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ARB > SEC Filings for ARB > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for ARBITRON INC

Form 10-Q for ARBITRON INC


6-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto in this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements regarding Arbitron Inc. and its subsidiaries ("we," "our," "Arbitron," or the "Company") in this document that are not historical in nature, particularly those that utilize terminology such as "may," "will," "should," "likely," "expects," "intends," "anticipates," "estimates," "believes," "plans," or comparable terminology, are forward-looking statements based on current expectations about future events, which we have derived from information currently available to us. These forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results to differ materially from results implied by such forward-looking statements. These risks and uncertainties include, in no particular order, whether we will be able to:

• successfully obtain and/or maintain Media Rating Council, Inc. ("MRC") accreditation for our audience ratings services;

• renew contracts with key customers;

• collect, manage, and process the consumer information we utilize in our media marketing and information services in compliance with applicable data protection and privacy statutes, regulations, and other requirements;

• successfully execute and maintain our cross platform and mobile measurement initiatives;

• support our current and future services by designing, recruiting, and maintaining research samples that appropriately balance quality, size and operational cost;

• successfully develop, implement, and fund initiatives designed to enhance sample quality;

• successfully manage costs associated with cell phone household recruitment, targeted in-person recruitment, and address-based sampling;

• successfully maintain and promote industry usage of our media and marketing information services, a critical mass of broadcaster encoding, and the proper understanding of our services and methodologies in light of governmental actions, including investigation, regulation, legislation or litigation, customer or industry group activism, or adverse community or public relations efforts;

• successfully manage the impact on our business of the current economic environment generally, and in the advertising market, including, without limitation, the insolvency of any of our customers or the impact of the economic environment on our customers' ability to fulfill their payment obligations to us;

• successfully integrate acquired operations, including differing levels of management and internal control effectiveness at the acquired entity;

• effectively respond to rapidly changing technologies by creating proprietary systems to support our research initiatives and by developing new services that meet marketplace demands in a timely manner;

• successfully execute our business strategies, including evaluating and, where appropriate, entering into potential acquisition, joint-venture or other material third-party agreements;

• successfully develop and implement technology solutions to identify and report consumer use of new and existing forms of media content and delivery, and advertising in an increasingly competitive environment; and

• compete with companies that may have financial, marketing, sales, technical or other advantages over us.

There are a number of additional important factors that could cause actual events or our actual results to differ materially from those indicated by such forward-looking statements, including, without limitation, the factors set forth in "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011, and elsewhere, and any subsequent periodic or current reports filed by us with the Securities and Exchange Commission (the "SEC").


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In addition, any forward-looking statements represent our expectations only as of the day we filed this Quarterly Report with the SEC and should not be relied upon as representing our expectations as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change.

Overview

We are a leading media and marketing information services firm primarily serving radio, advertisers, advertising agencies, cable and broadcast television, retailers, out-of-home media, online media, mobile media, telecommunications providers, and print media. We currently provide four main services:

• estimating the size and composition of radio audiences in local markets and of audiences to network radio programming and commercials in the United States;

• estimating the size and composition of audiences to media other than radio, including television viewed out-of-home, and content distributed on multiple platforms; we also analyze the behavior of smartphone and tablet users;

• providing qualitative information about consumers, including their lifestyles, shopping patterns, and use of media; and

• providing software to access and analyze media audience and marketing information data.

We have commercialized our Arbitron Portable People MeterTM ("PPM®") ratings service in 48 of the largest United States radio markets. We may choose to commercialize our PPM ratings service in additional markets in the future. We refer to each of the 48 United States radio markets in which we have commercialized our PPM service as a "PPM Market" and collectively, as the "PPM Markets."

Historically, our quantitative radio ratings services and related software have accounted for a substantial majority of our revenue. For each of the nine-month periods ended September 30, 2012, and 2011, our quantitative radio ratings services and related software accounted for approximately 91% of our revenue. Approximately 80% of our total revenue for the nine-month period ended September 30, 2012, was derived from local radio ratings services, of which approximately 70% was from the PPM Markets and 30% was from our Diary markets.

