SCOR

Business Context and Reporting Period

Company: COMSCORE, INC.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: comScore provides a digital marketing intelligence platform that measures, analyzes, and reports on digital activity. Its core offering relies on a proprietary panel of over two million Internet users worldwide to provide data on consumer behavior, demographics, and online advertising effectiveness. Key product families include Media Metrix (audience measurement) and Marketing Solutions (industry-specific analytics). In May 2008, the company acquired M:Metrics to expand its capabilities into mobile media measurement.

Key Financial Metrics (Year Ended Dec 31, 2008)

Note: Net income for 2008 includes a significant non-cash income tax benefit of $14.9 million due to the release of a deferred tax valuation allowance.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 34.7% year-over-year, driven by increased sales to existing U.S. customers ($18.3 million increase), new U.S. customers ($5.6 million increase), and international expansion ($6.4 million increase). The M:Metrics acquisition contributed to growth in the second half of 2008.
• Expense Increases: Total operating expenses rose to $106.4 million from $76.5 million. Selling and marketing expenses increased 37.5% due to headcount expansion and the M:Metrics acquisition. Cost of revenues increased 44.9% primarily due to panel maintenance costs and M:Metrics integration.
• Investment Impairment: The company recorded a $2.2 million pre-tax impairment charge related to auction rate securities, which were deemed to have an other-than-temporary decline in value due to credit market uncertainties.
• Customer Base: The total customer base grew by 271 net new customers, reaching 1,166 as of December 31, 2008. Subscription-based revenues accounted for 83% of total revenues.

Guidance, Outlook, Risks, and Unusual Items

• Economic Outlook: Management notes that the global financial crisis and economic downturn have caused some customers to delay or reduce renewals. However, the company maintained a subscription renewal rate of over 90% in 2008.
• Unusual Items:
  • Tax Benefit: A $20.4 million reduction in the deferred tax asset valuation allowance significantly boosted net income in 2008.
  • Auction Rate Securities: $2.9 million of long-term investments in auction rate securities are illiquid. The company recognized a $2.2 million impairment charge and expects to hold these securities until market stability is restored or maturity.
• Key Risks:
  • Customer Concentration: Microsoft Corporation accounted for 12% of total revenues in 2008.
  • Panel Maintenance: The business relies on maintaining a large, representative panel of users. Costs to recruit and retain panelists are rising, and privacy concerns or "spyware" classifications could hinder recruitment.
  • Competition: The market is highly competitive with players like Nielsen, Google, and Compete Inc.
  • International Expansion: Growth depends on expanding outside the U.S., which introduces currency risk and regulatory complexities.

Investor Verification Checklist

• Revenue Quality: Verify the sustainability of the 34.7% revenue growth given the economic downturn and the one-time impact of the M:Metrics acquisition.
• Tax Normalization: Assess future earnings potential excluding the $14.9 million non-cash tax benefit, which significantly inflated 2008 net income.
• Liquidity of Investments: Confirm the status of the $2.9 million in illiquid auction rate securities and the potential for further impairment charges.
• Customer Concentration: Monitor the relationship with Microsoft (12% of revenue) and the top 10 customers (30% of revenue) for renewal risks.
• Panel Costs: Track the trend of cost of revenues as a percentage of sales, which increased to 29.4% in 2008, to ensure margin stability.