comScore, Inc. (SCOR) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to comScore First Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Steve Calk. Sir, you may begin.

Thank you, operator. Before we begin our prepared remarks, I would like to remind all of you that the following discussion contains forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include comments about our plans, expectations, and prospects and are based on our view as of today, May 8th, 2019. We disclaim any duty or obligation to update our forward-looking statements to reflect new information after today's call. We will be discussing non-GAAP measures during this call for which we have provided reconciliations in today's press release and on our website. Our actual results in future periods may differ materially from those expected because of a number of risks and uncertainties. These risks and uncertainties including those outlined in our 10-K, 10-Q, and other filings with the SEC, all of which you can find on our website or at www.sec.gov. Now, I'll turn the call over to our Director and Interim Chief Executive Officer, Dale Fuller. Dale?

Thank you, Steve and now that we're safely in the harbor, hello everyone. Thank you for joining our first quarter financial results call. I'm also joined by Greg Fink, our Chief Financial Officer. But before I begin my remarks, I want to acknowledge that the company has undergone some significant changes in the past five weeks. I want to extend my utmost gratitude and appreciation to our employees around the world for their hard work and dedication through this period of transition. They are at the core of our success and I want them to know that their contributions are critical and valued. Over the last 15 months, we have strengthened our customer engagement and increased our understanding of customer needs. In my initial weeks as CEO, we have accelerated the core value process. Today, we want to reaffirm our strategy of being the cross-platform leader in measurement because that is what our clients want and they want it immediately. Both locally and nationally, comScore delivers cross-platform audiences that improve media effectiveness with the ability to measure them. Our mission is clear; we must operate with integrity, strive for excellence, and we have to put our customers first. With this in mind, just as I've done previously in my career, we have put in place a plan to refocus our efforts on the products that our customers want. I believe this focus will help our team prioritize, strengthen our customer relationships, increase our success in the marketplace, and accelerate our path to profitable growth. One of my first action items was to reevaluate how our technology is transforming the media landscape and how advertisers can fully engage with our data. My primary objective is to streamline our product portfolio and devote the appropriate resources to emerging areas of cross-platform extended TV, video and movie on-demand, addressable advertising, and campaign ratings. We are evaluating now our broad suite of products and plan to make more concentrated investments in these four growth areas where we believe return on investment will be most pronounced. This is the right path for comScore and I have the support of the Board of Directors and the rest of the management team on this mission. I want to reiterate that our strategy around cross-platform model has not changed, but we are placing a focal point on accelerated development in syndicated reoccurring products that best meet our customers' need and also help us achieve profitability. As a result of the streamlining, I'm happy to say that we're already seeing pronounced improvements in cross-functional communications, accountability, which more effectively links our customers' needs with product development. Our progress is best demonstrated in the local market where nearly 1,200 local customers made up of TV stations, advertising agencies, and advertisers have signed up for comScore, many of whom are using our advanced demographics to transform their media and increase the returns. As an example, in discussions with some of our largest local TV station groups, I hear their enthusiasm for comScore's local cross-platform services and the desire to use this in more and more innovative ways. We are working up some new agreements and hope in this quarter to announce some exciting commitments from local TV station groups to use our services on the cross-platform and over-the-top basis. Our progress in local agency usage continued in Q1 where the large regional agency adopting comScore at 39 markers for buying and posting TV schedules. Our national media clients remain our most ardent supporters and continue to find new revenue opportunities based upon our massive data set of advanced audiences. Last week, during their May 1 upfront presentation, Hulu publicly recognize comScore's positive impact. On a more niche basis, one of the largest legal online gambling companies used our audience data to develop new business opportunities around the Kentucky Derby. Simultaneously, we're working to reinvent digital with new syndicated reoccurring growth engines that link TV data with customer segmentation databases. Recently, a Fortune 50 consumer products company conducted a brand studies with comScore, we believe this had measurable impact during sporting events, and we expect to expand that relationship. Second, as part of our streamlining efforts, we are taking a deep dive into the business to reduce management layers, eliminate redundancies, improve processes and ultimately keep our cost in line with our revenues. We've upgraded our team by promoting internal candidates, adding new talent and bringing back critical team members. In conjunction with our review, we took the difficult step yesterday of reducing our workforce to cut expenses to better align our resources with our customers' need. Greg will discuss that in more detail in a few minutes. Along with headcount, we are revisiting every aspect of our cost structure, including our long-term data contracts, our facility requirements and lowering our fixed cost. Our sales organization is being optimized including our incentive structure, so that we can capitalize on the best opportunities in the marketplace. For most major purchases, formal RFPs have been implemented. We are rethinking the way we use contractors and in many areas, we reduced their use in over the last five weeks. We're optimizing our office footprint beyond what we previously have done and perhaps most importantly, we are accelerating our technology transformation by establishing very clear priorities based on customer needs. Collectively, we believe our focus on operational excellence and efficiency is good for business, but it's also designed to maintain our compliance with our debt covenants. Based on our current plans, we anticipate that we will remain in compliance with our minimum cash covenant under our senior secured notes. We continue to be focused on maintaining flexibility in terms of sources, amounts and timing of any potential financing transactions in order to best position the company for success. As part of the efficiency plan, I've empowered the company's senior leadership team to make critical decisions they believe will help drive better customer service and greater efficiency. So after five weeks in this role, I'm pleased with the speed of change, but we still have a number of initiatives on our action list. That said, I believe we are building the right foundation for both a sustainable revenue growth, profitability and as we continue to execute with excellence and accountability. comScore will be a better, stronger, faster company in the years to come. I will now the turn the call over to Greg to take us through the company's Q1 financial performance. Greg?

