Global Traffic Network, Inc. F1Q09 (Qtr End 9/30/08) Earnings Call Transcript

Global Traffic Network, Inc. (GNET)

F1Q09 Earnings Call

November 10, 2008 8:30 am ET

Executives

David Burke – KCSA Strategic Communications

William L. Yde, III – Chairman, President and Chief Executive Officer

Scott E. Cody – Chief Financial Officer and Chief Operating Officer

Analysts

Jason Helfstein - Oppenheimer & Co.

Mark Smith - Feltl & Company

Thomas Eagan - Collins Stewart LLC

Michael Kupinski - Noble Financial Group

John Gruber – Gruber & McBain

Richard F. Lyon - Dougherty and Company

Presentation

Operator

Good day and welcome to the Global Traffic Network first quarter fiscal 2009 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to David Burke of KCSA. Please go ahead, sir.

David Burke

Thank you. Good morning, everyone, and thank you for joining us today. And again, welcome to the Global Traffic Network first fiscal quarter earnings conference call.

Representing the company today are Bill Yde, Chairman, Chief Executive Officer and President, and Scott Cody, Chief Financial Officer and Chief Operating Officer.

Before I turn the call over to Bill, I will read the following safe harbor statement:

This conference call contains statements that constitute forward-looking statements. These statements reflect the company's current views with respect to future events. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including those discussed under the heading Risk Factors and elsewhere in the company's annual report on Form 10-K that may cause actual results, performance or achievements to be materially different from any future results, performances or achievements anticipated or implied by these forward-looking statements. The company does not undertake to revise any forward-looking statements to reflect future events or circumstances.

With that, I'll turn the call over to Bill Yde, Chairman, Chief Executive Officer and President. Bill?

William L. Yde, III

Thank you, David. In a moment, I'll review some of the highlights of our first fiscal quarter and provide an update on our accomplishments. Following that, I'll turn the call over to Scott for a complete review of the financials.

Fiscal 2009 got off to a strong start despite what has become a time of global economic uncertainty. We had a very profitable quarter, with record revenues as demand for our advertising spots in Australia and Canada remain strong and we began to generate revenue from our traffic radio contract with the Highways Agency in the United Kingdom.

Australia, which is our longest-established market, continues to experience solid top line growth, with revenues up 31% compared to the same quarter last year.

Our Canadian operations are growing rapidly, with revenues increasing 72% from the first quarter of fiscal 2008.

This strong sales performance has continued into the current quarter as we continue to pace ahead of the second fiscal quarter of last year in both Canada and Australia when measured in the local currencies. However, should the U.S. dollar continue to remain strong, it will have a negative impact on the current quarter's performance when measured in U.S. dollars. Nevertheless, we believe continuing to develop new advertising clients and driving demand for our products and services in the local markets is the key to our long-term financial performance.

We are pleased that there continues to be strong demand for advertising spots in both Australia and Canada. Our ability to continue to increase revenue during trying economic times is a tribute to our sales staffs and management, and I'd like to acknowledge their efforts and thank them for their outstanding performance.

We believe that our advertising products are especially attractive during slower economic times due to the cost efficiencies and effectiveness of our packages and the mass audiences we reach. Our advertising spots combine broad reach, high frequency with a message that cuts through the clutter by being adjacent to the traffic and news reports that actively engage the audience.

We have recently reported that we terminated the letter of intent to acquire UBC Media Group's commercial division. While this business would have been a good fit for us, unlike Global Traffic Network, UBC has experienced a revenue downturn in 2008 due to recent market conditions. We did not feel that the acquisition price accurately reflected the current value of the target and therefore determined that it was in the best interest of the company and its shareholders to terminate the letter of intent. However, we do remain in informal talks with UBC in order to work towards an acquisition structure that fairly reflects UBC's operating performance.

Regardless of whether an acquisition occurs, there is still tremendous opportunity for us in the United Kingdom. As you're probably aware, in July we began providing service under the traffic radio contract with the Highways Agency, which now provides us with a steady revenue stream in the market. The landing of the traffic radio contract over stiff established local competition was a major coup for our U.K. management team, and I'd like to thank them for their hard work and ingenuity in securing the contract.

With that, I'd like to turn the call over to Scott for a review of the financials.

