comScore, Inc. (SCOR) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the comScore Second Quarter 2019 Financial Results. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Jackie Marcus. Ma'am, go ahead.

Thank you, Operator. Before we begin our prepared remarks, I'd 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, August 6, 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 currently expected because of a number of risks and uncertainties. These risks and uncertainties include those outlined in our 10-K, 10-Q and other filings with the SEC, which you can find on our website or at www.sec.gov. I'll now turn the call over to comScore's Director and Interim Chief Executive Officer, Dale Fuller. Dale?

Thank you, Jackie, and welcome, everyone. Thank you for joining our second quarter financial results call. Today, I'm joined by Greg Fink, our Chief Financial Officer. Before I begin, let me start by thanking all of our employees worldwide who are working hard every day in supporting our customers, designing new technologies and providing newer insights into complex customer problems. I also want to acknowledge that the last 4 months have been a difficult period for comScore shareholders. Said simply, we're not pleased with the performance of our stock. We, as a team, are finally undertaking important, thoughtful and critical steps to position comScore for the significant opportunities that are in front of us. The market, for the time being, has clearly expressed uncertainty with respect to the outlook of comScore. And today, I hope I can give you a little more insight on what we're doing. This daily vote, which is a disparate collection of outlooks for our business could be distracting at times, but the management team and the company are staying focused. During our first quarter earnings conference call, I indicated that one of my primary objectives was to streamline our product portfolio. We are concentrating our people and investments on the emerging growth areas of cross-platform through premium video, movies on-demand, addressable advertising and campaign ratings. These areas will remain the focus of comScore going forward as we shift resources, both capital and people, to what we view as the avenues that have the highest return potential and shortest path to success. I would add a new subcategory of addressable advertising that we call under-addressable advertising, which I'll talk more about in a few minutes, and it's a new market area that we believe we are poised to succeed in. To succeed and to maximize our returns in these market areas, we have and will continue to make substantial changes. This management team is reviewing all aspects of the business and conducting a comprehensive strategic review of the company. The second quarter results we reported this afternoon no doubt reflect a changing environment for some of our current products and demonstrate why we need to focus on new markets and fulfill the original vision of the merger. We also felt the impact of our top line due to leadership distractions and our commercial efforts. We made necessary changes in the organization, including the rehiring of key sales leadership in Q2. Revenue in the quarter was down versus a year ago, which was below our expectation that revenue this quarter would be comparable to the year ago period. Looking forward, my expectations for the remainder of 2019 is that our top line results will be flat on a sequential quarterly basis as the business is repositioned, capital is reallocated and resources are concentrated in our key business areas. Before I turn the call over to Greg, I want to review changes made over the past quarter. It is clear our product department has not been innovating and developing solutions at a pace we or our customers need. To address this, we continue streamlining our products, reorganizing our product development organization and refocusing our IT and operations infrastructure. This means looking at everything we do and how we do it. Second, we reorganized our go-to-market teams to be more focused -- customer-focused, streamlined and to grow revenue. And third, we completed a very robust review of our expenses and made hard choices to cut certain expenses to improve our bottom line. While the work I just described continues, the following actions were taken in the second quarter to move the company forward. We made a difficult but necessary decision to reduce our workforce by 10%. We expect this action to reduce our annual operating cost by approximately $20 million. We also completed a capital raise. The decision to raise capital is predicated on the need to ensure that our cash position was adequate to comply with the step-up requirements in the covenant of our senior secured convertible notes. Number two, to succeed and capitalize on the substantial market opportunities in front of us, we are becoming a more focused organization. We are now all-in on the key areas I mentioned earlier, including under-addressable advertising, a new important subcategory in the addressable advertising market that, at this point, has not been adequately measured. It involves measuring impression ratings with demographics for the nontargeted ads after all addressable ads have been accounted for. We believe we can capitalize uniquely on this emerging market. With our cross-platform measurement solutions, know they are brand lift studies, we are seeing an uptick in demand. We have sold dozens of campaigns already for cross-platform brand lift studies. Overall, we are seeing expended uses of our cross-platform services with our brand customers. Our national network business remains strong and is growing across our syndicated services. Top media companies continue to supply to our TV, digital and video-on-demand services and continue to expand with contracts for our cross-platform and custom offerings. A great example of client expansion into the new services is Discovery, which has become our first movie lift client. This new offering provides conversion metrics for theatrical campaigns on television and/or digital. We are continuing to see demand in local TV markets where we have more than doubled year-over-year new agency clients signing to date in 2019. About 70% of our local advertising customers are now using comScore TV exclusively, and we are -- we have seen a 90% renewal rate among existing clients at the local market level. Notably, we expanded our local TV business with new deals from Lockwood Broadcasting Group to Block Communications, Hearst, California Oregon Broadcasting and Pandora Television. We're excited to welcome these new markets to comScore. I would also like to highlight an anecdote of comScore's leadership in local OTT. In Q2, we signed an expanded agreement with Sinclair's Compulse360 over-the-top recording platform. This agreement is designed to provide Sinclair and its over-the-top clients with campaign level measurements of audiences and impressions, including near real-time campaign evaluations so that they can optimize the delivery of their campaigns in-flight. As we evolve our product road map for these areas, we are looking at both internally-generated and third-party partnership opportunities. In addition, Xandr, AT&T's advanced advertising analytics company, has selected comScore as the measurement and currency provider for Xandr's addressable consortium, which includes DirecTV, Altice, Frontier. And this multi-year agreement is designed to get advertisers reliable third-party measurement across the leading national wide linear addressable footprint. Number three, the opportunities in front of us are substantial. Our customers are looking for us to expand our capabilities in more innovative ways and across multiple platforms. However, some of these developments will take time to launch. Because these projects and opportunities are critical, we need to ensure our product offerings are ready to deliver what customers are looking for. The shift in resources necessary to achieve these longer-term goals may result in certain legacy product areas suffering declining revenue. I'd now like to turn the call over to Greg who will provide an overview of our second quarter financial performance. Greg?

