Comscore Inc (SCOR) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2011 third quarter comScore, Inc.

earnings conference call.

My name is Taheesha and I will be your Operator for today.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr.

Ken Tarpey, Chief Financial Officer.

Please proceed.

Thank you very much.

Good afternoon, everyone, and welcome to comScore's earnings call for the third quarter of 2011.

Again, I'm Ken Tarpey, CFO of comScore.

On the phone with me today is Magid Abraham, our President, CEO, and co-Founder.

Before we begin, please allow me to read the following disclaimer regarding our use of forward-looking information and non-GAAP financial measures.

During the course of today's call, as well as during any question and answer periods that may follow, representatives of the Company may make forward-looking statements within the meaning of Securities Act of 1933 and the Securities Exchange Act of 1934 regarding future events or performance of the Company that involve risks and uncertainties, including without limitation the strength of comScore's business, expectations as to opportunities including new customers and markets for comScore, expectations as to the growth and composition of comScore's customer base and renewal rates, expectations regarding the impact and benefits of particular lines of business and products, expectations regarding the relative quality of comScore's products, expectations regarding comScore's acquisitions including AdXpose and Nexius, expectations regarding comScore's intellectual property rights, expectations regarding certain litigation matters, assumptions regarding tax rates and net operating loss carry-forwards, and forecasts of future financial performance for the fourth quarter and the full year of 2011, including related growth rates and assumptions.

Such statements are only predictions based on management's current expectations.

Actual events or results could differ materially from those predictions due to a number of risks and uncertainties, including those identified in the documents comScore files from time to time with the Securities and Exchange Commission.

Those documents specifically include, but are not limited to, comScore's Form 8-K filed earlier today relating to this call, comScore's Form 10-K for the period ending December 31, 2010, and comScore's Form 10-Q for the period ending June 30, 2011.

We caution you not to place undue reliance on any forward-looking statements included in these presentations, which speak only as of today.

We do not undertake any obligation to publicly update any forward-looking statements to reflect new information after today's call or to reflect the occurrence of unanticipated events.

In addition, we may also reference certain non-GAAP financial measures in the course of our presentation.

You will find in our press release and on our Investor Relations website a reconciliation of non-GAAP financial measures discussed during today's call to the most directly comparable GAAP financial measure.

The link to our Investor Relations website is ir.comscore.com and our results are posted under Press Releases.

With that, I will now turn the call over to Magid.

Thank you, Ken, and thank you all for joining our earnings conference call for the third quarter of 2011.

We are pleased to report strong Q3 results.

Our focus on strong execution and profitable growth that many of you heard during our Investor Day is delivering results.

Revenue in the third quarter was $58.8 million, a 29% increase from the third quarter of 2010.

We are particularly pleased that adjusted EBITDA came in at $10.7 million representing adjusted EBITDA margin of 18%, well ahead of our guidance midpoint of 16%.

We netted 64 new customers during the quarter including 11 from AdXpose which is consistent with what we have seen over the last year.

Renewal activity remains strong and continues to trend over 90% on a constant dollar business.

Our international business continues to grow at a healthy pace and represented 27% of our business in the third quarter, up from 21% a year ago.

We are also pleased with the announcement by AIMC, the online industry currency body in Spain, last week that comScore was selected as the vendor of choice for a significant market in which we had historically a minimal market presence.

With this, comScore has gained in the last year the status as a preferred online audience measurement source in two new markets which are Spain and the Netherlands.

We believe that core industry trends continue to drive interest in our products that help publishers, advertisers, and agencies optimize their use of digital strategies.

Our best in class products are increasingly at the right place and right time, allowing us to drive value for new customers and to enhance and broaden our value proposition at existing customers.

Both existing as well as new products and technologies contributed to our growth in the third quarter with Media Metrix 360 and our AdEffx suite making meaningful contributions yet again.

During the quarter we saw strength across a number of verticals including consumer packaged goods, telecom, and financial services.

