Global Traffic Network, Inc. (GNET-NASDAQ)
December 17, 2010 Issue
The Most Powerful Name In Corporate News and Information
With Little To No Competition In Providing Traffic Reports To Radio And Television Stations In Australian, United Kingdom And Canadian Markets, Global Traffic Network, Inc. Has A Strong Balance Sheet And Is Well Positioned For Future Growth
Global Traffic Network, Inc.
(Nasdaq: GNET) is a leading provider of custom traffic and news reports to
radio and television stations outside the U.S. GNET operates the largest
traffic and news network in Australia, operates traffic networks in eight
Canadian markets and the largest national radio traffic network across the
United Kingdom. In exchange for providing custom traffic and news reports,
television and radio stations provide Global Traffic Network with commercial
airtime inventory that GNET sells to advertisers. As a result, radio and
television stations incur no out-of-pocket costs when contracting to use
Global Traffic Network’s services. For more information, visit Global
Traffic Network’s website at www.globaltrafficnetwork.com.
Chief Operating Officer, Chief Financial Officer and Treasurer
Scott E. Cody has served as Chief Operating Officer and Chief Financial Officer of Global Traffic Network since joining the company in June 2005. Previously, Mr. Cody held various positions with Metro Networks, Inc., serving as Vice President of Finance from 1997 to June 2002 and Senior Vice President of Business Development from July 2002 to June 2005. Prior to joining Metro Networks, Inc., Mr. Cody was Vice President of Finance for Tele-Media Broadcasting Company. Mr. Cody earned a Bachelor of Arts in Accounting/Finance from Juniata College.
Interview conducted by: Lynn Fosse, Senior Editor, CEOCFOinterviews.com, Published – December 17, 2010
Mr. Cody: We have a very simple business, although it is somewhat difficult to replicate. What we do is we go to radio and television stations and give them high-quality traffic reports in exchange for advertising time. We then take that advertising time, bundle it up and we sell it to advertisers on a network basis. We currently operate in Canada, United Kingdom and Australia.
CEOCFO: Why these particular countries?
Mr. Cody: Our founder, Bill Yde, had run traffic networks the U.S. and had sold those to Metro Networks as part of Metro Networks roll-up of a number of small, independent traffic networks, when they were going public back in the mid-1990’s. At that time he had a non-compete in the United States, so he decided to go to Australia where he did not have a non-compete. What then happened was Metro Networks actually invested in that endeavor because they like to buy cash flow positive businesses instead of funding startup losses through their income statement. The idea was that he would get that started and maybe they would buy it some day.
CEOCFO: What do you need to supply the traffic information; is it all cameras and helicopters?
Mr. Cody: We use any resource available. Yes, we do have a bunch of helicopters. We have seven helicopters in Canada, and four in Australia, so we have eleven helicopters between those markets. We also tend to have people in the government traffic centers, so we have access to that information. We also run tip lines where people call in with information. We have scanners and we have contacts with the police, fire, rescue, and even taxi cab drivers. So there is no one area from where the information comes. We get it from anywhere possible, and then we take that information and weave it into our reports.
CEOCFO: Is there a lot of outsourcing from local radio and TV stations in this area, or is it something a little more unique to you?
Mr. Cody: The barter industry is very common here in the United States. It is not so common in the markets that we are in, which sometimes takes it a little longer to get people comfortable with the concept. So there is less competition, although it is not unheard of in those markets. For example, in the United Kingdom there is a company that does the same thing we do with our traffic model, only it is with news. But for the most part, it is not as common in those markets as it is here in the US.
CEOCFO: Is it difficult to get TV and radio stations to understand the concept?