Thanks, Dale. Today, we reported Q2 revenue of $96.9 million, which compares to revenue of $101.4 million reported in the second quarter of last year and $102.3 million in the first quarter. Revenue from Ratings and Planning in the second quarter was $68.9 million, a decrease of $1.6 million from the prior year quarter. TV and cross-platform products were higher as compared to the same period last year as a result of higher local TV revenue and increased delivery of cross-platform products. The TV revenue growth was impacted by last year's second quarter, having revenue from our political analyst customers ahead of midterm elections. Our syndicated digital revenue continued to decline and represented 50% of Ratings and Planning for the second quarter of 2019. This compared to 55% in the same period a year ago. Revenue from Analytics and Optimization in the second quarter was $17.3 million, down 16% from the second quarter of last year. The decrease was related to lower digital custom marketing solution sales and deliveries in the second quarter of 2019 as compared to the prior year. The decrease was offset in part by increased Activation revenue. Movies Reporting and Analytics revenue increased 3% in the second quarter relative to the same period a year ago related to both new products and new customers. I'll now turn to operating cost, which I'll discuss on a non-GAAP basis, excluding stock-based compensation. Cost of revenues increased in the second quarter of 2019 compared to the year ago quarter from higher data costs. The increase was offset in part by lower head count and operating efficiencies in our data centers. Our selling and marketing expense and R&D expense were lower compared to the prior year primarily from lower head count in the second quarter of 2019. G&A expense for the second quarter was lower primarily due to the completion of a 3-year transition services agreement. We recorded a $5 million liability related to an increase in litigation reserve, which management believes is the reasonable estimate of the company's probable liability for the previously disclosed SEC investigation. Due in part to a decline in our market capitalization and lower revenue, we performed an interim impairment assessment. As a result of the assessment, we determined the need to write down an intangible asset and goodwill by $242 million in Q2. This is a noncash charge, which reduces amortization expense by $3 million on an annualized basis. As Dale previously mentioned, our mission is to be a better and more efficient organization. These efforts resulted in a restructuring charge of $3.2 million in the quarter, and we saw some benefit in expense reduction as a result. For the second quarter, we reported a net loss of $280 million compared to a net loss of $56 million in the same period last year. We reported an adjusted EBITDA loss of $3.2 million for the second quarter. This compares to positive adjusted EBITDA of $1.3 million reported for the same period last year. Our non-GAAP net loss for the second quarter was $10.8 million, which compares to a non-GAAP net loss of $9.2 million reported in the year ago quarter. We ended the second quarter with cash, cash equivalents and restricted cash of $53.8 million, an increase of $3.6 million from year-end. Following the end of the quarter, we sold in an equity investment, which generated an additional $3.1 million of cash. As Dale mentioned, we completed a capital transaction in June, which resulted in $20 million of additional initial proceeds. The transaction was intended to ensure compliance with our minimum cash covenant, which increases from $20 million to $40 million with the filing of our second quarter 10-Q. With the changes Dale discussed, we believe we will move to breakeven to positive operating cash flow by the end of the year. As for our financial expectations for the remainder of 2019, while custom project revenue can vary quarter-to-quarter, we expect total revenue for the year to be between $385 million and $400 million. However, we expect the implementation of our cost-saving initiatives to result in lower core operating expenses in the second half of 2019 and, as such, we expect adjusted EBITDA to be positive for the second half of the year. As we transition to new products and enter new markets, as Dale discussed, we expect revenue to be similar to the current level over the next several quarters, generating higher levels of adjusted EBITDA. We expect both to improve as commercial development advance. Now let me turn it back to Dale for some closing remarks.

