comScore, Inc. (SCOR) Q3 2012 Earnings Report, Transcript and Summary

Thank you for your patience, and welcome to the Third Quarter 2012 comScore, Inc. Earnings Teleconference. My name is Candice, and I'll be your coordinator for today. [Operator Instructions] We will conduct a question-and-answer session after management's remarks. [Operator Instructions] I would now like to turn the presentation over to your host for today's conference, Chief Financial Officer, Mr. Ken Tarpey. Sir, you may proceed.

Thank you. Good afternoon and welcome to comScore's Earnings Call for the Third Quarter of 2012. Again, I'm Ken Tarpey, CFO of comScore. on the phone with me today is Dr. Magid Abraham, our President, CEO and Co-Founder; also Cam Meierhoefer, our COO; and Serge Matta, our President of Commercial Solutions, will also be available during the Q&A section of this call. In connection with this call, we have posted slides to supplement our prepared remarks in the Investor Relations section of our website under the Events and Presentations. Now before we begin, I'd like to turn your attention to Slide 2, cautionary statement of that slide deck, and please allow me to read the following disclaimer regarding our use of forward-looking information and non-GAAP financial measures. During the course of today's call, as well as during any question-and-answer sessions that may follow, representatives of the company may make forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 regarding future events or performance of the company that involve risks and uncertainties including, without limitation, the strength of comScore's business; expectations as to comScore's sales and booking cycle, particularly with respect to new products; expectations as to opportunities, including new customers and markets for comScore; expectations as to the growth and composition of comScore's customer base, bookings and renewal rates; expectations regarding the impact and benefits of particular lines of business and products; expectations regarding the relative quality of comScore's products; expectations regarding the potential discontinuation or divestiture of certain product lines; assumptions regarding tax rates and net operating loss carryforwards; and forecasts of future financial performance for the fourth quarter and the full year of 2012, including relating growth rates, exchange rates and other assumptions. Such statements are only predictions based on management's current expectations. Actual events or results could differ materially from those predictions due to a number of risks and uncertainties, including those identified in the documents comScore files from time to time with the Securities and Exchange Commission. Those documents specifically include, but are not limited to, comScore's Form 8-K filed earlier today relating to this call, comScore's Form 10-K for the period ending December 31, 2011, and Form 10-Q for the period ending June 30, 2012. We caution you not to place undue reliance on any forward-looking statements included in these presentations, which speak only as of today. We do not undertake any obligation to publicly update any forward-looking statements to reflect new information after today's call or to reflect the occurrence of unanticipated events. And now turning to Slide 3 of the slide deck, use of non-GAAP measures. During today's call, we also reference certain non-GAAP financial measures. You will find a reconsolidation of non-GAAP financial measures discussed during today's call to the most directly comparable GAAP financial measure in our press release and on our Investor Relations website at ircomscore.com. With that, I will now turn the call over to Magid.

