comScore, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The unaudited filing covers a global audience and advertising measurement and analytics business with one operating segment. Year-over-year revenue comparisons are not fully like-for-like because 2018 reflects ASC 606 while 2017 was not restated.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $101.4m | $99.4m | $207.3m | $200.3m |
| Operating loss | $(51.6)m | $(38.8)m | $(97.9)m | $(81.7)m |
| Net loss | $(56.0)m | $(38.6)m | $(107.4)m | $(79.4)m |
| Net loss per share | $(1.02) | $(0.67) | $(1.90) | $(1.38) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(74.4)m | $(22.3)m |
| Investing cash flow | Not stated for quarter | Not stated for quarter | $(6.5)m | $(4.0)m |
- Q2 gross margin was approximately 49.2%, down from 52.4%; operating margin was approximately (50.9)%, versus (39.0)%. For the six-month periods, gross margin was approximately 52.4%, versus 52.8%.
- Revenue rose 2.0% in Q2 and 3.5% for the first half as reported. The filing attributes $0.3m and $0.7m, respectively, of 2018 revenue to ASC 606 adoption; without the new standard, first-half revenue would have been $206.6m.
- Q2 product revenue: Digital Audience $49.9m, TV and Cross-Platform $29.5m, Advertising $11.7m, and Movies $10.4m. Digital Audience declined 8.3%; the other three offerings grew. Management cited customer losses and delayed renewals amid product changes and a shifting advertising market; TV growth reflected expanded customer agreements, while Movies benefited from higher contract values.
- Cash, cash equivalents and restricted cash totaled $53.2m at June 30, including $6.6m restricted. Current assets were $152.9m and current liabilities $171.3m, implying negative working capital of approximately $18.4m.
- First-half operating cash use increased to $74.4m, primarily due to payments of outstanding liabilities, including investigation and audit-related costs. Financing provided $90.1m, largely from note proceeds; investing used $6.5m, including $5.2m of capitalized software costs.
- At June 30, the company had $200m principal amount of Starboard senior secured convertible notes outstanding, with a $174.4m net carrying value and $15.9m of financing derivative liabilities. The notes mature in 2022, bear 6% interest through January 2019, and have a conversion price of $31.29 per share. Reported first-half net interest expense was $7.0m.
Material changes and unusual items
- General and administrative expense increased 115.6% in Q2 to $28.7m, primarily due to $9.1m of additional stock-based compensation and higher legal and audit fees. Total Q2 stock-based compensation was $23.0m; first-half expense was $24.9m.
- Investigation and audit-related expense was $4.9m in Q2 and $36.8m for the first half. Litigation settlement expense was $5.3m in both periods. Restructuring charges were $3.8m in Q2 and $5.1m for the first half.
- Q2 Adjusted EBITDA was $1.3m versus a loss of $3.7m; first-half Adjusted EBITDA was $4.9m versus a loss of $5.6m. These are non-GAAP measures; the filing cautions they exclude, among other items, stock compensation, investigation costs and litigation settlements.
- ASC 606 adoption was recorded using the modified retrospective method. For the first half, it increased reported revenue by $0.7m and reduced reported net loss by $2.2m compared with results absent adoption.
- In June, comScore issued 4.02m shares to resolve federal securities and derivative litigation. The securities settlement included $82.8m in company shares and $27.2m funded by insurers; the derivative settlement included $8.0m in shares for attorneys’ fees. The final Virginia derivative actions were dismissed in July, releasing $10.1m of escrowed insurance proceeds to the company.
Outlook, liquidity, risks and management commentary
- Management said funding sources were expected to cover anticipated requirements for at least 12 months, but noted that financing availability and liquidity actions were uncertain. A rights offering of up to $150m remained an option, not a committed transaction.
- On August 8, 2018, after quarter-end, Starboard amended the notes to reduce the minimum cash covenant from $40m to $20m through March 31, 2019, subject to limitations; comScore issued an additional $2m of notes in connection with the amendment. The company reported compliance with covenants at June 30 and did not anticipate a breach under its current plans.
- Management expected data costs to increase through 2018 as it invested in TV and mobile data. Investigation, audit and legal costs were expected to continue through the rest of 2018, but at a lower level than the first half or prior year. Additional restructuring charges of less than $5m were expected through Q1 2019 for office-space actions.
- The company appointed Bryan Wiener CEO effective May 30 and relisted on Nasdaq effective June 1. Management also described ongoing remediation of material weaknesses, with a goal of full remediation by year-end 2018.
- Disclosure controls and procedures were deemed ineffective at June 30 because of material weaknesses in revenue accounting, business combinations and significant asset acquisitions, financial close and reporting, and tax accounting.
- Material open matters include an SEC investigation into revenue recognition, internal controls, non-GAAP disclosures and whistleblower retaliation, and a voluntary disclosure review by OFAC and BIS concerning possible export-control or sanctions violations. The company said material losses were not probable or estimable for these matters at June 30. A privacy class action also remained pending; Nielsen arbitration and related litigation were resolved.
- Key risks include continued Digital Audience customer attrition, cash burn and financing needs, potential note interest-rate resets and dilution, debt covenant or redemption exposure, unresolved control weaknesses, legal and regulatory outcomes, and evolving privacy laws. The notes are secured by substantially all company and guarantor assets. The filing gives no specific full-year revenue or earnings guidance.
Investor facts to verify
- Cash generation and covenant headroom, including the effect of the August 8 amendment and the availability of any additional financing or rights offering.
- Note terms and potential dilution: $200m principal outstanding at quarter-end, conversion at $31.29 per share, possible payment of interest in shares, and warrants for 250,000 shares.
- Whether Digital Audience customer losses stabilize and whether growth in TV, Advertising and Movies can offset the decline and higher data costs.
- Progress remediating material weaknesses and the status and financial impact of the SEC, OFAC/BIS and privacy matters.
- The cash and earnings effects of investigation, audit, litigation and restructuring costs, alongside the company’s non-GAAP adjustments and ASC 606 comparability.