Mr. Cody: The hardest one to break is the first one. Once you get somebody over the hump, the other ones tend to follow. What happens is people are very possessive of their programming and their airtime. As you can understand, this is their identity. Traffic is a good place to start, because traffic is not something that is as core to them as other programming functions such as their music or their news. Once you get people used to outsourcing, you can get them to outsource other things to you as well. Therefore, the first one is the hardest to break, because everybody is used to the status quo. Once you get somebody to break, people tend to move fairly quickly in line. In general, what happens is you usually get a second or third tier kind of operator to take a chance because they are dealing with tighter margins. They are more likely looking for savings and they maybe don’t have quite the positioning in traffic as some of the bigger stations do. So, what then happens is you have a station that would be in other areas considered maybe an also ran, suddenly has the best traffic in the market. Well then, the other stations need to say, “Ok either I have to step up and spend more money on this or I need to come to some sort of agreement with Global Traffic Network”. They would then want to come to an agreement with us because it eliminates their costs in this area and also provides a revenue stream for them and a better product. The reason we can field a better product is because we put more resources to it and we can leverage those resources over a number of stations, whereas it doesn’t make a whole lot of sense for one radio station to fly a helicopter. However, it makes sense for us to fly a helicopter for ten radio stations.
CEOCFO: Are you typically contracting station by station, or do they tend to be groups of stations?
Mr. Cody: It runs the gamut. We have a number of group deals and we have a number of individual station deals. Interestingly in Canada, one of our original deals was a group deal. Then on our second biggest group, we talked to corporate and they told us to go out and cut our deals with each of the stations, because the group is decentralized and that is how the process works. We went market-by-market and it took us about eighteen months before we got all the stations. We are really indifferent as to how we do it. We are very flexible. I think that is why we have been able to grow this business so much; we do things the way stations want. If a station wants a certain number of reports, or they want shorter reports, or longer reports, a male voice or a female voice, from the air or ground; we don’t have one set way of doing things. This is why we are able to work with so many people.
CEOCFO: Who is advertising with you and how do you work with them?
Mr. Cody: Our adverting customers are mostly big national advertisers. This is because the local advertisers are kind of the bread and butter of the radio stations and one of the key things I said earlier about this being difficult is that you need to have a lot of finesse and contacts so that you are not selling the local radio stations airtime against them. If you do that, you are out of business because they are certainly not looking for more competition as radio is a very competitive business. We tend to focus on large national advertisers and we tend to focus on advertisers that want a broad reach. These advertisers are not looking for individual niches, because if you are looking at a certain demographic you should talk to the three or four stations that cover that demographic. If you want to cover everybody then you should talk to us.
CEOCFO: It sounds simple and makes a lot of sense!
Mr. Cody: It is a business model that is so simple that I could explain it on the back of an envelope. The hard part of it is that in a normal business I would say that the radio stations would be our vendors and we would just pound them and pound them and pound them, and try to ring concessions from them. Then we would go to the advertisers and we would super serve them. In this business because of the limited amount of radio stations in the market, we need to treat our “vendor” as our client as well. We super serve both the radio stations and the advertisers and that is kind of the secret sauce in the business that most people have missed and why not a lot people have been successful doing this.
CEOCFO: You mentioned you often lead with traffic; do many of your customers move on to the news service or is that in the development stage?
Mr. Cody: It is more in development, although we do some news for some smaller stations in Canada. We have not really pushed it because Canada is in its infancy, so we don’t really need the extra inventory there, and we don’t have every radio station there. In the U.K. and in Australia we have virtually every radio station in those markets to do traffic, so we need to look for other areas to expand. In Australia, we have kind of taken a hybrid approach. We have cut deals to get access to the stations news inventory, but we are not actually producing their reports. Basically we are funding the news departments in exchange for the inventory. They continue the editorial control, which is different from what we have in traffic where we control everything, but we have access to that inventory so it has been a nice compromise. We think that eventually we may get in to the point where we will do news in the same manner we have done traffic, but we are not there yet.
Is there much difference between radio and television?
CEOCFO: Is the UK a newer area for you?
Mr. Cody: Yes. We purchased a company called Unique Broadcasting in March 2009. Before that we had a small operation, but they were the long-standing dominant operation there. We decided it would be better to buy them than continue to fight it out.
CEOCFO: Do you see moving into any additional geographic areas?
Mr. Cody: Absolutely, I see us moving into additional areas. One of the things we had been prudent about expanding too rapidly is the status of Canada, which is still being in start-up mode, so we wanted to start turning a profit there before we went too aggressively into other areas. We do have feelers out in mostly mainland Europe where there are some very big cities with large populations and similar markets to the U.K. We think that would be a very logical place to expand our operations next. As for acquisitions, there are really not a lot out there because we are a very unique business, which is part of the key thing about us. That makes it a nice investment, but makes it difficult for us to participate in a great deal of M&A.
