comScore, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. comScore provides audience, consumer behavior and advertising measurement and analytics. It reports as one operating segment.
Financial performance and liquidity
- Q2 revenue: $96.9 million, down 4.4% from $101.4 million a year earlier. For the first half, revenue was $199.2 million, down 3.9% from $207.3 million.
- Revenue mix: Q2 Ratings and Planning revenue declined 2.2% to $68.9 million; Analytics and Optimization declined 15.8% to $17.3 million; Movies Reporting and Analytics grew 3.1% to $10.7 million. Management cited weakness in syndicated digital products and digital custom marketing solutions; Activation revenue grew.
- Margins and operating results: Q2 cost of revenue was $52.0 million, or 53.7% of revenue, versus 50.8% a year ago, implying gross margin of 46.3% versus 49.2%. Operating loss was $272.2 million, compared with $51.6 million, and net loss was $279.5 million, compared with $56.0 million. Q2 diluted loss per share was $4.61 versus $1.02. Results include $224.3 million of goodwill impairment and $17.3 million of intangible-asset impairment.
- First-half results: Operating loss was $294.8 million versus $97.9 million; net loss was $307.0 million versus $107.4 million. Adjusted EBITDA, a non-GAAP measure, was negative $5.7 million versus positive $4.9 million. Management cautions that non-GAAP measures have limitations and should not replace GAAP results.
- Cash flow: First-half operating cash use was $10.7 million, versus $74.4 million in 2018; investing cash use was $6.8 million versus $6.5 million; financing provided $21.0 million versus $90.1 million. Cash, cash equivalents and restricted cash totaled $53.8 million at June 30, including $4.9 million restricted.
- Debt and obligations: Senior secured convertible notes had $204.0 million principal outstanding and a $180.9 million carrying value, due January 2022. The stated interest rate was 12% after resetting from 6% in January 2019; effective rates were 18.6% on the Initial Notes and 14.7% on the Option Notes. Notes are secured by substantially all company and guarantor assets and include a $40 million minimum-cash covenant upon filing this report. Lease liabilities totaled $52.5 million operating and $4.9 million finance.
- Balance sheet: Total assets were $731.8 million and stockholders’ equity was $270.1 million at June 30, versus $954.1 million and $551.6 million at year-end 2018. Goodwill was $416.8 million after impairment.
Material changes and unusual items
- Q2 impairment charges followed a sustained share-price and market-capitalization decline, management changes and lower revenue. Goodwill was written down by $224.3 million; the WPP strategic-alliance intangible asset was fully impaired by $17.3 million. The latter is expected to reduce annual amortization by about $3.0 million.
- On June 26, the company raised $20.0 million gross through a private placement with CVI Investments, issuing 2.73 million common shares and four warrant series. The warrants had a reported fair value of $10.8 million and may create further dilution; certain warrant exercises could produce additional proceeds. A separate equipment sale-leaseback generated $4.3 million of cash proceeds.
- Interest expense rose to $8.2 million in Q2 from $4.1 million, primarily because the notes’ rate increased to 12%. The company elected to pay April and July note interest in shares; July’s payment was made after quarter-end.
- Management changes: CEO Bryan Wiener and President Sarah Hofstetter resigned effective March 31; Dale Fuller became interim CEO. The Chief Product Officer and Chief Operating Officer subsequently resigned.
- The company implemented a workforce reduction of approximately 10% in May 2019 and expected total related costs of up to $4.0 million, with remaining expense expected in Q3.
Outlook, risks and contingencies
- Management stated that, based on current plans and actions within its control, funding was expected to meet anticipated needs for at least 12 months. It cautioned that financing availability and the success of liquidity actions are uncertain. The company was in compliance with note covenants at June 30 and did not anticipate a breach, but covenant failure could trigger redemption at a premium and materially affect liquidity.
- Approximately $240 million of remaining performance obligations on non-cancelable contracts was expected to be recognized: about 38% in the remainder of 2019, 43% in 2020 and 13% in 2021, with the balance thereafter. This is not a revenue-growth forecast.
- Disclosure controls were deemed ineffective because of an unremediated material weakness in revenue accounting. Management said remediation would continue through 2019, with the goal of full remediation during that year.
- The SEC is investigating allegations concerning revenue recognition, internal controls, non-GAAP disclosures, tone at the top and whistleblower retaliation. The company accrued a $5.0 million liability, is cooperating, and said the SEC had made no decision on violations.
- Other disclosed matters include privacy class-action litigation and a securities class action; management said material losses were not probable or estimable for those cases as of June 30. An OFAC review related to possible sanctions violations remained unresolved; BIS closed its review without finding an export-control violation.
- Key risks include continued operating losses and cash needs, rising debt interest, covenant compliance, potential additional financing and dilution, customer and market effects of the investigations and control weakness, and possible further asset impairments.
Investor verification priorities
- Track operating cash use, vendor payment timing, available unrestricted cash, and compliance with the $40 million minimum-cash covenant.
- Review note interest, maturity and repayment terms, as well as potential dilution from PIK interest shares, conversion rights and CVI warrants.
- Assess whether revenue trends—particularly syndicated digital and Analytics and Optimization—stabilize, and compare actual results with the remaining-performance-obligation schedule.
- Monitor remediation and independent effectiveness of revenue controls, and developments in the SEC investigation and litigation.
- Review assumptions behind the goodwill and intangible-asset valuations and whether further impairment charges arise.