comScore, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. comScore is a global audience, consumer-behavior and advertising measurement and analytics company. The filing is unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $102.9 million | $100.3 million | $310.2 million | $300.6 million |
| Gross margin | 51.9% | 51.4% | 52.2% | 52.3% |
| Operating loss | $17.5 million | $133.9 million | $115.4 million | $215.7 million |
| Net loss | $24.6 million | $130.1 million | $132.1 million | $209.5 million |
| Adjusted EBITDA | $5.2 million | $(5.0) million | $10.1 million | $(10.6) million |
| Net cash used in operating activities | Not stated for quarter | Not stated for quarter | $73.9 million | $27.7 million |
Revenue increased 2.5% in Q3 and 3.2% for the nine-month period as reported. Comparisons are affected by adoption of ASC 606; excluding its reported impact, 2018 revenue was $102.7 million for Q3 and $309.2 million for nine months. Q3 net loss per share was $0.42, versus $2.26; nine-month loss per share was $2.32, versus $3.65. The smaller losses largely reflect lower prior-year litigation-settlement and investigation-related charges. Q3 operating expenses included $0.7 million of investigation and audit costs and no litigation settlement expense; nine-month expenses included $37.4 million of investigation and audit costs and $5.3 million of net litigation settlements.
Revenue growth was broad across the three solution groups: Ratings and Planning, Analytics and Optimization, and Movies Reporting and Analytics. Management cited ongoing weakness in digital products from industry changes and consolidation, partly offset by TV products, emerging activation products and movie analytics growth. Data costs rose as the company invested in TV and mobile data.
Balance sheet, cash flow and financing
- At September 30, cash and cash equivalents were $47.9 million and restricted cash was $6.3 million. Current assets of $136.4 million were below current liabilities of $152.6 million, a $16.2 million working-capital deficit.
- Cash, cash equivalents and restricted cash totaled $54.2 million, up from $45.1 million at the start of 2018. Nine-month operating cash use was $73.9 million; investing cash use was $9.6 million, while financing provided $93.8 million, primarily from note proceeds.
- Senior secured convertible notes had $202.0 million face value and a $175.9 million net carrying value, mature January 2022, and are secured by substantially all company and guarantor assets. The stated rate was 6%; effective rates were 11.5% on the Initial Notes and 8.5% on the Option Notes. The company also recorded $21.8 million of financing derivative liabilities.
- The minimum cash covenant was reduced from $40 million to $20 million through March 31, 2019. The company reported covenant compliance at quarter-end. Management said current funding sources were expected to cover anticipated requirements for at least 12 months, while acknowledging financing outcomes are uncertain.
- Operating leases and unconditional network-operator purchase obligations totaled $86.7 million and $150.8 million, respectively. The company estimated $75–$100 million of undiscounted lease liabilities may be recognized upon adopting the new lease standard in 2019.
Material changes, outlook and risks
- Starboard provided the company’s 2018 convertible-note financing, including $100 million in cash proceeds and equity consideration; an additional $2 million of notes was issued in August in return for the covenant amendment. A potential rights offering of up to $150 million is optional and is not assured. Interest may be paid in cash or, subject to conditions, shares.
- At the September 30 share price reference, the note conversion premium implied a 12% rate at a reset date, versus the then-current 6%. Management estimated that a 6-percentage-point increase would add approximately $12.1 million of interest expense over 12 months. Each 1-point rate increase adds about $2 million of annual interest expense.
- Management expected investigation and audit costs to continue through the rest of 2018 but be lower than in 2017. Additional lease-related restructuring charges of less than $5 million were expected through Q1 2019. No specific revenue or earnings guidance was provided.
- Disclosure controls were reported ineffective at September 30 because material weaknesses in internal control over financial reporting remained. Remediation was ongoing, with a goal to address all weaknesses by year-end 2018; completion was not assured.
- The SEC investigation into revenue recognition, internal controls, non-GAAP disclosures and whistleblower retaliation remained open, with no decision on violations. A privacy class action remained pending; the company said a material loss was not probable or estimable. OFAC’s review of potential sanctions issues remained uncertain, although BIS closed its review without finding an export-control violation.
- Major securities and derivative litigation settlements received court approval and were substantially completed in 2018, including issuance of $82.8 million in shares for the securities settlement and insurer-funded cash contributions. The company continued to face legal costs and other contingent exposures.
Important facts for investors to verify
- Whether cash generation improves enough to meet the $20 million minimum-cash covenant and other obligations, and whether any rights offering or other financing is pursued.
- The interest rate and cash-versus-share payment terms at future note reset dates, plus potential dilution from note conversion, PIK shares and warrants.
- Progress and independent evidence of remediation of internal-control weaknesses, and resolution of the SEC staff’s filing-related comments and investigation.
- Outcomes and potential costs of the privacy and OFAC matters, and any further litigation or compliance expenses.
- Revenue trends in digital products, growth in TV and activation offerings, and the comparability effects of ASC 606 and management’s changed revenue presentation.