comScore, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless noted. The filing describes comScore as a provider of subscription-based digital analytics, audience measurement, advertising, web, mobile and network analytics. The interim financial statements are unaudited.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $62.3 million | $53.0 million; up 17.6% |
| Operating income (loss) | $1.1 million | $(2.6) million |
| Operating margin | 1.7% | (4.9)% |
| Net loss | $(0.5) million; $(0.01) per share | $(0.3) million; $(0.01) per share |
| Cash from operating activities | $11.3 million | $15.1 million |
| Capital expenditures | $0.6 million | $1.6 million |
| Cash and cash equivalents | $42.4 million at March 31, 2012 | $38.1 million at December 31, 2011 |
- Gross margin was approximately 67.2%, compared with 67.6%. Operating expenses rose 10% to $61.2 million, slower than revenue growth; G&A fell 11.7% to $9.1 million, while cost of revenues and selling and marketing each increased about 19% and 17.5%, respectively.
- The company recorded a $1.1 million income tax provision, compared with a $2.2 million tax benefit in Q1 2011. The reported effective tax rate was 177.7%, affected by valuation allowances, foreign and state taxes, nondeductible expenses and other items.
- Operating cash flow was supported by $6.8 million of increased deferred revenue and noncash charges, but was lower year over year, partly reflecting payment timing and working-capital movements. Cash increased $4.3 million in the quarter.
- Current assets were $125.8 million and current liabilities $110.8 million, leaving working capital of approximately $15.0 million. Deferred revenue totaled $77.8 million, including current and long-term balances.
- Capital lease obligations were $12.3 million, of which $6.5 million was current. No borrowings were outstanding on the $50 million secured revolving credit facility, which matures June 30, 2013; $3.2 million of letters of credit were outstanding. The facility is secured by substantially all company assets and includes restrictive covenants; the company reported covenant compliance.
Changes and operating drivers
- Revenue from existing customers increased $11.2 million to $56.2 million, while revenue from new customers decreased $1.9 million to $6.1 million. Management attributed the new-customer decline partly to a focus on selling new products, particularly validated Campaign Essentials (vCE), to existing customers.
- Subscription revenue increased approximately $7.5 million; project revenue increased approximately $1.8 million. Subscription-based products accounted for 84% of revenue, versus 85% for full-year 2011.
- International revenue rose 30% to $16.2 million, or 26% of total revenue, led by Europe. U.S. revenue was $46.1 million.
- Operating income improved from a loss to a profit, but the company remained loss-making after taxes. The tax provision and foreign-currency transaction loss of $0.3 million weighed on results.
- Operating cash flow declined from $15.1 million to $11.3 million. Cash financing outflows included $5.4 million of share repurchases to satisfy employee tax withholding obligations and $1.6 million of capital lease principal payments.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings or cash-flow guidance. Management expects continued investment in its panel, technical infrastructure, personnel, new products and international growth. It anticipates infrastructure investment growth to be slower than revenue growth over time, while noting that spending timing may affect costs and margins.
- Management cited economic uncertainty, customer renewal and spending behavior, competition, acquisition integration, international expansion and the ability to scale products and operations as factors that could affect results. Results may fluctuate, and Q1 performance is not necessarily indicative of full-year results.
- A privacy-related putative class action filed in 2011 alleges violations of federal and Illinois statutes and seeks unspecified damages, punitive damages, injunctive relief and attorneys’ fees. The company says it believes the claims are without merit; it cannot estimate a potential loss range.
- Key disclosed risks include privacy and data-security regulation or litigation, panel recruitment and retention, data accuracy and service reliability, customer concentration and renewals, foreign exchange exposure, acquisition execution, and the company’s history of losses. Microsoft represented approximately 9% of Q1 revenue; the top 10 customers represented approximately 24%.
- Unusual equity compensation includes a CEO performance award of up to 580,000 shares, tied to revenue and adjusted EBITDA goals over 2012–2014. The company reported $40.2 million of unrecognized compensation cost on nonvested restricted stock and units, expected to be recognized over a weighted-average 1.45 years.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter. No impairments were recorded in Q1 2012.
Important facts for investors to verify
- Whether revenue growth and subscription renewals continue, especially given lower new-customer revenue and the sales emphasis on existing accounts.
- Whether operating improvement converts into sustained net profitability and operating cash flow, including the effects of the unusually high tax rate and working-capital movements.
- The status and potential financial or operational consequences of the privacy class action and evolving privacy regulation.
- Customer concentration and renewal exposure, including Microsoft’s share of revenue and the top-10 customer share.
- Capital lease repayment needs, lease commitments, and compliance with the secured credit facility’s covenants.
- The achievement conditions, eventual dilution and expense recognition for the CEO performance awards and other stock-based compensation.