comScore, Inc. (SCOR) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Q3 2013 comScore, Inc. Earnings Conference Call. My name is Sandra, and I'm your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd now like to hand the call over to Mr. Ken Tarpey. Please go ahead.

Thank you very much, operator. Good morning, and welcome to comScore's earnings call for the third quarter of 2013. Again, I'm Ken Tarpey, CFO of comScore. And with me today is: Magid Abraham, our CEO and Co-Founder; Serge Matta, our President; and Cameron Meierhoefer, our Chief Operating Officer. Before we begin, 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 periods 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 opportunities, including new customers and markets for comScore; expectations as to the growth and composition of comScore's customer base 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; assumptions regarding tax rates and net operating loss carryforwards; and forecasts of future financial performance for the fourth quarter and the full year 2013, including related growth rates, exchange rates and 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 and comScore's Form 10-K for the period ending December 31, 2012, and our quarterly reports on Form 10-Q. 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. In addition, we may also reference certain non-GAAP financial measures in the course of our presentation. You will find in our press release and on our Investor Relations website a reconciliation of non-GAAP financial measures discussed during today's call to the most directly comparable GAAP financial measures. The link to our Investor Relations website is ir.comscore.com, and our results are posted under Press Releases. With that, I will now turn the call over to Magid.

Thank you, Ken, and thank you for joining us today. Let me first provide an overview of the quarter. Serge will then discuss key operational highlights, and Ken will review our financial performance before we take your questions. We have a presentation posted on our IR website under Events & Presentations that will accompany our comments today. And it might be helpful for you to follow along with us. Turning to Slide 5 of that presentation, titled Priorities for 2013. We are very pleased with a productive third quarter and strong third quarter results that reflect momentum across our business, as we continue to lead the way in delivering digital measurement and analytics to our audience, advertising and enterprise analytics customers. Our results also reflect continued excellent execution on comScore's key priority for 2013. Number one is to maintain our measurement leadership, especially in mobile and multi-platform. Number two is to continue our campaign measurement progress and rollout globally. Number three is to capitalize on Digital Analytix momentum, both in the U.S. and globally. Number four is to focus on execution, particularly in driving organic growth and improving margin and increasing cash flow. And number five is to return capital to investors as appropriate, which continues to be a top priority for comScore despite a hiatus in Q3. Turning over to Slide #6. We continue to see strong momentum in the quarter. We reported record quarterly revenue of $71.6 million, which is up 14% versus pro forma results in Q3 2012. This number would be $71.9 million, accounting on a constant currency basis, which represents a 15% year-on-year growth. Our record revenues continue to benefit from growing customer adoption of our vCE, DAx and multi-platform products, together with the ongoing strength in our Audience Analytics business. We delivered adjusted EBITDA of $16.4 million, up 50% from a year ago and representing a 23% margin, which exceeded our expectations. On Slide 7, we have continued strong momentum in bookings and in contract value. For the trailing 12-month period ending in September 30, contract value grew 17% over the prior 12 months period. This is up 1 percentage point versus second quarter, and the gap between revenue and bookings continue to narrow. In Slide 8, new products continue to grow their contribution to our CV and ultimately to revenue, and they remain an important focus as we continue to extend our leadership position in Digital Analytix and strengthen SaaS-driven business model. At the end of 2002 (sic) [ 2012 ], new products including vCE, DAx and multi-platform audience solutions, accounted for 24% of bookings. At the end of -- at the beginning of this year, we set a target range of generating between 28% to 30% of bookings from new products. We are already at 30% on a year-to-date basis. Now I will turn the call over to Serge to discuss the other operating highlights.