In our last call we announced the acquisition of AdXpose whose technology helps to verify that ads are actually being delivered as intended and that they meet advertiser requirements for a brand safe advertising context.

They also allow us to measure view ability of campaign impressions delivered by an ad server.

Based on market feedback, the acquisition has been well received by customers and the integration efforts are going well.

AdXpose is an enabler to what we believe is the next frontier in advertising measurement embodied by our VGRP or validated gross ratings point metric.

We believe AdXpose gives us the potential to implement game changing technology to our AdEffx suite.

Introducing the VGRP concept has attracted a very positive reaction with several new client commitments to participate in early implementations.

Our vision is to create a one-stop shop and a potential currency for campaign verification and effectiveness measurement.

We believe the transparency and accountability that the VGRP offers will create significant added value for our customers and that our AdEffx suite can potentially revolutionize the way digital advertisements are being monetized.

Another noteworthy third quarter highlight is that comScore signed one of the largest wireless operators in the world to our Xplore mobile analytics platform which will provide customers with the ability to measure and analyze mobile usage across multiple modes of access and geographies.

We are seeing similar interest from international operators as well.

By combining comScore's network and customer analytics capabilities, comScore is uniquely able to provide wireless carriers with tools and valuable insights to help shape strategies and improve execution both on the revenue and cost sides.

Given the size of Xplore deals, the sales cycle tends to be longer than our other products, but our pipeline is developing very well and we remain encouraged by the opportunity in the network and carrier analytics market.

In summary, we are pleased with our momentum and execution in the third quarter which led to better than anticipated top and bottom line results with approximately 86% of revenue from highly visible subscriptions and 90% plus renewal rates and an expanded market opportunity enabled by our best in class products.

Our full slate of new and existing products position us well for top line growth and our focus on profitable growth positions us to deliver improved bottom line results as our business scales.

As such, we remain optimistic as we close out 2011 and we remain excited about our prospects in 2012 and beyond.

Now let me turn the call over to Ken for his comments on our financial performance in the third quarter and guidance for the rest of the year.

Ken?

Thank you, Magid.

GAAP revenue in the third quarter was $58.8 million, up 29% year over year.

Subscription revenue in the third quarter was a quarterly record of $50.3 million, up 31% year over year.

Subscription revenue represented 86% of total revenue.

Project revenue was $8.5 million, up 16% from the third quarter of 2010, slightly down from the second quarter of 2011.

Both our subscriptions and project revenue performed as anticipated with our subscription business showing particularly healthy growth trends increasing 31% in the quarter.

GAAP revenue from existing customers was up 31% year over year in the third quarter to $52.6 million and represented 89% of total revenues.

New customers made up the balance of the revenue.

Again, we added 64 net new customers in the third quarter with our customer count now standing at 1,924.

Our focus on international expansion is driving an increase in international revenue.

In the third quarter, revenue from outside the United States was $15.8 million, up 77% year over year.

Total deferred revenue, which includes current deferred revenue of $63.6 million and long-term deferred revenue of $736,000 for a total of $64.4 million.

This total deferred revenue is comprised of cash paid upfront for subscription licenses or subscriptions that will be recognized over future periods.

On a sequential basis, deferred revenue was down primarily due to seasonality in the third quarter which was not apparent a year ago to the impact of deferred revenues from acquisitions.

In addition, several larger third quarter renewals from a handful of top clients did not include significant advance payment terms.

However, with strong renewal activity anticipated in the fourth quarter and seasonal strength more generally, we anticipate a healthy improvement in deferred revenue balances at yearend.

Our top ten customers represented 24% of revenue in the third quarter reflecting increased diversification in our overall customer base.

We had no 10% customer in Q3, but our largest revenue customer represents 10% of our 2011 year to date revenue.

Turning now to expenses, gross margins were 67%, consistent with the second quarter and compares to 70% in the same quarter last year.

As we mentioned before, gross margins in the near term are impacted by the effects of our 2010 acquisitions.

GAAP pretax loss was $5.7 million in the third quarter as compared to our second quarter GAAP pretax loss of $6.2 million.