We expect for the year ending December 31, 2012, our quantitative radio ratings services and related software licensing will account for approximately 89% of our revenue. We also expect approximately 78% of our total revenue for the year ending December 31, 2012 will be derived from local radio ratings services, of which we estimate approximately 75% will be from the PPM Markets and 25% will be from the Diary markets. Quarterly fluctuations in these percentages are reflective of the seasonal delivery schedule of our quantitative radio ratings service and our Scarborough reports. For further information regarding seasonality trends, see "Seasonality."

While we expect our quantitative radio ratings services and related software licensing will account for the majority of our revenue for the foreseeable future, we continue to seek opportunities to diversify our revenue base by, among other things, leveraging the investment we have made in our PPM ratings service and technology.

With the commercialization of our PPM ratings service complete in 48 of the largest U.S. radio markets, our future performance will be impacted by our ability, and the costs required, to address a variety of challenges and opportunities in the markets and industries we serve. See "- Ratings Trends and Initiatives for our Syndicated Radio Ratings Services" below. Protecting and supporting our existing customer base, and ensuring our services are competitive from a price, quality, and service perspective are critical components to these overall goals, although there can be no guarantee we will be successful in our efforts.


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Ratings Trends and Initiatives for our Syndicated Radio Ratings Services

Challenges

We face a number of challenges in our syndicated radio audience ratings services. Response rates are one measure of our effectiveness in obtaining consent from persons to participate in our surveys and panels. Overall response rates for survey research, in general, have declined over the past several decades, and it has become increasingly difficult and more costly for us to obtain consent from persons to participate in our surveys and panels. We have been adversely impacted by these industry trends. Another measure often employed by users of our data to assess quality in our ratings is sample proportionality, which refers to how well the distribution of the group participating in any individual survey compares to the distribution of the population in the local market. We strive to achieve a level of both response rates and sample proportionality in our surveys sufficient to maintain marketplace confidence in our ratings and acceptance by the industry, and to support accreditation by the MRC.

If response rates decline or we are unable to maintain sample proportionality in our surveys or the costs of recruitment initiatives significantly increase, our radio audience ratings business could be adversely affected.

Quality Improvement Initiatives

In an effort to address the above challenges, we established internal benchmarks we strive to achieve for response rates and sample proportionality and have instituted a number of methodological enhancements, including cell phone household recruiting, targeted in-person recruiting, and address-based sampling. It is more expensive for us to recruit cell phone households and to conduct targeted in-person recruiting and address-based sampling. Because we intend to continue to increase the number of cell phone households in our samples and the level of address-based and targeted in-person recruiting, we expect the expenditures required to support these methods will be material. We currently anticipate the aggregate cost of cell phone household recruitment for the PPM and Diary services, and address-based and targeted in-person recruiting for the PPM service will be approximately $18.5 million in 2012, as compared to $15.5 million in 2011.

Portable People Meter Service. In operating our PPM ratings service, we have experienced and expect to continue to experience challenges, including those related to response rates and sample proportionality as described above in "- Ratings Trends and Initiatives for our Syndicated Radio Ratings Services - Challenges." We expect to continue to implement additional measures to address these challenges. Since launching our PPM ratings service, we have implemented a number of initiatives and announced additional initiatives. We believe these steps reflect our commitment to ongoing improvement and our responsiveness to feedback from customers and governmental entities. We believe these commitments and enhancements are consistent with our efforts to continuously improve our radio ratings services and to obtain and maintain MRC accreditation. We expect these initiatives will likely require expenditures that will be material in the aggregate.

Diary Service. We strive to achieve representative samples. We believe that additional expenditures will be required in the future as we continue to research and test new measures associated with improving response rates and sample proportionality as described above in "- Ratings Trends and Initiatives for our Syndicated Radio Ratings Services - Challenges."