Thank you, Ken, and thank you for joining our Earnings Conference Call for the Third Quarter of 2012, especially in light of the difficulties many of you are facing in the aftermath of Hurricane Sandy. If you can turn to Slide #4, we are pleased to report revenue and adjusted EBITDA for the third quarter that both were above the high end of our guidance ranges. Total revenue of $64.3 million increased 13% on a pro forma basis from a year ago when you exclude our advertising copy-testing revenue, which as we announced, we are evaluating for potential divestiture. Assuming constant currency, revenue would have grown 15% on a pro forma basis from a year ago. Sequentially, revenues grew by 7% relative to Q2 of 2012. Our better-than-expected performance is due to the continued strength of our core audience measurement products, as well as a strong sales trends from newer analytics products for digital advertising, website analytics and mobile analytics. As was the case in the second quarter, we believe our reported financial metrics do not fully reflect the underlying strengths we are seeing in the business. While we do not necessarily plan to provide bookings trends on a regular basis, we believe that bookings growth can provide you with a better sense of our overall business momentum beyond what can be ascertained from looking at our financial statements. We define bookings as the total noncancelable value of contracts in the first 12 months following contract commitment. As Slide 6 would show, excluding copy testing, our trailing 12 months bookings in September of 2012 grew by 21% compared to trailing 12-month booking in September 2011. Trailing 12 months bookings grew in excess of 30% for each of our new product areas in web analytics, advertising analytics and mobile analytics. As we communicated at the end of the second quarter, the growth in bookings is not fully reflected yet in revenue growth due to longer revenue recognition lags for these products. Nevertheless, these products are progressively translating into increased revenues, a factor that helped our revenue exceed prior expectations in the quarter. Our execution was also strong, resulting in adjusted EBITDA that was above the high end of our guidance range. We added 45 net new customers in the quarter, bringing our total customer count to 2,114. Renewal rates at customers remained in our historical range of above 90% on a constant dollar basis. Now we turn to Slide 7. We had a particularly robust quarter in the campaign measurement area. We have seen compelling ad impressions volume growth and adoption by over 160 agencies and advertiser clients in over 30 countries. These factors resulted in strong sequential bookings growth from the second to the third quarter. Separately, I would like to note that USA TODAY announced in September that it will use vCE metrics to sell display advertising on a guaranteed viewability basis. We believe this reflects increased marketplace interest in using viewable impressions as a currency for trading online advertising. Turning to Slide 8, our recent launch of vCE Video and vCE MP, MP stands for Multi-Platform, represents a major milestone in cross-platform analysis, by extending campaign validation to online video campaigns. vCE Video received endorsement from over 30 leading video advertising platforms listed in Slide 8. On Slide 9, vCE MP now goes beyond campaign measurement on the PC and provides comprehensive advertising measurement across TV, PCs, tablets and mobile platforms. vCE MP delivers person-based measurement of GRPs, reach and frequency, as well as person-level demographics for campaign audiences. Its innovative methodology avoid the potential overstatement of digital reach with cookie-based measurement approaches. With vCE MP, we are able to create a unified view of digital consumer behavior and add exposure, by using comScore's Census Network, a unique asset that leverages 1.3 trillion worldwide measurement events per month. And threads together, Census usage data from multiple digital platforms, such as PC and mobile, with set-top box TV data from over 5 million U.S. households. This unprecedented measurement scale provides unique accuracy and granularity advantages that we believe are highly attractive to the industry. Turning to Slide 10, we're also making strong progress with our web analytics suite called Digital Analytix, or DAx. DAx is performing well in the marketplace. A few weeks ago, we added a new module, DAx Monetization that allows publishers to leverage viewability and duration measurement for ad placements on their website in order to optimize viewable ad inventory and ad packages. These insights are proving critical for publishers for maximizing ad revenue in an increasingly competitive analytics-driven environment. DAx is already being used globally by clients including the Associated Press, Activision, Bloomberg, Microsoft and USA TODAY in North America, as well as the BBC, ITV, Liberal and euronews in Europe. In summary, we're pleased to report strong progress in the third quarter results, even though we believe our reported results do not yet fully convey the underlying sense of our business. We remain optimistic about our opportunities to continue realizing strong revenue growth with improving margin trends, as we capitalize on our position as a market and technology leader. Now I would like to turn the call back over to Ken for his comments on our financial performance in the quarter and for the outlook for 2012. Ken?