GAAP pretax loss in the third quarter of 2010 was $3.3 million.

The increase in GAAP pretax loss on a year over year basis is primarily attributable to added costs of litigation of $5.2 million in the third quarter of 2011, which are in line with our expectations, as well as costs from acquired companies such as higher intangible amortization costs of $2.4 million.

Our effective GAAP income tax rate for the third quarter was a 30% benefit rate due to the current book pretax loss position.

Our year to date GAAP tax rate is a benefit rate of 13% and the tax benefit of current loses is somewhat minimized by valuation allowances primarily relating to the Netherlands business.

Our year to date cash tax rate was 11% as the result of our profitability in certain international jurisdictions such as Canada, some South American countries, and certain states where we do not have net operating loss carry forwards available.

The Company is also subject to US Alternative Minimum Tax.

Currently for the year we project an annual GAAP benefit rate of approximately 13% and the annual cash tax rate of 11%.

We continue to hold significant net operating loss carry forwards in the United States, certain states in the US, and certain international subsidiaries, principally Netherlands and UK.

The GAAP net loss was $3.9 million or $0.12 per basic and diluted share in the third quarter of 2011 based on a basic and diluted share count of 32.5 million shares.

Non-GAAP net income for the third quarter of 2011 was $6.9 million or $0.21 per diluted share excluding litigation costs, stock-based compensation costs, amortization of intangibles costs, and acquisitions-related expenses.

This amount compares to a non-GAAP net income of $8.2 million or $0.26 per share in the third quarter of 2010.

With our varying tax rates and noncash expenses, we believe that adjusted EBITDA is a useful measure for investors to use to evaluate our operating performance.

Adjusted EBITDA takes non-GAAP net income and adjusts it to exclude the cash tax provision, depreciation, intangible amortization costs, stock-based compensation expense, acquisition-related expenses, litigation costs, net interest income, and the impact of purchase accounting on acquired deferred revenue.

On this basis, adjusted EBITDA was $10.7 million in the third quarter compared to $10.4 million in the third quarter of 2010, and represented an adjusted EBITDA margin of 18%.

Our adjusted EBITDA came in higher than anticipated primarily due to lower expenses in the quarter resulting from certain reorganization programs which we implemented.

During the third quarter we streamlined our processes, reduced duplication, and accelerated integration of our acquisitions.

We also looked at other cost barriers for expense optimization opportunities.

We will continue these cost efficiency programs while we make targeted investments for the strategic priorities which Magid has discussed.

Overall, while our consolidated EBITDA margin has been impacted by our recent acquisitions, the adjusted EBITDA margins of our core comScore business continue to improve.

Cash flow from operations for the third quarter was an outflow of $933,000.

Our capital expenditures were $1.7 million in the quarter.

This resulted in a Q3 free cash flow outflow of $2.6 million.

The most significant factor for the cash flow result in Q3 was the payment of $6.4 million for litigation related legal bills.

As of September 30, 2011, cash, cash equivalents, and short-term investments totaled $33.4 million.

Our receivables of $50.4 million increased from the $37.2 million a year ago because of the continued rapid growth of our business.

Our DSOs of 78 days are consistent with the second quarter of this year.

Turning now to our guidance for the fourth quarter of 2011 and the full year of 2011, we anticipate revenues in the range of $63.1 million to $63.7 million for the fourth quarter of 2011 which represents an expected increase of 23% to 24% over the fourth quarter of 2010.

We anticipate fourth quarter GAAP loss before income taxes of $0.5 million to $1.1 million.

As in the third quarter, fourth quarter GAAP loss before taxes will be impacted by a number of noncash items.

These include approximately $2.5 million in amortization of intangibles, $5.2 million in stock-based compensation.

We also project fourth quarter GAAP results will include approximately $3.3 million in litigation expenses based on our current trial schedule.

We anticipate adjusted EBITDA for the fourth quarter of 2011 to be in the range of $14.1 million to $14.7 million, which represents an adjusted EBITDA margin of 23% at the midpoint of our revenue and adjusted EBITDA guidance.