Thanks, Greg. Before we open the call for questions, I'd like to summarize where we're focus: number one is on operational excellence with accountability across the businesses by streamlining operations and deploying capital in attractive high-growth products; number two, increasing product clarity in areas where our data sets allow us to capitalize on demand for the products I described earlier; and number three, executing on a plan to position comScore for sustainable and profitable growth in the long term. As Greg mentioned, as we transition to new products and into new markets, we expect revenue to be similar to current levels for the next several quarters before accelerating as our product development efforts improve and our commercial activities follow. As a result, looking to 2020, we see revenue as flat to slightly higher as compared to our expectations in 2019. We look forward to updating you on our continued progress. With that, I'll open up the call for questions. Operator?

[Operator Instructions]. And your first question comes from the line of Laura Martin with Needham.

Can we talk about Movies for a second? So with the stock down here, you have to pay that 12% coupon to Starboard in shares. It sounds like that's really diluting. It looks like shareholders don't -- can you tell me, Dale, why not sell Movies to try to help the balance sheet get out from under that debt and it doesn't really -- it doesn't have to be part of the end-to-end cross-platform solution? And then my follow-up question is you just said that the revenue was down and you hope it to be flat, but you think it's going to be flat for the next several quarters. Can you just give us what's changing going forward that we're going to actually hit flat after this quarter, which we hoped to be flat, is down a little bit instead?

So Laura, Dale here. As I said earlier, we are looking at all strategic options for the company, and we're trying to ensure that we're not going to continue to add to dilution of the current shareholders. So we're going to do whatever is necessary to make sure those things happen. So I'm not saying we are selling Movies or we're looking at it, but I'm then saying we're looking at all options. Greg?

On your second question, Laura, just around the next few quarters, I think the trend that you've seen in syndicated digital and the custom solutions, right, are those trends that we are playing out and where we would think the second half will be similar to the first half. And so we expect that same kind of mix that we've seen this quarter from a revenue perspective to hold true over the next several quarters.

But flat revenue, not down. Like this quarter was down year-over-year, you're saying it's going to be flat, right?

That is what we have said that it would be comparable, on a sequential quarterly basis, to total revenue between $385 million to $400 million for the year.

And your next question comes from the line of Surinder Thind with Jefferies.

Just a follow-up on the revenue outlook for the Ratings and Planning business and more specifically the digital syndication business. Just to clarify, that business has been declining at close to a double-digit pace. I think if we will rewind a quarter or 2 ago, the thought was that we could get closer to breakeven year-over-year towards the end of the year. Is that still kind of the way the numbers shake out at this point? How should we be thinking about the digital syndication in terms of your comfort level around the declines in that business?

