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Executives

William Yde – Chairman, Chief Executive Office, President

Scott Cody – Chief Financial Officer. Chief Operating Officer

Analysts

Mark Smith – Feltl & Company

Michael Kupinski – Noble Financial

Thomas Eagan – Collins Stewart

Jason Helfstein – Oppenheimer

Richard Ryan – Dougherty & Company

John Gruber – Gruber McBain

Global Traffic Network (GNET-OLD) F2Q09 Earnings Call February 9, 2009 8:30 AM ET

Operator

Welcome to the Global Traffic Network second quarter fiscal 2009 earnings conference call. (Operator Instructions) At this time I would like to turn the conference over to Mary Beth [Cafsis].

Mary Beth [Cafsis]

Good morning everyone and thank you for joining us today. Welcome to the Global Traffic Network's fiscal second quarter earnings conference call. Representing the company today are Bill Yde, Chief Executive Officer and President, and Scott Cody Chief Financial Officer and Chief Operating Officer.

Before I turn the call over to Bill, I would like to read the company's safe harbor statement. This conference call contains statements that constitute forward-looking statements. These statements reflect the company's current view with respect to future events. These forward-looking statements involve known and unknown risks, uncertainties and other factors including those discussed under the head 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 statement to reflect future events or circumstances. With that, I will turn the call over to Bill Yde, Chairman, Chief Executive Officer and President.

Bill Yde

Thank you to everyone for joining us this morning. We've had a very eventful three months since our last call and I'll bring you up to speed on the major developments within the company. We've very pleased with our financial performance in the second fiscal quarter. Despite a difficult economy, we were able to significantly increase revenue in all three of our markets.

Even with a large decline in the Australian and Canadian currencies, this still translates to a revenue increase of 5% when reported in U.S. dollars. Despite a 25% decrease in Australian currency, we were able to maintain our adjusted operating income, but we were able to increase adjusted income in Australia by 35% when measured in local currency. And Canada achieved positive adjusted operating income for the first time. Adjusted operating income we define as operating income plus depreciation an amortization.

We are especially excited to report that our Canadian operations generated a positive adjusted operating income on a quarterly basis for the first time. This is a significant milestone in our progress in Canada. I'll turn the call over to Scott in a short while to review the financial numbers in more detail.

The biggest news recently is our signing of a definitive purchase agreement to acquire the Unique Broadcasting Company which operates the commercial division of UBC Media Group, PLC. Initial purchase price is 9 million pounds, approximately $13 million plus UBC has a chance to earn additional contingent payments over the next three years based on revenue performance.

Unique has over 700,000 commercials available for sale on an annual basis providing traffic reporting services to approximately 230 radio stations and entertainment news to approximately 120 radio stations. While not currently profitable, Unique has approximately $19 million of trailing revenue and an audience of over 21 million people, which is larger than our audience in Australia and Canada combined.

Despite a soft radio advertising market in the United Kingdom, Unique's addition of the former G-Cap radio stations appear to be boosting performance as January 2009 paced significantly ahead of January 2008.

We believe that this acquisition will give us the same dominant position in the United Kingdom that we currently enjoy in Australia. We anticipate that the acquisition will close in March 2009 in a subject to approval by the shareholders of UBC Media.

We've also been busy in our existing markets. In January, we opened service in Ottawa which is our eight market in Canada. Ottawa is Canada's fourth largest market and its capital. We have high expectations for the newest market.

In addition, effective January 1, we entered into a four year agreement to continue to provide traffic services [Forest Entertainment] which is our largest affiliate group in Canada. Forest was our original affiliate in Canada and we are pleased to extend this relationship for at least another four years.

We've continued to cement our market leading position in Australia as well. As you are aware, effective July 2008 we signed our two largest affiliates, Austerio and ARN for four years for traffic service and in addition, Austereo was signed for news for four years as well. Recently, we have followed up on these successes by signing ARN for news for an additional two years and Nova Traffic for an additional four years. These signings continue the stability of our network and assure reasonable price stability going into the future.

