Comscore Inc (SCOR) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the comScore second quarter 2009 earnings conference call.

My name is Maria and I'll be your audio coordinator for today.

At this time, all participants are in a listen-only mode and we'll be facilitating a question and answer session towards the end of today's conference.

(Operator Instructions).

I'd now like to turn the presentation over to your host for today's conference, Mr.

Ken Tarpey, Chief Financial Officer.

Please go ahead.

Thank you.

Good afternoon and welcome to comScore's earning call for the second quarter of 2009.

I am Ken Tarpey, Chief Financial Officer of comScore.

On the phone with me today is Magid Abraham, comScore's President, CEO and Co-Founder.

Before we begin the call, please allow me to read the following statement to inform you of certain Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

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 Act of 1934 regarding future events or performance of the Company that involve risks and uncertainties, including, without limitation, the expected strength of comScore's business, expectations as to the growth and composition of comScore's customer base and renewal rates, expectations regarding the impact and benefits of new products, assumptions and expectations regarding tax rates and net operating loss carry-forwards, expectations regarding cost control measures, expectations and forecasts of future financial performance, including related growth rates and assumptions for the third quarter and the full year of 2009.

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-Q for the period ending March 31, 2009 and comScore's Form 10-K for the period ending December 31, 2008.

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.

With this, I'll now turn the call over to Magid.

Thank you, Ken and thank all of you for joining us for our earnings conference call for the second quarter of 2009.

We're pleased to report results that were above our guidance for the second quarter.

Revenues were above the upper end of our guidance range at $31.4 million and were up 9% from the second quarter of 2008, with subscription revenue up 14%.

We continued to balance cost management with continued investments in products and technology, resulting in an adjusted EBITDA of $7 million for the quarter, with EBITDA margin of over 22%, which is the highest level in three quarters.

This was well above our expected range of $5.6 million to $6.1 million.

GAAP net income before taxes was $2.6 million, also above expectations.

GAAP net income per share was $0.04 per share.

Non-GAAP net income was $5.2 million or $0.17 per share.

Our ability to innovate while keeping overall costs in check was evident in the second quarter, as we announced Media Metrix 360, our unique panel-centric hybrid approach to Internet audience measurement, which represents a significant leap forward in the state of the art.

While launching and investing in this new offering, we effectively managed our costs so that we achieved a 30% sequential EBITDA growth in the quarter.

Within revenue, subscription revenue was $26.9 million, which is a record for comScore.

Subscription revenue was up 14% from the second quarter of 2008 and represented 86% of total revenue.

Project revenue was $4.5 million, which is up 10% from Q1 as project revenue has shown signs of stabilization.

However, project revenue was still down 12% from the second quarter of 2008.

Revenue from existing customers was $28 million in the quarter, up 15% from the second quarter of 2008, demonstrating our ability to expand our customer relationships, particularly within an environment where many of them are experiencing revenue contraction.

Reflected in existing customer growth is a continued strong renewal rate at 90% plus on a dollar-weighted basis.

As we've seen in the last couple of quarters, our smallest customers continue to be challenged in the current environment, though renewals at medium and large customers continue to offset renewal rates among smaller customers.

Regarding new customer acquisition, we added 100 gross customers in the quarter and a net of 14 customers, bringing our total customer count to 1,195 in the quarter.

While customer budgets continue to be constrained, we have been able to demonstrate value to our customers as we continue our success at upselling and at pushing deals through the generally lengthier purchasing process.

Looking at revenue in a little bit more detail, international revenue of $4.5 million was roughly flat with Q1 and represented 14% of the revenue in the second quarter, up 10% from Q2 of 2008.

Excluding the impact of the strengthening of the dollar vis-a-vis the euro and the Canadian dollar relative to a year ago, our international revenue would have grown by 16%, with growth experienced in all regions and a particularly strong one in Asia and Latin America.

A consistent theme that we've heard from our customers in the quarter is that they are looking to comScore to help them maximize the return they are getting on their online investments.

In addition to driving subscription revenue, this was reflected in project revenue in a quarter where we saw our ad effectiveness solutions continue to gain traction.

In the current market environment, comScore's ad effectiveness tools are helping ad agencies and publishers verify the impact of their campaigns by providing tangible data, demonstrating the return on investment from their advertising expenditures.

Therefore, in a tighter advertising budget environment, customers tell us that data is even more relevant when budgets are limited.

