July 21, 2015 - 5:47pm EST by
2015 2016
Price: 24.92 EPS 0.73 0.82
Shares Out. (in M): 137 P/E 37 31
Market Cap (in $M): 3,435 P/FCF 13 12.1
Net Debt (in $M): 2,245 EBIT 0 0
TEV ($): 5,680 TEV/EBIT 0 0

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Industry background:

Historically, outdoor advertising has historically been a unique advertising asset despite cyclical revenues that are indicative of advertising spend ebbs and flows that track the broader economy’s cycles.  They provide mass reach at a very cost effective price point.   They’re high margin assets, as physical depreciation on a static board de minimis so the only real cost, besides company overhead, is sending the truck and person out to replace the banner.  Often the land under the board itself is leased.  As many know, the 1965 Highway Beautification Act and many local ordinances create strong barriers to the development of new board assets – whether by incumbents or new entrants. 

The digital board economics are slightly different.  Take down a static board and then reinforce the underlying structure, put up a Daktronics digital panel and connect and increase electricity (naturally, like high-grading your acreage to develop the best wells first in the O&G industry).  CapEx are much higher, down to as low as $200,000/board from close to (or around) $1MM a decade ago.  Like TVs, these LED panels are highly deflationary.  Given you typically shuffle through ads at 6-8 second intervals and may offer a total of 6 or 8 spots, you’ve now increased your “prime” inventory at that site from 1 ad to as many as 8 ads, with the ability to charge nearly the same and the potential to reach new clients (no longer need to commit to 1 month, LAMR/OUT/CCO offer as little as multi-day or even 1-day spots for certain digital locations).  Obviously, the negative is that if everyone put up digital in every spot, inventory would technically grow massively.  By itself, you have declining capex and pricing based on the location rather than some sort of cost-plus model tied to the underlying capex.  Fast forward to 2015, digital billboards are quickly becoming an integrated, interactive part of an ad campaign just like any other digital screen. 

And location does matter.  For Yearend 2013, for OUT specifically, the company showed revenue per digital board of $91,500 in its NY metro area vs static revenues per board of $13,000 in the same area.  Those numbers for OUT’s Dallas locations are $17,000 and $3,000.

At less than $10 CPM, Outdoor advertising (aka Out of the Home or OOH) is one of the most cost effective forms of advertising.  Only radio and online search rivals that price point. 

Outdoor is a great tool for brand awareness.  That’s why AAPL relies on the medium.  People talk about memorable TV ads and Billboards more frequently than memorable online ads.  A 2012 survey by Outdoor Media Center (take with a grain of salt?) supports this opinion.

Scarcity value?  As audiences become more fragmented, billboard and posters still have the ability to reach a mass audience in a big way.  Even the hottest TV shows have distracted viewers texting on their phone or searching their tablet or watching the show several days or weeks later via On Demand.  Online viewers, whether through an App or through internet browsing, are hip to the quickest way to click out an advertisement. With outdoor, viewers cannot turn off the ad nor change the channel nor fast forward.  It is becoming one of the few places where the consumers do not have some level of control over the ad space.


Transformational shift in utilization of outdoor digital assets

Outdoor Advertising purchasing is on the cusp of becoming more integrated and outdoor ad viewing is becoming more interactive and integrated. 

Below are some examples that highlight modern usage of digital panels or static outdoor usage by modern tech companies.  Industry contacts suggest that it 1) legitimizes many of these startups as real companies, 2) provides a medium to reach mass audience – which is important because through mobile many apps and websites can be accessed while outdoor, and 3) they can target a specific neighborhood or demographic based on commuting schedules.

·         Apple spends 10% to 12% of its total ad budget on outdoor.  AAPL is no doubt calculated, sophisticated advertiser of its brand and products.  For comparison, top 100 National advertisers spend ~2-3% of their budget on outdoor.

·         Google locked up a Times  Square digital board exclusively, for entire month of Dec 2014.  To boot, besides being a tech company, this is a company that survives off of generating ad revenues.


·         Tech companies themselves see value in outdoor:


·         Snapchat this spring launched a brand campaign on its homepage and Youtube, which shows a backdrop their brand on a billboard in the background.


·         Scruffs, a popular gay matchmaking app, did its first billboard ad outside the superbowl in Phoenix. 

Coca-cola is using a digital board at Times Square on an interactive basis, to publish facts (in partnership with Google) about names for those who tweet their name to #cokemyname.