SCOR

Business Context and Reporting Period

Company: comScore, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: comScore provides a digital marketing intelligence platform, utilizing a panel of over two million Internet users to measure online behavior, demographics, and advertising effectiveness. The company operates primarily through subscription-based products (Media Metrix) and customized project services (Marketing Solutions).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 41.2% year-over-year, driven by a 48% increase in subscription revenues and a 17% increase in project revenues. The customer base grew by 205 net customers to 948.
• Profitability: Operating income more than doubled to $3.4 million. Net income attributable to common stockholders rose to $2.5 million from $655,000 in the prior year.
• Expense Increases: Selling and marketing expenses rose 38.7% due to headcount expansion and commissions. General and administrative expenses increased 55.0%, largely due to costs associated with being a public company (e.g., insurance, legal, Sarbanes-Oxley compliance).
• Amortization: Amortization of intangible assets dropped significantly from $293,000 to $7,000 as assets from prior acquisitions were fully amortized.
• Investment Portfolio: The company significantly increased its investment portfolio, purchasing $51.8 million in investments during the quarter. However, $4.5 million of auction rate securities are currently classified as long-term due to liquidity issues in the credit markets.

Outlook, Risks, and Management Commentary

• Liquidity: Management believes existing cash, cash equivalents, and short-term investments ($103.4 million total) are sufficient to meet requirements for at least the next twelve months. A $5.0 million revolving line of credit was opened in March 2008 with no amounts currently borrowed.
• Investment Risk: The company holds $4.6 million in auction rate securities that have failed to clear in recent auctions. While currently valued at fair value and not considered permanently impaired, liquidity is uncertain, and these assets are classified as long-term.
• Tax Position: The company maintains a valuation allowance of $21.4 million against deferred tax assets. Future reversals of this allowance could materially impact results of operations.
• Operational Risks: Key risks include the ability to maintain the size and quality of the Internet user panel, competition from larger firms (e.g., Nielsen, Compete), and potential regulatory changes regarding privacy and data collection.
• Seasonality: The company notes historically higher costs in the first half of the fiscal year due to payroll taxes and hiring ramp-ups.

Investor Verification Checklist

• Auction Rate Securities: Verify the current liquidity status and fair value of the $4.5 million in illiquid auction rate securities and the creditworthiness of the bond insurers backing them.
• Deferred Tax Assets: Monitor the company's assessment of the $21.4 million valuation allowance and the likelihood of future reversals impacting the effective tax rate.
• Customer Concentration: Review the dependency on top customers, specifically Microsoft Corporation, which accounted for approximately 13% of revenues in 2007.
• Panel Costs: Assess the trend in panel maintenance costs relative to revenue growth, as increased churn or recruitment costs could compress margins.
• Public Company Costs: Evaluate the sustainability of the increased General and Administrative expenses related to public reporting and compliance.