We continue to work diligently on mobile traffic network as well, having numerous discussions and meetings with potential partners and suppliers as we determine the best way to monetize our intellectual property. We continue to be bullish on the long term prospects for this division.

I will now turn the call over to Scott for a complete review of the financials.

Scott Cody

Good morning everyone. Revenue grew 5% for the quarter ended December 31, 2008 compared to the previous year quarter. In United States dollars, Australian revenue decreased 5%, Canadian revenue increased 18% and United Kingdom revenue increased 100% as we first began generating revenue this fiscal year.

During our second fiscal quarter, the United States dollar strengthened considerably when compared to our local currencies in Australia, Canada and United Kingdom. The Australia dollar depreciated 25% and the Canadian dollar 19% both when compared to the previous year quarter.

In local currencies on the markets in which we operate, Australia revenue increased 27% and Canadian revenue increased 46% when compared to the quarter ended December 31, 2007.

Adjusted operating income which we define as operating income plus depreciation an amortization was $2.1 million for the quarter ended December 31, 2008 which was basically flat when compared to the same quarter last year. Once again, changes in exchange rates had a significant impact on our reported numbers.

Australian adjusted operating income for the quarter increased 35% in Australian dollars and only 1% in U.S. dollars.

Net income decreased from $900,000 for the quarter ended December 31, 2008 compared to $1.1 million from last year. The main reason for the decrease from flat adjusted operating income was a reduction of interest income in the current period.

For the six month period ended December 31, 2008, our revenue grew 24% to $29.9 million from $24.4 million for the six months ended December 31, 2007. Revenues from our Australian operations grew 12% and revenue from our Canadian operations grew 38%. When measured in local currencies, Australian revenue grew 26% and Canadian revenue grew 56%.

Our revenue in the United Kingdom was $2.2 million compared to no revenue last year. The U.K. revenue was primarily generated by our traffic radio contracts with the Highways Agency.

Our adjusted operating income was $4.2 million for the six month period ended December 31, 2008 compared to $2.7 million for the same period. last year. Net income increased from $1 million for the six months ended December 31, 2007 to $1.7 million for the same period this fiscal year.

I will now turn the call back to Bill for an update on our current quarter.

William Yde

Based on our internal sales reports, our revenue continued to grow in both Canada and Australia in January, but at a slower rate than the first six months of our fiscal year. Since July 2008, we have made significant investment in Canada and Australia in the way of increased operating expenses, some of which are reflected in our financial results for the six months ending December 31, 2008 and others that have been incurred subsequent to that date and we've reflected in the subsequent financial reports.

The majority of our costs are fixed and cannot be meaningfully reduced in the short term. As a result, our adjusted operating income for the third fiscal quarter is likely to be less than same period last year. In addition, the Australian dollar remains weak against the U.S. dollar and should this continue, our revenues adjusted operating income and net income will be negatively affected.

We believe the decisions we have made to position the company for long term prosperity and we are well positioned to take advantage of an economic recovery in the future. Even after the Unique purchase, we will have a strong balance sheet with significant cash reserves and little debt.

Our strong financial position has allowed us to continue to invest in the business while many other companies are forced to make short term decisions. This ends our prepared remarks. We'll now open the lines to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mark Smith – Feltl & Company.

Mark Smith – Feltl & Company

Can you tell me where you are on mobile traffic network and also where you ran on expenses this quarter as kind of a good run rate to look at?

Scott Cody

We've certainly ramped up expenses in this quarter, as we've hired a number of extra staff to start completing some of the tasks that we're going to need to complete to get this project to market. We don't have a meaningful announcement that we can give you at this time regarding mobile other than to say that we're working very diligently on it and things are progressing, slow but progressing.

I think for modeling, I think the run rate is probably a reasonable number right now, obviously subject to change.