Thank you, Magid. Revenue in the third quarter was $64.3 million, up 9% year-over-year. Excluding our copy testing business, revenue grew 13% on a non-GAAP pro forma basis. Assuming a constant currency, our revenue growth would have been 15% on a pro forma constant currency basis from a year ago. Subscription revenue in the third quarter was $53.5 million, up 6% year-over-year and represents 83% of total revenue, in line with recent trends. Subscription revenue was also impacted by currency changes and decreasing minimum annual copy-testing commitments. Excluding copy-testing impact, a nonstrategic business we are evaluating for divestiture, subscription revenue grew 9% from the prior year and would have grown 11% on a constant currency basis. Project revenue reached a record $10.8 million, an increase of 27% from the third quarter of 2011 with vCE significantly contributing to its growth. vCE revenue is reflected in subscription revenue and project revenue, as some customers are doing initial campaigns on a project basis with a goal to eventual long-term subscriptions. Revenue from existing customers of $57.7 million was up 10% year-over-year in the third quarter and represented 90% of total revenues, while revenue from new customers was $6.6 million and an increase from $6.2 million a year ago. We added 45 net new customers for total customer count of 2,114 at the end of the third quarter. International revenue at the end of the third quarter was 17.3%, up almost 10% from a year ago despite a continued weak macroeconomic environment in Europe and exchange rate impacts. Our top 10 customers represented 21% of revenue in the third quarter compared to 24% a year ago, reflecting the increased diversification of our overall customer base. Now let me turn to expenses. Our gross margins were 66%, a decrease from 67% in the third quarter of 2011 due to additional costs to support our increasing data collection for our vCE products. Gross margin was consistent with the second quarter 2012 level. Total GAAP operating expenses increased 2% year-over-year to $56.6 million -- excuse me, to $65.6 million but decreased as a percentage of revenue, with a decrease in litigation expenses, offset by planned investments in sales and marketing to expand our presence worldwide. GAAP pretax net loss was a loss of $1.7 million in the third quarter, improvement from the GAAP pretax net loss of $5.7 million in the third quarter of 2011. Our year-to-date effective GAAP income tax rate through the third quarter was 35%. We recorded a year-to-date income tax expense instead of recording an income tax benefit for the year-to-date losses for several reasons. We have several loss-generating entities in foreign jurisdictions. We are unable to recognize a current income tax benefit. Additionally, we rolled off deferred tax asset of $2.5 million in the second quarter related to $7.4 million of stock-based compensation for certain market-based stock awards that will not be issued since the performance criteria were not met. The tax expense recorded in the third quarter represents the additional tax charge on the income generated by taxable entities during the quarter. GAAP net loss in the third quarter was $3.1 million, an improvement of approximately $800,000 from a year ago, and represents a GAAP net loss of $0.09 per basic and diluted share based on a basic and diluted share count of 33.5 million shares. At this point, overall, from a tax standpoint, we project an annual GAAP tax rate of approximately 22% for the full year of 2012. Also for 2012, we anticipate an annual cash tax rate of 13%, lower than our previous projections of 19%. We again continue to hold significant net operating loss carryforwards in the United States, certain states within United States and certain foreign jurisdictions, predominantly the Netherlands and U.K. Non-GAAP net income for the third quarter of 2012 was a loss of $700,000 or a loss of $0.02 per diluted share, excluding stock-based compensation, amortization of intangibles, impairment of intangible assets, acquisition and restructuring costs and deferred tax expense. This compares to the non-GAAP net income of $6.9 million or $0.21 per diluted share in the third quarter of 2011, with a decrease primarily the result of the reversal of tax benefits recorded earlier in the year. Non-GAAP net income in the third quarter was adversely affected by this tax provision adjustment. Using our annual cash tax rate, non-GAAP net income on a pro forma basis would have been $4.3 million. With our varying cash tax rates and noncash expenses, we believe that adjusted EBITDA is a useful measure for investors to use to evaluate our operating performance. Adjusted EBITDA takes non-GAAP net income and adjusted to exclude the cash tax provision, depreciation, intangible amortization costs, stock-based compensation expense, acquisition-related expenses, net interest income and the impairment of intangible assets. On this basis, adjusted EBITDA was $11 million in the third quarter, above the high end of our guidance range compared to $10.7 million in the third quarter of 2011. Adjusted EBITDA margin was 17% compared to 18% a year ago. Adjusting for the impact of our copy testing business, pro forma adjusted EBITDA would have been $10.5 million and was up $700,000 from $9.8 million a year ago. Turning to the balance sheet. As of September 30, 2012, cash and cash equivalents totaled $59.1 million, an increase of $8.8 million since June 30 and an increase of $21 million since December 31, 2011. Our receivables of $52.1 million increased from $50.4 million a year ago due to the growth of our business. Total deferred revenue was $70.6 million, with current deferred revenue of $69.8 million and long-term deferred revenue of $700,000. It's important to note that with some customers moving from annual billing to multiple billing cycles per year, current deferred revenue does not fully represent the fully anticipated billing value of current customers over the next 12 months. Cash flow from operations for the third quarter of 2012 was $8.9 million. Our capital expenditures were $1.9 million, resulting in a free cash flow of $6.9 million in the third quarter. Capital expenditures in the third quarter were used to support our expanding infrastructure and planned leasehold improvements in our New York and Western Virginia facilities. Now I direct you to Slide 12 in our pack, entitled Guidance. I will now outline our guidance for the fourth quarter of 2012 and the full year of 2012. Reflected in our expectations for the fourth quarter are revenue declines from our copy testing business and continued caution due to the fragile nature of the economy, particularly Europe. With this backdrop, we anticipate revenues for the fourth quarter of 2012 in the range of $64 million to $69 million, which represents an increase of 2% to 10% over the fourth quarter of 2011. We anticipate fourth quarter GAAP loss before income taxes of between $3.8 million to $300,000 loss. We expect adjusted EBITDA for the fourth quarter of 2012 to be in the range of $9 million to $12.5 million. This represents an adjusted EBITDA margin of 16%, at the midpoints of our revenue and adjusted EBITDA guidance. Our estimated fully diluted share count for the fourth quarter is 35.8 million shares. As in the third quarter, fourth quarter GAAP income before taxes will be impacted by a number of noncash items. We currently expect approximately $2.3 million in amortization of intangibles and patents, as well as $6.2 million in stock-based compensation. Looking at the full year, we expect revenue growth of 8% to 10%, with revenue expected to be in the range of $250.9 million to $255.9 million in 2012. Due to the uncertainty on the impact and timing of the planned copy testing divestiture, we believe it is useful to provide pro forma guidance excluding our copy testing business in current and year ago periods. As such, we expect Q4 pro forma revenue growth to be 10%, at the midpoint of our guidance. For the full year, we anticipate pro forma revenue growth of 11% to 13% on this same basis. For 2012, we currently expect approximately $9.3 million of amortization of intangibles and patents and $23.8 million in stock-based compensation. We anticipate GAAP loss before income taxes for the year to be in the range of $11.1 million to $7.6 million. We expect adjusted EBITDA to be in the range of $41.2 million to $44.7 million. For the full year 2012, we anticipate a fully diluted share count of 35.4 million shares. A reconciliation of GAAP net income before income taxes to adjusted EBITDA guidance for the fourth quarter and the full year is included in the tables to our earnings press release, as well as in the slides that were provided for this call. In summary, we're pleased to have exceeded expectations for the third quarter. We believe our bookings and market momentum reflect the health of our business fundamentals, which are not fully reflected on our reported results. We continue to be enthusiastic about our long-term market position and prospects for continued future growth. With that, operator, we can now open the lines to take questions.