As such, we believe that our ad effectiveness solutions will continue to gain traction and will remain a key area of focus for us, both in product development and our sales efforts.

At the same time, customers are excited about the debut of Media Metrix 360.

Media Metrix 360 combines our industry-leading panel-based Internet audience measurement with server-based measurement technology.

This powerful combination for the first time combines person-level measurement from comScore's proprietary two million person global panel with a full census of usage from participating websites.

This removes one of the ongoing frustrations with Internet audience measurement, namely the reconciliation of Internet -- internal data with third-party audience metrics.

The new hybrid methodology is consistent with the IAB guidelines for reach measurement, which requires client-side person-level measurement in order to calculate person-based reach.

In addition, Media Metrix 360 will allow us to report usage from wireless devices and public access locations such as libraries and Internet cafes that are particularly important in Asia, Eastern Europe, and Latin America.

It is hard to overstate the strategic importance of Media Metrix 360 in our business.

It will help us strengthen our existing customer relationships by working with numbers of our -- by working with customers on numbers that are reconciled to their internal metrics.

It will also help attract new customers, particularly those with business-oriented or specialty audiences.

It will help our international rollout with our ability to measure smaller markets and measure the usage coming from Internet cafes, which can account for half the audience in many countries.

It will improve our ability for more detailed reporting on client properties and ad packages using their customized taxonomies.

Finally, it helps us provide near-real-time campaign effectiveness measurement and reporting based on hundreds of millions of users on a worldwide basis.

Data collection is already underway in the U.S.

and Canada and will begin in the UK in August, with a worldwide rollout following that.

We have been extremely gratified by the positive client reaction and the strong level of cooperation from clients and prospects.

Media Metrix 360 reports will be available as early as August for U.S.

and Canadian websites.

Today, Microsoft announced at the Annual OMMA Conference in San Francisco RF Planner, which is a set of new capabilities in their Atlas ad serving platform that integrate comScore's data to provide improved reach and frequency metrics for online media planning and analysis based on actual ad placements.

We expect this new capability to further grow our revenue from the measurement of ad effectiveness.

Brand advertisers need the ability to evaluate reach and frequency by audience composition in ways that are actionable and accountable.

Current online reach and frequency metrics are typically computed at a site level.

Measuring reach and frequency at the ad placement level is more precise because it shows the reach of the ad campaign that can actually be achieved, the true potential frequency, and the specific demos of that audience.

Campaigns planned at a total site level can overstate reach and understate frequency and may not deliver the desired demographic mix.

This new hybrid approach to digital media planning offers a granular campaign-level analysis and streamlined capabilities upon which brand advertisers have long relied in the traditional media environment.

Operationally, the comScore team delivered a strong performance where we effectively balanced new technology investment with careful expense management.

This resulted in an EBITDA performance that was better than we expected.

That said, investment in new technology, including the worldwide rollout of Media Metrix 360 is and remains an important part of our strategy.

So, while our EBITDA performance was ahead of guidance in Q2, we remain very committed to investing in our long-term growth through key strategic priorities, including Media Metrix 360, while we continue to provide strong profitability.

Our primarily subscription-based revenue model provides us with high -- enough revenue visibility, which aids in our ability to manage our bottom-line results through a careful balance of investment and cost management.

As such, we are able to again affirm our commitment to achieving 2009 EBITDA margins of 21% to 23%, while delivering new value-added technologies and solutions to our customers that enable us to strengthen our market-leading position.

Now, let me turn the call back to Ken for specific comments on our financial performance and outlook for the rest of 2009.

Thank you, Magid.

Revenue in the second quarter was $31.4 million, up 9% year-over-year and 3% sequentially.

Within total revenue, subscription revenue in the second quarter was $26.9 million, up 14% year-over-year and 2% sequentially to a record level.

Subscription revenue represents 86% of total revenue, consistent with recent quarters.

Project revenue was $4.5 million, up 10% in Q1, which we believe indicates some stabilization in the marketplace.

With renewals consistent at 90% or higher, we saw year-over-year growth from existing customers.

Revenue from existing customers was up 15% year-over-year in the second quarter to $28 million, and represented 89% of total revenues, slightly higher than our experience during 2008.

Revenue from new customers was $3.4 million in the second quarter, down 24% from last year.

International business represented 24% of our revenue in the second -- 14% of our revenue in the second quarter, consistent with recent quarters.

