    
    
    4,661Selling, general and administrative(1)
    
    
    28,010
    
    
    
    22,313
    
    
    
    57,742
    
    
    
    43,561Total operating costs and expenses
    
    
    58,973
    
    
    
    48,752
    
    
    
    120,459
    
    
    
    93,680Income from operations
    
    
    4,208
    
    
    
    9,755
    
    
    
    7,030
    
    
    
    16,552Interest income
    
    
    1,145
    
    
    
    1,220
    
    
    
    2,708
    
    
    
    2,751Interest expense
    
    
    (74
    )
    
    
    (73
    )
    
    
    (166
    )
    
    
    (135
    )Income before provision for income taxes
    
    
    5,279
    
    
    
    10,902
    
    
    
    9,572
    
    
    
    19,168Provision for income taxes, net
    
    
    (2,213
    )
    
    
    (4,618
    )
    
    
    (4,168
    )
    
    
    (8,059
    )Net income
    
    $
    3,066
    
    
    $
    6,284
    
    
    $
    5,404
    
    
    $
    11,109Basic net income per share
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.13
    
    
    $
    0.29Diluted net income per share
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.13
    
    
    $
    0.27Weighted average shares outstanding
    
    
    41,505,503
    
    
    
    38,748,405
    
    
    
    41,569,468
    
    
    
    38,685,500Weighted average shares outstanding
assuming dilution
    
    
    42,764,086
    
    
    
    40,569,993
    
    
    
    42,863,406
    
    
    
    40,437,270
 
 (1)
    
    Stock-based compensation expense recorded for the three and six months ended June 30, 2008 and 2007 was classified as follows: Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of revenue
    
    $
    599
    
    
    $
    476
    
    
    $
    1,213
    
    
    $
    890Product development
    
    
    181
    
    
    
    153
    
    
    
    358
    
    
    
    289Selling, general and administrative
    
    
    2,754
    
    
    
    1,817
    
    
    
    5,424
    
    
    
    3,396
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DEALERTRACK HOLDINGS, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Six Months Ended June 30,2008
    
    
    2007(In thousands)Cash flows from operating activitiesNet income
    
    $
    5,404
    
    
    $
    11,109Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization
    
    
    20,208
    
    
    
    16,944Deferred tax benefit
    
    
    (1,135
    )
    
    
    (3,129
    )Amortization of deferred stock-based compensation
    
    
    6,995
    
    
    
    4,575Provision for doubtful accounts and sales credits
    
    
    3,572
    
    
    
    2,388Loss on sale of property and equipment
    
    
    1
    
    
    
    17Amortization of bond premium
    
    
    18
    
    
    
    Amortization of deferred interest
    
    
    103
    
    
    
    87Deferred compensation
    
    
    125
    
    
    
    145Amortization of bank financing costs
    
    
    31
    
    
    
    61Stock-based compensation windfall tax benefit
    
    
    (290
    )
    
    
    (1,663
    )Changes in operating assets and liabilities, net of effects of acquisitionsTrade accounts receivable
    
    
    (4,248
    )
    
    
    (8,174
    )Prepaid expenses and other current assets
    
    
    (1,844
    )
    
    
    1,086Accounts payable and accrued expenses
    
    
    (6,527
    )
    
    
    (3,620
    )Deferred revenue and other current liabilities
    
    
    1,499
    
    
    
    1,048Other long-term liabilities
    
    
    543
    
    
    
    (259
    )Deferred rent
    
    
    360
    
    
    
    94Other long-term assets
    
    
    (519
    )
    
    
    (171
    )Net cash provided by operating activities
    
    
    24,296
    
    
    
    20,538Cash flows from investing activitiesCapital expenditures
    
    
    (2,991
    )
    
    
    (3,038
    )Purchase of investments
    
    
    (144,084
    )
    
    
    (227,850
    )Sale of investments
    
    
    264,912
    
    
    
    293,965Capitalized software and web site development costs
    
    
    (4,410
    )
    
    
    (2,053
    )Proceeds from sale of property and equipment
    
    
    2
    
    
    
    7Payment for net assets acquired, net of acquired cash
    
    
    (2,358
    )
    