MRC Accreditation

On July 18, 2012, the MRC accredited the radio average-quarter-hour monthly ratings data produced by the PPM ratings service in five markets: Los Angeles, Tampa-St. Petersburg-Clearwater, Baltimore, Riverside-San Bernardino, and San Antonio. Three of the markets, including Los Angeles, Baltimore and San Antonio, were granted MRC accreditation for the first time. Two of the markets, including Riverside-San Bernardino and Tampa-St. Petersburg-Clearwater, regained accreditation, which had been withdrawn by the MRC in January 2012. The MRC has also voted to continue accreditation in nine other markets: Atlanta, Cincinnati, Houston, Kansas City, Milwaukee-Racine, Minneapolis-St. Paul, Philadelphia, Phoenix, and St. Louis. The MRC voted to not grant accreditation at this time in the remaining 34 PPM markets, and therefore PPM data in those markets continue to be unaccredited.


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As of the date we filed this Quarterly Report on Form 10-Q with the SEC, the quarter-hour-based radio ratings data produced by the PPM ratings service is accredited by the MRC in 14 local markets: Atlanta; Cincinnati; Houston-Galveston; Kansas City; Milwaukee-Racine; Minneapolis-St. Paul; Philadelphia; Phoenix; St. Louis; Los Angeles; Tampa-St. Petersburg-Clearwater; Baltimore; Riverside-San Bernardino; and San Antonio. We have applied for accreditation in all PPM Markets. We continue to seek accreditation in all unaccredited PPM Markets. For additional information regarding the status of MRC accreditation of our ratings services, see "Item 1. Business - Media Rating Council Accreditation" in our Annual Report on Form 10-K for the year ended December 31, 2011.

Privacy and Data Security

We are currently subject to U.S. and international data protection and privacy statutes, rules, and regulations, and may in the future become subject to additional such statutes, rules, and regulations. Complying with these laws may require us to make certain investments, make modifications to existing services, or prohibit us from offering certain types of services, any of which may be material and adversely impact our financial results. Failure to comply could result in civil and criminal liability, negative publicity, data being blocked from use, and liability under contracts with our customers, vendors, and partners.

Sale of TRA Investment

During July 2012, we sold our investment in TRA for approximately $1.7 million, which was approximately equal to its $1.7 million carrying value at the time of the sale. Cash proceeds received from the sale amounted to approximately $1.5 million with an additional $0.2 million deposited in escrow. The escrow funds will be released to us in January 2014, less any claims paid from the escrow account. The escrow fund deposit is recorded on our balance sheet as a portion of our non-current assets.

Stock Repurchases

On February 9, 2012, our Board of Directors authorized a program to repurchase up to $100.0 million in shares of our outstanding common stock through either periodic open-market or private transactions, in accordance with applicable insider trading and other securities laws and regulations, at then-prevailing market prices over a period of up to two years ending February 9, 2014. As of October 25, 2012, we have repurchased 1,372,853 shares of outstanding common stock under this program for approximately $50.0 million.

General Economic Conditions

Many of our customers derive most of their revenue from transactions involving the sale or purchase of advertising. During recent challenging economic times, advertisers reduced advertising expenditures, impacting advertising agencies and media. As a result, advertising agencies and media companies have been and may continue to be less likely to purchase our services, which has and could continue to adversely impact our business, financial position, and operating results. If the recovery from the recent economic downturn slows or if the economy experiences another downturn in the foreseeable future, it may also lead to an increase of incidences of customers' inability to pay their accounts, an increase in our provision for doubtful accounts, and a further increase in collection cycles for accounts receivable or insolvency of our customers.

We depend on a limited number of key customers for our ratings services and related software. For example, in 2011, Clear Channel represented approximately 19% of our total revenue. If one or more key customers do not renew all or part of their contracts as they expire, we could experience a significant decrease in our operating results.


