AltShares Merger Arbitrage ETF
Q4 2007 Earnings Call Transcript

Published: 19 Feb 2008

Operator:

Good Morning. I name is Rich and I'll be your conference operator today. At this time, I would like to welcome everyone to Arbitron Fourth Quarter 2007 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and answer-period. (Operator Instructions). Thank you. It's now my pleasure to turn it forward to your host, Thomas Mocarsky. Sir, you may begin your conference.
Thomas Mocarsky:

Thank you, Rich. Good morning ladies and gentlemen, and welcome to the Arbitron fourth quarter 2007 conference call. Today, I have the pleasure of introducing Steve Morris, our Chairman, President and Chief Executive Officer and Sean Creamer, our Chief Financial Officer. In today's call, Steve and Sean will review Arbitron's activities, accomplishments, and financial results for the fourth quarter 2007. They will also make some comments about our expectations for 2008. After the presentation, Steve and Sean will be happy to take your questions. But before we begin today's presentation, I do want to note that this morning's call does include forward-looking statements. These forward looking statements are within the meaning of a Private Security Litigation Reform Act of 1995. Our statements are based on current expectations about future events. We derive these expectations from information that's 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, do refer to Arbitron's 10-K for the period ended December 31, 2006. A copy of that 10-K is on file with the Securities and Exchange Commission. At this time, I'd like to turn the call over to Steve Morris, our Chairman, President and Chief Executive Officer.
Steve Morris:

Thanks Tom, good Morning everybody. It's a pleasure to welcome you to this call. Let me apologize in advance fro the frog-like quality of my voice. I 'm still emerging from a cold and Sean is a day or two ahead of me on this. So, together we may not sound our best, but we are going to try to highlight the year just passed and go through the good news and not so good news, and then focus on going forward. Recapping 2007, with the notable exception of the delay in the PPM rollout, we had a solid year. Revenue was plus 5.4% in the fourth quarter and plus 6% on the year. These percentages exclude the results of Continental Research, which we have recently sold and are carrying as a discontinued operation, but Continental included revenues were 6.9% up for the year Despite a very weak ad market for radio, we were bale to get the price increases on our core ratings businesses needed to support the higher cost of obtaining respondents, plus a bit of new business on top. Sean will take you through the cost picture, which is not surprisingly quite complex as PPM rollout cost got added to the diary base. At the bottom line, EPS for the quarter was $0.13 and the year was $1.35 at the top end of the revised guidance range that we provided when we announced the delay. That decision wound up by reducing our 2007 results by $0.05 a share. I've looked through our reason for the delay and the rollout of PPM in some depth in our last call, and there is no need to repeat them now. Our intention has always been to maintain industry trust and confidence in the ratings of PPM producers. So we are using the delay in the rollout to address concerns that have been resided by some of our customers and other radio industry constituencies. The good news is that, in our recently reported quality metrics there is evidence of considerable progress. We are consistently exceeding our 18 to 54 sample guarantees. We are steadily improving the sample composition for other key demographics, particularly at 18 to 34. We are also being open about the workings of the local market PPM services and about our internal measures of sample quality, all designed to build industry confidence in this new measurement data. We do this by reviewing with our customers on a monthly basis, the result of our efforts, and the standards we are using to judge our results. We have come a long way, but we can still do better. We have a significant array of additional initiatives in the pipeline designed to push our performance metrics steadily higher. I am optimistic that our improvements to date and these new measures will give our customers that level of confidence they need in this currency data that is so critical for programming and buy-sell transactions. Our schedule continues to call for a restart decision in June, with a rollout timetable back on track by the end of the year. Throughout this period, we will continue to do all we can through training and support to help the industry make a successful transition to electronic measurement. This means helping radio broadcasters use new PPM insights about their audiences to make the stations more comparative with other media and more attractive to advertiser. At the same time, we'll continue to provide agencies and advertise with information they can use to make informed decisions about the adjustments needed in their planning and buying strategies for radio when using the PPM radios. One point worth noting is that as we work on quality metrics, we continue to sign up radio customers and recently announced that have come a top ten radio group of a new customer for PPM. We now have about 85% of the revenue in the top ten markets signed up. With regard to Project Apollo, we are in the final stages of receiving customer decisions needed to make a go or no-go decision. The issue is, as it always is, whether the value justifies the cost. Unfortunately at this point, we don't have feedback from all of our private customers. We expect to know soon and we'll of course let you know then what the impact of a go or no-go decision would be on the 2008 plan. Two final events that I want to mention are that; first, we made the decision to sell our UK subsidiary, Continental Research and closed the deal last month. Continental has a talented staff and I want to thank them for their efforts to build their business with part of Arbitron. Well we've decided to sell it in order to be more fully focused on our core business. At the same time we've inaugurated our Arbitron India in Kochi as a technical center. A quantum leap in technical capabilities without an equivalent leap in cost of the technical center offices is very much on strategy, and we’re examining ways to expand this capability. The profile of 2008 is now one where revenue is anticipated to be up 8% to 10%, as new markets open in the second half of the year. Earnings per share will be in a range of $1.42 to $1.56. We continue to absorb the cost of building the panels and all of those markets will only recognize a relatively small amount of the annualized revenue in 2008. As we’ve indicated overtime our expectations in 2009 will see a significant gain in revenue and earnings per share, as we emerge from what has now been a three year investment period dedicated to getting PPM off the ground. Sean will give you some broad guidance on this. Yet the core business of Arbitron is solid, PPM continues forward despite the delay and will be a more robust service for the extra time we’ve invested to quality. Apollo is still undefined in terms of the 2008 plan, but we should have resolutions shortly. Let me turn things over to Sean now and then we’ll be happy to take your questions at the end.
Sean Creamer:

Thanks Steve and good morning everyone. I am going to review with you our 2007 results and then walk you to the guidance that we issued today. Before I begin now just a little bit more color attracting the impact of today’s announcement of the disposition of our Continental Research business. The transaction closed on January 31, effective with the fourth quarter 2007 and in accordance with GAAP where we're reclassifying Continentals results at a discontinued operation. For comparability purposes all historical periods will also be reflected and reflect Continental as a discontinued operation. For the fourth quarter, Continental's revenue was $4.6 million with a net loss of $458,000 and for the year, Continental generated revenue of $13.6 million with a net loss of $324,000. Including Continentals results, consolidated diluted earnings per share for the fourth quarter and full year was $0.13 and a $1.35 respectively. So, unless otherwise noted, my remaining comments are going to focus on revenue and earnings from our continuing operations. So, moving on to the financial results from continuing ops; for the quarter, revenue was $80.1 million, that's up $4.1 million or 5.4% when compared to the fourth quarter of last year. Cost of revenue was $49.3 million, up $10.3 million or 26.4% compared to the same quarter last year. And as a reminder, beginning in January this year, PPM operations cost that were previously reported in R&D are now presented in cost of revenue as PPM is commercializing. In addition of the re-class, we incurred incremental cost versus the fourth quarter of last year, predominantly relating to management recruitments of the PPM panels for New York, Los Angeles, San Francisco and Chicago. These cost increases were also offset somewhat by a reduction in $2 million in a power related cost, reported in cost of revenue as these cost are now reflected in our equity and net income of affiliate line. Selling, general and administrative expenses were $20.2 million for the fourth quarter, that’s essentially flat when compared to the $20.3 million reported in the fourth quarter of 2006. During the quarter, we reported a non-cash pretax of approximately $800,000 relating to the impairment of certain previously capitalized internal used software. This charge was offset by lower bonus accruals versus the prior year. We reported share based comp of $1.5 million for the quarter, most of which continued to be reflected in S&A, and this is up slightly from the $1.4 million that was reported in the fourth quarter of '06. Research and development expense was $10.5 million, that’s down $2.5 million or 19.1% compared to the fourth quarter of last year. For the quarter we had increased IT spend of $843,000, mostly related to PPM and client software initiatives. This increase is more than offset by the $3.6 million reduction quarter-over-quarter attributable to PPM operations cost shifting from R&D to cost of revenue in 2007. Our proportionate share in the net income of affiliates was $6 million for the quarter, a $900,000 decrease from the $6.9 million reported the in the fourth quarter of last year. As you know, beginning February 1st of this year our equity and net income loss of affiliates included, in addition to our share of the net results of our Scarborough joint venture, 50% of the net loss from the Apollo joint venture. Prior to then, our share of Apollo cost was included above the line in our cost and expenses, mainly in cost of revenue. Now only indirect support costs not shared by the partners are reflected above the line. For the quarter these non-LLC Apollo related cost were approximately $650,000. Our share of the proportionate loss of Apollo for the quarter was $1.2 million, therefore in total our Apollo related cost of the quarter were roughly $1.9 million. With respect to Scarborough, a share of their net income for the fourth quarter was %7.2 million versus net income of $6.9 million we recorded for Scarborough in the fourth quarter of 2006. For the quarter, net interest income was roughly zero, compared to net interest expense of $2.6 million in the fourth quarter of last year. Keep in mind, that the fourth quarter of '06 included a $2.9 million charge or roughly $0.06 per diluted share that was associated with the 2006 early repayment of our $50 million senior secured note. Income taxes for the quarter were $2.1 million and net income from continuing operations was $4.1 million or $0.14 per diluted share, compared to $4.7 million and $0.16 per diluted share for the fourth quarter last year. Earnings before interest and taxes were $6.2 million for the quarter, that’s down $4.4 million from the $10.7 million we reported in the last year. Depreciation and amortization for the quarter totaled $3.9 million, as compared to $2.5 million in the fourth quarter of '06 with capita expenditures for quarter of $10.1 million. During our retention to the full year results from continuing ops, revenue was $338.5 million, up $19.1 million or 6% compared to the same period last year. Our full year revenue guidance called for growth of 5.5% to 7.5%. You should note that our initial full year guidance for both revenue and EPS assumed the commercialization of New York in the fourth quarter, obviously due to the delay we did not commercialized New York on this time line and therefore the associated PPM revenue was not realized in 2007. In addition, our revenue guidance included Continental in both 2006 and 2007, revenue growth including Continental both years were 6.9% as Steve has noted. Cost of revenue for the year was $157.2 million, an increase of a little over 30% versus the $120.7 million which reported last year with the largest driver for the increase consistent with what I had outlined for the quarter. Selling, general, and administrative expenses were $79.5 million during 2007, up roughly $1 million compared to last year. Share bases comp totaled $6.5 million for 2007 and that was flat with 2006. Research and development expense was $42.5 million for the year, down $1.7 million or 3.8% compared to last year. The reclassification of PPM operating expense is to cost of revenue of $9.7 million versus last year, makes year-over-year comparison difficult. If you exclude that impact R&D increased 23.3% which is reflective of the increased IT investments I noted earlier. This years proportionate share in net income of our affiliates was $4.1 million versus last years $7.7 million. And our full year share of the loss in Apollo LLC was $4.2 million, while our share of income in Scarborough was 8.3 for the same period. Again net Apollo expenses outside of the LLC were $2.7 million for the year which brought our total net Apollo related loss in 2007 to $6.9 million for the year. The result in EBITD for the year was $63.3 million down $20.4 million from the $83.7 million that we reported in the same period last year. 2007 net interest income was approximately $1.5 million compared to net interest expense of $3.1 million last year and again the reduced interest bearing debt and the one time 2006 make whole payment more than offset the reduced interest income on our lower cash balances. Income tax expense for the year was $24.3 million yielding a full year effective rate of 37.5% which was consistent with our guidance. Full year net income from continuing ops was $40.5 million this year or a $1.37 per diluted share compared to the $50.3 million or a $1.67 per diluted share reported last year. Depreciation and amortization for the year was $12.6 million that compares with $9.4 million last year with the increase attributable to CapEx required to support PPM initiatives. Those capital expenditure for the year totaled $25.3 million. From a balance sheet perspective, we ended the year with $21.1 million in cash and short-term investments and interest bearing debt outstanding of $12 million. This compares to 2006 year-end net cash possession of $58.6 million. Our cash flow from operations was $24.7 million for the quarter and $65.1 million for the year. The reduction in our cash possession year-to-year is largely attributable to dividends and share repurchases during the year. Specifically in 2007; we paid roughly $12 million to shareholders in the form of dividends and bought back a $100 million of our stock while still aggressively investing our business. We also announced