Mark Smith – Feltl & Company

Can you tell me, are there any significant contracts that are coming up over the next six months or so?

Scott Cody

I think we're pretty much locked down as we said on the call. We basically, our major contract in Canada and that is now down for four years. The other contracts that we've entered in Canada are fairly recent so they all have more than a year to go.

Australia, the two biggest are Austereo, ARN and Nova and all those are taken care of. Other ones are out there floating around but nothing is particularly material compared to that and we don't see any of the ones that are floating out there as being issues.

Mark Smith – Feltl & Company

Can you comment on your sell out rate trends during the quarter and also so far in January, if you're still seeing kind of a decline in that or how you're faring in Australia and in Canada.

Scott Cody

For the quarter, the sell outs increased again which we anticipate given the revenue growth, especially we went from 84% approximately 88% in Australia quarter to quarter and for Canada went from 47% to 69%.

William Yde

Getting back to the other, I think our sell out rates for the first six months of this year are higher than any we've ever had in the history of the company when you look at six months to six months for both countries.

Mark Smith – Feltl & Company

Can you give a feel for January?

William Yde

I don't have the exact numbers there but I think January's numbers are relatively consistent this year to last year.

Mark Smith – Feltl & Company

So still some headwinds but you're holding your own?

William Yde

Yes, I think the performance that you saw over the last six months, I think most companies in great economic times would love to have.

Mark Smith – Feltl & Company

Is there any kind of one time type expenses that we should see as you implement this acquisition here in the third quarter?

Scott Cody

I don't really anticipate that. Obviously FAS 141 hasn't kicked in yet, so what would be expenses come July are actually still capitalizeable which would be legal and professional to get the deal done which obviously on the balance sheet has been a fairly significant number given that this is taking a long time to get done but that should all be capitalized, so I don't really think there's any material one time costs. I'm sure there will be a little extra travel and things like that but nothing that I would necessarily adjust the model for.

Mark Smith – Feltl & Company

A little housekeeping item, the earnest money that you paid originally, is that still I guess out at UBC?

Scott Cody

It's in an escrow account so it's not at UBC. It's not in our hands but it's in escrow between two sets of lawyers. We didn't pursue that at the time because we thought it might become a moot point. But obviously we felt that it was not at risk.

Operator

Your next question comes from Michael Kupinski – Noble Financial.

Michael Kupinski – Noble Financial

I was wondering, the economy in Australia seemed to, the recession kind of hit there fairly late and it seemed like it gained steam in the last month or so. I was just wondering if you can give me some commentary on the composition of the quarter in Australia by month in terms of the growth. Did you see material growth slow as opposed to the last month of the quarter or was it fairly consistent throughout the quarter?

William Yde

It was fairly consistent. Our highest sell out rates were in October and for the year, October was our highest sell out rate and November was our second highest sell out rate. We didn't really see any slow down in the second half for the first six months versus the first half.

Michael Kupinski – Noble Financial

Did you add any inventory in Australia?

Scott Cody

Not really significantly. We had our inventories us somewhat but nothing that was very meaningful on an incremental basis.

Michael Kupinski – Noble Financial

In terms of the acquisition, just kind of refresh my memory about what your plans are in terms of the integration of this acquisition, particularly now of course since the U.K. economy is struggling there, whether that strategy has changed a little bit because of the weakened economy there. You probably might want to slow some of the plans in terms of investment and that sort of thing, but if you could just give us your thoughts for the integration of that acquisition?

William Yde

I think the timing is perfect because when times are down the former model was more of a variable cost model where they shared revenue with the stations rather than our model which is a fixed cost model. Because revenue has been down in Great Briton, the amount of money stations have been getting has been decreasing, so it's probably the opportune time to go back in and renegotiate more fixed type deals.

The fixed type deals will allow us to reach higher margins and it's basically the way our model works. But we don't see any change in the plan or any reason to change the plan.

Michael Kupinski – Noble Financial

Are you planning on continuing with fairly high levels of investment to integrate the operations? Do you have any thoughts on what type of operating loss they might have in your first year of operations?

