Arbitron Inc. Business Update Call Transcript

| About: Arbitron, Inc. (ARB)

Arbitron, Inc. (NYSE:ARB)

Business Update Call

January 12, 2008 5:00 pm ET


Thomas Mocarsky – Senior Vice President Press & Investor Relations

Stephen B. Morris – Chairman of the Board, President & Chief Executive Officer

Sean R. Creamer – Chief Financial Officer & Executive Vice President Finance and Planning

Michael P. Skarzynski – President & Chief Executive Officer


Alexia Quadrani – JP Morgan


Welcome to the Arbitron business update 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 conference over to Mr. Thomas Mocarsky, Senior Vice President Press and Investor Relations.

Thomas Mocarsky

Welcome to the Arbitron business update call. I’m Tom Mocarsky and I’ll be your moderator for today’s call. Today I have the pleasure of introducing Steve Morris, Chairman; Sean Creamer, Chief Financial Officer; and Michael Skarzynski, Arbitron’s newly appointed President and Chief Executive Officer.

In today’s call Steve, Michael and Sean will discuss our executive transition, the accreditation of PPM and Riverside, our settlements with the New York and New Jersey Attorney General and the financial implications related to these events. After the presentation, we will be happy to take your questions.

Before we begin today’s presentation, I do want to note that this afternoon’s discussion does include forward-looking statements. These forward-looking statements are within the meaning of the Private Security Litigation Reform Act of 1995. These statements are based on our current expectations about future events. We’ve derived these expectations from the information currently available to us.

Actual results might differ materially from results projected in forward-looking statements which involve known and unknown risks. For a discussion of the factors that could cause actual results to differ materially from these 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 any subsequent periodic or current reports filed by us with the SEC. A copy of all these documents are on file with the Securities & Exchange Commission.

At this time I want to turn the call over to Steve Morris.

Stephen B. Morris

As we indicated in our press release Friday, it seemed a good idea to provide some color on what these recent events mean to Arbitron. We also want to address the issue that many of you have raised as to the cost implications of the enhancements we are making to our service and of course we will cover today’s announcement of CEO succession and the arrival of Michael at Arbitron.

Consistent with our past practice, we will release our annual guidance following final board review of our budget. Historically, that’s in conjunction with the release of our fourth quarter earnings. Since that has not yet occurred we will not be providing detailed guidance today. With that said, there are financial implications associated with some of the recent announcements and Sean will walk you through them later on the call.

Let me comment first on the appointment of Michael Skarzynski as the new CEO of Arbitron. Michael’s arrival is a culmination of a succession process that the board and I initiated three years ago. Our intention was to ensure with so much change taking place in our business and in the media industry that we could accomplish a smooth transition of leadership of the company as I reached retirement age.

I give our board a lot of credit for starting early so that we’ve been able to use the three years to add depth to the executive team preparatory to executing the actual search for a new CEO. This mix of the nominating committee developed recognized the importance of finding a candidate with a mix of public company CEO experience and technology management experience in addition to the usual requirement of strategic and operational skills and leadership talent.

We interviewed a number of excellent candidates and we feel very fortunate to have found someone like Michael who has all those qualities and an enthusiasm for applying them to Arbitron and the many challenges and opportunities that we face in this business. Michael comes from us most recently from Iptivia, a privately held performance management software company where he was CEO.

He was also CEO of Performance Technologies, a publically traded telecommunications and IP networking company and Xebeo which made high performance switches. He also spent three years as assistant secretary of trade development in the Commerce Department. He’s on the call with us this afternoon, although this is his first day and we’re not going to ask him to answer questions about the business but I’m sure he’d be happy to answer any questions you may have about his previous positions or his approach to managing the business like this one.

For my part, I’m not going away. I’m going to stay as non-executive Chairman of the Board for as long a transition period as is required to ensure that Michael gets all the support that he needs and not more. I’ve loved this job over the last 16 years and I’m going to regret leaving the day-to-day challenges and my interactions with all of you. However, it is time for me to move on to a new phase of my own life and it’s time to bring in new leadership that can make the critical decisions to the future with the knowledge that he’ll be here to see the results.

Michael, do you want to say anything at this point?

Michael P. Skarzynski

I simply want to say Steve that I’m very pleased and honored to become part of the Arbitron team and I wanted to publically thank you for your leadership and for all of your hard work and dedication over these many years and thank you and the board for your support.