Our estimated fully-diluted share count for the fourth quarter is 33.6 million shares.

Now for the full year of 2011, we are anticipating revenue growth of 33% over 2010 or a revenue range of $232.9 million to $233.5 million.

We anticipate GAAP loss before income taxes for the full year to be in a range of a loss of $14.8 million to a loss of $15.4 million.

Full-year GAAP income and loss before taxes will be impacted by a number of noncash items.

These include approximately $9.4 million in the amortization of intangibles, $21.6 million in stock-based compensation expense, and $1.6 million from the impact of purchase accounting on acquired deferred revenue.

GAAP expenses also include an estimated $2.6 million in costs related to acquisitions and restructurings and approximately $12 million related to litigation expenses.

We anticipate adjusted EBITDA on a full-year basis in the range of $45.8 million to $46.4 million, an increase from prior guidance reflecting our strong Q3 performance.

In summary, we're pleased with our Q3 results that reflect overall strong business momentum.

A reconciliation of GAAP net income before income taxes to adjusted EBITDA for the fourth quarter of 2011 and the full year of 2011 is included in the tables to our earnings press release.

Now with that, Operator, we can open the lines for questions.

(Operator Instructions) Jeetil Patel, Deutsche Bank.

Great.

Thank you.

A couple questions.

First of all, I guess as you look at the fourth quarter guidance, you're looking for some EBITDA margin improvement year on year.

Do you think that's a function of some of the re-org and cost containment initiatives you already put into place?

Or is there more to happen to get to that margin kind of flat line or improvement on a year on year basis?

Second, if you look at just the overall AdEffx product, I guess what is -- do you think you now have a comprehensive suite to sell into the marketplace or do you think there are still components that need to be layered on?

Okay, let me answer this.

The improvement in Q4 is really driven by the increase, the growth in revenue in Q4.

There is some impact of some of the cost actions that we have taken, but it is really primarily the strength of the business.

As we mentioned during Investor Day, our investments are being wound down from a lot of these acquisitions and integrations, and so we expect margins to show the kind of improvement that you see in the fourth quarter.

As far as the AdEffx product suite, we believe we have a full line and we don't really think at this point we're lacking anything to allow us to compete in a unique fashion in the marketplace.

If I may ask a follow up, I'm just curious if you think Europe, are there any particular products that are really showing some signs of momentum out there given the robust growth you're seeing?

Thanks.

I think we look at -- we're excited that the next frontier is really moving to ad measurement.

This is something that -- so instead of measuring sites, which is what comScore has traditionally done, which is a business that's still growing very nicely and certainly in international markets is doing very well, the -- I think that there is a big focus on improving the measurement of advertising beyond what ad servers give agencies and advertisers.

And I think that that's a global need that exists in virtually every country and we look at that as one of the growth opportunities, a strong growth opportunity that we have around the world.

Youssef Squali, Jefferies & Company.

Hi, this is Kip Paulson for Youssef.

Just a couple questions.

First, with regard to the EBITDA beat in the quarter, roughly how much of the beat was from improvement in the core EBITDA margin and streamlining efforts versus strong execution on the integration front?

And secondly, your guidance implies roughly 23% EBITDA margin next quarter.

Can this hold into 2012?

Or are there some temporary factors we should consider?

Thanks.

Sure, hi, this is Ken Tarpey.

Good afternoon.

I think in terms of the performance that we did, as you know, our revenue range, our revenue hit was at the high end of our range.

And so the impacts on the expense side were a combination of accelerating some of the efficiencies.

We were able to do some of that faster.

And to a second extent, some of the changes we made in terms of types of expenses and timing of expenses.

We were able to do something that will help benefit the expense structure of the Company in the short term and the longer term.

And yes, in terms of the fourth quarter, the growth of the business, as Magid points out, is an important element first, and then secondarily the continued efficiencies of the business to kind of expand the margin.

From there we will talk more strongly about 2012 in our next call as we get through our planning processes that we've commenced and have a clearer view of 2012.

