comScore, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. comScore provides audience, consumer behavior and advertising measurement and analytics. It reports as one operating segment.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $102.3 million | $105.9 million |
| Cost of revenue / gross margin | $53.4 million / 47.8% | $47.3 million / 55.4% |
| Operating loss | $22.6 million | $46.3 million |
| Net loss | $27.5 million; $0.46 per share | $51.5 million; $0.93 per share |
| Adjusted EBITDA (non-GAAP) | $(2.5) million | $3.6 million |
| Operating cash flow | $(1.6) million | $(44.8) million |
Revenue fell 3.4%. Ratings and Planning grew 1.4% to $70.6 million, while Analytics and Optimization declined 16.6% to $21.5 million and Movies Reporting and Analytics declined 3.4% to $10.3 million. Cost of revenue rose 13.0%, driven principally by higher data costs, contributing to gross-margin compression. The lower GAAP net loss largely reflects the prior-year quarter’s $31.9 million of investigation and audit-related expense; adjusted EBITDA declined from positive $3.6 million to negative $2.5 million.
Interest expense increased to $6.8 million from $2.9 million, primarily because the notes’ annual rate reset from 6% to 12% in January 2019. Other income included a $4.1 million net gain from changes in fair value of financing derivatives, partly offset by a decline in the fair value of an equity investment.
Liquidity, debt and cash flows
- At March 31, cash and cash equivalents were $36.7 million; restricted cash was $6.1 million. Combined cash, cash equivalents and restricted cash were $42.8 million, down $7.4 million during the quarter.
- Current assets were $124.6 million versus current liabilities of $161.5 million, a working-capital deficit of approximately $36.9 million.
- Senior secured convertible notes had $204.0 million face value and a $178.9 million carrying value, mature January 2022, and bear a 12% stated rate currently. The notes are secured by substantially all company and guarantor assets. Interest may be paid in shares, and comScore elected to pay the April 1, 2019 interest in shares.
- The notes require a minimum cash balance currently set at $20 million, scheduled to increase to $40 million on the earlier of August 9, 2019 or filing the Q2 2019 Form 10-Q, subject to limitations. The company reported covenant compliance at quarter-end and said it did not anticipate a breach.
- Operating lease liabilities totaled $54.4 million after adoption of the new lease standard. The company also disclosed a $4.4 million equipment lease commitment not yet commenced.
Management said it believes financing actions or other funding sources are probable of meeting estimated liquidity needs for at least 12 months after the financial statements are issued, but acknowledged uncertainty about the availability and outcome of financing. A potential rights offering of up to $150 million in convertible notes is optional and is not assured.
Material changes, outlook and risks
- The CEO and President resigned effective March 31, 2019; Dale Fuller became interim CEO. A further workforce reduction expected to affect approximately 10% of employees began May 7, 2019, with most departures expected in Q2 and the remainder in Q3.
- Management attributed lower syndicated digital revenue to industry changes in ad buying and consolidation. Lower Analytics and Optimization revenue primarily reflected project-delivery timing; the company expected some projects to be delivered in later 2019 quarters.
- Remaining performance obligations on non-cancelable contracts were approximately $265 million at quarter-end; management expected to recognize about 50% during the remainder of 2019, 35% in 2020 and the balance thereafter. This is not revenue guidance.
- Disclosure controls were deemed ineffective because of an unremediated material weakness in revenue accounting. New controls were executed during Q1; management expected remediation efforts to continue through 2019 but did not confirm remediation was complete.
- Contingencies include an SEC investigation into revenue recognition, internal controls, non-GAAP disclosures, tone at the top and whistleblower retaliation; a securities class action filed in April 2019; privacy litigation; and a possible OFAC matter. The company said material losses were not probable or estimable for the described matters as of March 31, 2019. BIS closed its export-controls review without finding a violation.
- Other notable items: stock-based compensation expense increased to $7.0 million from $1.9 million. A $500,000 retention bonus for the CFO, contingent on continued employment through December 15, 2019, was approved May 6, 2019.
The filing provides no specific full-year revenue or earnings guidance. Forward-looking statements are subject to risks including customer demand, execution of cost reductions, management turnover, financing and covenant compliance, litigation, regulatory matters, and control remediation.
Key facts for investors to verify
- Whether comScore can meet the scheduled $40 million minimum-cash covenant and secure adequate financing without a rights offering or materially dilutive funding.
- Whether revenue-accounting controls are remediated, and the status and potential impact of the SEC investigation and securities litigation.
- Whether revenue pressure in syndicated digital products persists and whether delayed custom projects convert to revenue later in 2019.
- How workforce reductions and management changes affect costs, execution, customer relationships and future results.
- Whether the 12% note interest burden, potential share-based interest payments and other obligations materially constrain liquidity.