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Q4 2008 Earnings Call Transcript

Published: 17 Feb 2009

[Operator:]

My name is Raquel and I’ll be your conference operator today. At this time I would like to welcome everyone to the Arbitron fourth quarter and yearend 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions) I would now like to turn the call over to Senior Vice President of Press and Investor Relations, Mr. Tom Mocarsky.

[Thomas Mocarsky:]

Welcome to Arbitron’s fourth quarter and yearend 2008 conference call. I’m Tom Mocarsky and I will be your moderator for today’s call. Today I have the pleasure of introducing Michael Skarzynski, President and Chief Executive Officer and Sean Creamer, Chief Financial Officer. In today’s call Michael and Sean will review Arbitron’s activities, accomplishments and financial results for the fourth quarter and yearend 2008. They will also make some comments about our expectations for 2009. After the presentation we will be happy to take your questions. But, before we begin today’s presentation I do want to note that this morning’s discussion includes forward-looking statements. These forward-looking statements are within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events. Arbitron derived these expectations from the information that is currently available to us. Actual results might differ materially from the results projected in our forward-looking statements which involve known and unknown risks. For a discussion of the factors that could cause our actual results to differ materially from our forward looking statements, please refer to Arbitron’s 10K for the period ended December 31, 2007, our quarterly report on Form 10Q for the period ended September 30, 2008 and elsewhere and within any subsequent periodic current reports filed by us with the Security & Exchange Commission. A copy of all these documents are on file with the SEC. At this time I want to turn the call over to Michael Skarzynski.

[Michael P. Skarzynski:]

This is my first opportunity to address Arbitron’s shareholders in an earnings call since joining the company as President and CEO on January 12th. It is my great honor and pleasure to serve as the new president and CEO of Arbitron. I am absolutely thrilled and excited to lead our company at this exciting time. I want to start by thanking Steve Morris for his significant contributions during his 16 year tenure as the leader of Arbitron. As you know Steve continues to serve as Chairman of the Board. On behalf of the customers, employees, partners and shareholders I would like to extend to Steve our deepest gratitude, respect and appreciation for all that he has done for Arbitron. Thank you very much Steve. In my comments today I will cover four topics

[Sean R. Creamer:]

