comScore, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited; amounts below are in U.S. dollars unless noted. comScore provides digital marketing intelligence and audience measurement products, primarily through subscriptions.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $58.1 million | $42.0 million | $111.0 million | $78.1 million |
| Operating income (loss) | $(6.2) million | $1.8 million | $(8.7) million | $3.1 million |
| Net income (loss) | $(8.2) million | $0.8 million | $(8.6) million | $1.1 million |
| Diluted EPS | $(0.26) | $0.03 | $(0.27) | $0.03 |
| Operating margin | (10.6)% | 4.2% | (7.9)% | 3.9% |
- Revenue rose 38.4% in Q2 and 42.2% in the first half year over year. Subscription revenue accounted for 85% of first-half revenue; management attributed growth to existing and new customers, acquisitions, and international expansion.
- Gross margin, calculated as revenue less cost of revenue, declined to 66.8% in Q2 from 70.5%; first-half gross margin was 67.2% versus 70.9%. Operating expenses grew faster than revenue: 60% in both periods, with higher staffing, stock compensation, acquisition-related amortization, infrastructure spending and litigation-related professional fees cited.
- First-half operating cash flow was $19.7 million, compared with $20.7 million in 2010. Investing used $5.1 million and financing used $8.5 million; cash increased $6.2 million to $39.9 million. Cash and short-term investments totaled $42.5 million at quarter-end.
- Current assets were $110.6 million and current liabilities $107.0 million, a current ratio of approximately 1.03. Total liabilities were $126.2 million, including $13.1 million of capital lease obligations. The company reported no borrowings on its new revolving facility as of August 4, 2011.
Changes and unusual items
- Adoption of new multiple-deliverable revenue guidance resulted in approximately $2.2 million of revenue and pretax profit being recognized in the first half that otherwise would have been recognized in future periods. Management did not expect a material full-year 2011 impact.
- After establishing standalone fair value for certain Nexius post-contract support services, Q2 included $1.2 million of revenue and $0.6 million of related costs; $0.9 million of revenue and $0.3 million of costs had previously been deferred.
- Acquisitions completed after June 30, 2010 contributed approximately $7.8 million of Q2 revenue and $13.7 million of first-half revenue. The company signed a definitive agreement on August 3, 2011 to acquire AdXpose for cash and common stock, subject to closing conditions.
- Q2 general and administrative expense included $5.2 million of litigation costs. First-half stock-based compensation was $11.0 million.
- The company sold its auction-rate securities for $2.6 million on July 6, 2011. It also decided to stop using the ARS trade name at year-end and will accelerate amortization of its $1.2 million remaining book value.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance is provided. Management said in Q2 it forecast a full-year 2011 loss, with most losses in jurisdictions where it did not expect to use them for tax purposes; this led it to reverse most of the tax benefit recorded in Q1. First-half tax benefit was $0.1 million, while Q2 tax expense was $2.0 million.
- Management reported subscription renewals above 90% measured by dollars renewed in the first half, while cautioning that weaker economic conditions could reduce spending, renewals or collections. Subscription products represented 85% of revenue.
- Nielsen sued comScore in March 2011 alleging patent infringement and seeking unspecified damages and injunctive relief. comScore called the claims without merit and is defending itself; comScore also filed its own patent suit against Nielsen and Netratings. The company said it could not estimate a potential loss range.
- The $50 million secured revolving credit facility matures June 30, 2013, bears interest at LIBOR plus 1.75%–2.75%, and is secured by substantially all company assets. It restricts dividends and certain indebtedness; the company reported covenant compliance. Capital lease obligations and office lease commitments remain significant.
- Key disclosed risks include customer and Microsoft concentration, competition, acquisition integration, reliance on panel and third-party data, data accuracy and service availability, privacy regulation, intellectual-property claims, economic weakness and foreign-currency exposure. The top ten customers represented approximately 29% of revenue and Microsoft approximately 11% for the first half.
Important facts for investors to verify
- Whether revenue growth can translate into improved operating margins, given accelerating expenses and first-half operating losses.
- The contribution and integration costs of acquired businesses, the AdXpose transaction terms and closing, and future amortization and stock-compensation expense.
- Progress and potential financial exposure in the Nielsen litigation, including the reported $5.2 million of Q2 litigation costs.
- Customer renewal trends and concentration, including Microsoft’s share of revenue and the sustainability of reported renewal rates.
- Liquidity and financing needs, capital lease and operating lease commitments, credit-facility covenants, and the company’s full-year loss and tax assumptions.