comScore, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; unaudited consolidated results. Unless noted otherwise, dollar amounts below are in millions. comScore provides digital audience, advertising, web, and mobile/network measurement and analytics; subscription products generated 85% of revenue in the nine months ended September 30, 2011.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $58.8 | $45.7 | $169.8 | $123.8 |
| Gross profit / gross margin | $39.2 / 66.7% | $32.0 / 69.9% | $113.8 / 67.0% | $87.3 / 70.5% |
| Operating expenses | $64.1 | $48.9 | $183.9 | $123.9 |
| Operating loss / margin | $(5.4) / (9.2)% | $(3.2) / (7.0)% | $(14.1) / (8.3)% | $(0.1) / (0.1)% |
| Net loss | $(3.9) | $(2.1) | $(12.5) | $(1.1) |
| Diluted loss per share | $(0.12) | $(0.07) | $(0.39) | $(0.04) |
| Operating cash flow | Not provided separately | Not provided separately | $18.8 | $24.9 |
Revenue grew 28.6% in Q3 and 37.2% year to date. Gross margin declined as cost of revenue grew faster than sales, reflecting added staffing, infrastructure, panel and third-party data-collection costs. Nine-month operating expenses rose 48%, including higher compensation and stock-based compensation, acquisition-related amortization, and professional fees largely related to litigation. General and administrative litigation-related professional fees contributed to a $9.0 million increase in that expense category year to date.
Cash, liquidity, and obligations
- Cash and cash equivalents were $33.4 million at September 30, 2011, versus $33.7 million at December 31, 2010. Nine-month cash decreased $0.3 million: operating inflow of $18.8 million, investing outflow of $8.0 million, financing outflow of $10.8 million, and a $0.3 million foreign-exchange effect.
- Current assets were $98.4 million and current liabilities $100.7 million at September 30; the approximate current ratio was 0.98. Deferred revenue, a current liability, was $63.6 million.
- Capital-lease obligations totaled $13.1 million ($6.0 million current and $7.1 million long-term). The filing reports no amount outstanding under the $50 million secured revolving credit facility as of November 2, 2011. The facility matures June 30, 2013, bears interest at LIBOR plus 1.75%–2.75%, is secured by substantially all assets, and includes restrictive covenants; the company reported compliance.
- Cash used in investing included $5.9 million of property and equipment purchases and acquisition payments, partly offset by $2.6 million proceeds from selling auction-rate securities. Financing outflows included $7.2 million of share repurchases/withholding-related share purchases and $3.9 million of capital-lease principal payments.
Material changes and unusual items
- Q3 revenue from existing customers increased $12.5 million year over year; new-customer revenue increased $0.6 million. Nine-month subscription revenue rose approximately $38.6 million and project revenue rose approximately $7.4 million year over year.
- International revenue was $42.9 million, or about 25% of nine-month revenue, versus $21.7 million, or about 18%, in the prior-year period. Management attributed much of the increase to 2010 international acquisitions, alongside organic growth.
- AdXpose was acquired on August 11 for estimated consideration of $19.4 million: $4.4 million cash and $15.0 million in comScore shares. The preliminary allocation included $16.5 million of goodwill. AdXpose results were included from the acquisition date.
- Adoption of new multiple-deliverable revenue guidance led to approximately $4.2 million of revenue and $0.9 million of related expense being recognized in the first nine months that otherwise would have been recognized later under prior guidance. Establishment of post-contract-support fair value for certain Nexius customers also supported recognition of $2.4 million revenue and $1.4 million related costs year to date, including amounts previously deferred.
- The company accelerated amortization of the ARS trade name after deciding to stop using it effective December 31, 2011; approximately $1.2 million of remaining book value was to be amortized over the nine months ending December 31, 2011. No goodwill or long-lived-asset impairment was reported.
- Management said customer renewals exceeded 90% based on dollars renewed in the first nine months. It also noted that fourth-quarter renewals have historically been somewhat higher. No quantified earnings or revenue guidance is provided in the supplied filing text.
Management commentary, risks, and contingencies
Management cited slow signs of economic recovery but warned that renewed or worsening economic weakness could reduce customer spending, delay renewals, or impair collections. It expects continued investment in personnel, panels, products, international expansion, and technical infrastructure, while anticipating that infrastructure capital-expenditure growth may be slower than revenue growth over time. Results may fluctuate with renewal timing, revenue mix, acquisitions, project activity, and spending. The filing states that interim results are not necessarily indicative of full-year results.
- Litigation: Nielsen alleges patent infringement and seeks unspecified damages and injunctive relief; comScore disputes the claims and has asserted patent counterclaims. A separate comScore patent action against Nielsen/Netratings was scheduled for trial in late November 2011; Nielsen’s suit against comScore was scheduled for July 2012. A class action filed by Mike Harris and Jeff Dunstan alleges privacy and computer-law violations and seeks unspecified damages and other relief. The company disputes the claims; it says potential loss ranges cannot be estimated for the Nielsen and class-action matters.
- Key business risks: subscription renewals and customer concentration (the top ten customers represented about 27% of nine-month revenue; Microsoft about 10%); economic weakness; intense competition; acquisition integration and dilution; data accuracy and service reliability; panel recruitment and retention; privacy, data-security and regulatory changes; international and foreign-currency exposure; and intellectual-property claims.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no off-balance-sheet arrangements.
Investor verification points
- Assess whether revenue growth, particularly international and acquisition-related growth, translates into improved margins and sustainable cash generation.
- Track subscription renewals, customer concentration, deferred revenue, and the mix of recurring versus project revenue.
- Review the outcome and potential cost of the Nielsen and privacy class-action litigation; the filing provides no clear estimated loss range for the principal claims.
- Monitor capital-lease commitments, revolver covenant compliance and availability, and the company’s ability to fund growth while reporting losses.
- Verify the evolving purchase-price allocation and integration performance for AdXpose, and the future revenue and expense effects of the accounting changes and acquired intangible-asset amortization.