SCOR

Business Context and Reporting Period

Company: comScore, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: comScore provides a digital marketing intelligence platform, offering insights into consumer behavior through a panel of over two million Internet users. The company operates primarily in the United States but has expanded internationally. In May 2008, the company acquired M:Metrics, Inc. to expand its mobile marketing intelligence capabilities.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 16.1% to $30.6 million, driven by a 23% increase in the customer base (1,181 customers vs. 948) and growth in international revenues (up 35%). Subscription revenues rose to 87% of total revenue.
• Profitability Decline: Net income decreased 89% to $277,000. Operating income dropped 63% to $1.27 million. This was primarily due to a significant increase in operating expenses and a higher effective tax rate.
• Expense Increases:
  • Cost of Revenues: Increased 43.0% to $10.0 million, driven by higher panel, data, and bandwidth costs ($1.3 million increase) and increased personnel costs ($1.1 million increase).
  • Selling & Marketing: Increased 17.2% to $10.5 million due to headcount expansion and higher stock-based compensation.
  • Stock-Based Compensation: Total expense rose to $2.3 million from $1.1 million year-over-year.
• Interest Income: Decreased 79% to $175,000 due to lower interest rates and a reduced average cash balance following the M:Metrics acquisition.
• Tax Provision: The effective tax rate surged to 80.9% (from 39.9% in Q1 2008) due to a $503,000 discrete tax expense related to stock compensation deductions being lower than financial statement expenses.

Guidance, Outlook, Risks, and Unusual Items

• Economic Outlook: Management notes that the global financial crisis and economic downturn have caused some customers to delay or reduce renewals and purchases. However, the company continued to add net new customers and maintained a renewal rate of over 90% based on revenue.
• Investment Liquidity Risk: The company holds $2.9 million in auction rate securities classified as long-term investments. These securities have failed to auction and are considered illiquid. While no further impairment was recorded in Q1 2009, the company previously recorded a $2.2 million other-than-temporary impairment in 2008. Future credit rating deterioration could lead to further write-downs.
• Stock-Based Compensation: The company expects stock-based compensation expense to increase in absolute dollars as it continues to use equity incentives heavily. Unrecognized compensation expense related to non-vested awards was $20.2 million as of March 31, 2009.
• Forward-Looking Statements: The filing contains standard cautionary notes that actual results may differ materially due to risks including economic conditions, competition, and the ability to maintain panel size.

Key Facts for Investor Verification

• Liquidity of Investments: Verify the status of the $2.9 million in illiquid auction rate securities and the potential for future impairment charges if credit ratings of issuers or insurers deteriorate.
• Customer Concentration: The top 10 customers accounted for over 29% of revenue in Q1 2009, with Microsoft Corporation alone representing approximately 12% of total revenue.
• Cost Structure: Monitor the trend of Cost of Revenues as a percentage of revenue, which increased to 32.8% in Q1 2009 from 26.6% in Q1 2008, driven by panel maintenance costs.
• Tax Rate Volatility: The effective tax rate of 80.9% was significantly impacted by stock compensation timing differences; future rates may fluctuate based on stock price performance at vesting.
• Debt Covenants: The company has a $5.0 million revolving line of credit with no restrictive financial covenants, but $4.4 million is currently tied up in letters of credit.