Scott Cody

I think we're hopeful that if you look at it on an adjusted operating income basis, or EBITDA basis, whatever term you're going to use, I think it'll be near break even to small loss. I don't think it's going to be a significant loss, based on the way they're billing right now. I think they're billing has picked up and we don't anticipate making a bunch of investment into it.

They have all the affiliates now that they're going to need. They virtually have the entire market like we do in Australia, and the integration, there will be some economies by integrating their operation into our operation.

Michael Kupinski – Noble Financial

Do you think there might be some incremental costs if you go to a fixed cost model, because you may end up spending more initially to get a better return over the life of the contract, and you may have some additional costs for sales staff? They have tended to have less of a sales staff than we had in the past and we're currently need to have a look at that once we're involved in it. Are you planning any changes in the outsourcing that they do right now and also, on the sales staff item, I know that they have a relatively light corporate staff there? What are your plans for FP's going forward?

Scott Cody

No change on the outsource right now. Those contracts are of a longer term nature and I don't think there will be significant expansion of the overhead there.

Operator

Your next question comes from Thomas Eagan – Collins Stewart.

Thomas Eagan – Collins Stewart

A follow-up on the U.K. Can you talk a little bit more about ramping up the ad sales force? I thought that was something that was being contemplated. Are you going to be setting quotas? How are you going to be working with the salesmen there? And then on Canada, I didn't expect Ottawa to be added quite so soon. Can you talk a little bit about other markets, for example, what's the latest on Quebec? And do you expect Canada will be adjusted operating income positive for the year?

William Yde

I think Canada will be adjusted operating income positive for the year. I don't think it's going to be a significant loss though. I think Canada traditionally has been the January, February, March quarter is usually a bad quarter. The quarter ending in December and the quarter ending in June are generally good quarters so I think you can see Canada go back first quarter, and then something that closely replicates the December quarter during the June quarter.

With regard to the sales staff in Great Briton, they have a very significantly capable staff in there but its small compared to the way in which we normally operate. And yes, we clearly will be ramping up. We talk about investment. This is the only real area that we anticipate ramping up investment in Great Briton, is to have a larger staff more spread around the country similar to what our model in Australia is.

Taking Quebec, right now there's no plans for Quebec. Things tend to move quickly and are fluid, so it's certainly a possibility, but there's no current plans. Clearly the markets we were not in in Canada, Ottawa was far and away the most important so we don't see Quebec as being that critical. But if the opportunity is there, we will certainly take advantage of it.

Operator

Your next question comes from Jason Helfstein – Oppenheimer.

Jason Helfstein – Oppenheimer

Can you give out what the pricing growth was in Australia and Canada? I don't think you said, but can you give us a statistic on what the sell out rate was in the U.K. for the quarter? If currency stays the same for the next fiscal year, or the next four quarters, what's the currency impact? In other words if we were to model, the dollar stays, what would be the annualized currency impact?

Scott Cody

First off, pretty strong rate increase. Australia went from about $1.18 to about $1.33 in local currency. Canada actually went down a little bit again from $0.38 to $0.35 which was offset by the sell out. U.K., there were negligible sell out. We had a couple of order but it was nothing worth talking about.

If the currency stays about where it's at now, for 3Q and 4Q, would be about 25% down in Australia and about 28% in Australia for those quarters and Canada would be about 28% and about 17%, and U.K. would be about 25% for both quarters.

And it has actually somewhat stabilized. You can see those numbers are very comparable to the 25% decreased in Australia and the 19% decrease in Canada for this quarter. Currency is relatively stable to last years higher level.

Operator

Your next question comes from Richard Ryan – Dougherty & Company.

Richard Ryan – Dougherty & Company

Any progress on the news site? Did you take more inventory on the news front in Australia?

William Yde

We're looking at that issue right now because we've been in certain markets in Australia; we've been completely sold out during the past few months so we're looking at taking on some new news affiliates right now.