    
    (99,387
    )Net cash provided by (used in) investing activities
    
    
    111,071
    
    
    
    (38,356
    )Cash flows from financing activitiesPrincipal payments on capital lease obligations
    
    
    (554
    )
    
    
    (5
    )Proceeds from the exercise of employee stock options
    
    
    797
    
    
    
    1,552Proceeds from employee stock purchase plan
    
    
    1,094
    
    
    
    823Purchase of treasury stock
    
    
    (19,131
    )
    
    
    (54
    )Principal payments on notes payable
    
    
    
    
    
    
    (211
    )Stock-based compensation windfall tax benefit
    
    
    290
    
    
    
    1,663Other
    
    
    
    
    
    
    (1
    )Net cash (used in) provided by financing activities
    
    
    (17,504
    )
    
    
    3,767Net increase (decrease) in cash and cash equivalents
    
    
    117,863
    
    
    
    (14,051
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (389
    )
    
    
    570Cash, beginning of period
    
    
    50,564
    
    
    
    47,080Cash, end of period
    
    $
    168,038
    
    
    $
    33,599Supplemental disclosureCash paid for:Income taxes
    
    $
    4,846
    
    
    $
    11,181Interest
    
    
    84
    
    
    
    48Non-cash investing and financing activities:Accrued capitalized hardware, software and fixed assets
    
    
    505
    
    
    
    609Goodwill adjustment
    
    
    
    
    
    
    72Deferred compensation reversal to equity
    
    
    125
    
    
    
    211
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##### Table of Contents



DEALERTRACK HOLDINGS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 1. Business Description
  2. Basis of Presentation
  3. Recent Accounting Pronouncements
 Determination of the Useful Life of
Intangible Assets
 Effective Date of FASB Statement 157
 The
Fair Value Option for Financial Assets and Financial Liabilities
 6




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4. Fair Value Measurements
 Fair Value Measurements
 
    
    Level 1  Quoted prices (unadjusted) in active markets that are accessible at the
measurement date for assets or liabilities. The fair value hierarchy gives the highest
priority to Level 1 inputs.
    
    Level 2  Observable prices that are based on inputs not quoted on active markets, but
corroborated by market data.
    
    Level 3  Unobservable inputs are used when little or no market data is available. The
fair value hierarchy gives the lowest priority to Level 3 inputs.
   Quoted Prices in
    
    
    Significant Other
    
    
    Significant
    
    
    Total CarryingActive Markets
    
    
    Observable Inputs
    
    
    Unobservable Inputs
    
    
    Value at(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    June 30, 2008Cash equivalents (1)
    
    $
    14,550
    
    
    $
    
    
    
    $
    
    
    
    $
    14,550Short-term investments (2)
    
    
    35,345
    
    
    
    
    
    
    
    
    
    
    
    35,345Long-term investments (3)
    
    
    
    
    
    
    
    
    
    
    12,842
    
    
    
    12,842Total
    
    $
    49,895
    
    
    $
    
    
    
    $
    12,842
    
    
    $
    62,737
 
 (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)
    
    Short-term investments consist primarily of corporate bonds and municipal commercial
paper with maturity dates of one year or less, for which we determine fair value through
quoted market prices.(3)
    
    Non-current investments consist of auction rate securities (ARS) that are invested in
tax-exempt and tax-advantaged preferred stock trust securities. We classify investment
securities as available for sale, and as a result, report the investments at fair value.
Auction rate securities have long-term underlying maturities, but have interest rates that
are reset every six months or less. Our intent is not to hold these securities to maturity,
but rather to use the interest rate reset feature to provide liquidity as necessary. Our
investment in these securities generally provides higher interest rates than money market
and other cash equivalent investments. Due to the lack of observable market quotes on our
ARS portfolio due to failed auctions within the industry, we utilize valuation models that
rely exclusively on Level 3 inputs including those that are based on expected cash flow
streams, including assessments of counterparty credit quality, default risk underlying the
security, discount rates and overall capital market liquidity. The valuation of our ARS
investment portfolio is subject to uncertainties that are difficult to predict. If the
issuers of these securities are unable to successfully complete future auctions or
refinance their obligations and their credit ratings deteriorate, we may be required to
adjust the carrying value of these securities and recognize an impairment charge for an
other-than temporary decline in the fair value. We believe that we will be able to
liquidate our investment without material loss and that these securities are not
permanently impaired, however, due to the uncertainty of whether we will be able to sell
these securities within the next year we have classified our ARS as long-term at June 30,
2008. Based on our available cash and other investments, we do not currently anticipate
that the lack of liquidity caused by failed auctions will have a material adverse effect on
our operating cash flows or will affect our ability to operate our business as usual.  Balance as of January 1, 2008
    