Scott E. Cody

Thank you, Bill. Good morning, everyone.

Revenue for the three months ended September 30, 2008 was $16 million, an increase of 45% when compared to $11 million in the first quarter of fiscal 2008. Australian revenue increased 31% for the quarter and Canadian revenue increased 72%. When measured in local currencies, Australian revenue increased 25% for the quarter and Canadian revenue increased 72%.

Adjusted operating income, which we define as operating income plus depreciation and amortization expense, increased to $2.1 million for the quarter ended September 30, 2008, up from $600,000 in the prior year period.

Net income for the quarter was $856,000 compared to a net loss of $89,000 for the three months ended September 30, 2007. The increase in net income was mainly due to our increased profitability in Australia, which was driven by increased sales and higher operating margins.

As many of you are aware, the United States dollar has strengthened considerably against the Australian and Canadian dollars and the British pound. The impact of this is to decrease both the revenues and expenses we report measured in United States dollars when compared with stable currencies. The impact is greatest on our Australian operations since they generate all our current profits. Should the Australian dollar remain weak, it will continue to act as a headwind on our financial performance despite our continued revenue and income growth as measured in Australian dollars.

Global Traffic Network continues to enjoy an outstanding balance sheet. At September 30, 2008 we had $36 million in cash and only $600,000 of debt, as well as a current ratio of almost 4 to 1. The company had almost $2 per diluted share in cash as of September 30, 2008.

That concludes our prepared remarks. Now we would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jason Helfstein - Oppenheimer & Co.

Jason Helfstein - Oppenheimer & Co.

Can you guys maybe first just talk about Canada. Obviously from a revenue standpoint that business looked like it took a meaningful step backwards. Can you talk about how much of that was currency and how much of that was just a fundamental slowdown in the business, and then can you break it down between the slowdown between pricing and volume?

And then can you provide any more detail you can on currency? I don't know if you wanted to wait for the Q, but if you can give us the rest of the delta on currency, which we'll assume is Australia.

And then if you just can give us an update on the overall - what you're seeing in the ad environment in the U.K. And is the assumption that you would not look to strike the deal with UBC if there was to be a new deal until you got greater visibility on the ad market, which presumably would be some time from now?

William L. Yde, III

Okay, first of all, remind me which points we don't get to. That seemed like a compound question.

The Canada revenue did not take a step backwards. When you're looking at the June 30 quarter to the September 30 quarter, you're looking at seasonality. And I'll let Scott get into the numbers, but the September quarter was vastly ahead of September quarter from last year. I think it was 72% ahead. So it wasn't a step down. Scott, you can get into the -

Scott E. Cody

I think that's, you know, I mean, it's just seasonality. Most of the growth came - we sold a lot more spots in this quarter versus last quarter and you really do need to look at it that way because of the seasonality of the business. Our sellout went from 33% to 56% from September to September.

You want to break out some of the other?

Jason Helfstein - Oppenheimer & Co.

Yes. So then what was the currency impact in Canada?

Scott E. Cody

I can do that. That's easy. The currency impact was virtually nothing because we're up 72% in local currency and we're up 72% in U.S. dollars. There was not a lot of impact from currency on that.

Now, if you're looking at the fourth quarter from last year, then there has been some currency impact because there was $0.99 versus $0.96. So it was not a big change; a fairly small change for fourth quarter.

Jason Helfstein - Oppenheimer & Co.

Okay, and then was there a currency calc for U.K. - I'm sorry, for Australia?

Scott E. Cody

Yes, Australia's actually a positive of about 5% for the quarter because it was about $0.89 this year and it was $0.85 last year.

Jason Helfstein - Oppenheimer & Co.

And then just lastly comment on the U.K. end market and was the presumption that we shouldn't expect to see you guys going back to the negotiating table with UBC or maybe having them come back until there's greater visibility to the ad market over there? And maybe just talk about what you're seeing with the overall advertising in the U.K.

William L. Yde, III

Overall advertising in the U.K. is down. I think it's down most places. We are in active discussions with them and we'll continue to be in active discussions with them to find a way. I think this acquisition has always been broken into two parts. There's a certain value for the customer list, which has a large, large audience, and the second component of it's the cash flow. It's reasonable to expect that the downturn in their cash flow that they announced over the last two quarters has eliminated much of their cash flow, so it's a valuation based on what is the audience worth.