Thanks, Magid, and good morning, everyone. Moving on to Slide 9, titled Media Metrix Multi-Platform Expansion Gaining Momentum. As Magid mentioned, we continued to make tremendous progress in securing important customer wins throughout the quarter. The adoption of Media Metrix Multi-Platform, or MMX MP, continues to grow as our multi-platform products rapidly gain broad market acceptance and momentum. This is especially the case with our core Audience Analytics business. Since the beta launch back in October of 2012, 218 customers have now signed up for MMX MP in the U.S., with 43 customers subscribing during the third quarter of this year. We are also seeing increasing upsell activity, where customers are adding MMX MP to existing subscriptions. Over half of new MP subscribers also bought Mobile Metrix and/or Video Metrix during the third quarter as well. In addition, we renewed an important partnership with ESPN for Project Blueprint. This is a pathbreaking cross-media measurement collaboration with ESPN that measures TV, radio, PC, tablets and mobile consumer usage across platforms where content and advertising converge. Looking to 2014, we expect to continue to expand the adoption of MMX MP beyond the U.S. and the U.K. to additional international markets, starting with Canada and Spain in the first half of 2014. Moving on to Slide 10, vCE Adoption at All Major Agency Groups. comScore's Advertising Analytics offerings continue to enjoy strong market reception. vCE is now being used by the top 10 CPG advertisers and 22 of the top 25 global advertisers. We believe there is significant room for further growth as advertising continues to migrate to a multimedia, multi-platform environment and the industry increasingly adopts real-time digital campaign optimization. The momentum of our vCE or validated Campaign Essentials Advertising Analytics suite continued through the third quarter with the addition of new clients, including 1 of the top 4 U.S. TV broadcasters. In addition, VivaKi selected comScore as its preferred campaign measurement partner and will make vCE available globally to all of Publicis Group companies through a single point of entry via its Audience on Demand real-time bidding platform. Moving on to Slide 11, vCE Usage Momentum. You can see that the market momentum of vCE as we continue to outpace the competition. Internationally, vCE is delivering 4.6x the impressions of our closest competitor. And in the U.S., we garnered 3x the impressions, up from 2.3x last quarter. Now I'll turn the call over to our CFO, Ken Tarpey, for a review of our financial results.

Great. Thank you, Serge. Again, good morning, everyone. Now let's take a look at our results for the third quarter in a little more detail, and I'll start with the revenues. As Magid has mentioned, revenue for the third quarter was a quarterly record of $71.6 million, up 14% versus pro forma results same quarter last year or 15% on a constant currency basis. Subscription revenue in the third quarter was $62.5 million, up 19% versus pro forma results in Q3 2012. Subscription revenue and project revenue represented 87% and 13% of total revenue, respectively. Subscription revenue mix has increased, as customers are now primarily contracting vCE on a subscription basis as compared to prior quarters. Revenue from existing customers was up 14% year-over-year in the third quarter to $64.5 million and represented 90% of total revenues. Our renewal rate with existing customers remained above 90% on a constant dollar basis, and we added 46 net new customers in the third quarter. And our customer count now totals 2,296. We continue to have strong growth in international revenues. In the third quarter, revenue from outside the United States represented 30% of total revenue and increased 25% over 2012 on a pro forma basis. Now let me turn to expenses and margins. Our gross margin was 70%, up from the second quarter levels due to higher revenue, continued cost optimization efforts and operating leverage. GAAP pretax income was $707,000 in the third quarter as compared to a loss of $1.7 million in the same quarter last year. The increase in pretax income from 2012 was the result of the operating margin leverage with our revenue growth. Our stock compensation expense for Q3 was $7.2 million. Our Q3 tax provision is high compared to pretax income due to the current nondeductibility of certain international losses for GAAP purposes. We expect this to continue in the fourth quarter. We are currently implementing a revised international tax program to address this for 2014. Our cash taxes remained low at 5% of the year-to-date non-GAAP net income, as we hold significant net operating loss carryforwards in the United States, certain states in the U.S. and certain foreign jurisdictions, principally the Netherlands and U.K. In the third quarter, the resultant GAAP net loss was $82,000 or 0 per basic and fully diluted share based on the basic and fully diluted share count of approximately 34.5 million shares. Non-GAAP net income for the third quarter of 2013 was $11.6 million or $0.32 per diluted share, excluding stock-based compensation, amortization of intangibles, acquisition-related expenses and other nonrecurring items. The accompanying EPS calculation is based on a Q3 fully diluted share count of 35.9 million shares. Adjusted EBITDA was $16.4 million in the third quarter, representing an adjusted EBITDA margin of 23%. Now turning to our balance sheet. We ended the quarter with cash and cash equivalents of $79.8 million. Total deferred revenue was $74.9 million at September 30, as Q3 sales bookings had a somewhat lower percentage with advanced billing terms as compared to prior quarters, plus the normal seasonality in the third quarter. Third quarter net cash from operations was $1.8 million. Timing of our Q3 cash collections were affected, in part, by the adoption of a standardized billing system implementation for most of our revenue business. Our third quarter capital expenditure was $1.2 million, primarily due to the build-out of a new data center, as mentioned in last quarter's call. This resulted in a free cash flow for the third quarter of $0.6 million, which was lower due to the somewhat lower cash collections than recent quarters. Year-to-date, however, 2013 free cash flow is $35.3 million, a 25% increase over the 2012 year-to-date free cash flow of $28.2 million, as the positive cash flow aspects of our business remained unchanged. Now let me return you to Slide 13 and guidance. The following guidance for the fourth quarter and full year of 2013 is provided on a non-GAAP basis, excluding the financial performance of our Non-Health Copy Testing and Configuration Manager products, which we divested in Q1 2013. The Q4 guidance includes anticipated investments for key product initiatives, such as expanded mobile data internationally. For the fourth quarter of 2013, we anticipate revenues in the range of $73.5 million to $77.5 million. This revenue range reflects the negative impact of recent foreign currency fluctuations. We anticipate fourth quarter GAAP loss before income taxes in the range of a $2 million loss to pretax income of $700,000. Our estimated basic share count for the fourth quarter is 36 million even. We anticipate adjusted EBITDA for the fourth quarter of 2013 to be in the range of $15 million to $16.5 million, which represents an adjusted EBITDA margin of 21% at the midpoint of our revenue and adjusted EBITDA guidance ranges. Combining this Q4 guidance with year-to-date actuals, we expect the full year 2013 non-GAAP pro forma revenue range of $282.5 million to $286.5 million. On this basis, the 2013 pro forma revenue growth range is 14% to 16%, or 15% at the midpoint. We anticipate full year non-GAAP pro forma income or loss before income taxes to be in the range of breakeven to pretax income of $2.2 million. Our estimated fully diluted share count for 2013 is 36.1 million shares. We anticipate pro forma adjusted EBITDA to be between $58.1 million and $59.6 million in 2013, representing an adjusted EBITDA margin of 21%. We expect our capital expenditures for the fourth quarter of 2013 to be in the range of $3 million to $4 million. For the full year, we expect approximately $7.9 million in amortization of intangibles and patents, $27.6 million in stock-based compensation. Additionally, we anticipate an average fully diluted share count of 36.1 million. This excludes the potential impact of share repurchases that may occur in the fourth quarter. A reconciliation of GAAP net income and net loss before income taxes to adjusted EBITDA guidance for the fourth quarter and full year of 2013 is included in the tables to our earnings press release, as well as the slides accompanying today's presentation. For your reference, we have also provided comparable 2012 and 2011 information for the pro forma products, which we divested or eliminated during the first quarter of 2013, so you'd get a sense of the financial contribution of those products during the quarters of 2012 and 2011. Now with that, operator, we can open the lines to take questions.

