comScore, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise. comScore provides subscription-based digital measurement and analytics, advertising and digital business analytics, and mobile operator analytics through a SaaS model. Subscription revenue represented 84% of revenue for the first nine months of 2012. The interim financial statements are unaudited.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $64.3 | $58.8 | $186.8 | $169.8 |
| Gross margin | 65.9% | 66.7% | 66.4% | 67.0% |
| Operating loss | $(1.3) | $(5.4) | $(6.2) | $(14.1) |
| Net loss | $(3.1) | $(3.9) | $(10.2) | $(12.5) |
| Diluted loss per share | $(0.09) | $(0.12) | $(0.31) | $(0.39) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $33.1 | $18.8 |
Revenue grew 9.4% in Q3 and 10.0% for the nine-month period. Operating margin was approximately (2.0)% in Q3 and (3.4)% for the nine months, versus (9.2)% and (8.4)%, respectively, in 2011. Revenue growth came mainly from existing customers; subscription revenue and project revenue both increased. Nine-month international revenue rose 20% to $51.3 million, approximately 27% of total revenue.
Financial position and liquidity
- At September 30, 2012, cash and cash equivalents were $59.1 million, up from $38.1 million at year-end 2011. Current assets were $128.3 million and current liabilities $111.0 million.
- For the first nine months, operating activities provided $33.1 million; investing activities used $5.0 million and financing activities used $7.9 million. The net increase in cash was $21.1 million.
- Revolving credit facility borrowings were $4.2 million under a $50 million secured facility maturing June 30, 2013. The company reported covenant compliance. Capital lease obligations totaled $13.0 million, of which $7.5 million was current.
- Operating lease minimum payments totaled $86.0 million. The company reported no off-balance-sheet arrangements. Of its cash, $11.2 million was held by foreign subsidiaries and management intended to keep foreign earnings invested abroad.
Material changes and unusual items
- ARS copy-testing revenue declined $1.5 million in Q3 and $5.0 million for the nine months versus prior-year periods. Following the revenue decline, comScore recorded a $3.3 million impairment of ARS intangible assets in Q2; it was not a Q3 charge. The assets were valued at $2.5 million and are being amortized over an estimated remaining life of 18 months. Management said it was exploring strategic options, including a potential sale of some or all of ARS.
- Operating expenses rose 2% in Q3 and 5% for the nine months. Higher staffing, sales and marketing, panel-related costs, and reseller fees were partly offset by lower professional fees following the settlement of patent litigation in Q4 2011.
- The nine-month tax provision was $2.6 million, versus a $1.8 million benefit in the prior-year period. The filing cites valuation allowances, jurisdictional tax effects, and discrete items, including a $2.5 million deferred tax asset write-off related to market-based stock awards. Q3 tax expense was $1.4 million despite a pretax loss.
- Stock-based compensation was $17.6 million for the nine months. Share repurchases primarily reflected employee tax-withholding elections and were not purchases under a publicly announced repurchase program.
Outlook, risks and contingencies
The filing gives no quantified revenue or earnings guidance. Management expects continued investment in panels, technology infrastructure, technical personnel, new products and international expansion; it believes these investments should be less than the revenue growth they generate and expects a lower rate of growth in infrastructure capital expenditures. Management also notes that subscription renewals have historically been slightly higher in Q4. These are expectations, not guarantees.
- Key risks include customer nonrenewals and spending reductions, competition and slower-than-expected growth in digital advertising and analytics, reliance on panel and third-party data, product or measurement inaccuracies, technology and service interruptions, privacy and data-security regulation, foreign-currency exposure, and acquisition integration and impairment risk.
- Microsoft accounted for approximately 9% of nine-month revenue; the top 10 customers accounted for approximately 23%. Subscription customers generally have no obligation to renew, and some major customers may cancel without cause.
- A putative privacy class action filed in 2011 alleges violations of federal and Illinois laws and seeks unspecified damages, injunctive relief and attorneys’ fees. The company considers the claims without merit, intends to defend itself, and said it could not estimate a potential loss range.
- The $50 million revolving facility is secured by substantially all company assets and includes restrictive covenants. Foreign exchange losses were $0.8 million for the nine months; the company did not hedge currency exposure.
Important facts for investors to verify
- Whether subscription renewals, sales to existing customers, and growth in new customers sustain revenue growth, particularly given the decline in ARS revenue.
- Whether ARS performance improves or the company pursues a sale or other strategic action, and whether further impairment is needed.
- How operating costs, panel expansion, and sales and marketing investment affect margins and the path to profitability.
- The cash-flow quality and working-capital drivers, including receivable collections, deferred revenue, and the distinction between cash generation and noncash compensation and other adjustments.
- Tax provision volatility, deferred tax asset realizability, and the status and potential exposure of the privacy litigation.
- Liquidity and refinancing plans ahead of the revolving facility’s June 2013 maturity, alongside capital lease and operating lease commitments.