comScore, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. comScore provides subscription-based digital analytics, audience measurement and mobile-operator analytics. Financial amounts below are in U.S. dollars; figures are rounded.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $71.6m | $64.3m | $210.4m | $186.8m |
| Revenue growth | 11.4% | 12.6% | ||
| Gross margin | 69.8% | 65.9% | 68.7% | 66.4% |
| Operating income (loss) | $0.9m | $(1.3)m | $2.5m | $(6.2)m |
| Net income (loss) | $(0.1)m | $(3.1)m | $(2.5)m | $(10.2)m |
| Operating cash flow | $38.8m | $33.1m | ||
| Capital expenditures | $3.6m | $5.0m |
Q3 operating margin was 1.2%, compared with a 2.1% operating loss margin a year earlier. The Q3 net loss was nearly break-even, but the $0.8m income tax provision exceeded pretax income of $0.7m. The nine-month effective tax rate was 240.5%, reflecting, among other items, valuation allowances, state and foreign taxes, nondeductible expenses and a $1.0m tax shortfall related to stock compensation.
Cash and cash equivalents were $79.8m at September 30, 2013, up $18.0m from year-end 2012. Current assets were $164.7m and current liabilities $121.5m (current ratio approximately 1.36). Operating cash flow less property and equipment purchases was approximately $35.3m for the nine months. Cash flow benefited from noncash charges, including $19.4m of stock-based compensation, and changes in working capital; deferred revenue declined $7.0m.
Total liabilities were $145.3m. There were no borrowings outstanding under the revolving credit facility; capital lease obligations totaled $18.8m, of which $8.6m was current. The company held $3.7m of letters of credit under the new facility.
Changes versus comparable periods
- Revenue rose 11.4% in Q3 and 12.6% for the first nine months. Management attributed growth principally to increased sales to existing customers, with a smaller contribution from new customers.
- Subscription revenue increased about $9.0m in Q3 and $23.9m year to date; project revenue declined about $1.7m in Q3 and $0.3m year to date. Some revenue was reclassified from project to subscription as offerings became recurring.
- International revenue grew 21% year to date to $62.1m, approximately 30% of total revenue. U.S. revenue remained about 70% of the total.
- Operating results improved despite higher operating expenses: Q3 expenses rose about 8%, while nine-month expenses rose about 8%. Higher headcount, commissions, professional fees, R&D and infrastructure costs were partly offset by lower amortization and the absence of the prior-year $3.3m intangible-asset impairment.
- Net cash provided by operations increased to $38.8m from $33.1m. Investing outflows declined to $3.4m from $5.0m; financing outflows increased to $16.8m from $7.9m, mainly reflecting capital lease payments and share withholding-tax repurchases.
Outlook, risks and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management expects continued investment in products, technical infrastructure, panel operations and international growth, and expects infrastructure investment to grow more slowly than revenue over time. Results may fluctuate; Q4 historically has had a slightly higher share of subscription renewals.
- Credit facility: On September 26, 2013, comScore entered a five-year $100m revolving credit agreement maturing September 26, 2018, with an option to request up to $50m of additional capacity. It was undrawn at quarter-end, and the company reported compliance with its covenants. The agreement permits up to $50m of stock repurchases over its term, subject to its terms.
- Share repurchases: The board authorized a program of up to $50m. Through September 30, the company reported $0.5m of program purchases (23,437 shares); no program repurchases occurred in Q3. Separate Q3 share repurchases related to employee awards and tax withholding.
- Litigation: A privacy class action has certified a class on three claims; discovery was underway. The company considers the claims without merit and intends to defend itself, but says it cannot estimate a potential loss range. Patent lawsuits initiated by the company were settled in Q2, producing a net gain of $1.2m.
- Other unusual items: The ARS Non-Health Copy-Testing and Equity Tracking asset sale generated a $0.2m gain; the company retained rights to serve health-related customers. No impairment charges were recorded in 2013, versus $3.3m in the first nine months of 2012.
- Principal risks: Customer renewal and concentration (Microsoft represented approximately 7% of nine-month revenue); accuracy and reliability of measurement data; privacy, data-security and regulatory developments; panel recruitment and retention; competition and technology changes; international, currency and economic exposure; and potential costs or restrictions from litigation. The company does not hedge foreign-currency exposure.
Investor verification points
- Assess the durability of subscription growth, renewal rates and the shift from project to subscription revenue.
- Review the drivers and sustainability of operating improvement, especially rising R&D, selling and administrative costs and substantial stock-based compensation.
- Examine the unusually high year-to-date tax provision and valuation allowances, and their effect on future earnings and cash taxes.
- Monitor the privacy class action, related legal expenses and any change in the company’s ability to estimate exposure.
- Reconcile share repurchase disclosures: distinguish the $0.5m program purchases from employee-related withholding and forfeiture repurchases.
- Track capital lease commitments, the new revolver’s financial covenants and the availability of cash held by foreign subsidiaries; $11.2m of cash was abroad and repatriation could incur 5%–15% tax.