in November that our Board authorized an additional repurchases program of up to $200 million over a period of up to two years. To-date, we've not began executing on this new authorization. As you know, we are precluded from buying or selling our stock while in possession of material and non-public information. We also can't enter into any program buying plans such as the 10b5 plan while in possession of such information. So in the immediate wake of our decision to delay further commercialization of PPM, we've been working very closely with important constituencies, primarily customers and MRC, to improve their confidence in our service. In addition, as a matter of simple normal course, we closed the trading window for the company and our executive and advanced out into a period following our earnings releases. The combination of these two factors led us to conclude, it was appropriately prudent to defer executing any share repurchases until we could provide you with an update on our progress. On some of the initiatives we outlined for investors back in November and their relative financial impacts to our business models. We have a demonstrative track record of executing on our share repurchases, that always within a our framework of a disciplined and methodical approach and we certainly remain committed to that approach. With the 2007 recap complete, I'd like to turn the attention to the financial guidance that we issued today. Four 2008, with respect to revenue, we are forecasting growth of 8% to 10%. For comparability purposes, our guidance excludes the 2007 revenue from Continental which as you can see from our earning release did not contribute to our profitability for the year. The year-over-year acceleration in revenue growth versus the 6% reported revenue growth in '07 reflects the realization of PPM pricing as we increase the number of commercialized markets. And as we noted in November when we announced the delay, in 2008 we now expect to commercialize New York, Los Angels, Chicago, San Francisco and San Jose in September and Atlanta, Dallas, Detroit and DC in December. From a revenue perspective, the delay in these markets, relative to our original schedule means that the PPM uplift is deferred as well. Obviously, if we had not delayed these markets, our revenue growth guidance for 2008 would have been higher. Also, since these markets are scheduled to commercialize in the last four months of the year and our customer contracts allow for phased-in PPM pricing increases, the full impact of the PPM price uplift is not realized in the first year of commercialization of that market. Based on our current published commercialization schedule in 2008, we expect to commercialize 12 markets, including the embedded markets in New York and L.A. However, that translates into only 36 months of PPM pricing for those markets this year or 25% of the PPM revenue available had all of these markets been commercialized for all of 2008. As more markets commercialize in the future and previously commercialized markets continue to ramp up pricing, there is a further acceleration of top line growth through the roll-out period. We expect the overall growth rate on our diary business will only be modestly above the level of our price accelerators which is historically averaged around 4%. From a bottom line perspective, we anticipate earnings per share between $1.42 and $1.46 in addition to the revenue impact, the delay and our commercialization schedule also results in incremental cost as we extend the period during which we're fielding both diaries and PPMs. We previously noted that it was our belief that 2007 would be the 12th year from an earnings perspective for a ratings business. However, that was based on the assumption that the PPM rollout would remain on track with originally published schedule. We also noted that 2008 would represent the beginning of the margin restoration process. Our expectation was that the markets that commercialized in 2007 would begin to generate incremental revenue in excess of their incremental variable cost, and that contribution would subsidize the initial negative variable contribution in each of the market schedule to commercialize in 2008. The net impact of the two would modest margin expansion in 2008 leading to a larger step-function increase in 2009. However we announced in November that the decision to delay commercialization of those markets in 2008 would result in a reduction in EPS of between $0.22 and $0.33 per share and our guidance range is reflective of those impacts. Included in the EPS guidance is approximately $1.6 million or roughly $0.4 per share in net expense related to the extension of the Project Apollo panel, roughly half of which we expect to be reflected in our equity and net income of affiliate line. This represents only the cost associated with extending the pilot through the projected go no decision date. In a go scenario, we would begin investing to increase the panel size to commercial levels, and as with our ratings business, this require investment in building the panels is expensed as incurred and perceive the generation and recognition of revenue. Therefore if we perceive with Apollo, we expect incremental cost above what is currently contemplated in our guidance. Also in a no-go scenario, we would incur incremental cost associated with winding down the panel and ceasing operations with our pilot customers. At this point we estimate that the incremental cost associated with any go no-go decision could be in the range of $4 million to $10 million in 2008, with the low end of the range representing a shutdown scenario and the high end representing an expansion scenario to a 15000 household commercial panel. Obviously at the time of the decision, we will provide an update on the timing and the sizing of our final plans including refinements to the financial implication. As I've noted in 2007 that the total net expense related to Apollo was $6.9 million or approximately $0.15 per diluted share. So if you net that out from 2007, this consolidated earnings per share of a $1.35 it yields net earnings per share excluding Apollo of a $1.50. If you add back the estimated $0.04 per share of net 2008 Apollo expense to our 2008 guidance, it translates to arrange of a $1.46 to a $1.60 per diluted share for the year on a apples-to-apples basis. Suggesting results ranging from down slightly to up about 7% year-over-year. Now just a little color on cash flow and CapEx expectations. Despite the modest change in earnings in 2008 our free cash flow is projected to increase more significantly during the year. The increase in capital expenditures in recent years to support PPM means that we will record increased depreciation and amortization this year. We are also projecting approximately $8.5 million of expense from non-cash compensation for 2008. And while our CapEx profile increases, as we commercialize PPM, it's still very manageable and easily funded through our operating cash flow. We're projecting total capital expenditures in 2008 of between $25 million and $27 million, with roughly 80% of that relating to PPM. Looking further out to 2009, we expect further acceleration of revenue growth to the extent where success on restarting the delayed market is planned and keeping our original schedule for the other markets. The 2008 delay should not have a significant impact on our original 2009 financial plan. Again, the key here is to have more markets commercialized with PPM. As we progress through the roll out, there is a compounding effect as the number of PPM markets increases and the pricing ramp kicks in, such that you should expect to see solid top line growth in excess of our historical levels, over the next four to five years. In 2009, we began restoring our gradings margins and grow our bottom line factor then at the top line. Progress is slower in 2008 than in later year, as a result of the schedule delay, and as we continue to have more markets in their first year commercialization than in their second. However, in 2009 and beyond, this dynamic begins to shift and the leverage in the model really begins to show its strength. I hope that information is helpful. I know we've covered a lot and I'm sure there are questions. So with that, I would turn it back to Rich and ask that we open the call for Q&A.
Operator:

(Operator Instructions) Your fist question comes from Barton Crockett of JPMorgan.
Barton Crockett:

A question. Steve, I wanted to see if you could give us a little bit more to hang our hat on in terms of how confident to be in the September roll-out schedules that you currently have for PPM? You guys have been giving these monthly presentations with data points up there, can you give us a sense of whether or not the numbers as they exist right now are good enough to go ahead with the rollout in September or whether there needs to be some improvements in those numbers and if so some color on where? And secondarily, if the level of commentary from radio operators and advertisers that you are hearing generally and may be out of the RAB conference is in your mind on balance supportive of September rollout or more supportive of the delay or unclear at this point?
Steve Morris:

Barton it's a -- I'll give you best color I can on that. Rolling out as I said, when we delayed and I'd said since then it's a function on confidence in the numbers and that's by definition intangible and is hard to say something as definitively, yes or not, yes or no on that. I think the numbers we have today are very, very solid, and we have a lot of confidence in them in terms of being valid research. We've also said that we really intend to use this delayed period to improve a whole series of metrics. And for example, one that we have not really improved yet is representation of 25 to 34 year old people of, whether it's black, Hispanic or white, that those numbers are relatively low and low versus the kind of standards we've set for ourself. So, we continuously expect to keep on building those numbers to bring all them up to the ranges that we have publicly disclosed. And let me just put it this way, that if we continue to do the things that we say we will do and get the kinds of metrics that we see that we are going to hit, then I feel very confident that those numbers would comfortably support a restart. Now that's by research point of view, and I was down at the RAB, and we have been spending a lot of time with customers on this subject. There are some other positive indicators. We do continue to sign-up new customers that are comp for example. We are getting verbal support, I would say, from most general market broadcasters, who really want to go forward. Who feel that the radio industry leads to kind of come together and get behind new measurement and sort of aggressively push this forward as a way to represent radio relative to other media. That's not a 100% there are people who continue to pushback on that. But I would say as a broad generalization that the majority of broadcasters were talking to are pushing us in that direction. There are some other things that are worth paying attention to. You are seeing people already starting to act based on the data that they are seeing in the markets where we have it. For example, there was just a format change in New York where MS moved their WQCD from smooth jazz to rock. That clearly is not an accident. That's very much based on the kind of data they were getting from PPM. That suggested that they would better off, should with that kind of format, and they are moving in advance of PPM becoming the currency and presumably that reflects their confidence with this changes going to take place. And we’ve also had conversations with customers who have been digging into the programming data from the market that are open and talking to us about what they are learning in terms of how to manage stop sets more effectively to build royalty. So you know strong as the wind maybe, but as time passes in the native out there and people realize what they can actually do with it and your are starting to see this kind of pickup, and I think that’s all very encouraging in terms of the industry seeing this now as a net benefit. But one of the thing I think is exciting is you see new products start to be spurn from the PPM bid. And we just announced a few weeks ago joint venture with a company called Media Monitors, where we’re producing a product with them that links minute-by-minute audience data with specific content that that station that given station was playing during that specific minute. And it allows them to start understanding which specific pieces of content will produce a net gain or net loss in listener loyalty. So you put all that stuff together and I think it's evidenced of people starting to see the net benefit of PPM and that's translating into I think a strengthening level of support, and if we can combine that with what I was describing in terms of improvements in our metrics, I feel pretty confident that September or that June decision on restart resulting in to September implementation is looking pretty good.
Barton Crockett:

Okay so trying to be clear on that. We need to see some improvement in the 18 to 25 demos for whites and Hispanics, any sense of the magnitude of improvement?
Steve Morris:

Well first of all it's just 25 to 34, not 18 to 24.
Barton Crockett:

Okay, thank you.
Steve Morris:

18 to 34 is the brackets that a lot of customers are really focused on. Within that there are two quite distinct subsets that we have to work separately. We made a lot of progress on 18-24, and 25-34, I think the exact same thing that we did on 18-24 is what we plan to do on 25-34, and because we just had a software restraint that prevented us from doing it before. We've now actually completed that software a week or so ago, it's in the market and I fully expect to see the 25-34 numbers starting to come up in late March and April.
Barton Crockett:

Okay
Steve Morris:

The exact number, I am not making a prediction here, but you should see significant improvement in that over the next three months.
Barton Crockett:

Okay, great. And then shifting gears here. The only other question I have right now is, you said that on Apollo you don't yet have feedback from all of the pilot participants, but it sounded like within that you may have feedback from some. And I was wondering if you could share with us, some types of the feedback whether it seems supportive of rollout or not?
Steve Morris:

Yeah, I'm going to duct that question for now. When we set this up, this group of customers in the pilot had worked together and operated as kind of a team, throughout this whole process and we set up this efficient process very carefully as here is the time period when you go, take this back to management and they'll work it through, and we're not going to announce anything until they have done that, and we're very close to being on that, I just reiterate you to be patient a bit longer, I don't want to be providing partial guidance in the middle of this.
Barton Crockett:

But you're saying, we should have a decision by June?
Steve Morris:

Oh, yes. But we said first quarter was the guidance we've given before and we're staying with that.
Barton Crockett:

Okay, Alright.
Steve Morris:

We're pretty [fired] in the first quarter.
Barton Crockett:

Okay, that's great. Thank you
Operator:

Your next question comes from Alexia Quadrani of Bear Stearns
Alexia Quadrani:

Thank you, a couple of questions. First I guess on, Sean, your comments on your buyback and how you haven’t been in the market yet because you have some material non-public information. I mean, if the date to go forward in the fall is in June, the start date. Does that mean you are not going to buying back stock at least until June?
Sean Creamer:

That certainly should not be the implication of the statement. I think what it is responding to is why we haven’t been in the market to-date. There's a lot that’s happened since the delay and I think this is a forum as well as the filing of our 10-K to make sure all the information that needs to be known is known. We don’t believe that the restart decision by itself, but we know anything more than we've already said which would suggest that that is not a limiting factor. So I think this call and the filing of our 10-K which we expect in very short order would be the forums where we get all that we need to get into the market place and then we can move forward from there.
Alexia Quadrani:

Okay. And then is there a scenario where you may end up, I guess moving forward with some of the markets planned for the end of '08, but are there others or is it more like all or none?
Steve Morris:

I don’t know this of a -- certainly reviewing it as we are quite capable of doing them all. Many of those markets, the panels are largely built, we are starting to build the remaining markets, and there's nothing we see looking that would push us off that track. Having said that, things can happen and something could throw us off. But certainly we have the capability to open all of those markets on the schedule we've described and that’s certainly our intention.
Alexia Quadrani:

And then, just lastly on Project Apollo; is there the possibility, I mean I know you hope to sort of say go or no-go by the end of the quarter. But is there a possibility you may chose to do additional testing?
Steve Morris:

Let me anger it this way Alexia. Project Apollo is a strategy for Arbitron. It's a strategy of multimedia measurement, and then combining multimedia data with product purchase data. That strategy is a long-term stranger for the company. So I would always view Apollo as being a piece of something larger, and it will go forward or not, if it doesn't there are other things that we would do in the same area that we would continue to forward on. So, it's not a binary kind of go, no-go on this entire area, it's something that we need to move forward. I think Apollo was a terrific way to start down that path, but it can have different flavors certainly and it can have there are other way we can get at this. So, I do see this as a continuing commitment.
Sean Creamer:

And with respect to at least the broad financial guidance outlined on that, as I indicated the high and low being two ends of the spectrum, one with the no-go or one with a go. Obviously there are permutations in the middle, but we believe that the numbers we talked about will contemplate anything. That was a potential outcome.
Alexia Quadrani:

So, it wouldn't be the beyond 10 million in a [real] scenario.
Steve Morris:

That's right.
Alexia Quadrani:

Thank you.
Operator:

Thank you. Next question comes from Mark Bacurin of Robert W. Baird & Co.
Mark Bacurin:

Good morning Sean and Steve.
Steve Morris:

Good morning.
Mark Bacurin:

Couple of questions. Steve I appreciate you not willing to comment too much on Apollo, but was just curious may be if you could give us some color on, I saw this new potential competitive entry of TRA that trying to use set-top boxes along with customer data, and just wondering if that might put a wrinkle in the timing of some of these advertiser's decisions if they are contemplating may be looking at that solution as well, and may be you could just give us some feel how you differentiate versus that solution.
Steve Morris:

I don't know enough details to give you a long answer on that Mark. I have the same press release that you've seen. What they are doing is taking large databases and modeling them together, and our experience for that kind of stuff is that it tends to blur discrimination to a pretty high degree. They don’t have the demographics that PPM provides, they are very TV centric as opposed to multi-media, and there a lot of data points that are included in Apollo, like program level detail that will be difficult for them to get at. So I think what they will have is a large sample size at relatively low cost, and the risk is that with all the modeling they going to have to do, they are going to windup with very little discrimination. But that’s a very generalized statement based on no specific knowledge of exactly what they have, but I do think at least as we understand it today that theirs quite significant differences in what the two services would provide.
Mark Bacurin:

And just with regard to kind of the feedback you're waiting from these panelist or from these participants in Apollo, its still comes down price I mean presumably if the data was keep enough they would want it. So I mean is it fair to assume that it really is just how much it might cost you upfront to launch this panel versus how much cost they are willing to share on it?
Steve Morris:

Well it’s always a question of price value Mark. As we’ve always said on Apollo this is expensive. It's just very expensive work to get the levels of specificity and granularity in these A.C. Nielsen panels and combining that with the PPM data, and it creates a very high barrier and only companies that really have dug into it and see the value and can see how they make a return on that investment can come in. But I think that’s bit unusual, and a new product like this values, ultimately the decider it is the high cost, but if it works as described then there should very be high value coming back on terms of more efficient, more targeted media schedules.
Mark Bacurin:

And $10 million in '08 will represent your, it sounds like you're kind of out of pocket expense or the willingness to commit that much capital to the project to move forward, is that a fair way to look at that?
Steve Morris:

Yeah, it's half of the launch expense and a heavy expense of ramping that panel up.
Mark Bacurin:

Okay, great. And Sean thanks for all the color, you kind of talking about '09 and the way the revenue might progress. I was wondering if you could help us just in terms of looking at the quarters in '08, with the expense upfront in the first half of the year trying to get ready for this PPM launch, presumably, you're going to have a very big lift in the back half, but Q1 and Q3 always seems like they are obviously stronger with the Scarborough data and Q2 and Q4. So I was hoping maybe you could help us think about the quarterly progression of earnings as we move through '08, and also if you can just comment quickly on kind of what's your tax and share count assumptions are in those numbers as well?
Sean Creamer:

Yeah, taking the first question first. Relative to the seasonality of the business, with PPM, we expect a blending effect over quarters, because we will release data on a monthly basis, I oppose to quarterly, such that the impact over the year should be a smoothing impact. That is once we are fully commercialized. Clearly at this point with the delay, we're backend loading and in fact the PPM revenue impact and the cost of running both the diary and the PPM will certainly have an impact on the first three quarters of the years, relative to historical seasonality. But post-commercialization, I think, what you'll say is a more smooth impact to our results, and with respect to 2008 quarter-to-quarter specifically, we don't issue quarterly guidance, so I don't want to betray that decision and start to lay out what we expect in the first quarter, second and third. But your point is valid relative to the impact on the cost side of running two services and the revenue impact in the fourth quarter when all those markets would be launched. In terms of the tax rate impact in 2008, we are assuming a slight increase to our tax rate, our blended rate for 2007 was 37.5. We expect it to creep up probably closer to 38.5, and the guidance that we issued is reflective of that. Also we have a relatively wide range from an EPS perspective and that contemplates a number of scenarios from a share count perspective, assuming the full spectrum, acquiring the full $200 million in a given calendar year or acquiring none. That is not dictating our approach or trying to suggest what we are going to do, but it contemplates all the potential outcomes. I would tell you, the impact in '08 of the share repurchase, if we did all or nothing would not be a significant change to the earnings per share in 2008, but the guidance contemplates a variety of different scenarios on share count. So I can't give you a specific number.
Mark Bacurin:

And just to that point, you took on a little bit of debt in this quarter, what's your appetite for incremental debt to fund more aggressive share purchases near term and kind of what's the deciding factor on that?
Sean Creamer:

Well' I would say that as a matter of course in the conversations we have with our Board and in sizing the approvals that are given, the expectation is that we will execute on that. And there is no specific timing with respect to that execution, other than it's over a period up to two years. But if you simply assumed we were going out and doing the entire 200 million at one time given trailing EBITDA in 2007 in the $76 million range, it certainly suggests we could borrow to fully execute that $200 million and still be comfortably within the two to three times leverage ratio that I've sort of talk about as being a no brainer. Again, not suggesting that they are sealing a floor, but it's a part of the discussion we have with our Board, and when they authorize repurchase that's taken into account and our overall appetite for taking on debt is considered as well, and we feel comfortable we could do that full amount and if we had to borrow to do it we would be willing to.
Mark Bacurin:

Thanks and there is one [picking] you on Sean. Are you going to be following 8K with the restated quarters for the Continental discontinued ops or are you going to, basically just give us as those on your report.
Sean Creamer:

Well, I said the 10-K will be filed very shortly and so that will reflect restated for the preceding years. I am not sure. I have to get back to you on 8-K. I am not sure what the requirements are. Obviously, it's important information but it is by no means material information. But if there is an 8-K requirement, we'll do it. But I think the next thing you should expect to see would be the 10-K.
Mark Bacurin:

Yeah, just mainly looking for the quarterly breakdown.
Sean Creamer:

Yeah, yeah.
Mark Bacurin:

Great, thanks.
Sean Creamer:

Sure.
Operator:

Thank you. Your next question comes from Jim Boyle of CL King.
Jim Boyle:

Good morning.
Sean Creamer:

Good morning Jim.
Jim Boyle:

Steve, could you give just one example of an event or quantifiable shortfall that could further delay or postpone PPM launches.
Steve Morris:

I don't think I can really answer the question they way you are posing it Jim, because the customers and the MRC make holistic decisions about things. They don't, if you have a single number that's just horrendous, I suppose it can be bad enough to cause some kind of a negative reaction. But I don't think any of our numbers are in that kind of category and when we make a decision to go forward in a new market, the basic MRC ground rules are that we conduct an audit and then that audit demonstrate that there are no material breaches of MRC minimum standards and that audit then be illuminated and discussed by the committee of the MRC that over sees this particular PPM project. And there is not in those minimum standards or in the standards that MRC uses for their further deliberations or accreditation any single member that is singled out as being, he must be at an X or you can't pass the order or you must at Y or you can't get accredited. There is no single member that works that way. So I don’t actually have an answer for you. We have to holistically address the kinds of issues that customers weren’t concerned about back in November, 18 to 34 was an important one, representation of ethnic groups is an important one, compliance rates are important, SPI or response rate is important. All those are important, and our objective is to move them all forward in a positive direction and then bring them holistically forward for customers and the MRC to make decisions about.
Jim Boyle:

Because you have said on the last conference call that you didn’t expect to be perfect by the time you restart up in September, and that’s small problems could be fixed on the run. I am just wondering is there a big problem that you could describe to us that could indeed delay things.
Steve Morris:

The things can break, wheels can fall off. There is no perfect world here, and there is no such thing as perfection. There is in this business, always a question of better, are you a better measurement than you had before, are you closer to getting it right. What you recognize is you never get there, and I think its one of the most important aspects of the MRCs charters that they are very focused on continuous improvement, companies being dedicated, demonstrably dedicated to continuous improvement of overtime. And based on that, and their experience with a lot of other services like Arbitron, they accept the fact that you may not be a perfection on any one point, but it then gets out of their belief, that you're taking a kinds of steps to demonstrate continuous improvement all the time. So, I really don't think there is a single silver bullet issue out there, that you're talking about. It's always a question of moving forward on all fronts, steadily and consistently.
Jim Boyle:

And Steve, on the flipside of that, is there any thing that could cause the PPM launches to start up earlier than September?
Steve Morris:

It would be hard to do that, right now. I think its better for us to kind of pick the steak that we have and go full speed ahead. There are people out there, who would like us to go faster, but I think on balance, we have a pretty complex set of things we put in place that key off that June date and I think our best time will be to stay with that, complete all of the steps that we think we are going to do and not try to carve a week or two weeks off of the scheduled time.
Jim Boyle:

Okay. Sean, we can guess that some of the potential upside to the '08 guidance. What could be any possible downside to the '08 guidance, besides a recession?
Sean Creamer:

Well, I think, I'd mentioned that obviously the guidance contemplates our current thinking and confidence level and our ability to restart on the schedule that guidance was developed on that basis. So, to the extent, you certainly outline two scenarios. One we'd go quicker and one we'd delay. Are either of those possible? Sure. But our job in developing guidance is to put -- make an assessment of what we think is most likely, and at this point we think it is most likely that we will meet that schedule and proceed accordingly. So that’s always out there as a potential upside or downside, but nothing that were seeing today suggest we should be developing guidance on a different basis. In terms of the, outside of the PPM business, it clearly is still a difficult selling environment. I mentioned this last year relative to the PPM price uplift and how our customers are certainly and understandably struggling to absorb that cost and it does make for a more difficult selling environment for some of those ancillary or discretionary services. I think that will continue in 2008, but gain I think our guidance contemplated that. So, certainly to the extent, the PPM data is embraced, things like software tool that allow people to do more with that more robust data, could certainly be an attractive upside, but I would not count on that in 2008. I think it's going to take a little bit more time for people to digest the new data that they are getting and learn how best to work with it.
Jim Boyle:

And Sean has any rebates been paid yet?
Sean Creamer:

No. We do our monthly customer calls where we outline our performance and we have been comfortably above those levels from the beginning, and we don’t, internally we don’t expect that we will ever will. Our job is not to pay rebates it's to give customers what they are looking for and we are committed to doing that.
Jim Boyle:

Okay. Thank you.
Operator:

Thank you. Your question comes from Richard Tullo of Sidoti.
Richard Tullo:

Yes, hi. Just want to clear up a couple of things. You may have answered the question, but might have gone pass me. The $4 million to $10 million expense range from Project Apollo, $4 million assumes that it's a no-go, $10 million assumes it's a go.
Sean Creamer:

Yes, right.
Richard Tullo:

Will there be any, if you anticipate any special charges in addition to those $4 million.
Sean Creamer:

No, I think what that range attempted to contemplate given less than complete clarity on the outcome is the broad range of potential outcomes. So, I think at the $4 million lower level shut down involves a number of things that would typically be categorized as only a one time charge relative to rationalizing the organization and shutting down the panel. So, I think all that contemplates any potential outcome within that range.
Richard Tullo:

Second question, in regards to Continental, these $3.6 million or $8 million that you cited in the press release, did those revenue run fairly even throughout the quarters or is there any seasonality associated with them?
Sean Creamer:

Indeed it’s a fundamentally different business in our ratings business, it is a somewhat more of an ad hoc customer orientation, and so the visibility with respect to contract is more difficult, and it tends to be choppier. So, I would suggest there is no particular seasonality to that business. It was one of the reasons we saw that was in better hands with someone who is in that business on a full-time basis. It allows us to focus on what we are keying for at, and it is just felt out of strategy with respect to that.
Richard Tullo:

And can you talk just a little bit more about this Indian, I guess the customer care. Is it a customer care center or is it a panelist recruiting center. What is it and does it indicate that there may be more foreign sales of PPM equipment than we’re modeling right now.
Steve Morris:

Kochi is not about equipment sales per say. In its origins it was designed to strengthen our IT capability, and the first group of people we’ve hired are primarily IT related. But there are other part of the companies that could benefit from the kind of talent pool that’s available. I have been over there for the inauguration of the center, and I was extremely impressed with the quality of people we’ve been able to attract. Kerala is the state that Kochi is in and that is, I think the statistic is Kerala provides 40% of the IT professional for India and is a very rich educational base there, and I think our opportunity is to use it more broadly. Calling center maybe less likely, but area for building an analystics capability, for example, might be a very good way to use the kind of talent pool that’s there. Looking at it actually very broadly across the company to see what the opportunities are but the key thing is that you an get very, very talented people at a still very reasonable prices.
Richard Tullo:

And what is going to be the cost to operate it and launch this center?
Sean Creamer:

We’ve built all that into our guidance. I mean I think at the end there is equal or better talent at more attractive pricing levels. But as you transition to it, there is a period of time where there is duplicative cost. You've got a cost structure in the US, it is winding down while you are winding up an operation in India, but long-term it’s a net benefit and is an efficiency that was assumed as one of many efficiencies as we move forward with he PPM rollout that we expect and need to realize in order to restore our margins as planned. So I don't think there's anything with the announcement today, that should be viewed as a change in our plan or focus, or have any significant unanticipated impact on our financial results.
Richard Tullo:

And will this center enable you to win licensing deals in that part of the world?
Steve Morris:

We didn't build that with the intension to make it a marketing, sales or a locus rate in Indian measurement business, for example, we continued to be interested in doing measurement work in that part of the world and other parts of the Far East, but we would do that generally through our partnership strategy that we've had in the past, most likely with Nielsen or some other company that just could help us with that sales and marketing piece on the ground, in this specific country. India is a very, very unique measurement market, there is no resemblance or way to almost any other large market like that and its not the kind of thing that we can easily look out from the outside and kind of throw in an entire infrastructure required to make that sales. Our partnership strategies have worked very well and I think we are going to continue with that.
Sean Creamer:

And just some additional color from the cost perspective. Our approach in entering in India was to do it in a balanced and as low risk way as possible, and as a result, we've negotiated a deal wherein we're largely outsourcing those efforts to begin with and once we get some experience with that, we have the opportunity to in effect take control of that operation. We're assuming based on our progress to date that that is the path we will proceed down and any associated cost with that are contemplated in our guidance as well.
Richard Tullo:

Okay, thank you.
Steve Morris:

Sure.
Operator:

Thank you. Your next question comes from Troy Mastin of William Blair and Company.
Bryan Freewell:

Hi. This is Brain [Freewell] for Troy Mastin. Thanks for taking my question.
Steve Morris:

Sure, no problem.
Bryan Freewell:

So, given the current economic outlook, downturn in radio and higher spending on PPM; could you elaborate a little bit more, and I know you talked about it, any change in demands you are seeing for your discretionary services?
Steve Morris:

No, I think we've been in the same position now for the last couple of year, Brian. It is a very tight revenue situation. You read in the trade press about the kind of staff cuts that some of the major groups are growing through, and trying to adjust to the cost that makes it very difficult selling. At the same time, if you can come in and demonstrate that you have a product that pays back, they'll listen and we have a revenue management product called IRS for example. And I was talking to a couple of people down at the RAB who were raving about how it really helped their pricing. And it doesn’t have to help much to pay back the cost of this piece of software. So, the logical industry is very pragmatic about stuff like this, and if you have a demonstrated way from them to make more money, it probably has to be fairly quickly. They don’t have may be an appetite for something with a long term pay back. But if it's got real benefit in the short term, there they are. So, we continue to get a steady but not spectacular flow of new business out of that. It's running probably at roughly the same levels it has over the last couple of year.
Bryan Freewell:

Great, thanks, and then regarding expenses. On the third quarter call you mentioned some cost cutting initiatives, and can you give us any more detail on that outside of your efforts you just mentioned on India and any progress you've made there.
Sean Creamer:

I think we actually mentioned that probably on the November call as far as the delay. I actually mentioned that probably on the November call, as far as the delay. It was not a response to the delay. It was in fact part of our normal scheduled reassessment and rationalization of our organization to better match-up with a PPM world. I think we did make progress. We have tightened our belts appropriately, not only because we like every other company feels the impact of the economic downturn, but I think it is appropriate for us to, on a regular basis revisit our existing cost structure to make sure; one, we are recognizing the efficiencies that our model called for, and I think we are doing well on that score. We recognized that there are things we will learn as we go through the process, and we have attempted as best we can to contemplate scenarios where there are cost that we did not anticipate, and we'll balance those against finding efficiencies, that we also did not anticipate. This is not new for us. I think we have done it for a long time in our diary world, and I think we are on course and on track for doing what we need to do to reach the ultimate goal that we set for ourselves which is restoration of our margins. So nothing dramatic response to the delay, it's all part of normal course of business for us.
Bryan Freewell:

Great, thank you. And lastly can you provide us with an update on your thoughts regarding acquisition? Has the delay in PPM slowed you down at all and are you finding the kinds of assets at acceptable prices that you hope to find?
Sean Creamer:

I will give some color on that. I don't think our appetite has changed, but our tolerance level has. We do recognize that there is a very few things out there including acquisitions that could create value in excess of what a failed PPM launch might erode in value, and so our priority is execution of PPM, and we recognize that M&A activity almost by definition can be a distraction. We also know that you can’t choose when the right deal comes along, so our eyes remain wide open. I think the implication of the delay is more that the hurdle has gone up. The returns and the ability to transition and absorb an acquisition with as little distraction as possible puts a premium to diligence and I would say that we will continue to keep our eyes open, but in the short-term its going to have to be a awful compelling deal for us to run the risk of taking our eyes of the immediate ball which is getting a restart back.
Bryan Freewell:

Great, thank you very much.
Operator:

Thank you your next question comes from the Dax Vlassis of Gates Capital Management.
Jeff Gates:

Actually it's Jeff Gate. Would another option for Project Apollo possibly be to license the PPM technology to a larger marketing company and let them do it?
Steve Morris:

Jeff that is always a possibility, the PPM platform is actually it’s kind of core technology is quite a broad one and we have in our spending sometime looking at ways to leverage that in terms of licensing. So it would be far more desirable for us to participate in something that we thing is as on strategy is Project Apollo is. But if there is no way to make that go economically as a freestanding venture of which we’re a part, sure we look at licensing.
Jeff Gates:

Alright, and I guess the other thing is I just looked at what your doing here as far as you are becoming more focused, you sold an asset that wasn’t really contributing, and now your basically saying that there is a cap on what your going to continue investing in Project Apollo once your customers want to pay for. And I'm just kind of wondering, now, the company seems to be getting a lot more return on capital and profitability restoring margins, focus, and I'm wondering, why now, instead of a year ago or why now instead of a year from now or but why now, are you getting so much more focused on that than you've been, I guess in the past five years?
Sean Creamer:

I guess Jeff; I'd take some exception to the idea that we're becoming more focused on that, I certainly have considered that a priority of mine, since I've been here. I think the implications of where we are relative to where we were a year ago, two years ago or where we might be two years from now is more of the issue. The idea of doing it at a time when there was a lot more uncertainty relative to PPM customers, needed to be signed up, that was an all encompassing effort for the entire company, and by definition limited our ability to do everything for everybody. I think our goal was to get our legs underneath us, get PPM on the right track and then allow us to pick our head up and see what else we can do, with the ultimate goals always, increasing shareholder value. So I think it's not a decision that we all of a sudden said, lets get focused, it is, I think we are now afforded the time to some other things that we weren't in the past and we remain committed to continuing to do that.
Jeff Gates:

And if I am hearing what you're saying, is that you basically, you won't make a significant acquisition until the PPM roll out is executed?
Sean Creamer:

What I said is, it would be a very difficult analysis and the hurdle rate on that type of an acquisition would have to be so compelling that the announcement of it would be received wildly by shareholders. Unfortunately the dial moving deals tend to also hold the potential for being the greatest distraction. So, I don't want to say it's precluding us from doing that, because I think that would be the wrong thing for us to do for shareholders to simply hunker down and close our eyes to the realities around us. We do believe in a multimedia strategy, and continuing to keep our head down alone will not get us there. But I think we are going to do it prudently and at the right time.
Jeff Gates:

Is there anything else non-core that is -- is there anything else that’s not contributing of anything size in your business units other than the Project Apollo investment?
Sean Creamer:

I would say nothing that is as far off focused as Continental. Honestly the initial acquisition of Continental was done at a time and for I think good reason, we were attempting to develop a beachhead if you will for international expansion. We were in fact seeking business in the UK. It was an appropriate first step. I think it was clear to us that it has served its purpose and would be a better business in someone's hands who is dedicated to that business. I don’t think there is anything else in our portfolio that meets that type of definition, but I think our job is always to make sure we remain on strategy, and I think changes beyond the Continental would be more around the edges than more surgical.
Jeff Gates:

Okay. We appreciate it. Thanks.
Sean Creamer:

Sure.
Operator:

Thank you. Your next question comes from Barton Crockett of JPMorgan.
Barton Crockett:

I just wanted to do a quick follow up on this Continental transaction. Can you give us a sense of the proceeds, how much you got in, in terms of cash, how much was paid for in total value, and is there any type of gain or charge that’s included in your guidance that we might see in the first quarter as a result of this?
Sean Creamer:

Yeah, we expect to report a modest gain in the first quarter. It's sort of immaterial to the guidance, but we have not finalized that calculation. We'll include that with our first quarter results. In terms of proceeds, again the dollars are not material to us. We are prohibited by the terms of the agreement to disclose the proceeds unless required for SEC purposes. So, I would simply ask that you wait until the 10-K is filled and perhaps we can have follow-up questions around some of the information that needs to be presented in there.
Barton Crockett:

Are you guys even able say who you sold it to?
Sean Creamer:

I don't believe we are.
Barton Crockett:

Okay, alright, that's it. Thanks.
Operator:

Thank you. We are out of time for questions. I will like to turn the phone over to Steve Morris for any closing remarks.
Steve Morris:

No, nothing more to say, good questions as usual, good session and we have, I think this is a very critical time in terms of getting this restart off the ground and I think that we feeling pretty comfortable about what we are. Sean there's one thing you must add.
Sean Creamer:

Barton just as a follow-up, I will say the company that bought it actually issue during press release, so I am assuming that we are okay to repeat that it's a company call BDRC Group which is UK's largest independently owned market research agency. So just to close the loop on that last question.
Steve Morris:

Okay, thank very much.
Operator:

Thank you. This concludes today's Arbitron fourth quarter 2007 earnings conference call. You may now disconnect.

AltShares Merger Arbitrage ETF Q4 2007 Earnings Call Transcript

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AltShares Merger Arbitrage ETF
Q4 2007 Earnings Call Transcript