As you know, our business works on you accumulate audience and then you convert that audience to revenue, so the discussions that we have are centered around what's the price to acquire this audience versus what's the price for us to build this audience. And if it's less expensive for us to acquire it, then we'll acquire it, and if it's not, then we'll build it.

Jason Helfstein - Oppenheimer & Co.

And does the weaker U.K. - my last question, sorry - does the weaker U.K. ad market have any impact on your own business plan with respect to the non-UBC business and does it impact your hiring decisions or other budgeting type of decisions that you previously made when you struck the deal with the government?

William L. Yde, III

No, it's not really having any impact on our current plans.

Operator

Your next question comes from Mark Smith - Feltl & Company.

Mark Smith - Feltl & Company

First, can you give us any update on possibly highways expansion?

William L. Yde, III

There is the possibility of highways expansion into a couple - I think we're in England right now; there's possible expansion into Scotland, Wales and Northern Ireland as well for the highways contract.

Those other three areas would not be as big as what it is in England, but there is certainly possibility for expansion and further productivity.

Mark Smith - Feltl & Company

And with that expansion, it would be the same as when you first announced the highways contract?

Scott E. Cody

Yes, because the whole contract is a set amount and they've committed to do the majority of it with the England portion, but the rest would be add on.

Mark Smith - Feltl & Company

And then, still in the U.K., can you talk about if nothing comes of UBC the cost of build out and your organic growth and also the possible timing of when we could see some revenue generation from that?

William L. Yde, III

We're generating small amounts of revenue now with our small regional list of stations. We started focusing on that in August and September of this year, hiring additional sales staff to get prepared.

I forgot the other part of your question, Mark.

Mark Smith - Feltl & Company

I guess cost of build out, what that might take to grow that business organically.

William L. Yde, III

To grow if we didn't acquire UBC?

Mark Smith - Feltl & Company

Yes.

William L. Yde, III

That's probably something we shouldn't say in this conference call because that would probably give away our negotiating position.

Mark Smith - Feltl & Company

Last question, can you talk a little bit about mobile traffic network and where you are today and how the future looks with that?

William L. Yde, III

Yes. We continue to be excited about mobile traffic network. We've been involved with a number of major companies that are moving forward on technology, and I'm hoping that we'll have some announcements for this before the end of the year.

Mark Smith - Feltl & Company

So you're still pretty pleased with where it is and how the progression's been coming along there?

William L. Yde, III

Yes.

Operator

Your next question comes from Thomas Eagan - Collins Stewart LLC.

Thomas Eagan - Collins Stewart LLC

I guess the first couple of questions are on Canada. Bill and Scott, could you talk about the prospects for the business to be EBITDA breakeven? Obviously it wasn't in Q1 and we would think maybe it would turn EBITDA positive in Q2 and then maybe negative in Q3, but for the year it looks as though it could be kind of on the border. And then I have a follow up on Australia.

William L. Yde, III

You're absolutely right with Canada. We expect Canada to be EBITDA positive in Q2. We'd expect it to drop back in Q3, and then be EBITDA positive again in Q4, somewhere around. And that's just the seasonality. You know, Q1 and Q3 are always our lower quarters, and Q2 and Q4 are always our higher quarters.

Thomas Eagan - Collins Stewart LLC

And so for the year it could be, you know, up to down a little bit maybe?

William L. Yde, III

That's correct.

Thomas Eagan - Collins Stewart LLC

And Australia, I got on the call kind of late so maybe I missed it but if you could talk about, in Australia, what the sellout and the rate was?

William L. Yde, III

Sellout was extremely high. Scott can give you the precise details.

Scott E. Cody

Yes. Sellout went from about 80% to about 85%, and the rate went from about $1.20 to about $1.27. All these are exclusive of TV.

Operator

(Operator Instructions) Your next question comes from Michael Kupinski - Noble Financial Group.

Michael Kupinski - Noble Financial Group

I was just wondering, can you talk about the month-to-month experience in the last quarter? Were the revenues pretty consistent throughout the quarter? And if you wouldn't mind, could you repeat the color on the current quarter pacings? I know you just kind of glossed over that a little bit. I was wondering if you can just give a little color and what your thoughts are on how the quarter's shaping up. And I just have a couple of other follow up questions.