Thanks, Dale. Today, we reported Q1 revenue of $102.3 million, which compares to revenue of $105.9 million reported in the first quarter last year and $109.3 million in the fourth quarter of 2018. Revenue from Ratings and Planning in the first quarter was $70.6 million, an increase of $1 million from the prior year quarter. The increase was the result of continued growth in our TV products offset by a decline in our syndicated digital products. Increases in TV and cross-platform products were driven by improving existing customer contract values in the period as well as the establishment of stand-alone selling pricing over certain performance obligations and arrangements that include the purchase and sale services. Our syndicated digital revenue represented 51% of Ratings and Planning for the first quarter as compared to 61% in the same period a year ago and 50% in the fourth quarter of 2018. With the vast majority of these syndicated contracts now sign for 2019, we expect a sequential decline to slow in the coming quarters. Revenue from analytics and optimization in the first quarter was $21.5 million, down 17% from the first quarter of last year and down 10% sequentially. The decrease was related to lower digital custom marketing solutions delivery in the first quarter of 2019 as compared to the prior year quarter. This was primarily the result of delivery timing of certain custom projects, which we expect to deliver in future periods, as well as the first quarter of 2018 having higher deliveries. The decrease was offset by increased activation revenue, which continues to experienced year-over-year growth. Moving to movies reporting and analytics. Revenue decreased 3% in the first quarter relative to the same period a year ago as a result of lower project based revenue. I'll now turn to operating cost, which I'll discuss on a non-GAAP basis, excluding stock-based compensation. In the first quarter, we continue to maintain our expense discipline across key expense areas with the year-over-year change related primarily to workforce optimization and other operating cost improvements. Cost of revenues increased in the first quarter of 2019 compared to the year-ago quarter from higher data cost and employee cost. These increases were offset by efficiency improvements in our data centers as we transition to a cloud-based system. Selling and marketing expense for the quarter decreased $23.5 million, or 23% of revenue compared to $25.3 million, or 24% of revenue reported in the year-ago quarter. R&D expense for the quarter was $17.5 million, or 17% of revenue compared to $18.4 million, or 17% of revenue in the year-ago quarter. G&A expense for the quarter were was $15.5 million, or 15% of revenue, down from $17.9 million, or 17% of revenue in the year-ago quarter. The decrease was partially due to the completion of a three-year transition services agreement as well as lower audit costs. These decreases were offset by $2.4 million in expense associated with the resignation of certain executives. We recognized $842,000 expense for items related to the Audit Committee investigation. This compares to $31.9 million in investigation and audit-related expenses in the first quarter of 2018. This decrease was the result of the conclusion of the multiyear audit in the first quarter of 2018. Fair value changes in our derivative instruments and equity investments resulted in other income of $3 million in the quarter, an increase of approximately $2.9 million from the first quarter of 2018. We could experience continued variability in this line. Moving to our operating performance in the first quarter. We reported a net loss for the first quarter of $27.5 million compared to a net loss of $51.5 million in the same period last year. We reported a net adjusted EBITDA loss of $2.5 million for the first quarter. This compares to positive adjusted EBITDA of $3.6 million reported for the same period last year. Our non-GAAP net loss for the first quarter was $14.1 million. This compares to a non-GAAP net loss of $5.3 million reported in the year-ago quarter. We ended the quarter with cash, cash equivalents and restricted cash of $42.8 million, a decrease of $7.4 million from year-end. As Dale mentioned, we took steps yesterday to reduce our workforce by approximately 10%, which includes open positions that will not be filled. This reduction was implemented in order to decrease cost more effectively align resources to business priorities and ultimately improve profitability and cash flow. We will incur certain related exit cost, which are expected to raise between $2 million and $4 million. We expect these changes to immediately improve our cash flow and ultimately reduce our operating costs by approximately $20 million on an annualized basis, a portion of which will be realized beginning in the second quarter of 2019. We are also realigning some resources to support more promising projects that we believe will accelerate our operating plan. Both the reduction and the realignment are consistent with our March 31, announcement that we intend to optimize our operations and accelerate our path to profitability. We continue to closely manage our cash position and capital requirement, and we believe that yesterday's action, in conjunction with other ongoing cost savings initiatives, will move us towards positive cash flow and improve our liquidity position. We continue to consider our short and long-term financing needs in conjunction with our anticipated future cash generation. In January of 2019, coupon on our senior secured notes reset from 6% to 12%. The interest payment on April 1 was paid in shares of common stock. Now let's shift to our financial expectations moving forward. We expect second quarter revenue to be comparable to the prior year. As for the year, we will update our revenue guidance when we have better clarity on the financial impact of the revised operating plan. That said, we believe this revised plan will positively impact adjusted EBITDA in 2019. We believe the actions taken yesterday, as well as others we have and will take in the future, will allow us to self-fund product development to increase efficiency and profitability as well as cash flow. While we believe the recent changes in our Management Team and Board will drive success in the long term, our revenue forecast for 2019 will be dependent on the timing and rollout of the initiatives that Dale discussed. We are making adjusted EBITDA a priority and are reducing cost so that we can generate attractive returns and cash flow over time. Now, let me turn it back to Dale for some closing remarks.