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Critical Accounting Policies and Estimates

Critical accounting policies and estimates are those that are both important to the presentation of our financial position or results of operations, and require our most difficult, complex or subjective judgments.

Software development costs. We capitalize software development costs with respect to significant internal use software initiatives or enhancements from the time the preliminary project stage is completed and management considers it probable the software will be used to perform the function intended, until the time the software is placed in service for its intended use. Once the software is placed in service, the capitalized costs are amortized over periods of three to five years. We perform an assessment quarterly to determine if it is probable all capitalized software will be used to perform its intended function. If an impairment exists, the software cost is written down to estimated fair value. As of September 30, 2012, and December 31, 2011, our capitalized software developed for internal use had carrying amounts of $28.4 million and $28.9 million, respectively, including $10.0 million and $10.4 million, respectively, of software related to the PPM service.

Deferred income taxes. We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and for deferred tax assets and liabilities for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. We must make assumptions, judgments and estimates to determine the current provision for income taxes and also deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our assumptions, judgments, and estimates relative to the current provision for income taxes take into account current tax laws, interpretation of current tax laws and possible outcomes of current and future audits conducted by domestic and foreign tax authorities. Changes in tax law or interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in the consolidated financial statements. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account forecasts of the amount and nature of future taxable income. Actual operating results and the underlying amount and nature of income in future years could render current assumptions, judgments and estimates of recoverable net deferred tax assets inaccurate. We believe it is more likely than not that we will realize the benefits of these deferred tax assets. Any of the assumptions, judgments and estimates mentioned above could cause actual income tax obligations to differ from estimates, thus impacting our financial position and results of operations.

We include, in our tax calculation methodology, an assessment of the uncertainty in income taxes by establishing recognition thresholds for our tax positions. Inherent in our calculation are critical judgments by management related to the determination of the basis for our tax positions. For further information regarding our unrecognized tax benefits, see Note 11 in the Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

Insurance Receivables. During 2008, we became involved in two securities-law civil actions and a governmental interaction primarily related to the commercialization of our PPM service. Since 2008, we have incurred a total of $12.7 million in legal fees and expenses in connection with these matters. As of September 30, 2012, an aggregate of $9.7 million in insurance reimbursements related to these legal actions has been received. As of September 30, 2012, and December 31, 2011, our insurance claims receivable related to these legal actions was $0.1 million and $1.0 million, respectively, and these amounts are included in our prepaid expenses and other current assets on our balance sheet. See Note 7 in our Notes to Consolidated Financial Statements for additional information concerning our insurance recovery receivables.

Contingent consideration. The agreement governing the 2011 acquisition of Zokem Oy, now Arbitron Mobile Oy ("Arbitron Mobile"), provides for possible additional cash payments to be made by us to the former Zokem shareholders through 2015 of up to $12.0 million, contingent upon Arbitron Mobile reaching certain financial performance targets in the future. We estimated the fair value of this contingent consideration to be approximately $0.9 million as of the July 28, 2011 acquisition date. We periodically estimate the fair value of the contingent consideration and any change in fair value will be recognized in our consolidated financial results of operations. An increase in the contingent consideration expected to be paid will result in a charge to operations in the quarter the anticipated fair value of contingent consideration increases, while a decrease in the contingent consideration expected to be paid will result in a credit to operations in the quarter the anticipated fair value of contingent consideration decreases. The estimate of the fair


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value of contingent consideration requires subjective assumptions to be made of future operating results. We estimated that the fair value of the contingent consideration as of September 30, 2012 to be $1.1 million. Future revisions to our assumptions could materially change our estimate of the fair value of contingent consideration and therefore materially affect our future financial results and financial condition.


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Results of Operations

Comparison of the Three Months Ended September 30, 2012 to the Three Months Ended September 30, 2011

The following table sets forth information with respect to our consolidated statements of income:

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