[Operator Instructions] Okay, we do have a question for you, apologies for pronunciation. This is from Youssef Squali from Cantor Fitzgerald. Youssef H. Squali - Cantor Fitzgerald & Co., Research Division: Youssef Squali. Ken, a couple of questions. First, I was just wondering what drove the incremental margin in Q3 and why the assumed decline in Q4? I think at the midpoint, you're at 20.8%. And then second, Magid, maybe you can just talk a little bit about the Nielsen settlement. What does it mean for the company practically in 2014? And I have a quick follow-up.

Well, let me ask Ken to answer the question about the guidance, then I will take the Nielsen stuff.

Sure, I'd be happy to, Magid. And on the quarter, as you know, it was a very strong quarter. We're getting more leverage from our newer products, which are flowing through. But as we indicated on the call, with new product initiatives, there are new areas of opportunity where we need additional data sets, as we've been doing over the course of the year. And those data sets, based on the timing of them and when they hit the expenses, don't always -- are not as ratable at this point in time as an element of startup, so we didn't have as much of that in the third quarter. But we see that coming online in the fourth quarter and going forward. I hope that helps. Youssef H. Squali - Cantor Fitzgerald & Co., Research Division: So was there any push-forward of -- or actually pushbacks of...

I wouldn't say push. It's just timing from that standpoint. It just ended up coming -- it's going to get online from an expense standpoint a little bit later than when we gave our guidance last quarter. But the other element is we are getting better -- we are getting a better bit gross margin, 69% to 70%. Last quarter, we saw ourselves at 69%, but we were able to do better than that.

