comScore, Inc. — Q3 2014 Form 10-Q
Business and period: Digital media analytics and measurement provider operating a subscription-led SaaS model. This unaudited quarterly report covers the three and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013.
Key financial results
Amounts below are in millions of dollars, except percentages and per-share data.
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $82.1 | $71.6 | $239.0 | $210.4 |
| Operating income (loss) | $(6.0) | $0.9 | $(8.6) | $2.5 |
| Net income (loss) | $(3.3) | $(0.1) | $(7.2) | $(2.5) |
| Adjusted EBITDA (non-GAAP) | $19.1 | $16.4 | $51.3 | $43.0 |
| Adjusted EBITDA margin (non-GAAP) | 23% | 23% | 21% | 21% |
- Revenue increased 14.7% in Q3 and 13.6% for nine months year over year. Growth primarily came from existing customers and subscription products; project revenue declined. Subscription revenue was 90% of nine-month revenue, versus 86% in the comparable 2013 period.
- Q3 cost of revenue was 29.8% of revenue, versus 30.2%; nine-month cost was 29.8%, versus 31.3%. Q3 operating margin was approximately (7.3)%, versus 1.2%; nine-month operating margin was approximately (3.6)%, versus 1.2%.
- Adjusted EBITDA is a company-defined non-GAAP measure; the filing cautions it excludes, among other items, stock compensation, capital expenditures, working-capital needs and taxes. The nine-month 2013 adjusted EBITDA comparison uses management’s estimated pro forma adjustment for products divested in 2013; its revenue figure is $209.0 million, rather than reported GAAP revenue of $210.4 million.
Cash, liquidity and obligations
- At September 30, cash and cash equivalents were $39.6 million, down $28.2 million from year-end 2013. Current assets were $159.0 million and current liabilities $146.8 million; working capital was $12.2 million.
- For the first nine months, operating cash flow was $42.0 million, investing cash flow was $(10.6) million, and financing cash flow was $(57.7) million. Financing outflows included $36.9 million of share repurchases, $14.5 million of tax-withholding share repurchases and $8.7 million of capital-lease principal payments.
- No borrowings were outstanding under the $100 million revolving facility; $3.8 million of letters of credit were outstanding. Capital lease obligations totaled $25.6 million, including $12.6 million current and $13.0 million long-term. The company reported compliance with facility covenants.
- $12.6 million of cash was held by foreign subsidiaries and, if repatriated, would incur estimated withholding taxes of 5%–15%; management said foreign earnings were intended to remain reinvested abroad.
Material changes, outlook and notable items
- Operating expenses rose 25% in Q3 and 19% for nine months. Drivers included increased headcount and stock compensation, third-party data and bandwidth costs, and research and development investment. Nine-month general and administrative expense also reflected higher stock compensation and bad-debt expense.
- A decline in the wireless division prompted a $6.9 million impairment of related intangible assets in Q3. The valuation used discounted cash flows, including a 20% discount rate and 0.8% royalty rate; the assets’ estimated fair value was $2.8 million. The filing identifies the assumptions and forecasts as judgment-sensitive.
- The privacy class-action settlement received final court approval on October 1, 2014. It requires a $14 million settlement fund, funded by comScore and insurers, and changes to privacy policies and protocols. The company recorded a $3.5 million net contingent loss; an associated $10.5 million receivable was recorded. The accrued settlement liability was $14 million at quarter-end.
- The August 2014 MdotLabs acquisition cost $4.5 million in cash and added approximately $3.3 million of goodwill; it is intended to strengthen detection of invalid advertising activity.
- Q3 included $4.6 million of revenue and $2.9 million of expense from nonmonetary data transactions; the filing attributes $1.5 million of revenue and $2.4 million of expense to a transaction considered potentially related-party. Nine-month amounts were $8.6 million revenue and $7.0 million expense.
- No specific financial guidance was provided. Management expected continued international growth and further investment in panels, technology infrastructure, products and personnel, while anticipating capital-expenditure growth to be lower than revenue growth. Historically, more subscription renewals occur in Q4.
- Principal risks highlighted include subscription renewals and customer concentration, privacy regulation and reputational exposure, data accuracy and collection, competition, technology changes, international and currency exposure, and potential further asset impairment. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscription growth, renewal rates and customer expansion continue to offset declining project revenue and the disclosed decline in the wireless division.
- The assumptions supporting the $6.9 million impairment valuation and whether further impairments or revised useful lives become necessary.
- Final settlement-fund funding, insurance recoveries and any remaining costs or obligations related to the privacy litigation.
- Cash conversion and liquidity trends, including the effects of repurchases, capital-lease payments, foreign-held cash and working-capital movements.
- The comparability of non-GAAP adjusted EBITDA and the filing’s pro forma 2013 revenue adjustment, as well as the valuation and expense/revenue timing of nonmonetary transactions.