Yes. Thank you for the question. We expect syndicated digital to continue to see this decline that we've been seeing over the last few quarters, although the size of the decline, when you look at it on a sequential basis, which we've been using as our measurement tool, has been slowing. And we continue to focus on that. We think that over time that, that business will stabilize. We shared that on the Q1, but we are kind of looking at it on a sequential basis versus year-over-year in trying to stem that decline.

Fair enough. And then in terms of just when we take a step back and the big picture, you kind of talked about really refocusing the resources on a few key product areas. How should we think about, I guess, that relative to the road map that was provided to the investor community a couple of quarters ago in terms of just -- any additional color you can provide there in terms of where we are in that cycle? And I'm trying to kind of gauge the introduction of new products versus kind of really focusing your effort on maybe making continued improvements in some of the products, it's not quite clear to me where you guys are in your product cycles.

Well, let me jump in here. I think that's a good question. And what I'd like to share, I think Dale was fairly clear in May and reiterated the same point here on the call regarding the areas that we're going to focus on. There are emerging trends that we think that we can capitalize on those. And Dale was specific in his remarks regarding the fact that some of these areas we can get to market sooner rather than later. And so what I would say is we pivot to where the market is headed. We think that we're well positioned to bring those products to market. And so we want to focus on those new and emerging markets where we have an advantage and we have the product portfolio set that we believe will allow us to accelerate and grow revenue. And I think we've hit on those, both back in May and again today, in the addressable, and Dale talked a little bit about under-addressable and emerging areas with large opportunities that we think we can capitalize on. So I think we're going to have to take a step back and look at what the company was versus the opportunities of what the market might be, and those are the directions that we're heading.

Understood. And then a question on expenses and the head count reductions that were announced last quarter. How much of that was in the 2Q numbers? And are we going to be at the run rate -- on the annualized run rate in 3Q? Or is that still further out in 4Q at this point? Just kind of the cadence of those expense control initiatives on the head count.

Sure. So Dale mentioned and again I think we talked about in the last call, it was about $20 million on an annualized basis. If you think about the fact it happened in May, you will use the half-a-quarter convention, right, so $5 million a quarter, you would get a little bit about half of that in the second quarter that you see in our financial results. As you move into the back half of the year, those folks have exited, and it's $10 million. So $5 million a quarter here on out from the actions we've already undertaken. We continue to take additional actions in other areas outside of head count, Dale mentioned that in his remarks, around areas where we've cut expenses immediately and see immediate benefit. So it's more than just the head count, but we will get a full impact of that in Q3 and Q4 moving forward.

That's helpful. And then finally, are you -- do you have what the expectations are for the fully diluted -- and this is more of a modeling question, but the expectations for the fully diluted share count for 3Q and then for 4Q? If the stock price -- I understand that there's some variables that will impact that, but if the stock price where to stay at current levels.

Yes. I think that we're happy to take that one off-line at another time.

And your next question comes from the line of Victor Anthony with Aegis Capital.

So you rattled off a few potential growth areas, video, movies on-demand, addressable advertising, under-addressable advertising. What areas are you most excited about in the addressable advertising and under-addressable? How big is that market for you guys? What's the size? I'm just trying to figure out where the growth story could potentially be for this business going forward because clearly the market is just basically saying there's no growth story there at all. That's essentially what you stated with the guidance. And second, you said flat to slightly high -- higher revenue growth in 2020. What's the EBITDA expectation for 2020 off those numbers?

Yes. So let me deal with the growth aspect of it. I think that we have -- what we've seen in the company, we actually are very excited about the addressable marketplace and in that, the under-addressable marketplace, as I described. I think we -- because with the local market standpoint, which we -- I'm not going to say we own it all, we have to continue work on it every day, but I think we continue to see growth there. The addressable marketplace with the consortium is going to be the bigger overarching aspect, and that's going to give us the base numbers that we're going to have. There'll probably be three consortiums in the world. One of them is going to be AT&T Xandr, we just talked about it, and they picked us, okay? There's going to be another one out there shortly, which we're not going to talk about on this call. And the third one, we haven't -- we don't know who they are going to be. But they -- targeting three out there in the marketplace. But at the local level, there's always going to be the under-addressable piece of that. We're uniquely qualified to provide that information to those markets. And so we think that, that business is going to grow substantially over the years as the addressable marketplace starts expanding. So we're excited about that. Now on top of that, we have over-the-top, which we believe we'll get our fair share of and maybe even more as we continue to build new technologies there. So I think those 3 areas within the premium video are really going to be the source of the growth of the company. But I said we have to prove all that, and the only way we can prove all that stuff is by showing the numbers. So right now, we're giving you kind of the head, just telling you where we're going. The next quarters and the next quarters as we roll our products and as we start showing those numbers and announcing partnerships, you'll start -- it'll start coming into play that this really could be a growth story. And Greg, I think the second question is yours.