Richard Ryan – Dougherty & Company

In the U.K., it looks like you have the station side of the equation pretty well in hand. When you look at the advertising side, it is a switch from 30 second and 60 second ads to your model. What's the reception there and do you have to do more through agencies in the U.K. than you've done in Australia and Canada?

William Yde.

I think it's going to be a long process. I don't necessarily think there's going to be a switch from 30 second and 60 seconds to 10 seconds. It's certainly something we're going to look at along the way. I think the first effort we're going to make is increasing the size of the sales staff to increase the sell off percentages based on what they sell now to a much higher rate.

The second process will be looking at the stations to convert from maybe convert from the 30's down to 10's in exchange for more inventory giving us more impacts. Again, our first effort I think is just going to be increasing the sales staff, increasing our sell out rate.

Richard Ryan – Dougherty & Company

Do you have to change how they can pick their spots, whether they can cherry pick for placement or if it's a constant network?

William Yde

Cherry picking is just not going to be allowed. I don't think they do a significant portion of that. There's some very, very minor mechanical differences between what they do and what they do that we'll integrate with how they do things.

Scott Cody

I think some of the real similarities to take away too is, a, it is a network sale not a station sale, and they also have what we like to call the slowest placement, so that these spots are associated with the programming as opposed to a floating spot. I think those two are very important parts of the equation, and they're both already in place.

Richard Ryan – Dougherty & Company

The comments about Q3, the revenue so far in January, is this more just the kind of seasonality that we typically see in the March quarter or are you seeing something more related to the global economic situation?

William Yde

I guess the thing is, we're ahead of where we were last year and January is generally a very bad month no matter what, so yes, it's seasonal. Yes, it's ordinary, and I think it's too early to predict whether it's anything extraordinary or not.

Richard Ryan – Dougherty & Company

Do you have any visibility in the bookings for the rest of February or March?

William Yde

February in Australia is going to finish ahead of February in Australia last year. March is going to finish ahead in Australia over where it was last year.

Scott Cody

Canada's pace is a little soft right now, but there it's really kind of early to tell where things are going to end up. Both months were up in January, just not up as much as we've grown accustomed to in either market, so that is obviously a concern right now and I think things are just like everywhere else, things are coming a little later than they have in the past so it makes the visibility a little more difficult.

William Yde

I think the other thing is, your percentage isn't going to stay as high as it's been just because the bases are so much higher. We grew 40% in each of the last two years, so the basis is higher and the percentage growth is slower.

Richard Ryan – Dougherty & Company

Did you notice any change in your customers or the advertisers? Any switch within the industry, who is buying spots?

William Yde

No, we still have the same advertisers. We haven't lost any significant advertisers.

Operator

Your next question comes from John Gruber – Gruber McBain.

John Gruber – Gruber McBain

On the mobile alert system, where do we stand and what hurdles do you have to pass there and when do we expect service to start?

William Yde

I think we're dealing with a couple of very large major companies and we're marrying I guess formalization of a road map by the end of this month. We would expect agreements to follow that road map. I still am hopeful that we'll get our product to market this year, but it's certainly not going to be any time in the first calendar quarter.

John Gruber – Gruber McBain

Are you saying this fiscal year?

William Yde

I think this fiscal year is possible, but aggressive. I think the major phone company we've been talking to, we need a four to six week leeway from the time we have everything agreed. If they're anything like they have been in the past, it can double that to be safe.

Operator

We have no further questions at this time. I'd like to turn the call back over to our speakers for any additional or closing remarks.

William Yde

Thank you all for coming. Again, I think we've had an outstanding quarter in difficult times. Our growth rates in both Canada and Australia are reflective of a boom economic period, and we're very proud of what we've accomplished and look forward to seeing you again in the next quarter.

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Source: Global Traffic Network F2Q09 (Qtr End 1/31/09) Earnings Call Transcript
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