Traffic.com IPO Filing - Key Excerpts (TRFC, CMCSA, XMSR)

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Includes: CMCSA, SIRI, TRFC
by: David Jackson

Traffic.com submitted an IPO filing to the SEC. (Proposed ticker: TRFC. Underwriter: WR Hambrecht.) The company provides traffic data to online, offline and mobile distribution channels. Here's the description of Traffic.com's business from the S-1, with an added excerpt about the adverting market containing some noteworthy stats. Note the deals with XM Satellite Radio (ticker: XMSR) and Comcast (ticker: CMCSA):

Traffic.com's sources of revenue:

Advertising

Radio and Television Advertising. In exchange for providing traffic information, cash and/or production services (including announcers and producers) to radio and television station customers, we receive the right to sell advertising time adjacent to traffic, news or weather reports as well as the right to sell advertisements on our customers' websites. Additionally, under certain of our contracts with radio stations to which we do not provide traffic information, we buy for cash in advance the right to sell a set amount of advertising time, primarily to expand our advertising sales coverage. We refer to the advertising time that we receive in exchange for these two types of contracts as "owned inventory." As of July 31, 2005, we had contracts to acquire owned inventory from over 360 radio stations (including 107 to which we provide our traffic information) and with 43 television stations. Revenue from owned inventory advertising grew from $11.3 million in 2002 to $26.0 million in 2003 to $30.3 million in 2004 and $16.7 million in the first six months of 2005.

We supplement our owned inventory by purchasing additional advertising time for cash from time to time from radio stations that are not under contract with us. These purchases, referred to as "cash buys," usually are made to satisfy specific advertisers' needs for additional coverage on particular stations or in smaller markets. Because cash buys are purchased in the spot market on an as-needed basis, the cost of acquiring this advertising is higher than the cost of owned inventory. As a result, margins for the sale of cash buys are generally lower than the margins that can be achieved from the sale of owned inventory. As we expand our presence into a larger number of major metropolitan areas in the United States, we expect our cash buys to decrease in relation to our owned inventory.

Revenue from our radio and television advertising is recognized in the month that an advertisement is aired.

In the fourth quarter of 2004, we introduced our second generation television product, Traffic Pulse NeXgen, which provides 2D and 3D color graphics that simulate the sense of flying over highways, bridges and other roadways. Because NeXgen depicts moving vehicles, buildings, billboards and other items on the reported routes, these graphics can be branded with an advertiser's name or logo. Due to its recent introduction, we have not sold any NeXgen sponsorships to date. Based on product placement advertising trends in television programming and films, however, we believe this will be an attractive opportunity for advertisers. Any revenue from this advertising channel will be recognized as the programming is aired.

In May 2005, we launched our first traffic-focused, four-hour television news program, which is broadcast during the morning commuting hours on a Viacom-owned UPN station in Philadelphia. This program changes the standard morning news format by focusing first on traffic, which constitutes approximately 40% of airtime, then approximately 40% on weather and the balance on news. We produce and broadcast this program from our own studio facility in our principal office. This program provides us with significant opportunities for promoting our brand name on air, which we believe could lead to an increase in the number of users of our other services, such as our website and consumer wireless subscription services. In return for this service, we received an upfront fee, which is being recognized over the life of the contract, and receive advertising inventory. We expect to introduce this program in other markets.

Internet Advertising. With the introduction of our enhanced website at the end of June 2005, we have begun to offer advertising on our own www.traffic.com website, in addition to offering advertising on the websites of a number of our customers. As of June 30, 2005, given the recent introduction of our enhanced website, we had not generated any significant revenue from Internet advertising. Revenue from Internet advertising will be recognized over the period during which the advertisement is displayed. In some cases, we have agreed with our radio and television customers to share advertising revenue generated on their websites.

We believe that our multiple media delivery platforms provide advertisers with an attractive cross-media campaign opportunity. Our advertisers can reach their customers at various times of day using advertisements associated with our traffic content aired on radio and television, placed on our website and embedded in our wireless services. We believe that this cross-media opportunity will result in heightened interest in our services from advertisers.

