ok, let me poke some holes in your model. You state:
margins would be the same, as te concessions would grow in tandem with ASP's
I think it's a (widespread) misconception to think that margins would stay the same if the concessions increase by the same % as the CPM. Although the increase in % may be the same, the $ amount of net profit per bus is different resulting in different (mostly higher) profit margins.
For simplicity, assume CCME pays a bus contractor $10K/yr for concession fees and generates $100K/yr (probably much more) from that contractor. Let's say that it pays another 25K/yr other expenses per contract (production+SGA+tax), so total annual expense per contract is 35K, for a net margin of 65k/100K= 65%. If it raises CPM by 15% this year and pays 15% more in concessions, it will get 15%x100K= 15K more rev vs. 15%x10K= 1.5K more concession fee per contract, it gets an extra 13.5K profit per contract (if all other expenses remain the same). So the net margin will have increased by 13.5k/115k= 11.7% (due to equal increases of CPM and concession fees). If CPM is raised at a higher avg rate (say 18% annualiazed via multiple raises throughout the year) than the once-a-year concession fees, this will of course result in an even higher net margin increase.
The other thing that may work in favor of overall net margin is that the higher expected increase rate of airport busses vs. intercity busses will automatically result in higher net margins since airport busses bring about 12X to 15X higher rev per year than IC busses. Let me use numbers suggested by both Dan and Marty (links below) to illustrate this point.
- Total of IC busses increases from 24,493 by EOY'10 to 32,200 by EOY'11 for an increase of 31.5% at a revenue of about $590 per month per bus
- Total of airport busses increases from 507 by EOY'10 to 800 by EOY'11 for an increase of 57.8% at a revenue of about $7800 per month per bus.
The much higher increase rate of the higher-margin airport busses vs. IC busses will result in a net increase of net margin. Combined with the increase of net margin resulting from increased direct vs. brokered ad contracts and embedded ad % in the mix, these will probably offset much (if not all or more) the set-up, production and SGA expenses due to SWITOW and other new rev sources.
Maybe Marty can run the exact # and show us the result for all of this but my impression is that in the long run (except for one-time setup expenses that may hit the first Q ) gross margins will stay at about 72 to 74 % compared to approx 75% currently. fwiw
Reasoning makes sense to me. Another wild card is utilization rate. I thought I saw some discussion that utilization rate is highest in Q4 and lowest in Q1.
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