Yes. So on the question regarding 2020 and the adjusted EBITDA potential margin, we obviously didn't provide that today. What I would say, Victor, is that if you take kind of the current expense run rate as to where it is today and layer in the $20 million and other things that we're doing, I think that that's a good proxy for where our expenses will land in 2020 against a flat to slightly higher revenue base that Dale talked about.

[Operator Instructions]. The next question comes from Jason Helfstein with Oppenheimer.

So Laura asked about the Movie business. To do what you want to do for television, do you need to have -- do you need to own the syndicated business? Is there a way to do it without the technology?

With what we want to do with the addressable marketplace and as we described the under-addressable and the whole premium aspect of cross-platform, we need the access to the data that's in the syndicated business. We need to have it, that's core to this. That's why both these companies were originally put together a bunch of years ago. So the true vision that we're marching to right now, and it's really clear, is that thing that we should have done 3 years ago or 4 years ago that we didn't. I think we have the will and the desire, and I think we have the know-how how to get there. And it's within striking distance, so...

Well, here's another question. What if someone else owned the -- can you hear me

Yes, I can.

Yes. What if somebody else owned the tech and you license the data? So effectively, you got out of the syndicated business and you would focus entirely on television across media without being in the data collection business or...

Yes. Sure. I'll go back to one of the first things I said, and this is the answer to Laura's question as well, we are looking at all strategic options for the company.

And your next question comes from Matthew Thornton with SunTrust.

Dale, just following up on your last comment, can you just remind us, the process that you're running right now, is that entirely an internal process? Or are you working with advisers and this is a full internal and external process will be question number one. Question number two, is there any update on the CEO search process? Are you looking external, internal, both? Any color on kind of what the right candidate qualities might be, but any status there would be helpful. And then just third, you talked about getting to breakeven operating cash flow in the back half of the year. Can you just remind us, the 10% workforce reduction, I think there was $2 million to $4 million in cash charges associated with that. Did that all land in 2Q? Did some of that spill into 3Q? And related, what's your confidence in staying above that $40 million as we work our way through 3Q and 4Q? I know it's a lot. I'm happy to repeat any of those questions.

Let's take the last question first, Greg.

Yes. I think to kind of articulate as best I can, right, I think the actions that we've taken and the things that we're undertaking, as I mentioned earlier, around other things that we're doing to reduce costs provide us with a view that we can get to the cash flow that we talked about earlier. And as a result, we think that we will be within the confines of our covenants, we feel comfortable with that.

And to answer your first question, as you could recall with the financing, we worked with Goldman through that. And Goldman has been our adviser through a number of things. They are still our bank of records, so they continue to work with us. And so that answers that one. The second question, on the CEO search, the search is ongoing and active. And it has the full attention of the Board. Since this is a matter for the Board, it would be inappropriate for me to say anything more than that. But I can tell you this is a very high priority, and I've been here now five months -- well, pretty close to five months, and it's been an exciting time. So I look forward to getting back to retirement.

I am showing no further questions at this time. I would now like to turn the conference back to Dale Fuller.

Thank you, Operator. And thank you, everyone, for joining us today. To our loyal and patient customers, our shareholders, employees, we appreciate your support. As we invest and refocus the business and position comScore for a sustainable and profitable growth for the long term, we want to reinvigorate and rejuvenate this great company for its customers, its employees and shareholders. And we appreciate your ongoing investments and interest in the company. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may disconnect.