[Operator Instructions] Our first question will come from the line of Mark Zgutowicz with Piper Jaffray.

Yes. This is John Crowther, on for Mark. First question is wondering if you could give us sort of a breakdown of growth in your core Media Metrix business by geography. I know in the last quarter, you still have some solid international growth with some pockets of weakness in the U.S. market. Still wondering if you could give us an update on that front?

Well, our audience measurement business on a worldwide basis grew in the high double digits. I think that there wasn't really that much of a differential between international and domestic due to the foreign currency impact that affected international growth. So we -- we're still pleased with the growth in that core segment of the business.

And maybe if I can just follow-up on that. Obviously, we're seeing a fairly sort of rapid progression of traffic from desktop towards mobile. And obviously, you guys have a product and are able to sort of measure that mobile. But wondering if that sort of transition is having any sort of impact on your conversation with customers as they sort of look out into what sort of products they need from you or maybe potentially and where they might be allocating the budget dollars towards your products or services?

Well, actually, the mobile -- this mobile trend represents a good revenue opportunity for us. We have started selling, in many cases, mobile measurement, mobile audience measurements to existing Media Metrix clients on a PC, and that has helped in maintaining a -- growth, as I said, in the high double digits. So I do think that it represents a growth opportunity, which is probably in the beginning stages of materializing, starting in the U.S. and then expanding overseas as phone penetration with smartphones increases.