Our top ten customers represented 31% of revenue in the second quarter, which is also consistent with the past few quarters.

We have one customer which is more than 10% in the quarter of our revenue.

Turning to expenses in the second quarter, gross margins were 69.1% in the second quarter compared with 67.2% in the first quarter and 72.7% a year ago.

Our sequential margin improvement was helped by cost management and a further streamlining of the costs associated with the M Metrix products, which increased our cost of goods sold relative to a year ago.

Our total operating expenses, while up 8% year-over-year, were down 2% sequentially, even as we invest in strategic initiatives that will help drive our long-term growth.

We've increased our R&D expenses from $4 million to $4.5 million sequentially, while other expenses were impacted by the cost containment actions.

Pre-tax GAAP net income was $2.6 million, well above our guided range of $1 million to $1.4 million, with revenue above guidance and lower expenses than were previously anticipated in our guidance for the quarter.

Our effective tax rate in the second quarter was 54.8% while our second quarter cash tax rate was 9%.

The difference arises from the treatment of stock compensation charges under statement FAS 123(R).

For GAAP accounting, we use fair value at the time of stock grant whereas for cash tax, we use fair value at the time of vesting.

With the considerable restricted stock shares vesting in Q2 2009 and a fair value below the value at the time of grants resulted in an effective tax rate for GAAP that is well above our cash tax rate.

This book tax stock compensation difference will continue to occur throughout 2009.

We cannot predict the stock compensation effect because of future stock price impacts.

This makes our effective tax rate for Q3 in the year difficult to predict.

But we would expect our cash tax rate to be similarly smaller because of our historical net operating losses.

GAAP net income was $1.2 million or $0.04 per share in the second quarter of 2009 based on a diluted share count of 31 million shares.

We anticipate Q3 fully diluted share count to be approximately 31.1 million shares.

In the second quarter, stock-based compensation expense was $2.5 million and amortization on acquired intangibles was $327,000.

Non-GAAP net income for the second quarter of 2009, which excludes stock-based compensation and amortization of intangibles, was $5.2 million or $0.17 per share.

On the same non-GAAP basis, adjusted EBITDA was $7 million in the second quarter compared to $6.5 million a year ago and was well above our expected range largely to the diligent expense management.

Adjusted EBITDA margin was 22.4%, up from 18% in the first quarter and consistent with the 22.5% we reported a year ago.

Cash flow from operations for the second quarter of 2009 was $9.2 million.

Our capital expenditures were at $1.3 million in the quarter, which resulted in a free cash flow of $7.9 million in the second quarter.

As of June 30, 2009, cash, cash equivalents, and short-term investments totaled $74 million, plus there was $4.5 million of cash investments with maturities over 12 months that are classified as part of long-term investments.

The balance of our long-term investments are auction rate securities whose value is unchanged from the end of the first quarter and is at $2.9 million.

We had strong collection efforts in the second quarter, which reduced receivables by $6.3 million from the first quarter and accordingly, our DSO decreased to 83 days.

Turning now to our guidance for the third quarter of 2009, [we believe we should] be able to continue to drive both new and follow-on business at our bread and butter, medium and large clients where business trends appear to be stabilizing.

In addition with new technology initiatives such as Media Metrix 360 and other strategic products -- projects, we continue to be optimistic that these trends will continue for the near team as comScore delivers value and a healthy return on investments to our customers in this environment of tight overall budgets.

With our highly visible subscription revenue model, we are confident in our ability to grow revenue in the 10% to 12% range in 2009 over 2008.

We believe our continued balancing of cost management with investments keeps us on track to achieve an adjusted EBITDA margin in the range of 21% to 23%.

So for the third quarter of 2009, we anticipate revenues in the range of $32.1 million to $33.2 million.

We're anticipating third quarter GAAP net income before income taxes of $2.3 million to $2.8 million, and we anticipate an adjusted EBITDA for the third quarter of 2009 to be in a range of $6.8 million to $7.6 million, which represents an adjusted EBITDA margin of 22%, at the midpoint of our revenue and adjusted EBITDA guidance.

And our reconciliation of GAAP net income to non-GAAP net income and adjusted EBITDA guidance for the third quarter is included in the tables to our accompanying press release.

With that, Operator, we can now open the lines to take questions, please.

(Operator Instructions).