Scott E. Cody

Well, September was the strongest of the three months, although that may be also, you know, a lot of it generated by how the calendar falls. And for this year we had a strong October. It looks like we have a strong November. There's a lot of business to write still for December, but that's not unexpected at this point.

Michael Kupinski - Noble Financial Group

And can you break down the revenue components in Australia and Canada for news traffic and so forth?

Scott E. Cody

Yes, I can, but it's not something that, you know, we really don't worry about too much because of the fact that - because the radio network we sell is the same, so that it is -

William L. Yde, III

It's really a function of the percentage of spots. We sell news and traffic together as one product.

Michael Kupinski - Noble Financial Group

I could talk to you about that offline, if you'd like. In terms of the U.K., the expenses were a little bit higher than I was looking for. I was just wondering if you can give us a little color if those expenses start to trail off a little bit as you kind of ramp up there, aside from the expansion, I suppose, that you might have with some of the highway contracts, I would imagine, right?

William L. Yde, III

Yes, virtually all of the expenses that you see increase this quarter were all related to the installation and the operation of the Highways Agency contract. The only other place where we increased is we added sales people to start selling alleging in the United Kingdom.

Michael Kupinski - Noble Financial Group

Do you have any thoughts about how we should look for expenses in the U.K. going forward?

Scott E. Cody

I would think they would be fairly steady until you see some sort of movement on the affiliate side, if we decide to go that route. I think that the expenses you're looking at now are fairly fully loaded.

Michael Kupinski - Noble Financial Group

So, Scott, should we just annualize what we saw in the quarter then for the expenses in the U.K.?

Scott E. Cody

I think that's reasonable. I think that's a reasonable way of looking at it. Just to give you some idea on the other things. News was probably about $2.1 million of U.S. dollars, TV was right around $1 million, and traffic would be the rest.

Operator

Your next question comes from John Gruber – Gruber & McBain.

John Gruber – Gruber & McBain

Can you bring us up-to-date on the U.S. traffic alert situation? Where do we stand there? I missed the beginning of the call; you might have addressed it then.

William L. Yde, III

Yes, we did cover that already. We're testing with companies right now and we are also working towards an agreement with a company that you would call, I guess, Switzerland. One of the parts of this process is to get mobile phone identification numbers. To be able to alert these people, there has to be a company that stands in the middle between the phone carriers and us as a dependable third party and we're working an agreement with them right now. And then actually we'll be making joint presentations for finalizing agreements with some of the carriers very shortly after that.

John Gruber - Gruber & McBain

So when do you hope to get an agreement?

William L. Yde, III

We're expected to meet next week on that.

Operator

(Operator Instructions) Your next question comes from Richard F. Lyon - Dougherty and Company.

Richard F. Lyon - Dougherty and Company

Bill, can you talk about contract renewals that are coming up. I think Canada's due. Any issues there or is anything coming up in Australia?

William L. Yde, III

Australia, most of our major affiliates have been renewed for four years. We are in negotiations and I think we've pretty much finished negotiations for Canada. We've not yet signed agreements, but I think we're pretty far along.

Scott E. Cody

I would agree with that. I think we're in pretty good shape on that.

Richard F. Lyon - Dougherty and Company

When does that one expire? Is that the end of the year or end of the calendar year here?

William L. Yde, III

January 31.

Scott E. Cody

Yes, it's somewhere between there and first quarter, but we feel like we have an agreement going forward on that. But it was based on the start date, so it's probably kind of a rolling end date because obviously we open the markets all the same day. It's kind of like three years from when we started.

Richard F. Lyon - Dougherty and Company

Would that be a multi-year agreement?

Scott E. Cody

Yes. It would be a multi-year.

Operator

(Operator Instructions) And there are no other questions. At this time, I'd like to turn the conference back to our presenters for any additional or closing comments.

David Burke

All right. We would like to reiterate how encouraged we've been with the recent results given the current market conditions and continue to see ample opportunity in the coming quarters for the company. We appreciate your continued support and look forward to updating you in the near future. Thank you.

Operator

Again, that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!