comScore, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. comScore provides digital media analytics and measurement products, primarily through subscriptions and a SaaS delivery model. Figures below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $91.4 | $80.0 | $178.7 | $156.9 |
| Operating loss | $(2.8) | $(2.3) | $(12.0) | $(2.6) |
| Net loss | $(4.8) | $(3.2) | $(12.1) | $(4.0) |
| Diluted loss per share | $(0.12) | $(0.09) | $(0.33) | $(0.12) |
| Adjusted EBITDA (non-GAAP) | $22.9 | $17.6 | $44.2 | $34.6 |
| Adjusted EBITDA margin (non-GAAP) | 25% | 22% | 25% | 22% |
Revenue grew 14.2% in both the quarter and first half. Subscription revenue increased to $83.7 million in Q2 from $72.6 million, while project revenue rose modestly to $7.7 million. Subscription products represented 92% of first-half revenue. Revenue growth reflected higher sales to existing and new customers. International revenue was $49.0 million, or 27% of first-half revenue; management cited U.S. dollar strength as a constraint on reported international growth.
Cost of revenue was 31.2% of revenue in Q2 versus 29.0% a year earlier, implying a lower gross margin before intangible amortization. For the first half, cost of revenue was 29.9% versus 29.7%. Operating expenses increased 15% in Q2 and 20% in the first half. First-half drivers included stock-based compensation, higher headcount, data and bandwidth costs, research and development investment, acquisition-related amortization, and the disposal loss.
Cash, liquidity and capital structure
- Cash and cash equivalents were $187.9 million at June 30, 2015, up from $43.0 million at year-end 2014. First-half operating cash flow was $40.5 million, compared with $28.3 million a year earlier.
- First-half investing cash use was $14.6 million; financing cash provided was $120.1 million, principally reflecting the WPP share issuance. Cash increased by $144.9 million over the period.
- Current assets were $307.4 million and current liabilities $134.7 million. No borrowings were outstanding under the $100 million revolving facility; $3.6 million of letters of credit were outstanding, and the company reported covenant compliance.
- Capital lease obligations totaled $30.5 million, of which $15.3 million was current. The filing reports no off-balance-sheet arrangements.
- The company repurchased $60.0 million of shares in the first half. A $150 million repurchase program began in May; $96.0 million remained at quarter-end. Through August 6, an additional approximately $30.6 million had been repurchased.
Material developments and period comparisons
- On April 1, comScore acquired WPP’s European internet audience measurement business and established a strategic alliance with WPP/Kantar. The transaction included 1.605 million treasury shares valued at $82.5 million and a separate issuance of 4.438 million new shares to WPP for $204.7 million cash. WPP held approximately 15% of comScore after the transactions. The alliance generated a $98.6 million intangible asset, amortized over ten years.
- comScore acquired Proximic in April for $9.5 million cash, to enhance brand-safety and content-categorization capabilities.
- In May, comScore sold assets of its mobile operator analytics business (CSWS) and recorded a $5.2 million loss. It also agreed to provide transitional technology services and offered the buyer a secured loan facility of up to $1.5 million; no borrowing had occurred by quarter-end.
- Goodwill increased to $111.7 million and net intangible assets to $115.6 million, largely reflecting acquisitions and the WPP alliance. Q2 amortization expense more than doubled year over year to $4.3 million.
- Nonmonetary transactions contributed $10.8 million of Q2 revenue and $5.0 million of Q2 expense; first-half amounts were $14.6 million and $9.2 million, respectively. These exchanges involved no corresponding cash revenue receipts and expenses recognized can differ in timing.
Outlook, risks and other considerations
Management said it expects U.S. revenue to remain substantial and international revenue to grow faster over time, and plans continued investment in panels, technical infrastructure, personnel, new products and international expansion. It believes funding is sufficient for anticipated needs through the foreseeable future. The filing provides no quantified revenue or earnings guidance, and cautions that interim results are not necessarily indicative of full-year results. Fourth-quarter subscription renewals have historically been higher than in other quarters.
- Key business risks include subscription cancellations or weaker renewals, customer concentration (top ten customers generated approximately 27% of first-half revenue), intense competition, and reliance on accurate measurement and third-party data.
- Privacy regulation, data security incidents, panel recruitment and retention, technological changes, and access to cross-media data could impair products or raise costs. The company does not hedge foreign currency exposure and notes that currency risk may grow with international operations.
- Management cited higher data-collection costs and investments as supporting growth, but these costs contributed to weaker GAAP operating results. Stock-based compensation was $30.4 million in the first half versus $16.3 million a year earlier.
- Q2 included a $2.0 million income tax provision despite a pretax loss; the first half recorded a $0.3 million tax benefit. The filing attributes the effective tax rate variation in part to tax benefits associated with the CSWS disposition.
- The company reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. Management stated that pending legal matters were not expected to have a material adverse effect. The earlier privacy class-action settlement involved a $14 million fund contribution by the company and insurers and required changes to privacy practices.
Important facts for investors to verify
- Whether revenue growth, particularly subscription growth, continues and whether customer renewal rates and concentration remain stable.
- How much reported growth and adjusted EBITDA reflect nonmonetary transactions and non-GAAP adjustments, including the exclusion of CSWS; reconcile these measures to GAAP results.
- Whether WPP/Kantar alliance economics and acquired businesses generate returns sufficient to support the $98.6 million alliance intangible asset and expanded amortization.
- The cash impact of continued buybacks, acquisition activity, capital leases and infrastructure spending, and the remaining availability under the credit facility and repurchase authorization.
- Whether elevated stock-based compensation, data costs and R&D spending translate into durable growth and improved GAAP profitability.
- Potential effects of privacy rules, data quality or security issues, foreign exchange movements, tax positions and any developments in litigation or contingencies.