comScore, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The interim financial statements are unaudited. The report was signed March 23, 2018, well after the period ended.
Business context
comScore measures audiences, consumer behavior and advertising across digital, television and movie platforms. It reports one operating segment. Its offerings include Digital Audience, TV and Cross-Platform, Advertising, and Movies. Comparisons with 2016 are affected by the January 2016 Rentrak merger; 2016 also included the sale of the Digital Analytix (DAx) business.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $99.4m | $100.5m | $200.3m | $191.8m |
| Gross margin | 52.4% | 55.7% | 52.8% | 57.7% |
| Operating loss | $(38.8)m | $(43.4)m | $(81.7)m | $(64.6)m |
| Net loss | $(38.6)m | $(41.0)m | $(79.4)m | $(54.1)m |
| Adjusted EBITDA | $(3.7)m | $6.6m | $(5.6)m | $13.6m |
| Adjusted EBITDA margin | (3.8)% | 6.6% | (2.8)% | 7.1% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(22.3)m | $(28.9)m |
Q2 revenue declined 1.0%; first-half revenue rose 4.4%. Q2 product revenue was $54.4m Digital Audience (down 7.5%), $25.4m TV and Cross-Platform (up 26.0%), $10.5m Advertising (down 15.0%), and $9.2m Movies (roughly flat). First-half growth in TV and Movies was partly offset by declines in Digital Audience and Advertising. Management attributed Digital Audience weakness to product changes that disrupted data trends and customer reporting, delayed renewals and cancellations, and a weaker market for smaller publishers.
Q2 cost of revenue rose 6.2% to $47.3m, reducing gross margin to 52.4%. For the first half, cost of revenue increased 16.7% to $94.6m, including higher data and panel costs and investment in operations and TV and digital platforms. Investigation and audit costs were $17.4m in Q2 and $35.1m for the first half. Lower general and administrative costs included lower stock compensation and fewer merger-related costs; first-half 2016 also included a $33.5m DAx disposition gain, which did not recur.
For the six months, investing cash outflow was $4.0m and financing cash outflow was $4.0m. Cash, cash equivalents and restricted cash declined $30.3m to $58.0m. At June 30, cash and equivalents were $47.6m, restricted cash $10.4m, and marketable securities $28.4m. Current assets were $206.9m and current liabilities $198.8m. Capital lease obligations totaled $14.9m, of which $10.2m was current; there was no outstanding revolving-credit borrowing. The company had $3.7m of letters of credit, fully cash collateralized.
Material changes, liquidity and outlook
- First-half adjusted EBITDA shifted from positive $13.6m to negative $5.6m; first-half GAAP net loss widened by $25.3m. Operating cash use improved by $6.7m year over year, despite the larger net loss, partly because of working-capital movements and noncash items.
- Late SEC filings led to Nasdaq suspension in February 2017 and delisting effective May 30, 2017; the stock traded on OTC Pink as “SCOR.” The report states disclosure controls were ineffective as of June 30, 2017 because of material weaknesses in internal control over financial reporting.
- Management cited substantial investigation, audit, compliance and litigation costs as a drain on working capital. In December 2017, it announced a restructuring intended to reduce staffing by about 10% and exit certain regions. The filing says management believed these actions and financing would meet estimated liquidity needs for the following year, but cautions that outcomes and available financing were uncertain.
- Subsequent to quarter-end, in January 2018, comScore issued Starboard-affiliated funds $150m of senior secured convertible notes for $85m cash and 2.6m shares valued at $65m. The notes mature in 2022 and initially bear 6% interest, subject to later resets. Additional note purchases and a stockholder rights offering were contemplated; proceeds beyond the initial cash issuance were not assured.
Risks, contingencies and unusual items
- The Audit Committee’s investigation concerned revenue recognition, internal controls, disclosures and related matters. The company had previously concluded that specified 2013–2015 financial statements and 2015 interim statements should no longer be relied upon. The SEC was investigating revenue recognition, controls, non-GAAP disclosures and whistleblower-retaliation allegations; it had made no determination, and the company said it was cooperating.
- At June 30, 2017, the balance sheet included $19.1m of accrued litigation settlements and $17.3m of insurance recoverable, principally related to the Rentrak merger litigation settlement. Other significant securities and derivative settlements described in the filing were proposed or agreed later and had not been recognized at June 30, 2017.
- The company disclosed possible export-control and sanctions violations involving survey data collected from panelists in embargoed countries. It made voluntary disclosures and began an internal review; potential fines or penalties were not estimable at the time.
- Other disclosed matters included securities and derivative litigation, a Section 11 case, and Nielsen arbitration and litigation. The filing also described privacy demand letters; no lawsuit had been filed on those claims. Outcomes and potential financial effects were uncertain.
- Related-party relationships warrant attention: WPP owned approximately 19.7% of the company at June 30, 2017, and the company had transactions and balances with WPP and its affiliates. A related-party consulting firm also received investigation and audit-related fees.
- No specific operating or revenue guidance was provided. Management’s forward-looking statements were subject to material risks, including customer losses, continued operating losses, litigation and compliance costs, financing access, and execution of the restructuring.
Investor verification priorities
- Review subsequent filings for completion and terms of the Starboard financing, any rights offering or option-note exercise, and the company’s actual liquidity runway.
- Track remediation of the disclosed material weaknesses and whether disclosure controls and internal controls were later judged effective.
- Verify final outcomes and company-funded costs of the securities, derivative, merger, export-control and other legal or regulatory matters, including insurance recoveries.
- Assess whether Digital Audience customer retention and reporting stability improved, and whether growth in TV and Cross-Platform and Movies offset continuing weakness in Digital Audience and Advertising.
- Reconcile GAAP results and cash flows with management’s adjusted EBITDA measure, noting that the company excludes substantial investigation, litigation and other costs from that non-GAAP measure.