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Business Context and Reporting Period

Company: comScore, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: comScore provides a digital marketing intelligence platform, offering insights into consumer behavior through a panel of over two million Internet users and server metrics. The company serves customers globally with subscription-based products and customized projects.

Key Financial Metrics

Margins: Gross margin was approximately 67.6% for Q1 2011 compared to 71.3% in Q1 2010. The company reported an operating loss of 4.9% of revenue in Q1 2011, compared to an operating profit of 3.6% in the prior year period.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by 46.5% ($16.8 million) year-over-year, driven by increased sales to existing customers ($12.7 million increase) and new customers ($4.2 million increase). International revenues grew 98% to $12.5 million.
• Expense Increases: Total operating expenses rose 60% ($20.7 million). Key drivers included increased employee salaries and benefits ($8.8 million), higher stock-based compensation ($2.8 million), and increased amortization of intangible assets ($1.5 million) due to acquisitions of Nexius and Nedstat.
• Profitability: The company shifted from a net income of $229,000 in Q1 2010 to a net loss of $334,000 in Q1 2011. This was primarily due to higher operating costs outpacing revenue growth, partially offset by a significant income tax benefit of $2.2 million.
• Customer Base: The total customer base grew by 458 net new customers to 1,807 as of March 31, 2011.

Guidance, Outlook, Risks, and Unusual Items

• Accounting Changes: Effective January 1, 2011, the company adopted FASB ASU 2009-13 regarding multiple deliverable revenue arrangements. This resulted in the recognition of approximately $0.7 million in revenue and profit that would have otherwise been deferred.
• Legal Proceedings: On March 16, 2011, The Nielsen Company filed a lawsuit alleging patent infringement. On March 22, 2011, comScore filed a counter-suit against Nielsen and Netratings alleging infringement of comScore's patents. Management believes the claims are without merit but notes the potential for costly litigation.
• Liquidity and Investments: The company holds $2.9 million in long-term auction rate securities which have been illiquid since 2007. While no impairment was recorded, the company cannot determine when liquidity will improve.
• Outlook: Management anticipates continued revenue growth from international expansion and new product introductions but notes that operating expenses will increase to support growth initiatives. The company expects to maintain positive cash flow from operations.

Key Facts for Investor Verification

• Revenue Concentration: Verify the dependency on top customers; the top 10 customers accounted for approximately 27% of revenue in Q1 2011, with Microsoft alone representing approximately 12%.
• Stock-Based Compensation: Review the impact of stock-based compensation, which totaled $5.5 million in Q1 2011 (up from $2.7 million in Q1 2010), and the $32.5 million in unrecognized compensation expense expected to be recognized over the next 1.33 years.
• Acquisition Integration: Assess the integration progress and revenue contribution of recent acquisitions (Nexius, Nedstat, ARSgroup), which contributed approximately $6.0 million to Q1 2011 revenues.
• Legal Exposure: Monitor the status of the patent litigation with Nielsen, as an adverse outcome could result in unspecified damages or injunctive relief.
• Deferred Revenue: Note the significant deferred revenue balance of $71.6 million, representing future revenue recognition obligations.