    $
    169,580Net sales of auction rate securities
    
    
    (156,280
    )Unrealized losses included in accumulated other comprehensive income
    
    
    (458
    )Balance as of June 30, 2008
    
    $
    12,842
 7




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##### Table of Contents



5. Net Income per Share
 Earnings per Share .
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income
    
    $
    3,066
    
    
    $
    6,284
    
    
    $
    5,404
    
    
    $
    11,109Denominator:Weighted average common
stock outstanding (basic)
    
    
    41,505,503
    
    
    
    38,748,405
    
    
    
    41,569,468
    
    
    
    38,685,500Common equivalent shares
from options to purchase
common stock and restricted
common stock (1)
    
    
    1,258,583
    
    
    
    1,821,588
    
    
    
    1,293,938
    
    
    
    1,751,770Weighted average common
stock outstanding (diluted)
    
    
    42,764,086
    
    
    
    40,569,993
    
    
    
    42,863,406
    
    
    
    40,437,270Basic net income per share
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.13
    
    
    $
    0.29Diluted net income per share
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.13
    
    
    $
    0.27
 
 (1)
    
    In accordance with SFAS No. 128, for the three and six months ended
June 30, 2008 and June 30, 2007, we have excluded 393,333 and 290,000
contingently issuable shares, respectively, from diluted weighted
average common stock outstanding as their contingent conditions (a)
have not been satisfied at the reporting date nor (b) would have been
satisfied if the reporting date was the end of the contingency period
(Refer to Note 15 for further information).  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Stock options
    
    
    2,342,710
    
    
    
    488,966
    
    
    
    2,209,070
    
    
    
    431,245Restricted common stock
    
    
    177,194
    
    
    
    
    
    
    
    177,317
    
    
    
    101,300Total
    
    
    2,519,904
    
    
    
    488,966
    
    
    
    2,386,387
    
    
    
    532,545
 8




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##### Table of Contents



6. Comprehensive Income
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    3,066
    
    
    $
    6,284
    
    
    $
    5,404
    
    
    $
    11,109Foreign currency translation adjustments
    
    
    406
    
    
    
    4,182
    
    
    
    (1,633
    )
    
    
    4,913Unrealized loss on available-for-sale securities
    
    
    (56
    )
    
    
    
    
    
    
    (342
    )
    
    
    Total
    
    $
    3,416
    
    
    $
    10,466
    
    
    $
    3,429
    
    
    $
    16,022
  7. Stock-Based Compensation Expense
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Stock options
    
    $
    2,083
    
    
    $
    1,473
    
    
    $
    4,013
    
    
    $
    2,698Restricted common stock
    
    
    1,378
    
    
    
    904
    
    
    
    2,789
    
    
    
    1,732ESPP
    
    
    73
    
    
    
    69
    
    
    
    193
    
    
    
    145Total stock-based compensation expense
    
    $
    3,534
    
    
    $
    2,446
    
    
    $
    6,995
    
    
    $
    4,575
    8. Stock Repurchase Program
  9




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9. Related Party Transactions
  10. Property and Equipment
  EstimatedUseful Life
    
    
    June 30,
    
    
    December 31,(Years)
    
    
    2008
    
    
    2007Computer equipment
    
    
    3
    
    
    $
    18,167
    
    
    $
    16,719Office equipment
    
    
    5
    
    
    
    3,079
    
    
    
    2,189Furniture and fixtures
    
    
    5
    
    
    