I mean, I think, overall, what you -- looking at the year, we are performing across the board from a cost standpoint better than we thought, and we are exceeding our guidance that we gave pretty much every quarter throughout the year. And in Q4, we're going to be cautious in terms of some of the investments that we may be making, particularly in the area of a cross-media. So let me answer the question about the settlement with Nielsen. The acquisition of Arbitron was -- actually resulted in a settlement between Nielsen and the FTC that included a consent decree requiring them to make Arbitron PPM data, Personal (sic)[Portable] People Meter data, available to an unnamed third party. But they made it clear that comScore is the leading unnamed third party and that they gave comScore and Nielsen up until the end of the year to reach an operational agreement that will basically guide -- will guide kind of the transfer of data. What's important about this is that it allows us to get data from -- on TV usage, in particular. Obviously, everybody knows that PPM provides radio usage. But it will allow us to get data on TV usage on an individual basis, with individual demographics on up to 70,000 panelists. And that is collected on a passive basis. So we are very excited about being able to leverage that data source in future products. I do have to caution that given the 2-step process in the consent decree, where the consent decree basically outlined the principles and the parameters of the agreement, and where we are negotiating with Nielsen, mirroring closely what those parameters are, we will be able to discuss in more detail what it means for us when we have a signed agreement, and the uncertainty about what the content of the agreement will go away. Youssef H. Squali - Cantor Fitzgerald & Co., Research Division: Okay. That's very helpful. And then lastly, maybe you can -- can you just comment maybe on the partnership that Twitter recently signed with Nielsen and if you think that will have any impact on the data collection, particularly on the mobile side in the U.S.?

Youssef, it's Serge. No, we're aware of the Twitter relationship with Nielsen. It doesn't really have much of an impact on the mobile side. But Twitter is a large customer of comScore, we feel good about our relationship with them and we continue to grow our business with them. So I'm not sure how much the impact it is on mobile. But regardless, we feel good about our relationship with Twitter.

We have another question for you. And this one's from, apologies for pronunciation again, Jason Helfstein from Oppenheimer. Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: Two questions about the business, and then kind of one housekeeping balance sheet question. So can you guys talk about, just as we're seeing more and more focus on RTB and programmatic, how that has an impact in your business? Given the fact that your contracts typically renew annually, would we start to see ARPU go up or accelerate as a function of clients asking for more data and to do more things with the data on a programmatic basis and when we could start to see that impact the business? Second question, given the kind of the lack of cookie data or the lack of robust cookie data on smart devices, can you just talk about how the shift to more mobile usage positions you more aggressively with clients? And then lastly, Ken, can you just talk about the target balance sheet profile you're looking for? Obviously, cash continues to increase. Is there a level at which you'd start to redeploy that back to -- or deploy as a buyback? Or is the idea to keep hoarding cash to use in future acquisitions at some point in time?

Okay. Well, I think the first part of the question was the RTB. I think what you saw earlier in the quarter in terms of VivaKi signing a commitment to comScore, VivaKi is the trading platform across the entire Publicis Group. And one of the important elements of future RTB is information about whether a particular placement or a particular impression is likely to be viewable or not. So we think that between that and some other information, we have more information that is relevant for RTB, and we will benefit from that. In terms of the timing of the revenue, whether that ends up being annual commitments or whether that would end up being a transactional pricing kind of deal, it's kind of too early to tell. Second question about the mobile stuff. One of the benefits that comScore has is that we have what we call the comScore Census Network, which allows us to see the usage across all devices, across a very vast footprint of properties. And without getting into technical details, we do have the ability of actually capturing and marrying different cookies or different IDs on a mobile device, as well as on a PC. So this is actually a technology that we're very excited about because we are deploying in Media Metrix MP. We are deploying in DAx. We did it for the blueprint project for ESPN. And there are -- and for campaign measurement. So all of these things are things that leverage kind of a hidden asset that people don't -- we haven't really kind of talked about its impact and its usage in terms of helping us solve the multi-platform puzzle, but we are very excited about that. The last point that you asked about, the hoarding cash and the share buyback. As I mentioned in my remarks, we ended up being in a hiatus mode during Q3, and that was because the 10b5-1 plan had parameters that were not met during Q3. But we are serious about the share buyback plan and we are making the adjustments that are necessary to be active in executing that plan.

