SCOR

Business Context and Reporting Period

Company: comScore, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: comScore provides a digital marketing intelligence platform, offering insights into consumer behavior, online property usage, and demographic characteristics via a panel of over two million Internet users. The company operates globally, with significant revenue derived from subscription-based products (86% of revenue for the nine months ended Sept 30, 2009) and project-based services.

Key Financial Metrics

Note: Total Debt represents current and long-term capital lease obligations. The company has no long-term bank debt.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 4.1% ($1.3M) for the quarter and 9.5% ($8.1M) for the nine-month period compared to 2008. Growth was driven by increased sales to existing customers and international expansion, offset by a decline in revenues from new U.S. customers.
• Profitability Decline: Net income for the nine months ended Sept 30, 2009, decreased 50% to $2.4M from $4.8M in the prior year period. This was primarily due to a higher effective tax rate (64.9% vs. 47.6%) and increased operating expenses.
• Expense Increases:
  • Cost of Revenues: Increased 20.2% ($4.9M) due to higher panel recruitment costs and expanded workforce.
  • Selling & Marketing: Increased 6.7% ($1.9M) for the nine-month period, driven largely by a $1.8M increase in stock-based compensation.
  • R&D: Increased 21.9% ($2.4M) due to headcount growth and new product development.
• Stock-Based Compensation: Total stock-based compensation expense rose significantly to $7.4M for the nine months ended Sept 30, 2009, compared to $4.6M in the prior year period.

Guidance, Outlook, Risks, and Unusual Items

• Restructuring Plan: On October 29, 2009 (subsequent to period end), the company announced a restructuring plan resulting in an approximately 8% reduction in workforce. Estimated costs range between $700,000 and $900,000.
• Acquisition: On October 29, 2009, the company entered into a definitive agreement to acquire Certifica, Inc., a leader in web measurement in Latin America. The transaction is subject to closing conditions.
• Investment Liquidity Risk: The company holds $2.9M in auction rate securities classified as long-term investments. These securities have failed to auction since 2008 and are considered illiquid. While no further impairment was recorded in 2009, the company faces uncertainty regarding when liquidity will be restored.
• Tax Rate Volatility: The effective tax rate for the nine months ended Sept 30, 2009, was 64.9%, significantly higher than the statutory rate. This was impacted by stock compensation tax deduction shortfalls where the stock price at vesting was lower than the grant date fair value.
• Economic Outlook: Management notes that adverse economic conditions have led some customers to delay or reduce renewals, particularly among smaller customers and in project-based revenues.

Investor Verification Checklist

• Subscription Renewal Rates: Verify the 89% renewal rate cited for the quarter and monitor for potential declines in the current economic environment.
• Auction Rate Securities: Monitor the status of the $2.9M illiquid investment portfolio for potential future impairment charges if credit ratings of issuers or insurers deteriorate.
• Stock-Based Compensation Impact: Assess the impact of future stock price fluctuations on the effective tax rate and compensation expense, given the company's heavy reliance on equity awards.
• Restructuring Execution: Track the actual costs and timeline of the announced 8% workforce reduction to ensure they align with the $700k-$900k estimate.
• Customer Concentration: Note that the top 10 customers accounted for approximately 30% of revenue, and Microsoft alone accounted for approximately 12%.