comScore, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial statements are unaudited. comScore provides digital media analytics through subscription products and customized projects; it reported one operating segment.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $80.0 million | $69.9 million | $156.9 million | $138.8 million |
| Operating income (loss) | $(2.3) million | $1.0 million | $(2.6) million | $1.7 million |
| Net income (loss) | $(3.2) million | $(0.4) million | $(4.0) million | $(2.4) million |
| Adjusted EBITDA and margin | $16.7 million; 21% | $14.0 million; 20% | $32.1 million; 20% | $26.6 million; 19% |
Revenue increased 14.4% in Q2 and 13.1% for the six-month period year over year. Cost of revenue was 29.0% of revenue in Q2 versus 30.9% a year earlier, implying gross margin before intangible amortization of 71.0% versus 69.1%. GAAP operating results included a net litigation settlement expense of $2.9 million in Q2, compared with a $1.2 million net gain in the prior-year quarter.
Subscription revenue represented 90% of six-month revenue, versus 86% in the comparable 2013 period. Management attributed growth primarily to existing customers and subscription-product expansion, including vCE; new-customer revenue declined. International revenue was $46.6 million, about 30% of six-month revenue, up 14% from $40.8 million.
Six-month operating cash flow was $28.3 million, down from $37.0 million. Capital expenditures were $4.7 million, compared with $2.3 million; financing activities used $52.8 million, principally $36.3 million of share repurchases, $12.1 million of tax-withholding share repurchases and $5.6 million of capital-lease payments. Cash declined to $39.0 million from $67.8 million at year-end.
At June 30, current assets were $160.4 million and current liabilities $150.2 million, leaving approximately $10.2 million of working capital. The company had no revolving-credit borrowings, a $100 million revolving facility maturing in 2018, and $3.8 million of outstanding letters of credit. Capital-lease obligations totaled $25.4 million, including $11.9 million current. The company reported compliance with credit-facility covenants.
Material changes and notable items
- Operating expenses increased 19% in Q2 and 16% for the six-month period. Major drivers included privacy-litigation expense, higher headcount and stock compensation, product-development data costs, and increased bad-debt expense.
- Research and development expense rose 32% in Q2 and 27% for six months; general and administrative expense rose 30% and 38%, respectively. Management cited investment in new products, higher stock compensation, and slower collections on some newer products.
- The prior $50 million repurchase program concluded after $49.4 million of purchases. A new $50 million program was authorized in June; no purchases under the new program had occurred by June 30.
- A tentative privacy class-action settlement would establish a $14 million fund, subject to court approval. The company recorded a $3.5 million contingent loss and a $10.5 million insurance receivable; management expected the company’s net cash cost to be less than $5 million. The settlement would also require privacy-policy changes and additional protocols.
- On August 4, 2014, after quarter-end, comScore acquired MdotLabs, an advertising invalid-traffic security platform, for approximately $4.5 million in cash.
- Q2 revenue included $1.8 million from nonmonetary transactions, with $2.8 million of related expense. Six-month amounts were $4.0 million for both revenue and expense; a portion related to an exchange with a company sharing a board member.
Outlook, commentary and risks
The filing provides no formal numerical earnings or revenue guidance. Management expected continued investment in technology infrastructure, panels, products and international expansion, while anticipating that capital-expenditure growth would be slower than revenue growth. Management cautioned that quarterly results may fluctuate and are not necessarily indicative of full-year results. It also disclosed the anticipated departure of the CFO and stated that it was recruiting for the position.
Key disclosed risks include subscription renewals and customer concentration, competition and product adoption, accuracy and reliability of measurement data, privacy regulation and litigation, panel recruitment and retention, international collection and foreign-exchange exposure, and collection delays. The top ten customers generated about 21% of revenue in the six months. The company did not hedge foreign-currency risk; $13.6 million of cash was held by foreign subsidiaries and could incur 5%–15% withholding tax if repatriated.
Important facts for investors to verify
- Track subscription renewals, growth from existing customers, and whether declining new-customer revenue persists.
- Confirm court approval, insurer contributions and final cash and operating obligations for the privacy settlement.
- Assess whether increased bad debt and longer collection cycles affect receivables, cash conversion or future write-offs.
- Reconcile the filing’s 2013 comparison bases: GAAP six-month revenue is $138.8 million, while the key-metrics discussion gives $137.4 million after adjustments for divested products.
- Monitor cash use from repurchases, capital leases and the MdotLabs acquisition, alongside the company’s liquidity and covenant headroom.