comScore, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The interim financial statements are unaudited. comScore provides subscription-based digital measurement and analytics, advertising analytics, digital business analytics, and mobile operator analytics through a SaaS model. It served more than 2,200 customers worldwide during the quarter.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $69.9 million | $60.3 million | $138.8 million | $122.6 million |
| Operating income (loss) | $1.0 million | $(6.0) million | $1.7 million | $(4.9) million |
| Net income (loss) | $(0.4) million | $(6.6) million | $(2.4) million | $(7.1) million |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $37.0 million | $24.3 million |
Margins: Q2 gross margin, calculated as revenue less cost of revenues, was approximately 69.1%, versus 66.2%; operating margin was 1.4%, versus negative 9.9%. First-half gross margin was approximately 68.2%, versus 66.7%; operating margin was 1.2%, versus negative 4.0%. Net margin was negative 0.6% in Q2 and negative 1.7% for the first half.
Growth and cost trends: Revenue rose 16.0% in Q2 and 13.2% for the first half. Management attributed growth primarily to existing customers; subscription revenue increased approximately $7.7 million in Q2 and $14.8 million in the first half. For the first half, subscription revenue was 86% of total revenue. Operating expenses rose 4% in Q2 and 8% for the first half, with higher personnel, commissions, professional fees, data collection costs and product-development spending. Cost of revenues declined as a percentage of revenue, which management attributed to operating leverage.
Cash, liquidity and obligations: Cash and cash equivalents were $85.8 million at June 30, up from $61.8 million at year-end 2012. Current assets were $165.3 million and current liabilities $123.0 million. First-half operating cash flow of $37.0 million, less $2.3 million of property and equipment purchases, implies approximately $34.7 million of cash flow after those purchases. Financing activities used $10.1 million, including capital-lease payments and stock-related repurchases. About $10.2 million of cash was held by foreign subsidiaries; management said it intended to reinvest foreign earnings abroad.
Revolving-credit borrowings were approximately $2.0 million; the $50 million secured facility was due to mature September 30, 2013. The company reported compliance with its covenants. Capital-lease obligations totaled $18.2 million, including current and long-term portions. Contractual future minimum operating-lease payments were $79.9 million. The filing also describes a $10 million equipment-leasing arrangement.
Material changes and unusual items
- Q2 and first-half operating results improved substantially from the prior-year periods, which included a $3.3 million intangible-asset impairment charge. No impairment was recorded in the first half of 2013.
- Q2 included a $1.16 million net gain from settlements of patent lawsuits initiated by comScore against third parties. The first half also included a $0.21 million gain on the sale of certain ARS non-health assets. The sale did not qualify as discontinued operations; comScore retained rights to serve health-related customers.
- The board authorized repurchases of up to $50 million of common stock. The company repurchased $0.5 million under the program during Q2, leaving approximately $49.5 million authorized. Separately, it used $7.0 million during the first half for shares withheld or repurchased to satisfy employee tax obligations.
- Income-tax provisions were $1.3 million in Q2 and $3.5 million for the first half, despite pretax income in both periods. Reported effective rates were 143.4% and 325.4%, respectively; the filing cites valuation allowances, foreign and state taxes, nondeductible items, uncertain tax benefits, and stock-compensation tax effects.
Outlook, risks and contingencies
The filing provides no numerical revenue or earnings guidance. Management expected continued investment in panels, technology infrastructure, technical staff, new products and international expansion, while expressing the view that capital-expenditure growth should be lower than revenue growth over time and that greater scale could improve operating leverage. Results may vary materially and interim performance is not necessarily indicative of full-year results.
- A privacy-related class action alleges violations of federal privacy and computer laws. The court certified a class on three claims, discovery was underway, and the company said it believed the claims were without merit and intended to defend itself. The potential loss could not be estimated.
- Key risks include subscription cancellations or weaker renewals, customer concentration, competition, economic uncertainty, data accuracy and service reliability, panel recruitment and retention, privacy regulation and litigation, cybersecurity, and foreign-exchange exposure. Microsoft accounted for approximately 8% of first-half revenue; the top ten customers accounted for approximately 23%.
- The company reported no off-balance-sheet arrangements and no material changes to internal control over financial reporting; disclosure controls were deemed effective. It does not hedge foreign-currency exposure and noted that international growth could increase that risk.
Investor verification priorities
- Confirm renewal rates, subscription growth and customer concentration, particularly Microsoft and the top ten customers.
- Track operating leverage and whether rising sales, research and development, and international investment translate into sustainable profitability and cash generation.
- Verify the outcome and financial exposure of the privacy class action, including legal costs and any changes in class certification or claims.
- Check the status and terms of the revolving-credit facility as its reported maturity date approached, alongside capital-lease and operating-lease commitments.
- Assess the use and remaining authorization of the $50 million repurchase program against cash needs, growth investment and other obligations.
- Review the unusually high interim tax rates, deferred-tax valuation allowances and the realizability of tax assets.