Thanks, Greg. Before we take your questions, let me just sum up what we're working towards in 2019. First, we're driving comScore towards operational excellence with accountability across all lines of the business. We believe that streamlining our operations will provide us with the capital to redeploy in attractive high-growth products. Second, we are increasing product clarity. This means bigger bets in areas where our data sets allow us to capitalize on demand for our syndicated recurring products. Our customers are eager for us to deliver cross-platform extended TV, video and movies on-demand, addressable advertising and campaign ratings. Where we need to augment our existing platforms, we will consider the strategic, small, but accretive tuck-in acquisitions. Third, we're executing on a tactical plan to win. This comes from the cross-functional alignment and coordination amongst sales, product and technology teams. We believe these steps will allow comScore to leverage our unique market position and truly capitalize on this unprecedented fragmentation that we are seeing across the media landscape. With that, we'll open up the call for questions. Operator?

Thank you. [Operator Instructions] And our first question comes from the line of Matt Thorton from SunTrust. You may begin.

Hey, it's Anthony Duplisea on for Matt. Just a couple of questions for you guys. First off, do you guys have any progress on a permanent CEO search? And then secondly, is there any update on the three-year guidance framework?

Yes. So this is Dale speaking, we have -- the Board has retained an outside search forum, and we are in that process. It's again, six weeks into the process, and we're looking for great qualified candidates that can come in and run this company. My job right now is not being part of that process. But, I mean, I'm not on the cycle of intervening those guys. My job is to get this company fixed and getting it running operationally well for whoever takes over.

On the guidance question, as I mentioned in my remarks, we continue to look at revenue from the perspective of the things that Dale outlined and the timing of those products. And so, as I shared, we will update where we stand as we move forward. So at this point, we're only focused on the items that Dale talked about, delivering those products and we'll provide a more fulsome update at a future point.

Understood. Thanks guys.

Thank you. And our next question comes from the line of Tim McHugh from William Blair. You may begin.

Hi. Good afternoon. It's actually Trevor Romeo in for Tim. Thanks for taking the call. Just wondering, if you could give us your latest, kind of, broad view on the cross-platform opportunity and comScore Campaign Ratings in particular? What was the uptake from media networks like? What was the pipeline look like? I mean, are you still kind of thinking 2020 is the time frame for starting to see meaningful revenue from Campaign Ratings?

Well, I think, as we mentioned, we're not specifically talking about long-term revenue at this point. We want to work through the operating plan that we've talked about. We do believe -- Dale outlined four areas that we're going to be focused on, CCR is one of those. I think that as we build out this plan over the coming quarter, as Dale mentioned, he's been in the seat for five weeks, right? He has put together, as he talked about, four key areas. CCR being one of them and we would expect to be able to provide a broader update as we move forward. I think that those will refine themselves out, as we get very much in the detail of all four of those categories and where we want to employ our resources. It's one of -- part of the strategic review that we've highlighted. And as we go through that process, those areas will become clear, as to where the largest revenue opportunities are for us, and where we want to focus, and we'll bring that back once that's done.

