Business context and reporting period
comScore, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2014. It provides digital media analytics and measurement products, primarily through a subscription-based software-as-a-service model, and reported one operating segment. The company served approximately 2,400 customers worldwide.
Financial and operating metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $76.9 million | $68.8 million |
| Operating income (loss) | $(0.3) million | $0.7 million |
| Net income (loss) | $(0.8) million | $(2.0) million |
| Adjusted EBITDA, non-GAAP | $15.4 million | $12.6 million* |
| Adjusted EBITDA margin, non-GAAP | 20% | 19%* |
| Cash provided by operating activities | $19.4 million | $18.4 million |
| Cash used in investing activities | $1.9 million | $1.4 million |
| Cash used in financing activities | $33.5 million | $4.9 million |
*The 2013 adjusted EBITDA and margin comparison excludes the disposed Non-Health Copy-Testing and Configuration Manager products; management’s adjusted revenue baseline for that comparison was $67.5 million, rather than reported GAAP revenue of $68.8 million.
Revenue increased 11.7% on the reported GAAP comparison. Subscription revenue rose approximately $9.7 million and represented 90% of revenue, versus 86% a year earlier; project revenue declined approximately $1.6 million. Management attributed growth mainly to existing customers and newer products. U.S. revenue was $54.2 million (about 70%); international revenue was $22.7 million (about 30%).
Cost of revenue was $23.4 million, or 30.5% of revenue, compared with $22.6 million, or 32.8%. Selling and marketing was $26.1 million; research and development was $12.5 million; and general and administrative expense was $13.3 million. Total operating expenses rose 13.2%, faster than revenue, with higher stock compensation, staffing, professional fees, and data costs cited as drivers.
Cash and cash equivalents were $51.8 million at March 31, down $16.0 million during the quarter. Current assets were $162.9 million and current liabilities $137.6 million. Capital lease obligations totaled $23.0 million, including $10.6 million current and $12.4 million long-term. The $100 million revolving credit facility had no borrowings outstanding; $4.0 million of letters of credit were outstanding, and the company reported compliance with its covenants. Cash held by foreign subsidiaries was $19.1 million and management stated it intended to reinvest foreign earnings abroad.
Material changes versus the prior comparable period
- Revenue and adjusted EBITDA increased, and the net loss narrowed; however, the company moved from operating income to an operating loss.
- Operating expenses increased $9.0 million, or 13.2%, against revenue growth of 11.7%. General and administrative expense rose 48.1%, primarily due to stock compensation and professional fees; research and development rose 22.0%.
- Operating cash flow increased by approximately $1.0 million. Financing cash outflow rose substantially, principally reflecting $21.5 million of program share repurchases, $9.6 million of shares withheld for employee tax obligations, and $2.7 million of capital lease payments.
- Cash fell from $67.8 million at year-end 2013 to $51.8 million at quarter-end. Treasury stock increased by $21.5 million from program repurchases.
Outlook, commentary, risks, and unusual items
- The filing provides no formal full-year revenue or earnings guidance. Management expected continued investment in technology infrastructure, panels, products, personnel, and international expansion, while anticipating that infrastructure investment growth would be lower than revenue growth over time.
- In January 2014, comScore entered a partnership to integrate vCE into Google’s DoubleClick platform; it disclosed a similar Yahoo! partnership in April 2014, after the quarter. Management described subscription growth and international expansion as important opportunities.
- Q1 included $2.2 million of revenue and $1.2 million of expense from nonmonetary transactions. The filing notes that $1.7 million of revenue and $0.8 million of expense related to a data-asset exchange with a company whose board also included a comScore director.
- A privacy class action remained pending. The court had certified a class for three claims, discovery was complete, and trial was anticipated in Q2 2014. The company disputed the claims and said it could not estimate a potential loss range; an adverse ruling could have a significant business impact and legal costs could be substantial.
- Principal risks include customer subscription non-renewals and concentration, reliance on accurate measurement and third-party data, privacy and data-security regulation or claims, technological change and panel-maintenance costs, competition, international and foreign-exchange exposure, and continued operating losses. The top ten customers accounted for approximately 20% of Q1 revenue; Microsoft accounted for approximately 6%.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No impairment charges were recorded.
Important facts for investors to verify
- Reconcile the reported GAAP revenue comparison with the adjusted 2013 revenue baseline used for the non-GAAP EBITDA comparison.
- Track whether subscription growth, renewals, and newer offerings offset declining project revenue, and whether expense growth moderates.
- Review cash generation and liquidity after the quarter’s substantial share repurchases, alongside capital lease payments and planned infrastructure spending.
- Monitor developments and potential costs or outcomes in the privacy class action, which had no estimable loss range in the filing.
- Assess the quality and sustainability of adjusted EBITDA, including its exclusions and the company’s significant stock-based compensation.