Your first question comes from the line of John Blackledge with Credit Suisse.

Please proceed.

Thanks for taking the question.

A nice quarter.

Just a couple of things.

One on the pricing environment.

If you could just talk about pricing, particularly for renewals, we're at -- I think historically it's -- you guys get a mid-single-digit pricing increase.

So where are we at now given the current environment?

And the other question was on Media Metrix 360, is that being sold separately to Media Metrix clients?

How does that work?

Thank you.

Okay.

John, on the pricing environment, there isn't really a significant difference with the first quarter.

I think the pricing environment remains mixed.

In some situations, we are able to pack on price increases.

Our key focus is to make sure that we increase our renewals with customers at a higher value and that's something that we have been actually successful at doing in the second quarter.

Obviously, that would vary by customer.

With most customers we've been able to do that, but with a few that have been particularly hard hit in the advertising downturn, some of their -- the value that they are buying went down, but overall, the mix was favorable and we were able to increase our value of contract per customer.

In terms of Media Metrix 360, Media Metrix 360 will -- is an evolution of Media Metrix and will become Media Metrix in the future.

So in essence, if you are a current subscriber to Media Metrix, you will automatically become a customer of Media Metrix 360.

Right now, we are not charging extra for participating.

So, in essence, all existing customers are invited to do it.

To participate as a new customer, there is an online program that gives you limited access to data to get you started, but then you'd have to become a full subscriber if you want to have access to the entire suite of products embedded in Media Metrix 360.

Thank you.

Your next question comes from the line of Youssef Squali with Jefferies & Co.

Please proceed.

Hi, good afternoon, guys.

This is Sandeep Swadia on behalf of Youssef.

Thanks for taking my question.

Just two quick questions.

First, your net subs continue to show a declining trend, at least in the last five quarters.

So, just wondering what you are baking into your guidance in terms of net adds for 3Q as well as the rest of the year?

Are you seeing any stabilization or assuming the decline will continue?

And then, I have a follow-up.

Well, we believe we've seen stabilization.

I mean, the difference between 15 net adds and 14 net adds between Q1 and Q2 is not that material, and so we are not looking for a big change in that number for the rest of the year.

Okay.

That's great.

And just trying to get your thoughts on what impact, if any, would you see from the recent Yahoo!-Microsoft deal.

We know that Microsoft is still the largest customer.

Is this good for you long-term, slightly negative, neutral?

Well, we don't foresee any short-term downside for us from this combination.

Longer-term, we think it's -- we think it can be good for us, because it is something that creates a strong number two player in the market and who's working hard on improving their market share and relies extremely heavily on the use of our data.

We believe that to be the case, both at Yahoo!

and at Microsoft.

So, we are cautiously optimistic that this is a deal that will be good for comScore and certainly good for the industry.

Okay.

And just quickly, you were talking about MMX 360.

How many customers have you already signed up for that product to date and how many do you need to actually get real scale in that product?

I don't really have a number off the top of my head, but we have something like 30 of the top 100 media companies and we have in various categories more than half the players in that category committed.

The sign-up process involves two things.

Number one is, a client who agrees to participate has to roll out a little piece of code that has to be implemented on their website and that usually requires the implementation by their IT groups, which in some cases is not as quick as everyone would like even though the actual work is actually pretty limited.

Once that happens, we take people through an audit period where we want to make sure that people -- that what we are reporting is of the highest integrity level that the customer expects from us and the market expects from us.

So, it is possible in certain situations for people to be gaming the system.

So for instance, you could be putting multiple beacons on the same page and if you are not careful, you could be double, triple counting pages in your census counts and clearly that's -- it's easy to do and it is not something that comScore can ignore.

And so, as a result, there's a 60-day period that we go through where we do a substantial audit of all the different web pages that are being tagged and whether they are legitimate page views and whether there are even missing pages that the clients may have overlooked when they are tagging, because our objective at the end of the day is to report the best possible number and make sure that we prevent abuses, which unfortunately can be common in this kind of a business.

So, after that 60-day period, our clients can start getting reported in a Media Metrix interface.

The people who are not participating will continue to be reported as normal.

So, there will be no outage in reporting and the ramp-up in hybrid-level reporting will mirror the pace of the IT implementation by clients and that 60-day quality control period, if you like, to ensure the transparency and reliability of the data.

That's helpful.

Thank you.

Your next question comes from the line of Heath Terry with FBR Capital Markets.