Okay. And then just looking towards your project revenue, I think that was a little bit better than expectations here. And I think you called out vCE as being a driver there. I'm just wondering, some of that is more on a trialing basis. Did you see sort of a pickup in trialing in the current quarter? Or is this really more a factor of starting to get more traction and more comfort level by both advertisers and agencies with using the product across multiple -- more and more campaigns?

I'm going to let Serge Matta answer the question.

Yes. We're definitely seeing a huge pickup in vCE sales and vCE bookings. Sequentially quarter-over-quarter, we saw an increase of 71% in bookings for vCE. So it's definitely very strong momentum. And we are -- Q4 has already -- is on the same path.

Okay. And then just last question is obviously, you guys have announced sort of a partnership with Arbitron in sort of developing a 5-screen cross-platform solution. And just wondering if you could maybe give us some updates on time line there and how you sort of view that product sort of as it approaches sort of a scalable solution as being applicable to your client base. What sort of holes is that sort of filling across -- that vCE and some of your other products aren't necessarily addressing at this point in time?

Well, as you know, that product that we're developing together with Arbitron is being purchased by ESPN, and we're making good progress in the milestones for that particular product. Obviously, with vCE Multi-Platform, we would be doing not the 5 screens, as you mentioned, but 4 screens, excluding radio. And we'll be doing that by incorporating the digital measurement that we traditionally do and adding to its data from set-top boxes for TV. So that is going on as a core initiative at comScore, and we have already analyzed over a dozen brands with this kind of methodology. The addition of radio to it will probably come into production in the middle of next year as we put all the components together and figure out what the total 360-degree view is for a particular consumer in terms of media consumption.

Our next question will come from the line of Matt Chesler with Deutsche Bank.

Magid and Ken, just wanted to look at the revenue that you're laying out. If I read your comments correctly, even on this pro forma numbers, 4Q has a modest incremental slowdown year-over-year relative to the 9% reported number that you just put out this quarter. Can you just talk generally about the general tone of clients? Have you seen any change in their willingness to deploy budget? Just perhaps some explanation for what it looks like, the incremental slowdown, while you're sounding quite positive about some of the more recent trends you're having and traction you're getting in some of your products?

I guess, I'm not sure about the revenue slowdown that you're mentioning here because on a reported basis, our growth in Q2 year-over-year was 4%, and Q3 was 9%. Sequential revenue grew by 7%, which is a pretty strong growth. And then when we exclude ARS, there is a -- there is also a significant progression from 8% to 13%. So I'm not sure that I'm getting exactly the slowdown that you're talking about. Maybe you want to...

The -- or maybe I just -- maybe I misspoke, but the -- you talked about x ARS, revenue growth in the third quarter year-over-year, up 13%. I don't think that's what you're guiding to on a pro forma basis for the fourth quarter. I think your guidance is something less than that. I just the [ph] general tone of clients and kind of what you're hearing from your client base given the current environment as well.

Serge, you want to talk about...

To be honest, we're not seeing any slowdown that you're mentioning. We're not hearing anything from our clients, Matt. I think on the opposite, I think in certain areas, we see strong momentum in vCE like we mentioned on the 71% growth rate in bookings. DAx in the U.S. and in Europe continues to do well. In the U.S., it's doing phenomenal. And mobile and audience measurement continues to do well. So I just don't see any -- we're not seeing anything from clients that's indicating any sort of slowdown.

Okay. What type of -- I mean, in your last call, you highlighted the bookings conversion delay. What -- where does that dynamic stand right now for you guys? Have you made progress against that?

Well, I mean, we have -- I think that the gap is narrowing between the booking growth and the revenue growth. And that's in part reflected in the sequential growth from Q2 to Q3. I think that the gap will always exists. The issue is that once you reach more of a steady state, there will be some offsets that will happen when you begin a contract and there is a lag in revenue accrual. But on the back end of the year, there will be a benefit relative to a straight-line revenue accrual. So we expect the gap to continue to improve. But it's hard to forecast at what rate. We also know that the mix of our business that incorporates these new products is going to get higher. So in terms of affecting the overall growth, that revenue lag, even though it's improving, will still, given the mix of the business, still manifest itself for a while.