    3,070
    
    
    
    2,840Leasehold improvements
    
    
    5-11
    
    
    
    1,148
    
    
    
    992Total property and equipment, gross
    
    
    
    
    
    
    25,464
    
    
    
    22,740Less: Accumulated depreciation and amortization
    
    
    
    
    
    
    (12,135
    )
    
    
    (9,948
    )Total property and equipment, net
    
    
    
    
    
    $
    13,329
    
    
    $
    12,792
  11. Intangible Assets
  June 30, 2008
    
    
    December 31, 2007Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    AmortizationBook
    
    
    Accumulated
    
    
    Book
    
    
    Accumulated
    
    
    PeriodValue
    
    
    Amortization
    
    
    Value
    
    
    Amortization
    
    
    (Years)Customer contracts
    
    $
    36,713
    
    
    $
    (13,896
    )
    
    $
    41,569
    
    
    $
    (14,789
    )
    
    
    2-4Database
    
    
    13,333
    
    
    
    (7,836
    )
    
    
    16,433
    
    
    
    (9,577
    )
    
    
    3-6Trade names
    
    
    10,500
    
    
    
    (4,964
    )
    
    
    10,500
    
    
    
    (4,460
    )
    
    
    5-10Patents/technology
    
    
    20,763
    
    
    
    (6,123
    )
    
    
    35,212
    
    
    
    (16,618
    )
    
    
    2-5Non-compete agreement
    
    
    11,413
    
    
    
    (6,265
    )
    
    
    14,062
    
    
    
    (6,214
    )
    
    
    1-5Partner agreements
    
    
    4,400
    
    
    
    (2,067
    )
    
    
    4,400
    
    
    
    (1,029
    )
    
    
    5Other
    
    
    
    
    
    
    
    
    
    
    900
    
    
    
    (861
    )
    
    
    5Total
    
    $
    97,122
    
    
    $
    (41,151
    )
    
    $
    123,076
    
    
    $
    (53,548
    )
 10




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##### Table of Contents



12. Goodwill
  Balance as of January 1, 2008
    
    $
    117,702Impact of change in Canadian dollar exchange rate
    
    
    (717
    )Other
    
    
    (887
    )Balance as of June 30, 2008
    
    $
    116,098
 13. Other Accrued Liabilities
  June 30,
    
    
    December 31,2008
    
    
    2007Customer deposits
    
    $
    2,755
    
    
    $
    2,773Professional fees
    
    
    2,616
    
    
    
    1,462Revenue share
    
    
    2,151
    
    
    
    1,196Other
    
    
    1,801
    
    
    
    920Taxes
    
    
    1,607
    
    
    
    3,379Software licenses
    
    
    287
    
    
    
    1,212Public company costs
    
    
    235
    
    
    
    174Severance
    
    
    80
    
    
    
    271Total other accrued liabilities
    
    $
    11,532
    
    
    $
    11,387
 14. Income Taxes
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109 of FIN 48
   15. Long-Term Incentive Equity Awards
  11




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007EBITDA Performance Award
    
    $
    167
    
    
    $
    148
    
    
    $
    334
    
    
    $
    296Market Value Award
    
    
    187
    
    
    
    173
    
    
    
    374
    
    
    
    346Total
    
    $
    354
    
    
    $
    321
    
    
    $
    708
    
    
    $
    642
  16. Commitments and Contingencies
 Retail Sales Tax
      12




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##### Table of Contents



Commitments
    Legal Proceedings
  DealerTrack Inc. v. RouteOne LLC
   DealerTrack, Inc. v. Finance Express et al., CV-06-2335;  DealerTrack Inc. v. RouteOne and Finance Express et al., CV-06-6864; and  DealerTrack Inc. v. RouteOne and Finance Express et al., CV-07-215
     13




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##### Table of Contents



17. Segment Information
 Disclosures about Segments of an Enterprise and Related
Information
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Transaction services revenue
    
    $
    36,321
    
    
    $
    38,596
    
    
    $
    74,488
    
    
    $
    72,886Subscription services revenue
    
    
    22,877
    
    
    
    17,444
    
    
    