Please proceed.

Great.

I was wondering if you could update us on the certification process, kind of where you are, any sense you have in terms of kind of what the timing is like for finishing that process and to what extent that certification process influenced the development of 360, would certainly be interesting?

Thanks.

Okay.

There is really not a whole lot of news to report on the certification process.

It is going at its own pace.

We're pleased with the pace it's going at and we're working very well with the MRC on it.

But as we mentioned before, it is a lengthy process.

As far as the 360 is concerned, we have certainly briefed the MRC on the concept and there is a component of our data collection related to collection of server-side pages and all the data quality controls that we have in place, are things that we will take the MRC through and that will be an additional audit step that -- an additional but at the same time independent audit step that we will go through to achieve accreditation for the full service.

Great.

And do you have a sense of kind of where you are relative to at least your primary competitor who is also going through this process?

Again, I don't really have any direct information other than the impression that we get is that we're both proceeding around the same pace.

Great, thank you very much.

I appreciate that.

Your next question comes from the line of Jeetil Patel with Deutsche Bank.

Please proceed.

Great, thanks.

A couple of questions guys.

I guess going to the kind of international side of the equation, just UK and Europe, the revenues and the overall business environment, can you talk about whether you're seeing a kind of similar kind of uplift in terms of customers signing up or is that lagging in terms of potential weakness out in the European and UK markets?

Second, I guess if you look at the back half of the year and going forward, and I guess the key to sub growth, subscription revenues picking up, do you think it more so hinges upon products like Media Metrix 360 or do you think that it will be lower churn among the smaller accounts that will really incrementally help you out first as you look at the overall sub revenue growth picking up?

And I have a quick follow-up.

Okay.

As far as the situation in Europe, clearly the UK economy has been hit pretty hard, but we do service from the UK other regions; in particular, India is serviced out of the UK as well as the rest of Europe.

And so, those to some extent can help us offset some of the pressure that you would see in the UK and the main countries in Europe as far as the economy is concerned.

What has helped our international revenue are strong performance in our newest markets, which are Southeast Asia and Latin America that have delivered incremental growth that has helped our continued growth internationally and we think that those still represent the tip of the iceberg as far as where our international potential would be.

As far as what is key to sub growth, I think Media Metrix 360 will play a substantial role in gaining additional customers and in also reducing some of the churn.

I mean to some extent, the churn that is a result of severe economic distress is a churn that you cannot avoid no matter how good the product is.

But in situations where a client thinks that Media Metrix 360 can substantially help their monetization, it is possible that we could avoid a churn in that area.

But we have also started seeing a pickup in interest from clients that we've talked to in the past and for a variety of reasons have had niche audiences or audiences that are oriented towards user at work that are now very interested and are taking a look at Media Metrix 360 and becoming a subscriber.

So, we hope that that will have a positive impact on gross adds.

And on net adds, we think it will have a partial impact, but we also think that we are going through the bulk of the weaker customers and hopefully at some point before the end of the year will start running out of those and the net adds will pick up again.

Magid, I have a couple of quick questions, but I guess you have almost 1,200 customers today, obviously paying and I'm just curious with Media Metrix 360, how many accounts do you think -- or prospective customers do you think are out there that this product will be much more relevant to of the -- let's say you have 1,200 today.

Is that another 1,000 that you have access to now with this type of solution or is it 500?

I guess, can you quantify a bit of how much kind of is below water that you don't have access -- kind of haven't signed up at this point?

And then, I guess any time frame that you look at in terms of how much the UK is lagging the U.S.

in terms of kind of bottoming out and turning around?

Yes.

So, just to give you a benchmark, Omniture, which is collecting census-level data for a number of clients for a different purpose but they have over 5,000 clients.

We think that Media Metrix 360 will represent an opportunity, both here in the U.S.

as well as particularly internationally.

And it's -- we haven't really done a direct calculation of what the potential is, but it's very reasonable to assume that this will increase our ability over the next three to five years to reach customers.

And it wouldn't surprise me if it is in the area of a couple of thousand customers that we would be able to get to with the help of this technology, either because they are in sectors that we typically weren't really in a good shape to be able to measure or because they are in markets where our panel is too small or the shared-use machines are too important and a home and work panel-only approach will understate the audiences significantly and limit the potential of the revenue we can have in those kind of markets.

