comScore, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. comScore is a global audience and advertising measurement and analytics company. Financial statements are unaudited.
Financial results
- Revenue: $105.9 million, up 5.0% from $100.9 million reported in Q1 2017. The comparison is affected by adoption of ASC 606; on the filing’s comparable basis, Q1 2018 revenue would have been $105.5 million. Product-line results: Digital Audience $57.8 million (down 0.2%); TV and Cross-Platform $25.3 million (up 15.0%); Advertising $12.2 million (up 5.5%); Movies $10.6 million (up 13.3%).
- Profitability: Gross profit was approximately $58.7 million, or 55.4% of revenue, versus $53.5 million, or 53.1%, in Q1 2017. Operating loss was $46.3 million, compared with $42.9 million; net loss was $51.5 million, or $0.93 per share, versus $40.8 million, or $0.71 per share. The higher net loss included increased investigation and audit costs and interest expense.
- Cash flow: Operating cash outflow was $44.8 million, versus $2.0 million in Q1 2017. Investing cash outflow was $2.7 million. Financing provided $76.8 million, principally from the new notes. Cash, cash equivalents and restricted cash totaled $74.8 million at quarter-end, including $7.6 million restricted.
- Liquidity and debt: The company reported $67.3 million of unrestricted cash and $150.0 million face value of senior secured convertible notes; their net carrying value was $126.2 million. The notes mature in 2022, carry 6% interest through January 2019, and are secured by substantially all company and guarantor assets. A $40 million minimum-cash covenant applies; the company reported compliance at March 31.
- Other metrics: Total assets were $1.032 billion and total liabilities $483.3 million at March 31. The company recorded $31.9 million of investigation and audit-related expense and $1.3 million of restructuring expense during the quarter.
Changes and management commentary
- Revenue growth reflected higher TV and Cross-Platform, Advertising and Movies sales, partly offset by Digital Audience softness. Management attributed Digital Audience pressure to product changes and customer disruption following investment in mobile data, as well as market changes affecting smaller publishers. Management said customer losses were slowing and expected declines to moderate.
- Cost reductions lowered selling and marketing expense 12.9% and research and development expense 11.0% year over year. Management expected these expenses to continue declining versus 2017. Data costs rose as the company invested in TV and mobile data and were expected to increase during 2018.
- Investigation and audit-related expense rose to $31.9 million from $17.7 million. Management expected these costs to continue for the rest of 2018, but at a lower level than Q1 and the prior year.
- Management believed available funding was sufficient for anticipated needs for at least 12 months, including financing actions it considered probable. A potential rights offering of up to $150 million and additional financing remained under evaluation; management cautioned that financing availability and proceeds were uncertain.
- ASC 606 adoption reduced reported Q1 revenue by $0.4 million and increased net loss by $0.8 million versus the amounts that would have been reported without adoption. The 2017 comparative figures were not restated.
- Management announced Bryan Wiener as CEO, effective May 30, 2018. It also expected approximately $20 million of stock-based compensation expense in Q2 upon anticipated issuance of previously delayed equity awards, subject to approval of a new incentive plan.
Risks, contingencies and unusual matters
- Disclosure controls were deemed ineffective at March 31 because of material weaknesses in revenue accounting, business combinations and significant asset acquisitions, financial close and reporting, and tax accounting. Remediation was ongoing, with a goal of full remediation by year-end 2018.
- Proposed derivative and federal securities litigation settlements remained subject to final court approval, with hearings scheduled for June 7, 2018. The securities settlement provides for $27.2 million cash funded by insurers and $82.8 million in company stock, with an option to use cash instead. Accrued litigation settlements totaled $118.2 million; insurance recoverables totaled $37.2 million.
- The SEC was investigating revenue recognition, internal controls, non-GAAP disclosures and whistleblower retaliation; the company said the SEC had made no decision on violations. The company also began a voluntary disclosure and internal review concerning possible export-control and sanctions violations; potential fines or penalties were not estimable.
- Nielsen’s preliminary-injunction request was denied in March; arbitration was resolved in April 2018, after quarter-end, and the company expected the court action to be dismissed.
- The company’s $4.2 million equity investment and $15.1 million financing-derivative liabilities were subject to fair-value risk. Management estimated a 10% fair-value change could produce a $1.9 million gain or expense.
Important facts for investors to verify
- Assess underlying revenue trends using an ASC 606-adjusted comparison, particularly Digital Audience customer retention and the growth of newer products.
- Track operating cash burn, unrestricted cash, the $40 million minimum-cash covenant, and whether the rights offering or other financing is completed on expected terms.
- Review the notes’ effective interest cost, conversion and warrant terms, security provisions, and potential dilution from notes, warrants and anticipated equity awards.
- Confirm final court approval and actual funding or share issuance for the proposed settlements, including insurance recoveries.
- Monitor control-remediation progress, SEC and export-control reviews, and the financial or operational effects of any findings.