comScore, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The filing was signed March 23, 2018, and includes subsequent events and developments through early 2018. Financial statements are unaudited.
Business context
comScore measures audiences, consumer behavior, and advertising across digital, television, and movie platforms. It reports one operating segment. Its offerings include Digital Audience, TV and Cross-Platform, Advertising, and Movies. The comparison with Q1 2016 is affected by the January 2016 Rentrak merger: Q1 2017 included three months of Rentrak revenue versus approximately two months in Q1 2016.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $100.9 million | $91.3 million |
| Gross profit / gross margin | $53.5 million / 53.1% | $54.8 million / 60.0% |
| Operating loss / operating margin | $42.9 million / (42.6%) | $21.2 million / (23.2%) |
| Net loss | $40.8 million | $13.1 million |
| Adjusted EBITDA / margin | $(1.9) million / (1.8%) | $7.0 million / 7.8% |
| Operating cash flow | $(2.0) million | $1.2 million |
At March 31, 2017, cash and cash equivalents were $72.6 million, restricted cash was $4.5 million, and marketable securities were $28.4 million. Total assets were $1.104 billion, total liabilities $235.5 million, and stockholders’ equity $868.5 million. Current assets were $227.4 million against current liabilities of $199.8 million. Capital lease obligations totaled $18.4 million; there were no borrowings under the revolving credit facility, and $4.0 million of letters of credit were outstanding and cash-collateralized.
Changes versus the prior comparable period
- Revenue rose 10.4%, but management said revenue was effectively unchanged after excluding the additional Rentrak month in 2017 and the DAx revenue present in Q1 2016.
- TV and Cross-Platform revenue increased 59.1% to $22.0 million; Movies increased 54.0% to $9.4 million. Digital Audience declined 0.4% to $57.9 million, Advertising declined 3.2% to $11.6 million, and DAx revenue fell to zero after its sale.
- Operating expenses increased 27.8% to $143.8 million. Higher investigation and audit costs, cost of revenues, and amortization, together with the absence of the prior-year DAx disposition gain, outweighed lower general and administrative costs.
- Investigation and audit-related expense increased to $17.7 million from $6.5 million. Cost of revenues rose 29.5%, and its share of revenue increased to 46.9% from 40.0%.
- Cash and cash equivalents declined from $84.1 million at year-end 2016 to $72.6 million. Cash used in investing activities was $3.0 million, compared with $79.7 million provided in Q1 2016, which included Rentrak acquisition and DAx sale proceeds.
Outlook, risks, and unusual items
- Liquidity actions after quarter-end: In January 2018, comScore issued $150 million of senior secured convertible notes to Starboard for $85 million cash and shares valued at $65 million. The notes carry 6% interest initially, mature in 2022, and have a $31.29 conversion price. The company also described an option for additional notes and a potential rights offering. Management stated that financing and restructuring actions were expected to meet estimated liquidity needs for at least 12 months, while warning that outcomes and financing availability were uncertain.
- Costs and restructuring: The company reported significant investigation, audit, and litigation-related costs. It announced a restructuring in December 2017, including an approximately 10% workforce reduction and exits from certain geographic regions.
- Financial reporting and controls: An Audit Committee investigation identified accounting errors and misconduct involving certain transactions; prior financial statements were identified as unreliable. Management concluded disclosure controls were ineffective at March 31, 2017 because of material weaknesses in internal control over financial reporting.
- Trading and financing constraints: Nasdaq trading was suspended in February 2017 and the stock was formally delisted in May 2017, moving to OTC Pink. Late SEC filings also restricted access to certain financing and registration routes.
- Litigation and investigations: The filing describes shareholder and securities litigation, an SEC investigation into revenue recognition, controls, non-GAAP disclosures, and whistleblower retaliation, and a voluntary disclosure and review concerning possible export-control and sanctions violations. At March 31, 2017, the proposed later settlements of certain lawsuits had not been recognized on the balance sheet; later developments included proposed settlements subject to court approval.
- Other notable items: Q1 2017 included $19.1 million of accrued litigation settlements and $17.3 million of insurance recoverables. Other income of $3.2 million primarily reflected transition-services income from the DAx disposition. The 2016 tax benefit included a $6.9 million valuation-allowance release; Q1 2017 recorded a $0.9 million tax provision.
Important facts for investors to verify
- Review the underlying restatement and audit findings, material weaknesses, and the status and effectiveness of remediation.
- Confirm final court approval, funding, and share dilution implications of the securities and derivative litigation settlements, as well as insurance recoveries.
- Check the terms and outstanding balance of the convertible notes, any exercise of Starboard’s option, and whether the rights offering proceeded.
- Assess cash burn, restructuring savings, ongoing investigation and litigation expenses, and whether liquidity assumptions remain adequate.
- Track the SEC investigation and export-control review, including any findings, penalties, or related contingencies.
- Interpret year-over-year revenue and expense comparisons in light of the Rentrak merger timing and DAx divestiture; treat Adjusted EBITDA as a non-GAAP measure with the limitations described in the filing.