    45,263
    
    
    
    33,213Other
    
    
    3,983
    
    
    
    2,467
    
    
    
    7,738
    
    
    
    4,133Total net revenue
    
    $
    63,181
    
    
    $
    58,507
    
    
    $
    127,489
    
    
    $
    110,232
 18. Credit Facility
  19. Second Amended and Restated DealerTrack Holdings, Inc. 2005 Incentive Award Plan
  20. Subsequent Event
  
 14




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 You should read the following discussion and analysis of our financial condition and results
of operations in conjunction with our consolidated financial statements. Certain statements in this
Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act). These statements involve a number of risks,
uncertainties and other factors that could cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements expressed or implied
by these forward-looking statements. Factors that could materially affect such forward-looking
statements can be found in the section entitled Risk Factors in Part I, Item 1A. in our Annual
Report on Form 10-K for the year ended December 31, 2007 filed with the SEC on February 28, 2008.
Investors are urged to consider these factors carefully in evaluating the forward-looking
statements and are cautioned not to place undue reliance on such forward-looking statements. The
forward-looking statements made herein are only made as of the date hereof and we will undertake no
obligation to publicly update such forward-looking statements to reflect subsequent events or
circumstances.
 Overview
     Three Months Ended June 30,
    
    Six Months Ended June 30,2008
    
    2007
    
    2008
    
    2007EBITDA and Other Business Statistics:EBITDA (1)
    
    $
    13,894
    
    
    $
    18,853
    
    
    $
    27,238
    
    
    $
    33,496Capital expenditures, software and web site development costs
    
    $
    5,027
    
    
    $
    2,253
    
    
    $
    7,941
    
    
    $
    5,700Active dealers in our network as of end of the period (2)
    
    
    21,735
    
    
    
    22,630
    
    
    
    21,735
    
    
    
    22,630Active financing sources in our network as of end of period (3)
    
    
    659
    
    
    
    447
    
    
    
    659
    
    
    
    447Transactions processed (4)
    
    
    21,047
    
    
    
    23,498
    
    
    
    44,936
    
    
    
    46,223Product subscriptions (5)
    
    
    31,499
    
    
    
    25,621
    
    
    
    31,499
    
    
    
    25,621
 
 (1)
    
    EBITDA represents net income before interest (income) expense, taxes,
depreciation and amortization. We present EBITDA because we believe
that EBITDA provides useful information with respect to the
performance of our fundamental business activities and is also
frequently used by securities analysts, investors and other interested
parties in the evaluation of comparable companies. We rely on EBITDA
as a primary measure to review and assess the operating performance of
our company and management team in connection with our executive
compensation plan incentive payments. 15




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##### Table of Contents




    
    EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
    
    EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
    
    EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or
principal payments, on our debts;
    
    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have
to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and
    
    Other companies may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.Because of these limitations, EBITDA should not be considered as a measure of discretionary cash available to us to
invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and
using EBITDA only supplementally. EBITDA is a measure of our performance that is not required by, or presented in
accordance with, GAAP. EBITDA is not a measurement of our financial performance under GAAP and should not be considered
as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or
as an alternative to cash flow from operating activities as a measure of our liquidity.
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007GAAP net income
    
    $
    3,066
    
    
    $
    6,284
    
    
    $
    5,404
    
    
    $
    11,109Interest income
    
    
    (1,145
    )
    
    
    (1,220
    )
    
    
    (2,708
    )
    
    
    (2,751
    )Interest expense
    
    
    74
    
    
    
    73
    
    
    
    166
    
    
    
    135Provision for income taxes
    
    
    2,213
    
    
    
    4,618
    
    
    
    4,168
    
    
    
    8,059Depreciation of property and equipment and
amortization of capitalized software and website
costs
    
    
    3,185
    
    
    
    2,429
    
    
    
    6,081
    
    
    
    4,705Amortization of acquired identifiable intangibles
    
    
    6,501
    
    
    
    6,669
    
    
    
    14,127
    
    
    
    12,239EBITDA (Non-GAAP)
    
    $
    13,894
    
    
    $
    18,853
    
    
    $
    27,238
    
    
    $
    33,496
 
 (2)
    