Stephen B. Morris

Well, as I said he’s here and you can ask more questions and obviously over time we’ll be looking for opportunities for him to meet all of you directly. Turning now to the announcements relative to the Attorney Generals settlements with New York and New Jersey, the language of the agreements is specific and pretty self explanatory.

Essentially, the agreements will remove all pending litigation related to our commercializing PPM. In exchange, we’re making some payments and are committing to actions for quality improvement that are essentially in line with a program of continuous improvement that we’ve discussed with customers in the MRC over the last six months. There are costs associated with these commitments and Sean will deal with that in a moment.

However, I will say that we are pleased with the outcome of these extremely grueling negotiations and we look forward to being able to focus on executing the PPM rollout in a high quality fashion. I want to emphasize that these settlements do not erase all of the issues raised by other legal, regulatory and legislative bodies however, they clearly represent a huge step forward.

Looking at the MRC accreditation of Riverside-San Bernardino, it is one market but we believe there is considerable significance in the fact that this is the first market to be accredited using the radio first methodology. Its accreditation is specific to just that market and other markets will be dealt with separately by the MRC.

However, we’ve now established definitively that the radio first methodology is fully capable of accreditation and it is now a matter of execution and continuous improvement. As I said, all this does have a price tag and Sean’s going to give you his thoughts on how this fits with our short and long term margin expectations.

Sean R. Creamer

Thank you for joining us to discuss the recent series of important announcements that we have made. I’m going to spend a few minutes discussing some of the financial implications of these developments and probably more importantly, we will open up the call for questions. As Steve noted, we are very happy to have Michael joining us at this very critical time in the company’s transition to electronic measurement.

I think his specific background and experience along with this track record of strong leadership in rapidly evolving markets will serve us particularly well and we are very happy to have him on board. As Steve transitions to the Chairman role, we will obviously remain beneficiaries of his vast Arbitron and industry experience through his continued leadership on the board. I want to thank Steve personally and on behalf of all our employees for his contributions and leadership particularly through the challenge time as PPM has become a marketplace reality.

While we’re by no means done, we have come a long way and accomplished a great deal. At the same time, I want to welcome Michael. He is joining the company at a very important as well as exciting time and we’re very pleased that he has joined us as CEO.

Now, switching gears, I’ll spend a few minutes talking about some of the financial implications of these recent developments. First of all, we are obviously pleased to be able to resolve all the claims against Arbitron that were alleged in the law suits 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.

That’s not to say there are no incremental costs as a result. Obviously, the roughly $600,000 in combined settlement fees, costs and contributions we agreed to all represent incremental costs that will be reflected in our fourth quarter 2008 results. With respect to the various methodology initiatives and metrics targets that were agreed to, many were already contemplated in our existing business model. However, in some cases the agreements call for an acceleration of our plans for implementation and therefore the timing of the resulting costs are accelerated as well.

All in all we don’t believe these agreements fundamentally alter our business plan. We had noted in the past that restoration of our operating margins to historical levels following the completion of the PPM transition process is our goal. However, we obviously cannot guarantee this will be the case. As we continue the commercialization of PPM in the largest radio markets, we learn more about and get better at building and managing panels.

This can lead to efficiencies and cost savings versus our current run rate. We believe that this would be the case and therefore incorporated assumed efficiencies in the development of our pricing models. So, on a line-by-line item basis there are costs that are running higher than our original model and there are costs that are actually lower; on balance we believe we are largely on track.

The one area that we’ve been monitoring very closely and have frequently highlighted for investors in the past is the increasing incidence of cell phone only households. Given current governmentally mandated restrictions prohibiting the use of auto dialer technology to reach cell phones, it is much more manually intensive and therefore more expensive to recruit cell phone only households. In fact, we’ve noted that it could be three to four times more expensive for us.

The number of households that are disconnecting from landlines and relying solely on their cell phones appears to be increasing every year. Just a few years ago the penetration was estimated at approximately 7% to 8% of the population. The latest national estimates from the federal government are closer to 16% to 18%, although this varies by region of the country. We assume that the growth will continue, although we certainly can’t predict how quickly but, such a rapid increase in cell phone only households was not contemplated in our initial models and all research companies, not just Arbitron are struggling with this issue.

We current are utilizing a more expensive method for introducing cell phone only households in to our [sample] than we expect to be using in the future. In fact, incorporating address based sampling methods in to our recruitment frame will not only help us meet the agreed to targets that we announced last week but we expect will ultimately be less expensive than our current cell phone only recruitment approach.