And then, the last question is about when we think the UK will stop lagging the U.S.?

Yes, just how far behind is it relative to the U.S.

in terms of coming back or at least stabilizing -- showing signs of improvement?

Ken, do you have any notion of that or --?

No, I think, in working with our management over in the UK feeling that they think the 360 creates wonderful opportunity with the customers in the UK but just as we've gone through here in the U.S., the economic conditions, to your point, Magid, are something that they have to work through customer by customer.

Your next question comes from the line of Meggan Friedman with William Blair.

Please proceed.

Hi, good afternoon.

Hi.

A couple of questions.

The first, at this point, what portion of revenue do the small customers represent?

As they have been in the past, Meggan, this is Ken, typically in that range of about 5% or so, relatively small overall in terms of the revenue of the Company.

Okay.

And that's not a change historically.

No, that's where it's been tracking, yes.

Okay.

It's actually slightly down, a fractional point down but...

Right.

Basically in that range.

And then, guidance is back-half weighted.

What are the dynamics that make you so comfortable that we'll see sequential increases in the second half?

Is it based on net adds and pricing on renewals?

And how are renewals weighted throughout the year, or contracts coming up for renewal, rather?

Sure.

Let me start if I could with the renewal weighting in the course of the year.

More of our renewals in terms of dollars are in the second half of the year.

The split is approximately 55:45 overall.

So, we do have more activity taking place from the renewal perspective in the second half of the year.

We're, again, as we've chatted, starting to see some stabilization here in the U.S., which is where more of our revenues come from.

So that's one consideration certainly in terms of looking at things.

I think also, to Magid's point, the large interest that's coming from our customers with 360 and the other opportunities that we see are things that will also help us in terms of our renewals and the opportunities of what we can continue to provide to our customers.

Great.

Thank you.

And then, finally, if you could talk a little bit about the competitive landscape, we've seen a fair bit of press recently from Nielsen and Quantcast, in particular.

Any comments there and have you seen any change in the competitive landscape in terms of pitch activity or in terms of client losses?

As far as the competitive dynamics are concerned, the situation between us and Nielsen remains pretty much unchanged.

We tend to win more business than we lose and this is something that has continued.

They issued a press release about increasing their sample size, but we followed up with a clarification to clients pointing out that, despite the fact that they have increased their sample size, we're still larger and we're still -- they're aiming at where we were -- in essence, they've sort of aimed at where were eight years ago.

After continuing to deride the comScore measurement approach of a combined calibration panel and a large sample, they finally decided that, well, maybe we'll do that after all.

Our main focus is going to be that we want to establish a currency, which is tied to the currency of the Internet and that is a census of all Internet ad impressions.

They get measured impression by impression and that's the conceptual appeal of having this hybrid that takes 100% of the page views measured correctly, audited for fraud, audited for completeness and come up with a service that is a significant improvement in terms of accuracy, in terms of granularity and in terms of the sets of applications that you can get from it.

And we think that that's where the industry is heading and the market gives us credit for that innovation.

Great, thank you.

Your next question comes from the line of Jason Helfstein with Oppenheimer & Co.

Please proceed.

Yes, hi, thanks.

I have two questions.

Can you give us a little more color on breaking down organic growth?

If you strip out M Metrix, was it really any different than the types of revenue [we saw to] Metrix in the prior quarter?

And then, just talk about costs, obviously you guys did a good job managing costs this quarter.

Should we expect those costs to come back next year, assuming a more robust top line or do you think you can manage the business on these level of fixed expenses?

And then just last thing, following back on the media audit, our conversations kind of suggest that clients aren't really focused on this anymore.

There's now multiple competitors emerging, the competitors don't plan on getting audited.

Is the audit still necessary and what are you guys spending on it on an annualized basis?

Thanks.

Okay.

As far as costs are concerned, we think we have taken some systematic costs out of the system and we will be managing very carefully the additions of costs here.

I think that the Media Metrix 360, while it represents an investment now, it also pushes us towards a lot more automation, which I think will deliver some productivity gains for next year.

So, as far as some of the work that we have done in terms of controlling costs, while some of that will grow back, not all of it will grow back and there will be other efficiencies that we will be able to benefit from to maintain and grow the kind of margins that we are reporting now.

As far as the MRC audit is concerned, are clients paying less attention to it?

It certainly doesn't have as much buzz as it had a year or two ago.