Do you have a sense yet -- we're 1 month into the quarter, it's a decent portion of the quarter, but there's still quite a bit left, particularly the holiday season. I know a numbers of your clients have minimums on the vCE contract. Do you have a sense as to how much of those in aggregate may get deployed to be recorded in the fourth quarter versus typically need to be recognized over the remaining life of the commitment period?

I mean, we are expecting to see strong revenue recognized for vCE between Q3 and Q4. I don't really...

And we're seeing more and more -- Matt. we're seeing more and more larger packages coming in. So we mentioned last quarter, Microsoft, vCE. We've had sizable deals from Kellogg's that came in via Starcom. So we're seeing more and more, much more sizable deals that clients are now have tested it and now are going towards buying all in or larger amounts of campaigns once -- post trial.

And again, the USA TODAY announcement that they have made -- includes a commitment to measure a large number of their campaigns that they do that they will sell on a guaranteed viewability basis. And that's something that we think will be picked up by more and more publishers, as some of those publishers are taking the initiative and say, "I'm not going wait for the entire market to adapt -- to adopt this new currency. I think it's an opportunity for me to differentiate myself and deliver a quality advertising experience to my customers."

Okay. Just one quick one for Ken. I just saw you guys drew on the credit facility. You had nice positive cash flow in the quarter. Can you just provide any explanation for why you did that?

Sure. Happy to do that. That's really a temporary measure to help us. We are in a process of combining or collapsing some of the acquired subsidiaries internationally, principally euro-based subsidiaries into comScore operations in those countries. And in order to do it efficiently, we drew down temporarily on our line for euros, for the necessary intercompany resolution transactions we need to do. We -- by the -- in early part of this month, we'll be paying back about 40% of that. And over time, we'll kind of keep reducing that. It's really just to help us a bit with simplifying our international subsidiary structure and balance the swings from a currency standpoint.

Our next question will come from the line of Shyam Patil with Raymond James.

This is Brandon Pickett, filling in for Shyam. My first question just comes around sort of the competitive environment you guys are seeing for your Internet measure products. Has that gotten any more competitive or has it gotten less competitive over the past 12 to 18 months for you?

Well, for the basic measurement product, no. We maintained a strong position as we've always done both in the U.S. And internationally, we've made a lot of progress in Europe, Latin America and Asia in the last year or so. So I think that what is really probably the biggest hindrance on the development of this business internationally right now is the economic conditions and uncertainty rather than competitive environment. I'd also note that the foreign exchange fluctuations impact that business disproportionately because that's basically the majority of the revenue that we achieved overseas.

Got it. And then I was just wondering if you could talk a little bit about how we should be thinking about margin expansion going into 2013. I know you guys aren't providing guidance yet, but.

Well, I mean, I think that we are now reporting the revenue growth with a gap of 7 to 8 percentage points relative to bookings growth. As that gap narrows and translates into revenue, at least half that translation will go into margin. So that's one factor that we could take into account. There are also -- as we get all these products streamlined and we will get more efficiencies from our sales investments both behind these new products and internationally, and that we also think will help our margin expansion. Our goal is to look at this year as an exception, as far as where the margins are ending up being in the 16% to 17% range. And we think we have the potential of doing it by translating more of the new sales from new products into revenue.

Yes, great. And then I also have one just quick question. What was the gross adds for the quarter?

Sure. It's 175 gross adds in the quarter.

Thank you, ladies and gentlemen. This concludes the question-and-answer portion of today's conference. I will now turn the call back to Dr. Abraham for any closing remarks. Sir?

Well, thank you, operator, and thank you very much for your participation today. We look forward to speaking with you again in the near future, and I hope everybody is safe. Goodbye.

We thank you for your participation. You may now disconnect. Have a great day.