comScore, Inc. — Form 10-Q summary
Reporting period: The filing covers the quarter and nine months ended September 30, 2017, and was signed March 23, 2018. Although the request metadata says 2017 Q1, this is the September 2017 quarter (Q3), not the March quarter. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and results
comScore provides audience, consumer-behavior and advertising measurement and analytics across digital media, television and movies. It reports one operating segment. Nasdaq delisted its common stock in May 2017 after delayed SEC filings; shares traded on the OTC Pink Tier as SCOR.
| Metric | Quarter ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2017 | $100.3 | $300.6 |
| Revenue, 2016 | $100.7 | $292.5 |
| Net loss, 2017 | $(130.1) | $(209.5) |
| Net loss, 2016 | $(31.2) | $(85.3) |
| Adjusted EBITDA, 2017 | $(5.0) | $(10.6) |
| Adjusted EBITDA, 2016 | $6.1 | $19.7 |
| Adjusted EBITDA margin, 2017 | (4.9)% | (3.5)% |
| Adjusted EBITDA margin, 2016 | 6.0% | 6.8% |
Quarterly revenue declined 0.4%; nine-month revenue rose 2.8%. For the quarter, TV and Cross-Platform revenue increased 11.2% and Movies increased 8.8%, while Digital Audience declined 6.0%. Management attributed Digital Audience weakness to product changes that disrupted data trends and customer reporting, delayed renewals, and weaker smaller publishers. For nine months, TV and Cross-Platform grew 28.5% and Movies 16.7%, offset by declines in Digital Audience and Advertising. Comparisons are affected by Rentrak being included for eight months in the 2016 nine-month period versus all nine months in 2017.
Profitability, cash flow and liquidity
- Third-quarter operating loss was $133.9 million, versus $33.1 million in 2016; nine-month operating loss was $215.7 million, versus $97.7 million. GAAP net loss included substantial litigation, investigation and audit costs.
- Gross margin, calculated from revenue less cost of revenue, was approximately 51.4% for the quarter and 52.3% for nine months, compared with 55.1% and 56.8%, respectively, in 2016. Cost of revenue increased 7.9% for the quarter and 13.6% for nine months, in part due to data, panel and infrastructure investments.
- Net cash used in operating activities was $27.7 million for nine months, compared with $49.7 million in 2016. Investing activities provided $7.4 million; financing activities used $5.2 million. Cash, cash equivalents and restricted cash decreased $24.9 million to $63.4 million.
- At September 30, cash and cash equivalents were $54.8 million, restricted cash $8.7 million, and marketable securities $13.4 million. Current assets of $205.4 million were below current liabilities of $212.9 million. Total liabilities were $337.1 million and stockholders’ equity was $722.6 million.
- There were no borrowings under the revolving credit facility at September 30; $3.7 million of letters of credit were outstanding and fully cash-collateralized. Capital lease obligations totaled approximately $11.9 million. The credit facility commitment had been reduced to $3.6 million and was terminated in January 2018.
Material changes, outlook and risks
- Litigation settlement expense was $81.8 million in the quarter and $82.4 million for nine months. At September 30, the company reported $118.7 million of accrued litigation settlements and $37.2 million of insurance recoverables. The proposed federal securities class-action settlement included $27.2 million cash expected from insurers and $82.8 million in comScore shares, with an option to pay some or all of the stock portion in cash; final court approval remained pending as of the filing.
- The company reported $56.5 million of investigation and audit-related expense for nine months, up from $32.8 million. It disclosed an SEC investigation into revenue recognition, internal controls, non-GAAP disclosures and whistleblower retaliation; the SEC had made no determination of violations.
- Management said its liquidity actions were expected to meet estimated needs for the year following issuance of the financial statements, but cautioned that financing availability and proceeds were uncertain. In January 2018, comScore issued Starboard $150 million of senior secured convertible notes in exchange for $85 million cash and 2.6 million shares; the notes mature in 2022 and initially bear 6% interest. Additional note issuance and a rights offering were possible, not assured.
- In December 2017, the company announced a restructuring intended to reduce staffing by approximately 10% and exit certain regions. Management cited lower global costs and better alignment of resources. No specific revenue or earnings guidance is provided in this filing.
- Management concluded disclosure controls were not effective as of September 30, 2017 because of material weaknesses in internal control over financial reporting. Delayed filings had also restricted access to borrowing under the credit facility and to certain capital-markets registrations.
- Other significant exposures included pending shareholder derivative and Oregon securities litigation, Nielsen arbitration and related litigation, privacy demand letters concerning alleged collection of information from children under 13, and a voluntary review of possible U.S. export-control and sanctions violations. The company stated outcomes were uncertain; potential penalties or losses were not estimable for certain matters.
- Other unusual items included a $4.0 million gain from Adobe’s release of a remaining obligation, recorded in other income, and the absence of the $33.5 million DAx disposition gain recognized in the 2016 comparable nine-month period.
Important facts for investors to verify
- Confirm the current status, final approval and actual cash-versus-stock funding of the securities and derivative litigation settlements, including related insurance recoveries.
- Review the January 2018 convertible-note terms, any exercise of Starboard’s option, whether the rights offering proceeded, and the resulting debt, dilution and liquidity.
- Track remediation of material weaknesses, timely SEC reporting, and the company’s continued OTC trading status.
- Assess whether Digital Audience customer losses and product/data instability have stabilized, and whether growth in TV and Movies can offset weakness elsewhere.
- Monitor cash consumption, restructuring execution, investigation and compliance costs, and outcomes of the SEC, Nielsen, privacy and export-controls matters.