    We consider a dealer to be active as of a date if the dealer completed at least one revenue-generating credit application
processing transaction using the DealerTrack network during the most recently ended calendar month.(3)
    
    We consider a financing source to be active in our network as of a date if it is accepting credit application data
electronically from dealers in the DealerTrack network, including financing sources visible to dealers through drop down
menus. These numbers reflect a change in counting methodology to reflect financing sources available through drop down
menus.(4)
    
    Represents revenue-generating transactions processed in the DealerTrack, DealerTrack Digital Services and DealerTrack
Canada networks at the end of a given period.(5)
    
    Represents revenue-generating subscriptions in the DealerTrack and DealerTrack Canada networks at the end of a given period. Revenue
 Transaction Services Revenue.
 16




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




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##### Table of Contents



Results of Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(% of net revenue)
    
    
    (% of net revenue)Consolidated Statements of Operations Data:Net revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating costs and expenses:Cost of revenue
    
    
    44.1
    
    
    
    41.3
    
    
    
    44.3
    
    
    
    41.2Product development
    
    
    4.9
    
    
    
    3.9
    
    
    
    4.9
    
    
    
    4.2Selling, general and administrative
    
    
    44.3
    
    
    
    38.1
    
    
    
    45.3
    
    
    
    39.6Total operating costs and expenses
    
    
    93.3
    
    
    
    83.3
    
    
    
    94.5
    
    
    
    85.0Income from operations
    
    
    6.7
    
    
    
    16.7
    
    
    
    5.5
    
    
    
    15.0Interest income
    
    
    1.8
    
    
    
    2.1
    
    
    
    2.1
    
    
    
    2.5Interest expense
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (0.1
    )Income before provision for income taxes
    
    
    8.4
    
    
    
    18.6
    
    
    
    7.5
    
    
    
    17.4Provision for income taxes
    
    
    (3.5
    )
    
    
    (7.9
    )
    
    
    (3.3
    )
    
    
    (7.3
    )Net income
    
    
    4.9
    %
    
    
    10.7
    %
    
    
    4.2
    %
    
    
    10.1
    %
 Three Months Ended June 30, 2008 and 2007
 Revenue
 Three Months EndedJune 30,2008
    
    
    2007Transaction services revenue
    
    $
    36,321
    
    
    $
    38,596Subscription services revenue
    
    
    22,877
    
    
    
    17,444Other
    
    
    3,983
    
    
    
    2,467Total net revenue
    
    $
    63,181
    
    
    $
    58,507
  Transaction Services Revenue.
 18




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Subscription Services Revenue.
 Cost of Revenue and Operating Expenses
 Three Months EndedJune 30,2008
    
    
    2007Cost of revenue
    
    $
    27,879
    
    
    $
    24,158Product development
    
    
    3,084
    
    
    
    2,281Selling, general and administrative
    
    
    28,010
    
    
    
    22,313Total cost of revenue and operating expenses
    
    $
    58,973
    
    
    $
    48,752
 Cost of Revenue.
 Product Development Expenses.
 Selling, General and Administrative Expenses.
 Provision for Income Taxes
 Three Months EndedJune 30,2008
    
    2007Provision for income taxes, net
    
    $
    (2,213
    )
    
    $
    (4,618
    )
  19




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Six Months Ended June 30, 2008 and 2007
 Revenue
 Six Months EndedJune 30,2008
    
    
    2007Transaction services revenue
    
    $
    74,488
    
    
    $
    72,886Subscription services revenue
    
    
    45,263
    
    
    
    33,213Other
    
    
    7,738
    
    
    
    4,133Total net revenue
    
    $
    127,489
    
    
    $
    110,232
  Transaction Services Revenue.
 Subscription Services Revenue.
 Cost of Revenue and Operating Expenses
 Six Months EndedJune 30,2008
    
    
    2007Cost of revenue
    
    $
    56,491
    
    
    $
    45,458Product development
    
    
    6,226
    
    
    
    4,661Selling, general and administrative
    
    
    57,742
    
    
    