And Jason, last point, this is Ken. We also executed a broader credit line arrangement this past quarter of $100 million. So between the cash we have and the $100 million credit line, we have the ability to pursue the return to shareholders, as Magid mentioned, but also have dry powder if there was something that made sense to us as we get into 2014 from an acquisition standpoint. Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: Great. And it's nice to see you guys kind of moving beyond the all the disruption from the integration of the acquisitions.

We have another question for you, again sorry for the pronunciation. Mark Zgutowicz from Northland Capital Markets.

Just wanted to talk a little bit further about the cross-media measurement opportunity. I understand it's early and you're still sort of negotiating with Nielsen, which I do want to touch on a bit. But I'm just curious if you have sort of your hands around the size of that market opportunity and sort of what your go-to-market strategy will be. Not looking for definitives, obviously, from a competitive standpoint, but just trying to get an idea of sort of when do we start to see some tangibles coming from that. Is that a '14 opportunity? Or is that a '15? And then specifically, Magid, you talked about some negotiations with Nielsen. My understanding is the consent decree was pretty straightforward. Is the negotiations having to do with potentially more than the 70,000 panelists, which my understanding, Nielsen is responsible for sort of keeping updated? Maybe if you could provide some clarity on that, I'd appreciate it.

Sure. I really want to refrain from providing any estimates about market size and impact at this point. We do really want to have the agreement concluded with Nielsen, and that's what we're really focused on. And you're right, the consent decree is fairly clear, but there are -- anytime you put legal teams together, it's not as straightforward as it sounds. But I think we're making progress. The 2 key elements of the consent decree that we are excited about is that it's a provision of that panel data, the TV panel data, as well as the radio data when needed, royalty-free in the sense that our obligation is to pay for the incremental cost of procuring the data and delivering it. But we don't have any kind of revenue share that we would have or a royalty that we would have to pay as a percentage of the sales as we go forward. We expect to be in a much better position to talk about where we think the upside is in 2014 and 2015. Obviously, it's a big area. We're excited about it. But we are kind of limited in what we can say right now.

And the only thing I want to add, this is Serge, Mark, is per all of our discussions with the FTC, our plan here is, once all of these negotiations are done and some -- and concluded in 2014, to syndicate this product beyond ESPN. This is not just a product just for ESPN. We are planning on syndicating it. But as Magid said, it is a bit premature to estimate the size of this market until we have that agreement completed.

Okay, fair enough. Just one final question on just vCE in general. Obviously, some pretty impressive penetration at the agency and CPG level. I'm curious if you look at some other verticals, like auto and telecom specifically, if you expect to see some incremental revenue coming in, in '14 from those verticals, obviously sort of longer sales cycles. But do you have a sales model that's set up to sort of attack those verticals today? Or is that something that's sort of being put in place as we speak?

Sure. The auto and telco verticals are very important for us. Actually, within our sales organization, we do have dedicated sales and account management teams for those specific verticals. And we do see plenty of opportunity both in -- across all of our product lines, including vCE, in those verticals.

The only thing that I would say is that in some of those verticals, some of the advertising done is on a pay-for-performance basis or a CPA basis. But there has been a lot of press recently about kind of what you'd call as kind of fraudulent impressions, where people are playing a lot of tricks to make it look like there are impressions that have delivered results. And in fact, there were not. So I think that the majority of the vCE revenues so far has been among advertisers who are advertising for branding purposes. But we do think that there is a significant -- some significant savings that could be done when vCE is used for identifying some of these fraudulent impressions.

Okay. One last quick housekeeping. What was the quarterly -- the customer churn?

Gross, what was the -- what were the gross adds, Mark?

Yes.

Just hold on 1 second, please. I just don't have that in front of me right now, Mark, but I'll shoot that back to you shortly.

We have 46 net clients in the quarter. How much of the gross, we'll have to get back to you, Mark.

You have no more question at this time. [Operator Instructions]

Okay. Well, if there are no more questions, I want to thank everybody for participation today. Obviously, we're pleased with our third quarter results. We think we accomplished a lot, some of it is reflected in the results, some of it is really an investment in the future. So we're pleased with the strong execution and momentum. We're confident we can sustain the momentum throughout the balance of the year and 2004 (sic) [ 2014 ]. And we remain laser-focused on the strategy and the priorities that we outlined during our presentation and delivering value to shareholders. We look forward to speaking with you again on the next conference calls. Thank you very much.

Thank you. Thank you, ladies and gentlemen, for your participation in today's conference call. This has now concluded your presentation. You may now disconnect. Thank you.