Traffic Data Services

Government Services. In 1999, in a competitive bidding process under the 1998 Transportation Equity Act for the 21st Century (TEA-21), we were awarded, as principal subcontractor to the U.S. DOT, a subcontract to enable us to deploy an intelligent transportation infrastructure system (now our sensor network) to collect and distribute traffic flow data. TEA-21 envisioned a program in more than 40 metropolitan areas. Under the terms of this subcontract, of $2.0 million received by our prime contractor for each designated metropolitan area, we are paid 95% or $1.9 million to provide to federal and state transportation agencies the traffic flow data from our sensor network in these areas for non-commercial purposes, such as research, infrastructure planning and congestion management. We retain the exclusive right to use this data for commercial purposes. Under our subcontract, we own and are responsible for constructing, operating and maintaining our sensor networks. As a condition to our receipt of federal funds for each metropolitan area, we are required to commit, or have a third party provide, an additional $0.5 million in cash or services per metropolitan area deployed.

Our ability to recognize revenue from our federal subcontract is based on when we begin providing traffic flow data for a new metropolitan area, which is when a certain number of our planned sensors in that area are able to collect and send data. Revenue is then recognized over the periods and in proportion to which depreciation on the constructed assets is charged to operations—generally three years. Revenue recognized under our federal subcontract totaled $0.2 million in 2000, $1.2 million in 2001, $1.6 million in 2002, $1.4 million in 2003, $2.2 million in 2004 and $2.0 million in the first six months of 2005. This revenue varies depending on the number of metropolitan areas in which we are deploying and have deployed our sensor network.

In addition, as a subcontractor to the U.S. DOT, we must enter into agreements with state or local government agencies responsible for the metropolitan areas in which we deploy our sensor network, in order to proceed with deployment of the network. Once the relevant state or local agency accepts our proposal and enters into a contract with us, we are required to meet certain milestones, including federal acceptance of our plans, designs and architecture. We have completed our sensor network and received system acceptance from the relevant transportation agencies in Boston, Chicago, Philadelphia, Pittsburgh, Providence and Tampa. We are collecting data from sensor networks that we are in the process of constructing in Los Angeles, Phoenix, San Diego, San Francisco, St. Louis and Washington, DC. We are under contract to deploy our sensor network in Baltimore, Detroit, Oklahoma City and Seattle. We are recognizing revenue from our sensor network in connection with our subcontract to the U.S. DOT in Boston, Chicago, Providence, San Diego, Washington, DC and Tampa. We have completed recognizing revenue under this subcontract in Philadelphia and Pittsburgh.

We are obligated to reinvest in activities and equipment related to our sensor network or share a specified percentage of our revenue that is directly attributable to the commercial sales of flow data generated under the program from the sensors we install and own. This amount is calculated as 5% of revenue generated from commercial sales of such flow data between $250,000 and $1.0 million and 10% of such revenue over $1.0 million. This amount does not include revenue from sales of flow data collected from government-owned sensor systems, which constitutes a significant amount of the flow data for many of the metropolitan areas that we cover, or from information which is gathered independently about incidents and events. To date, the total amount of our reinvestment and revenue sharing has not been material. The activities funded are determined in consultation with the relevant state or local agency. These funds may be used for a number of purposes, including integrating the existing state and local agency intelligent transportation systems with our sensor network or installing additional sensors.

Commercial Traffic Data Services. In the first quarter of 2004, we began to enter into agreements with companies to provide our traffic data directly to these customers for their own use in their websites and media and service offerings. Our first such agreement was with XM Satellite Radio and, since that time, we have entered into agreements with NAVTEQ, Motorola, The Weather Channel and Comcast. Revenue from our other traffic data services agreements includes one or more of annual usage and exclusivity fees, fees for 24/7 support services, and in-vehicle traffic data subscription fees. Revenue for these data service agreements was $1.4 million in 2004, the first year in which we recognized such revenue, and $1.2 million in the first six months of 2005. Revenue recognition from these contracts varies, based upon contract minimums, subscriber growth and special services provided by us.