As the incidence level increase, cell phone only households should become easier to find. In effect, the haystacks become smaller and the needles larger. We’ll obviously continue to monitor this situation and provide updates as appropriate but for now, I’m sure there are a lot of questions on all the information that we’ve discussed so I’d like to turn it back to the operator to start the Q&A.

Question-and-Answer Session


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

Alexia Quadrani – JP Morgan

Just a couple of questions, first Sean just following up on your comments about the cell phone only households, could you let us know how much of your costs are associated just with the recruiting functions?

Sean R. Creamer

We have not broken down the specific line item by line item make up of the business model and are not going to do that on this call. But, suffice to say recruitment including the premiums that we pay are the single largest part of the business model costs.

Alexia Quadrani – JP Morgan

But including the ongoing premiums that you pay the panelist?

Sean R. Creamer

That’s right.

Alexia Quadrani – JP Morgan

And I would assume that the average life of the panelist or the tenure of the panelist still is roughly about a year? Is that right?

Sean R. Creamer

Yes. Obviously, the goal is to keep them up to a period as long as two years but on average I think it is in the one year neighborhood right now.

Stephen B. Morris

A little less.

Alexia Quadrani – JP Morgan

I guess sort of a more general question perhaps for Steve, some time has passed since Cumulus deal with Nielsen and I was wondering if you had any better sense of sort of Nielsen’s ambitions to go further after radio measurement?

Stephen B. Morris

There’s been really nothing more on that since the initial flurry of announcements. They’re working on starting off and developing their capability. They are aiming to start gathering data in March and report out by August so they have a lot of homework to do before they even deliver against their first step down [inaudible]. So, we don’t actually have anything more specific on that.

Alexia Quadrani – JP Morgan

Any thoughts or potential thoughts of pursuing accreditation for TV measurement in the PPM market?

Stephen B. Morris

We’re staying with getting our radio service accredited here. We have historically had Houston accredited for TV as well as radio. We know we can do it but our first priority is the radio side.

Alexia Quadrani – JP Morgan

In terms of the accreditation in Riverside [inaudible] last week, is there any reason it was Riverside versus another market?

Stephen B. Morris

You’d have to ask the MRC that question. They reviewed all of the markets, they chose to accredit this one. There are other markets that have metrics that are very, very strong in the same kind of range as San Bernardino Riverside but the exact process they go through and what drives their decisions is not something that we’re privy to.

Sean R. Creamer

I think it’s important though, and Steve mentioned it in his comments, it does represent accreditation of the radio first methodology. Obviously, to folks who had objections to not having that particular methodology accredited I think it speaks to our ability to move now efficiently or hopefully more efficiently through the other markets. But, getting that first one accredited I think is an important event.

Alexia Quadrani – JP Morgan

Then going forward I assume we’ll just hear about these accreditations whenever they happen, there’s no real specific timeline is that correct?

Stephen B. Morris

That’s correct. They are all in process continuing and we continue with our commitment to continuous improvement and our commitment to work with the MRC toward ultimate accreditation of all markets.

Alexia Quadrani – JP Morgan

Sean, I think you touched on this a little bit but in terms of the costs associated with the recent settlement in New York and New Jersey, should we assume that the legal costs are pretty much contained now in the fourth quarter and there shouldn’t be much of it in Q1 or should we have some ongoing legal costs in the first half of this year?

Sean R. Creamer

Well certainly our expectation is the run rate should go down significantly. The settlement itself did occur in the month of January although a significant amount of the leg work was done in the fourth quarter. As we mentioned, we were projecting somewhere in the neighborhood of $4 to $6 million of legal fees in the fourth quarter and are comfortable with that guidance right now.

We need to continue to evaluate as we’re working through and finalizing our budget where things stand but at this point we’d expect that certainly with respect to New York and New Jersey which are the only once out there with filed charges, we’re beyond that. But, there was some trickle over in to January.

Alexia Quadrani – JP Morgan

I know you talked about longer term margins briefly Sean but should we assume since you didn’t really give us an update on ’09 yet because you’re waiting until you report Q4 like you said, should we assume that profits should grow at a faster rate than revenues for ’09? Does that still sort of stand intact as of now?

Sean R. Creamer

We’re not updating anything we said in the past but we are not in a position to issue full detailed guidance and are going to wait until we’ve completed that process and Michael new on board has had an opportunity to be brought through the budget and get comfortable and receive our final board approval.

Stephen B. Morris

If that’s all the questions there are I think we ought to say thank you for your time. It’s obviously a lot of things happening in the business and compounded now by the change in leadership so stay tuned and we’ll keep you posted.


This does conclude today’s presentation.

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