I’d like to spend a few minutes reviewing our 2008 financial results, providing some color on our performance and discussing our guidance. For the fourth quarter of 2008 revenue was $93.6 million up $13.4 million or 16.8% compared to the fourth quarter last year. Obviously the commercialization of the 12 new markets in the third and fourth quarters of 2008 drove much of that increase. Cost of revenue was $56.1 million up $6.9 million or 14% compared to the same quarter last year. This increase is largely attributable to incremental costs relating to management of the PPM panels for our commercialized markets as well as recruitment of the panels scheduled to commercialize in the first and second quarters of this year. Specifically we had an average of nearly 32,500 panelist during the fourth quarter versus 18,560 in 4Q ’07. In addition, as a result of the dislocation of residents and lack of essential services during and after Hurricane Ike, we announced that we issued PPM data in Houston for only three of the four weeks in September and two of the four weeks in October. The lost revenue associated with this was approximately $400,000. In addition, the call center we operate in Houston was severely damaged leading to our decision to close the facility. We have back filled the loss capacity by running more shits in our other two call centers and the current costs associated with displaced workers net of anticipated insurance recoveries were in the range of $500,000 and are reflected in cost of revenue. Selling, general and administrative expenses were $26.7 million for the fourth quarter that’s up $6.6 million or 32.5% when compared to the $20.2 million we recorded in the fourth quarter 2007. We incurred net costs of $6.4 million in litigation and settlements as well as other interactions with governmental entities primarily regarding our PPM radio rating service. Our $5.8 million in net legal fees for the quarter is in line with the guidance we provided on our third quarter call of $4 to $6 million. We recorded share based compensation of $2 million during the quarter, most of which continues to be reflected in SG&A and that compares to $1.5 million recorded in 4Q ’07. Research and development expense was $11.6 million up $1.1 million or 10.9% compared to the fourth quarter of last year as we had increased IT spend for both PPM and diary. Most of our $1.3 million in investments in multimedia in the quarter are included in R&D as well. Our equity in net income of affiliates was $7.7 million for the quarter a $1.7 million increase from the $6 million recorded in the fourth quarter last year. Of this variance, $1.2 million is attributable to our share of the Apollo LLC loss that was reported in the fourth quarter of ’07. The LLC was liquidated during the second quarter of 2008 and therefore no Apollo loss is reflected this quarter. Our share of the Scarborough joint ventures net income for the fourth quarter was $7.7 million as compared to $7.2 million recorded in the fourth quarter of 2007. For the quarter net interest expense was roughly $650,000 compared to net interest expense of only $4,000 reported in the fourth quarter last year. Increased borrowing on our credit facility and reduced interest income attributable to our lower cash balances drove the change. Income taxes on continuing ops for the fourth quarter were $2.7 million and net income was $3.4 million or $0.13 per diluted share compared to $3.7 million or $0.13 per diluted share for the fourth quarter of last year. Earnings before interest and taxes EBIT were $6.7 million for the quarter, that’s up $532,000 from the $6.2 million reported in the fourth quarter last year. Depreciation and amortization for the quarter totaled $4.8 million versus $3.9 in 4Q ’07 with capital expenditures for the fourth quarter of ’08 of $9.3 million. EBITDA in the quarter was $11.6 million compared to $10.1 million that was generated in fourth quarter of ’07. Turning our attention to the full year results, revenue was $368.8 million up $30.4 million or 9% compared to 2007 and in line with our full year guidance of 8% to 10%. The commercialization of 12 PPM markets during 2008 along with the full year PPM revenue associated with that Houston and Philadelphia markets that commercialized in the first half of 2007 contributed significantly to the year-over-year revenue growth. Cost of revenue for the year was $185.6 million, an increase of 18.1% versus the $157.2 million reported last year as we more than doubled the average of PPM panelist for the year to 27,240 in 2008 from 11,900 in 2007. Selling, general and administrative expenses were $85.3 million during 2008, that’s up $5.8 million compared to 2007 and again, increased legal expenses were the primary driver. Share based compensation totaled $8.4 million for 2008 up from $6.5 million in 2007 and in line with our original expectations. Research and development expense was $41.4 million for the year down $1.1 million or 2.6% compared to the prior year. This decrease resulted primarily from year-over-year reductions in cost associated with development and maintenance of certain client software and internal use applications. Our equity and net income of affiliates was $6.7 million for the year versus $4.1 million in 2007. Our share of loss in the Apollo LLC was $1.9 million for the year and compares to $4.3 million loss reported in 2007. While our full year share of income in Scarborough was $8.6 million which is up $269,000 over 2007. Net Apollo expenses outside the LLC were $1.3 million for the year for a total net Apollo related loss in 2008 of $3.2 million. For the year our total expense relating to multimedia initiatives outside of project Apollo was $2 million. The resulting EBIT for the year was $63.1 million, that’s down $197,000 from the $63.3 million that we reported in the same period in 2007. EBITDA for the year was $80.6 million, that’s up 6.2% from the $75.9 million generated in 2007. 2008’s net interest expense was $1.6 million and that compares to net interest income of $1.5 million in 2007. Again, the increased borrowings and reduced interest income on our lower cash balances drove the change. Income tax expense for the year was $24.3 million, that yields a full year effective tax rate of 39.5%. 