Under our NAVTEQ agreement, NAVTEQ has paid us $9.9 million as an advance against subscription, license and other fees payable by NAVTEQ. Upon expiration or earlier termination of the agreement, we are required to repay NAVTEQ an amount equal to (i) any portion of the $9.9 million advance payment that has not yet been earned, less (ii) aggregate specified annual minimum license fees of $0.4 million in each of the first, second and third years of the agreement, $0.8 million in the fourth year of the agreement and $1.0 million in the fith year of the agreement. Upon expiration of the agreement, if it is not renewed, up to $1.9 million of any remaining portion of the advance fee that we are required to repay may, at our option, be repaid in quarterly installments over three years at an interest rate of prime plus 1%.

The NAVTEQ agreement has a term of five years. The agreement may be terminated by either party upon a material breach not cured within thirty days' notice, a performance failure caused by a force majeure event not cured within six months or bankruptcy of the other party. A material breach includes a material breach by us of our service level commitment to NAVTEQ, but only if more than 15% of the covered population is affected by the service failure for more than 180 days or the failure lasts longer than 270 days. Each party may terminate the agreement if the other sells all or substantially all of its business to certain specified entities.

Consumer Wireless Subscriptions

Following the completion of our enhanced website, we began to offer subscription wireless services to consumers as of June 30, 2005. Subscribers can currently sign up for one of two levels of service: my Traffic.com, a free service that provides real-time traffic conditions via e-mail alerts, and TrafficInform, a monthly paid subscription service that provides subscribers with outgoing e-mail or voice traffic alerts and condition updates for chosen roadways. We expect to introduce, by the end of September 2005, a premium paid subscription service, TrafficMax which, in addition to all of the services offered through TrafficInform, will answer e-mail or voice queries from subscribers regarding traffic conditions on their chosen roadways with real-time information, on a 24/7 basis.

We have begun to offer advertising opportunities and sponsorships associated with our subscription services to our advertising customers, although we have not generated advertising revenue from this source to date.

We will collect our monthly subscription fees from our subscribers by credit card at the beginning of each month and revenue from these subscriptions will be recognized on a monthly basis. Revenue from advertising and sponsorships in connection with our subscription services will be recognized over the period during which the advertisement or sponsorship is displayed and will be recognized as advertising revenue in our statement of operations.

On online advertising and local ads:

Advertisers Seek Value in New Media: Advertisers are adjusting their campaigns to include broader exposure than is available through traditional media buys. According to Forrester Research, the market for online advertising is growing at more than double the rate of the traditional advertising market. The total U.S. advertising market was $243.5 billion in 2004 and is projected to reach $306.3 billion by 2008, for a compound annual growth rate of 6%. However, the U.S. online advertising market was $12.0 billion in 2004 and is expected to grow to $22.0 billion in 2008, for a compound annual growth rate of 17%.

To date, we have derived substantially all of our revenue from selling radio and television advertising that we receive in exchange for our traffic information, cash and other services. Since advertising messages can now be coupled with traffic reports across new media platforms such as the Internet and wireless devices, we have expanded our business model to include those new opportunities. Traffic reports, regardless of delivery platform, serve as an attractive vehicle for advertisers seeking to reach consumers for several reasons. First, consumers pay close attention to traffic reports because of the relevance and the succinct and timely nature of the information. In addition, traffic is inherently local content and many advertisers believe that advertisements associated with local content can be more specifically targeted to a particular market or market segment. Further, because traffic conditions change constantly, many consumers access traffic information multiple times per day. For these reasons, advertising connected to traffic content generally commands a premium among radio and television advertisers; we believe it will garner a premium in the new media space for similar reasons.

Traffic.com's full S-1 here.

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