Great, thanks.

And in the wake of the strong 64 net sub adds in the quarter, should we expect roughly 50 net adds going from here and especially in the fourth quarter?

This is Ken again.

Again, as we mentioned previously to investors, there's always a certain ranging to it.

I think 50 has obviously been a pretty good number on an average basis this year excluding the impact of AdXpose.

The range could be, it could be plus or minus 10, depending on the timing of when things close, when customers are added, etc.

All right, great.

Thank you.

(Operator Instructions).

John Blackledge, Credit Suisse.

Thanks.

In the last call you mentioned the macro environment may have an impact on second half.

But with the renewal rates at all time highs and strength in sub and project revenue, did that not materialize?

Did the macro environment and uncertainty not have an impact?

Thanks.

Yeah, we really did not see any material macro environment.

You always have the occasional client that's running into budget cutbacks, but that's no more so than what we normally see.

Now it's always important to be cautious because I guess uncertainty can always cause people to hold back.

But net net, we feel that the revenue came in as we expected and we did not see any softening or direct impact of the economy.

Thanks, just one quick follow up.

Project revenue was better than we had.

Just wondering if something came in late in the quarter, if it was better than you guys had thought?

I think to Magid's point, John, as he just mentioned, as we went through the quarter we did not see any further changes in terms of our customer situations and our business there on the project side did improve a bit as we proceeded through the quarter.

But still, as you can see in terms of the growth rate both at the subscriptions -- much more strength on the subscription side at this point given certain circumstances.

We basically said at the last call that we expect project revenue to flatten out and it was 8.6 in Q2 and 8.5 in Q3.

It still grew 16% relative to a year ago, but that is I think came in in line with what we had predicted.

(Operator Instructions).

Mark Zgutowicz, Piper Jaffray.

Yes, this is John Crowther on for Mark.

A couple quick questions here.

One, it looked like US revenue slowed on a sequential basis.

Now some of that obviously is from acquisitions rolling off here.

But just wondering how kind of the cross sell into the US market is going given that that's the predominant area of growth going forward.

And maybe you can give an update on the average number of products you're selling into the market?

Well I think we actually -- we're very pleased with the growth in the US.

A lot of the core areas that were growing for us were in the US.

Now remember last time we talked about a handful of advertisers who were reducing their TV spending and therefore their copy testing expenditures, so that may have had a little bit of reflection on the number.

But when we look at Media Metrix, AdEffx, some of the verticals like CPG, telecom, etc., all of these were really strong in the US and are primarily in the US.

So I think that the US continues to be our most important market and we are pleased with the growth there.

Okay.

And then as I look at the guidance for Q4, it appears to represent a step up in organic growth from Q3.

I'm just wondering what is the main drivers behind that confidence?

And does that have to do, again, with I believe the network analytics product contract you signed, is that the same one you announced at the analyst day?

And is that kind of driving some of the confidence in accelerating organic growth in Q4?

We're not even sure whether we'll be able to accrue any revenue on that one, so it's not.

We do have traditionally a very strong fourth quarter and it's just -- all I can tell you is that by looking at the business and doing a bottom up forecast, we see something that's really consistent with what we had predicted for the year.

Okay.

And last one here real quick -- but obviously you guys talked about good expense control in the current quarter.

I 'm just wondering, I know going into the year you had highlighted and I think we had talked about ramping up your sales force by as many as 30 heads across international, digital analytics in the US, as well as telecom.

Just wondering how that ramp is progressing and if some of the expense saving was maybe stretching some of that out into next year.

I think we are hiring salespeople as aggressively as we can.

We -- as Ken mentioned, there are certain investments that we believe in that we will continue to do.

One of them is to invest in sales capacity because of our increased market opportunity.

So we are not cutting into the muscle here, we are just being very judicious on where we spend money.

Ladies and gentlemen, we have no more questions.

I would now like to turn the call over to Mr.

Magid Abraham for any closing remarks.

Okay, well thank you very much and we'll see you on the next call.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.