2008 full year net income was $37.2 million this year 2008 or $1.36 per diluted share compared to $40.2 million or $1.35 per diluted share for 2007. Depreciation and amortization for the year was $17.5 million versus $12.6 million in 2007 with the increase attributable to ongoing capital expenditures required to support PPM initiatives. Capital expenditures for the year totaled $32 million. From a balance sheet perspective we ended the year with $8.7 million in cash and interest bearing debt outstanding of $85 million or net debt of $76.3 million. This compares to 2007 yearend net cash position of $9.1 million. The reduction in our cash position and increased borrowings year-to-year is largely attributable to dividends and share repurchases during the year specifically in ’08 we paid roughly $11 million to our shareholders in the form of dividends and bought back $100 million of our stock while still appropriately investing in our business for the future. We repurchased in excess of 2.2 million shares at an average price of approximately $44.50 under the current $200 million authorization. We do not disclose specifics regarding when we are or will be in the market. Securities law impose limitations with regard to the timing and quantity of repurchases and we are precluded from buying or selling ours securities when we are in possession of material non-public information. We are constantly evaluating the implications of current and ongoing events and other factors on our ability to repurchase shares but as a reminder, over calendar years 2006 through 2008 we have repurchased approximately 6.3 million shares. That concludes by 2008 recap. I’d like to now address the financial guidance we issued today. However, before jumping in to the details, I think some context is appropriate. The current recession is negatively impacting virtually all companies and we are not immune. In fact, the radio industry has been particularly hard hit as advertising budgets are squeezed. Some analysts are projecting double digit declines in radio revenues for 2009. We can’t predict at this point how long these economic problems will persist. In this environment is it very important that we work with our customers where possible to help us collectively weather the storm. Nielsen’s previously announced entry in to smaller radio markets means that we are in an increasingly competitive environment against a formidable company. However, we’re not backing down or backing out of any of our measured markets. We remain committed to all the markets we current measure and as Michael noted, it is our goal to win back the Cumulus and Clear Channel business loss to Nielsen and those markets and we are allocating the resources to do just that. As Michael also noted, we are working hard to identify opportunities for expense reduction and process and quality improvements. To the extent that those efforts result in savings, those savings will be evaluated for possible redeployment in to our core product to subsidize improvement initiatives, to fund growth initiatives and to improve earnings. Our focus is on increasing and extending the long term value of the Arbitron franchise. Protecting and supporting our existing customer base, ensuring our products and services are competitive from a price quality and service perspective and generating compelling financial returns are critical components to this overall goal. Our guidance was developed with these uncertainties and priorities in mind. We believe our ranges are sufficiently wide to contemplate the economic realities in the marketplace and what we currently anticipate as potential outcomes for the year. With that in mind, we are forecasting revenue growth of 6% to 10% based on our current commercialization schedule. In 2009 we expect to commercialize 19 new markets however, since these markets are scheduled to commercialize throughout the year and our customer contracts allow for phased in PPM pricing increases the full impact of the PPM price uplift in these markets is not realized in the first year that a market goes live with PPM. This revenue guidance also reflects the impact of the roughly $5 million in lost recognized revenue in 2009 stemming from Cumulus and Clear Channel signing with Nielsen in certain smaller markets. We expect the overall growth rate in our diary markets will be roughly equal to the level of our price escalators. We’re also assuming that the difficult economy will continue to have a negative impact on our sales of more discretionary services, specifically our software and qualitative offerings. Our guidance range contemplates a potential 100 to 200 basis point reduction to our top line growth rate in 2009 as a result. From a bottom line perspective we anticipate earnings per share of between $1.40 and $1.55. We will continue to produce ratings in the sticker diary markets and therefore 100% of the $5 million revenue loss drops to the bottom line. We are certainly pleased to be able to resolve all claims against Arbitron that were alleged in the lawsuits filed by the New York and New Jersey AGs and importantly to be in a position to accomplish this substantially within the framework of our ongoing continuous improvement program for PPM. However, as I mentioned on our call last month there are incremental costs in 2009 as a result with respect to the various methodology initiatives and metric targets that were agreed to, many were already contemplated in our current business model however in some cases the agreement called for an acceleration of our plans for implementation and therefore the timing of the resulting cost is moved up as well. We announced in January that we are increasing our cell phone only representation in our PPM panels by the end of 2009 in all commercialized markets. We are also introducing cell phone only in to our diary services. Both these initiatives are aimed at improving the delivery of the critical 18 to 34 demo. This is an expensive but necessarily qualitative quality initiative and in total represents an investment of nearly $10 million for the year. In addition, our guidance contemplates $1.1 million in incremental 2009 cash compensation relating to the office of the CEO and the transition from Steve to Michael. There is also additional non-cash compensation stemming from the transition. We are projecting approximately $11 to $12 million expense for non-cash compensation for 2009 which is an increase of $3 to $4 million from 2008, nearly half of which relates to final vesting of Steve’s remaining equity grants and the initial vesting of Michael’s inducement grants. I hope that information is helpful. I know we’ve covered a lot and I am sure there are questions so with that I would like to turn it over to the operator and ask that we open up the phone call for questions.