I still think it's an important aspect of what we're doing and we are pursuing it.

You are right that some of the new entrants are not necessarily pursuing it with the same level of either rigor or transparency.

But at the end of the day, we look at our ultimate metric is with the 360, we will be reconciling to a well-established count of a census of the usage and I think, once we do that, a lot of the anxiety about my number is different than your number, that anxiety will be significantly diminished.

We have apprised the MRC with the methodology and I think they find it interesting.

I think that this whole MRC audit was prompted by the IAB and in essence, if you go back to their letter that they published two years ago, they were essentially calling for the combination of census data and panel data to be able to do this.

They have recently published guidelines in terms of what they think the proper ways of doing reach are and they have specifically said that methods that rely on server-only are not appropriate for measuring audience reach and you need measurement at the client level which is why you need a panel.

So, I think that we are really delivering what the industry is asking for and that puts us in a really good position to move beyond sort of that kind of debate and focus a lot more on the applications and helping our customers make money with the data that we're providing.

And just what's your cost for the audit on an annual basis?

Ken?

Sure.

It's going to run somewhere in the neighborhood all in of about $0.5 million based on our estimate over the time frame and it's obviously baked into our guidance and it's a relatively small portion of our quarterly or annual costs.

Okay.

And then just lastly, did M Metrix do anything different this quarter than prior quarter, meaning March quarter?

M Metrix, I think that is probably the weakest element of our business.

So if you were to basically say, how is that business trending, there are clearly clients where we are doing well with, but we continue to experience a shrinkage in the business.

And so as a result, I would say that they are probably down relative to Q1 but reaching a closer point of stabilization.

I know you asked a question about the organic growth.

I think that between the loss of the Citadel agreement, which was in the data or in the revenue base in Q1 and Q2 of last year and what M Metrix is contributing now, they are roughly a wash.

Great.

Okay, that's helpful.

(Operator Instructions).

Your next question comes from the line of James Cakmak with Sidoti & Company.

Please proceed.

Hey.

Good afternoon.

Hi.

Good afternoon.

Yes, just a quick question on -- going to your -- breaking down your guidance for the full year, can you talk about what expectations you have baked in on the project revenue side?

I mean are you looking for a significant rebound from kind of what we've been seeing in the first half?

Was it more driven off of expected growth on the subscription revenue?

I think we're probably looking at a revenue that is closer to what we saw in the second quarter rather than what we saw in the first quarter, so that's the first thing.

I think we are also counting on a continued increase in subscription revenue and with a lot of the renewals that -- the large company renewals that we typically get in the second half.

Okay.

So we can assume around the $4.5 million range for the back half of the year?

That's a good assumption.

Okay.

And then just looking at the existing customer revenue growth, that was slightly higher than I anticipated.

Can you talk about the mix between how much of that was able to actually being passing on price increases versus upselling of additional products?

Thank you.

Well, we -- once again, let me just remind everyone that about 33% of our subscription contacts are under multi-year contracts.

So, those have baked in price increases and those will not change.

So, there is an element of price increase there.

I think that the contracts that are up for renewal, some of them have a price increase.

By the way, something like the introduction of 360, when we go and we talk to customers and we introduce a major new improvement in a service and yet, we don't charge for it at the time of introduction, that's what we use to justify the price increase.

And it is again a significant improvement in functionality.

The price increases that we ask for are a reflection of the added value that we would deliver to clients.

I'd say that price increases as a mix would probably still be in the 2% to 3% range for the year and then the remainders are upsell.

And if you look at that 15% increase among existing customers?

Yes.

That 15%, the vast majority of it is really not price increases, it is upsells.

Okay.

Great.

Thank you.

And at this time, there are no further questions.

I'd like to turn the call over to Magid Abraham for closing remarks.

Well, thank you, everyone.

We are obviously very pleased with this quarter.

It took us a lot of hard work to be able to deliver not only on what we promised we'd do, but to be able to exceed it both on the top line and the bottom line.

It took a lot of hard work on the part of our employees and we thank them for that, and a lot of customer loyalty, particularly among our larger customers and medium-sized customers, but also the smaller customers that stuck with us.

So we thank them for that.

And I'll encourage those of you who are on the call to not hesitate to call Ken or I, if you have additional questions.

Thank you very much.

Ladies and gentlemen, this concludes today's conference.

You may now all disconnect.

Enjoy your day.