Okay, fair enough. Thank you .And then, on the cost of revenue line item. I know you mentioned higher data costs and employee cost. But I think that line was up something like 700 basis points year-over-year as a percentage of revenue. So was there anything kind of unusual on that line that drove it up so much? Or maybe any other details you can give about the increase there.

Yeah, if you recall, in the second quarter of last year, we changed how we accounted for certain contracts, specifically on the network operators, and they went to a gross presentation of revenue and a cost. So that happened in the second quarter of last year. Therefore, first quarter didn't have that accounting. This will be the last quarter where you don't have a fair year-over-year compare. So that's -- the bulk of that increased year-over-year.

Got it, thank you and then maybe just one more quick one if I could. Could you just clarify strategic review? I guess does that -- is that more of an internal review? Or does that possibly include external options like divesting certain parts of the business or the sale of the whole company? Thank you.

I think all things are on the table. But I would tell you my comment was primarily about us internally reviewing things and going through that. So being a public company, you're always for sale no matter what people can buy our stock at any time across counter, over the market.

Okay, make sense. Thank you very much.

Thank you. And our next question comes from the line of Victor Anthony from Aegis Capital. You may begin.

Hi guys thanks. Two questions, one on the restructuring that happened yesterday. Could you just tell us, how big of a headcount reduction occurred yesterday? And as you go out throughout the year, are there more opportunities for you to reduce headcount and cut more cost? And second, last quarter, you announced CNN as a win, one of the partners that converted out of beta. Could you just talk to about all of the other beta testers? Are there any ones that's coming close? Or do you think that could ultimately come out of beta anytime soon? Thanks.

So, on the cost aspect of it I think that -- I don't foresee us doing any more headcount or a need for any more headcount reductions. I think that, with the reorganization of our sales -- sorry, our sales organizations being optimized, and setting the incentive structure such that helps us capitalize on our best opportunities, you look at formalizing just our most of our major purchases, through with RFPs. That's going to help drive some costs out. We're looking at other locations, facilities that will drive some cost out. We've mentioned the data costs that we have right now, renegotiating some of those, looking at some of those where our partners can help us. That will drive more cost out. And again, accelerating even in our integration or our technology will drive cost out, too. So, I think, that you'll see more costs coming out for the year but primarily through those areas, not any others. And the second part of the question was?

Victor, can you repeat it? How to deal with the beta test, right, of CCR?

Correct.

Yeah. So we continue to make significant progress in that area. We didn't highlight any here today, but I think you can expect -- as I said, I think it was the last call or, right, and as Dale mentioned, it is one of our key four areas that we're focused on, and I think that we continue to make excellent progress in that area and look forward to announcing more wins as we move forward.

But just to be cautionary, I mean there is -- CCR is one piece of a multi-tier strategy for a customer. What I've heard from customers is they want the other pieces as well. So we have to get our cross-platform extended TV out there. We need our video-on-demand pieces that integrate into that. Otherwise, it's not a complete tool set for them. So it's the first phase, we have multiple phases we have to do with that product to actually make it really useful. And so that's why we're really betting on these technologies and addressing them and really focusing everyone because that's what we hear from customers across the board.

So, just a follow-up on that. You guys gave time frames for product launches. Have those been changed, altered, given the series of events over the past month or two?

I can't address that right now. I'm six weeks in, so I will tell you that next week is my product road map, get into the time frames, making sure we have the appropriate carrot sticks and sugar cubes ready for everyone, so we can actually deliver on time. Also, on top of that, talking to customers to understand better their needs and what are the feature sets they have to have, must have. It will be great to come out with the product and call it something and not fit into what they need. So we have to -- we still have a lot of work to do there. And so we're aligning our product group with our technologies -- technology group, with our sales organizations and we make sure we're listening to customers really well. And we're transferring that knowledge all the way into actionable plans. So I'll know more and better to give you a better picture of it at our next earnings call.

Okay. Thank you.

Thank you. And I now like to turn the call back to Mr. Dale Fuller for closing remarks.

And thank you, everyone for joining us, and especially thank you to all the employees, the hundreds and hundreds of employees that are listening in today. Thank you for everything you've been doing over the last five or six weeks, and I'll even go back and say thank you for everything you've been doing for last five or six years that you've been here, and maybe even longer, 10 or 20 years. So, thank you, everyone, and we look forward to reporting progress at our next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.