CEOCFO: Is there anything different country to country or is traffic, traffic?
Mr. Cody: I think it is similar country to country. Traffic is traffic as you say, advertising is advertising, but the product is very effective. Our advertising commercial really cuts through the clutter. It is generally a live read and ten seconds long and it is embedded at the end of the report so that the people really almost can’t avoid it because you have this report that is of great interest. People are actively listening to that report, then all of a sudden the commercial is there and only ten seconds long so by the time, you would even think about leaving the message it is already delivered. Whereas in traditional radio due to longer stops and things like that advertisers spots can get lost while ours is always by itself, what we call solus placement. The spots are by themselves attached to the programming people seek, so that has been really effective for us and our clients.
CEOCFO: GNET has a recognizable group of advertisers!
Mr. Cody: Absolutely! We have Mercedes, we have General Motors, and Walmart; it is just amazing, Woolworths in the Australia, which is different than the Woolworths in the United States, because it is still a very viable business there. We are not overly automotive, but we do banks, and we do retail. We do any kind of company that is looking for a broad reach, iconic type brands or companies that really seek out large, diverse audiences and it works well for them.
CEOCFO: What is the financial picture like for Global Traffic Network today?
Mr. Cody: Very strong. We had a tough time during the global meltdown and we got double whacked with that because first during a recession advertising is reduced and our business is an advertising business. Second, the exchange rates went against us as currency investors flew to safety and the U.S. dollar strengthened considerably. However, we were still generating positive cash even at the lowest point. A lot of investors look at these kind of businesses on an EBITDA basis. We call that adjusted operating income and all we do is take our operating income and add to that depreciation and amortization. Four quarters ago, at our lowest point, that number was still positive; it was $2.3 million. For the last four quarters, which would be three quarters of last fiscal year plus the 1st quarter this fiscal year that number has jumped to $12.2 million and still growing rapidly. So we are very happy with how that is going and we continue to have a very strong balance sheet as well.
CEOCFO: What is ahead?
Mr. Cody: First off, in our existing markets, we expect Australia and U.K. to continue to be profitable and grow. We expect our biggest growth to come from Canada, which is EBITDA negative, but it is growing rapidly. So we expect that to be positive and significantly positive over the next couple of years. In addition to that, we have a business called Global Alert Network, which is a little different in that its idea is to try to provide more specialized traffic to individuals’ mobile phones. The idea behind this product is that right now, there are a lot of applications where you can get traffic on your cell phone, but generally you need to either “pull” that information by using your phone or you need to preprogram a route to have the information sent to you. What our product does for smart phones is actually tracks your location, then sends you an alert before you get into trouble. We are currently operational with Blackberry. It is available for free at the Blackberry APP store right now. We are in the process of getting the I-Phone and Android up and running and we expect that in the next month or so. We think that this will be a very interesting business as well for the future.
CEOCFO: So there is a lot going on!
Mr. Cody: Absolutely!
CEOCFO: Do you much investor outreach?
Mr. Cody: Yes and no. We do probably a normal amount. We try to go see people after our earnings call every quarter, and then we usually do anywhere from one to two additional meetings a month. More so the CEO than myself, but we both go see people.
CEOCFO: Is the investment community starting to pay attention?
Mr. Cody: It looks like it. Today they are. In the past month our stock has had a strong run, from around $5.00 to its current level. Our investors tend to be very long-term.
CEOCFO: In closing, why should potential investors choose Global Traffic Network?
Global Traffic Network is a unique business because no one else does what we
do outside the United States. We have a successful business, with a lot of
opportunity to grow into additional markets. In addition, we have a business
that generates cash and a very strong balance sheet. So we are geared up to
grow very rapidly and strongly for a number of years.
Global Traffic Network is a unique business because no one else does what we do outside the United States. We have a successful business, with a lot of opportunity to grow into additional markets. In addition, we have a business that generates cash and a very strong balance sheet. So we are geared up to grow very rapidly and strongly for a number of years. - Scott E. Cody
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