    43,561Total cost of revenue and operating expenses
    
    $
    120,459
    
    
    $
    93,680
 Cost of Revenue.
 Product Development Expenses.
 20




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##### Table of Contents



Selling, General and Administrative Expenses.
 Provision for Income Taxes
 Six Months EndedJune 30,2008
    
    2007Provision for income taxes, net
    
    $
    (4,168
    )
    
    $
    (8,059
    )
  Liquidity and Capital Resources
       Six Months EndedJune 30,2008
    
    2007Net cash provided by operating activities
    
    $
    24,296
    
    
    $
    20,538Net cash provided by (used in) investing activities
    
    $
    111,071
    
    
    $
    (38,356
    )Net cash (used in) provided by financing activities
    
    $
    (17,504
    )
    
    $
    3,767
 Operating Activities
  21




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##### Table of Contents



Investing Activities
  Financing Activities
  Contractual Obligations
  Off-Balance Sheet Arrangements
  Industry Trends
  Effects of Inflation
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Exposure
  Interest Rate Exposure
   22




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##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  DealerTrack Inc. v. RouteOne LLC
   DealerTrack, Inc. v. Finance Express et al., CV-06-2335;  DealerTrack Inc. v. RouteOne and Finance Express et al., CV-06-6864; and  DealerTrack Inc. v. RouteOne and Finance Express et al., CV-07-215
      23




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##### Table of Contents



Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Purchases of Equity Securities by the Issuer
   Total
    
    MaximumNumber of
    
    NumberShares
    
    of SharesPurchased
    
    Thatas Part of
    
    May Yet beTotal Number
    
    Average Price
    
    Publicly
    
    Purchasedof Shares
    
    Paid per
    
    Announced
    
    Under thePeriod
    
    Purchased
    
    Share
    
    Program
    
    ProgramApril 2008
    
    
    
    
    
    $
    
    
    
    
    n/a
    
    
    
    n/aMay 2008
    
    
    403
    
    
    $
    19.22
    
    
    
    n/a
    
    
    
    n/aJune 2008
    
    
    994,284
    
    
    $
    19.18
    
    
    
    994,284
    
    
    
    (1
    )Total
    
    
    994,687
 
 (1)
    
    As of June 30, 2008, an additional $55.9 million of our common stock may still be
purchased under the repurchase program. 24




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
   Name
    
    Votes Received
    
    Votes WithheldMary Cirillo-Goldberg
    
    
    34,881,187
    
    
    
    5,222,858Mark F. ONeil
    
    
    35,031,615
    
    
    
    5,072,430
    
 Item 6. Exhibits
 ExhibitNumber
    
    Description of Document10.1
    
    Second Amended and Restated DealerTrack Holdings, Inc. 2005
Incentive Award Plan (incorporated by reference to Exhibit I to
the Companys definitive proxy statement filed on April 29, 2008).31.1
    
    Certification of Mark F. ONeil, Chairman, President and Chief
Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Robert J. Cox III, Senior Vice President, Chief
Financial Officer and Treasurer, pursuant to Rule 13a-14(a)and
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certifications of Mark F. ONeil, Chairman, President and Chief
Executive Officer, and Robert J. Cox III, Senior Vice President,
Chief Financial Officer and Treasurer, pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 SIGNATURE
  DealerTrack Holdings, Inc.
(Registrant)Date: August 11, 2008
    /s/ Robert J. Cox IIIRobert J. Cox IIISenior Vice President, Chief Financial Officer and
Treasurer
(Principal Financial and Accounting Officer) 25




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document10.1
    
    Second Amended and Restated DealerTrack Holdings, Inc. 2005
Incentive Award Plan (incorporated by reference to Exhibit I to
the Companys definitive proxy statement filed on April 29, 2008).31.1
    
    Certification of Mark F. ONeil, Chairman, President and Chief
Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Robert J. Cox III, Senior Vice President, Chief
Financial Officer and Treasurer, pursuant to Rule 13a-14(a)and
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certifications of Mark F. ONeil, Chairman, President and Chief
Executive Officer, and Robert J. Cox III, Senior Vice President,
Chief Financial Officer and Treasurer, pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 26