Business Context and Reporting Period
Company: comScore, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: comScore provides a digital marketing intelligence platform, offering insights into consumer behavior through a panel of over two million Internet users. The company operates primarily in the United States but has expanding international operations. A significant strategic event during the period was the acquisition of M:Metrics, Inc. on May 28, 2008, to expand capabilities in mobile media intelligence.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Revenues | $30,661 | $85,781 | $61,879 |
| Net Income | $575 | $4,817 | $6,571 |
| Operating Income | $1,847 | $8,466 | $6,847 |
| Operating Margin | 6.0% | 9.8% | 11.0% |
| Net Cash from Operating Activities | N/A | $28,237 | $14,648 |
| Cash and Cash Equivalents (Sep 30, 2008) | $39,891 | ||
| Total Assets (Sep 30, 2008) | $175,526 | ||
| Total Liabilities (Sep 30, 2008) | $62,015 |
Note: The company reported a significant impairment charge of $841,000 related to marketable securities (auction rate securities) for the nine months ended September 30, 2008.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 37% year-over-year for the quarter and 39% for the nine-month period. Growth was driven by increased sales to existing customers, new customer acquisition, and the contribution from the M:Metrics acquisition.
- Profitability Decline: Despite revenue growth, Net Income decreased 37% for the quarter and 27% for the nine-month period compared to 2007. Operating margins compressed from 12.4% to 6.0% (quarterly) and 11.0% to 9.8% (nine-month) due to increased operating expenses and impairment charges.
- Expense Increases:
- Cost of Revenues: Increased 58% (quarterly) and 40% (nine-month), largely due to higher personnel costs, panel maintenance, and M:Metrics integration.
- Selling & Marketing: Increased 44% (quarterly) and 42% (nine-month) due to headcount expansion and M:Metrics inclusion.
- General & Administrative: Increased 39% (quarterly) and 58% (nine-month), driven by public company compliance costs (Sarbanes-Oxley) and professional fees.
- Balance Sheet Impact: Goodwill increased significantly from $1.4 million to $42.7 million due to the M:Metrics acquisition. Cash and cash equivalents decreased from $68.4 million to $39.9 million, primarily due to the $44.5 million cash outflow for the M:Metrics acquisition.
Guidance, Outlook, Risks, and Unusual Items
- Acquisition Integration: The company is integrating M:Metrics to provide mobile market intelligence. While this drove revenue, it also increased costs and goodwill.
- Investment Impairment (Unusual Item): The company recorded a pre-tax impairment charge of $841,000 for the nine months ended September 30, 2008, related to auction rate securities. These securities became illiquid due to credit market uncertainties. The company classified these as long-term investments and determined the decline in value was other-than-temporary.
- Economic Outlook: Management noted that the global financial crisis and economic uncertainty have caused some customers to delay or reduce renewals. However, the company maintained a renewal rate of over 90% for the quarter.
- Foreign Currency: The strengthening U.S. dollar against the Euro and British Pound poses a risk to international revenues and operating results.
- Stock-Based Compensation: Unrecognized compensation expense related to non-vested awards was $19.3 million as of September 30, 2008, expected to be recognized over approximately 2 years.
Key Facts for Investor Verification
- Liquidity of Investments: Verify the status of the $4.3 million in auction rate securities classified as long-term and the potential for further impairment if credit ratings of issuers or bond insurers deteriorate.
- Customer Concentration: Review the dependency on large customers; Microsoft Corporation accounted for approximately 13% of total revenues in 2007.
- Valuation Allowance: Monitor the $26.4 million valuation allowance against deferred tax assets. A reversal of this allowance could materially impact future tax provisions and net income.
- Integration Costs: Assess whether the cost synergies from the M:Metrics acquisition are being realized against the increased operating expenses.
- Panel Maintenance: Verify the stability and cost trends of the consumer panel, which is critical to the company's product value proposition.