Business context and reporting period
comScore, Inc. provides subscription-based digital analytics, audience measurement, advertising analytics, digital business analytics and mobile operator analytics. This unaudited Form 10-Q covers the three months ended March 31, 2013; comparisons are with the first quarter of 2012 unless otherwise noted. The company reported more than 2,200 customers worldwide.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $68.8 million | $62.3 million; up 10.6% |
| Operating income | $0.7 million; 1.0% margin | $1.1 million; 1.7% margin |
| Net loss | $2.0 million; $(0.06) per diluted share | $0.5 million; $(0.01) per diluted share |
| Operating cash flow | $18.4 million | $11.3 million |
| Cash and cash equivalents | $73.7 million at March 31 | $61.8 million at December 31, 2012 |
| Borrowings and capital leases | $3.8 million revolver; $15.1 million capital lease obligations | Revolver was zero at December 31, 2012 |
Subscription revenue grew approximately $7.1 million, partly offset by a $0.6 million decline in project revenue. Subscriptions represented 86% of revenue, versus 85% for full-year 2012. Revenue from existing customers rose $4.6 million and from new customers $1.9 million. International revenue increased 25% to $20.3 million, approximately 30% of total revenue.
Cost of revenue was 32.8% of revenue in both periods, implying a stable gross margin of approximately 67.2%. Operating expenses increased about 11% to $68.2 million: selling and marketing rose 14.6%, research and development rose 27.2%, and general and administrative expense declined 1.0%. Cash from operations benefited from noncash expenses, lower receivables and higher deferred revenue; it does not represent reported earnings. The company used $1.4 million in investing activities and $4.9 million in financing activities. Current assets were $158.1 million and current liabilities $122.4 million at quarter-end. The $50 million secured revolver had $3.8 million outstanding, plus $3.6 million in letters of credit; the company said it remained covenant-compliant. Capital lease obligations totaled $15.1 million.
Material changes and unusual items
- Net loss widened despite revenue growth, as operating income declined and the income tax provision rose to $2.2 million from $1.1 million. The reported effective tax rate was unusually high because pretax income was small and the provision included items such as stock-compensation tax shortfalls, statutory rate changes and uncertain tax positions.
- On March 18, 2013, comScore sold certain ARS Non-Health Copy-Testing and Equity Tracking assets. It recorded a $0.2 million gain and a $1.2 million licensed-intellectual-property asset; total cash proceeds are $1.0 million, including $0.75 million in escrow scheduled for quarterly payments through December 2013. The transaction was not presented as discontinued operations.
- Foreign currency transaction losses were $0.3 million, while foreign-currency translation reduced other comprehensive income by $0.8 million.
- Stock-based compensation was $5.0 million in the quarter. The company repurchased shares to satisfy tax withholding obligations; these were not purchases under a publicly announced repurchase program.
Outlook, commentary and risks
The filing provides no quantified revenue or earnings guidance. Management cited increased sales to existing customers, modest new-customer growth and international expansion as revenue drivers. It expects to continue investing in panels, technology infrastructure, personnel and new products, while anticipating capital-expenditure growth to be lower than revenue growth over time. Management said it expected to repay the revolver borrowing later in 2013 from operating cash flow. It also noted that results are not necessarily indicative of full-year performance and that customer renewals have historically been higher in the fourth quarter.
Key risks include subscription nonrenewals and customer concentration, privacy and data-security regulation or litigation, accuracy and reliability of measurement data, panel recruitment and retention costs, competition and technology changes, international and foreign-exchange exposure, and the company’s history of losses. The top ten customers accounted for approximately 22% of Q1 revenue; Microsoft alone accounted for approximately 8%. A privacy class action had a class certified on three claims on April 2, 2013; comScore sought appellate review, disputed the claims and said it could not estimate a potential loss range. The revolving credit facility matures September 30, 2013. Approximately $10 million of cash was held by foreign subsidiaries and management intended to leave foreign earnings invested abroad.
Most important facts for investors to verify
- Whether subscription growth and customer renewal rates continue, and whether the customer mix remains concentrated.
- Whether operating expenses grow more slowly than revenue and the business returns to sustained operating and net profitability.
- Developments in the privacy class action, including class certification appeals and any estimate of potential exposure.
- Repayment or refinancing of the revolver before its September 30, 2013 maturity, alongside capital-lease and operating-lease commitments.
- Future tax provisions, valuation allowances and realization of U.S. and foreign tax-loss carryforwards.
- Collection of the escrowed asset-sale proceeds and the assumptions supporting the fair value of the licensed intellectual property.