[Operator:]

(Operator Instructions) Your first question comes from Alexia Quadrani – JP Morgan.

[Alexia Quadrani:]

Sean, just following up on your comments just now about the guidance for 2009, when you’re looking at the revenue guidance specifically the low end and the high end you obviously talked about the economy having an influence in that which makes a lot of sense but, it’s still a pretty big range. In the low end are you assuming maybe further drop off of some smaller market products given radio stations maybe choosing not to buy ratings for those markets anymore or are you looking for maybe Nielsen gaining more business in those smaller markets?

[Sean R. Creamer:]

Well, we’re certainly not expecting to lose further business, that is our stated goal. I think the range is sufficiently wide to contemplate the realities and the uncertainties whether it be in bankruptcy risk which we certainly fielded a lot of questions about in the past or simply a more significant decline in our discretionary services sales which we’ve highlighted as an exposure. We’ve put what we think is a reasonable base case but have tried to put sensitivities around that on both the upside and downside. We’re not sure how deep the recession will go or how quickly it will recover and I think we’ve expanded our range simply to try and contemplate the realities of that uncertainty.

[Alexia Quadrani:]

Not to just keep beating on this but just on the high end of the range, are you assuming some sort of full economic recovery or is it still sort of in the realm that things are going to stay soft but probably stabilize at some point in the year? I’m trying to get a sense of how optimistic the high end is?

[Sean R. Creamer:]

I think the high end would assume just like the bottom end assumes a significant change in course so that the economy recovers more quickly at the high end and declines more rapidly on the low end.

[Alexia Quadrani:]

Historically, you had mentioned sort of a two year kind of big ramp up or step up in both revenue and kind of earnings growth once you see these PPM markets really come up and running. Should we still assume in 2010 obviously being sensitive to the economic environment that you should see further improvement in profitability and further revenue acceleration given this roll out schedule?

[Sean R. Creamer:]

We’re not providing any guidance with respect to 2010. I will reiterate that the basic tenants of the business model remains intact in terms of how revenue ramps when PPM markets commercialize. I think you would have seen that certainly to a greater extend in our ’09 guidance had it not been for one, the economy and two, the drop off as a result of the loss Cumulus and Clear Channel business which obviously had an effect on the growth rate.

[Alexia Quadrani:]

The last question is have you seen any incremental signs either whether qualitative or quantitative that Nielsen has the intention to move further in to the radio marketplace?

[Sean R. Creamer:]

We certainly aren’t aware of anything other than a stated test that was going to be conducted in Lexington Kentucky with the results to have been released in the middle of February. As of today we certainly have not heard anything. We can’t comment on anything beyond that because we’re simply not aware of anything else.

[Operator:]

At this time there are no further questions. Mr. Mocarsky the floor is yours for closing remarks.

[Michael P. Skarzynski:]

Thank you everyone for participating in the fourth quarter earnings conference call today. Thank you for your continued interest in Arbitron. I’d like to assure shareholders that we’re working hard to improve the company operations and achieve the level of improvement in revenue and EPS that we’ve given in our guidance and we look forward to sharing with you in coming weeks and months the results of our strategic plan goal guidance and intent and perhaps some other news on new activity in our application software front. Thank you very much and have a great day.

[Operator:]

This concludes today’s conference call. You may now disconnect.