Comscore Inc (SCOR) 2012 Q3 法說會逐字稿

Thank you for your patience, and welcome to the Third Quarter 2012 comScore, Incorporated Earnings Teleconference.

My name is Candice, and I'll be your coordinator for today.

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

We will conduct a question and answer session after management remarks.

(Operator Instructions)

I would now like to turn the presentation over to your host for today's conference, Chief Financial Officer, Mr. Ken Tarpey.

Sir, you may proceed.

Thank you.

Good afternoon, and welcome to comScore's earnings call for the third quarter of 2012.

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

On the phone with me today is Dr. Magid Abraham, our President, CEO, and Co-founder.

Also, Cam Meierhoefer, our COO, and Serge Matta, our President of Commercial Solutions will also be available during the q and a section of this call.

In connection with this call, we have posted slides to supplement our prepared remarks in the Investor Relations section of our website under the Events and Presentations.

Now, before we begin, I'd like to turn your attention to slide 2 -- a cautionary statement of that slide deck, and 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 answers sessions that may following, representatives of the company may make forward-looking statements within the meaning of the Securities Act of 1933, and the Securities Exchange Act of 1934, regarding future events or performance of the company that involve risks and uncertainties, including without limitation, the strength of comScore's business, expectations as to comScore's sales and booking cycle, particularly with respect to new products, expectations as to opportunities, including new customers and markets for comScore, expectations as to the growth and composition of comScore's customer base, bookings, 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 the potential discontinuation or divestiture of certain product lines, 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 2012, including related growth rates, exchange rates, and other assumptions.

Such statements are only predictions based on management's 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, 2011, and Form 10-Q for the period ending June 30, 2012.

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.

I'm now turning to slide 3 of the slide deck.

Use of non-GAAP measures.

During today's call, we also reference certain non-GAAP financial measures.

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

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

Thank you, Ken, and thank you for joining our earnings conference call for the third quarter of 2012, especially in light of the difficulties many of you are facing in the aftermath of Hurricane Sandy.

If you can turn to slide number 4, we are pleased to report revenue and adjusted EBITDA for the third quarter that both were above the high end of our guidance ranges.

Total revenue of $64.3 million increased 13% on a pro forma basis from a year ago when you exclude our advertising copy testing revenue, which, as we announced, we are evaluating for potential divestiture.

Assuming constant currency, revenue would have grown 15% on a pro forma basis from a year ago.

Sequentially, revenues grew by 7% relative to Q2 of 2012.

Our better-than-expected performance is due to the continued strength of our core audience measurement products, as well as the strong sales trends from new analytics products for digital advertising, website analytics, and mobile analytics.

As was the case in the second quarter, we believe our reported financial metrics do not fully reflect the underlying strength we are seeing in the business.

While we do not necessarily plan to provide bookings trends on a regular basis, we believe that bookings growth can provide you with a better sense of our overall business momentum beyond what can be ascertained from looking at our financial statements.

We define bookings as the total non-cancellable value of contracts in the first 12 months following contract commitment.

As slide 6 would show, excluding copy testing, our trailing 12 months bookings in September of 2012 grew by 21% compared to trailing twelve month booking in September 2011.

Trailing twelve months bookings grew in excess of 30% for each of our new product areas in web analytics, advertising analytics, and mobile analytics.

As we communicated at the end of the second quarter, the growth in bookings is not fully reflected yet in revenue growth, due to longer revenue recognition lags for these products.

Nevertheless, these products are progressively translating into increased revenues, a factor that helped our revenue exceed prior expectations in the quarter.

Our execution was also strong resulting in adjusted EBITDA that was above the high end of our guidance range.

We added 45 net new customers in the quarter bringing our total customer count to 2,114.

Renewal rates at customers remained in our historical range of about 90% on a constant dollar basis.

Now we turn to slide 7. We had a particularly robust quarter in the campaign measurement area.

We have seen compelling ad impression volume growth, and adoption by over 160 agencies and advertiser clients in over 30 countries.

These factors resulted in strong sequential bookings growth from the second to the third quarter.

Separately, I would like to note that USA Today announced in September that it will use vCE metrics to sell display advertising on a guaranteed viewability basis.

We believe this reflects increased market based interest in using viewable impressions as a currency for trading online advertising.

Turning to slide 8, our recent launch of vCE Video and vCE MP, MP stands for multi-platform, represents a major milestone in cross-platform analysis.

By extending campaign validation to online video campaigns, vCE Video received endorsement from over 30 leading video advertising platforms listed in slide 8.

On slide 9, vCE MP now goes beyond campaign measurement on the PC, and provides comprehensive advertising measurement across TV, PCs, tablets, and mobile platforms.

vCE MP delivers person-based measurement of GRPs, reach and frequency, as well as push and level demographics for campaign audiences.

Its innovative methodology avoids the potential overstatement of digital reach with cookie-based measurement approaches.

With vCE MP, we are able to create a unified view of digital consumer behavior and ad exposure by using comScore's census network, a unique asset that leverages 1.3 trillion worldwide measurement events per month.

And threads together census usage data from multiple digital platforms, such as PC and mobile, with set top box TV data from over 5 million US households.

This unprecedented measurement scale provides unique accuracy and granular advantages that we believe are highly attractive to the industry.

Turning to slide 10, we are also making strong progress with our web analytics suite called Digital Analytix or DAx.

DAx is performing well in the market place.

A few weeks ago we added a new module, DAx Monetization, that allows publishers to leverage viewability and duration measurement for ad placements on their website in order to optimize viewable ad inventory and ad packages.

These insights are proving critical for publishers for maximizing ad revenue in an increasingly competitive analytic-driven environment.

DAx is already being used globally by clients, including the Associated Press, Activision, Bloomberg, Microsoft, and USA Today in North America, as well as the BBC, ITV, Libero, and Euronews in Europe.

In summary, we're pleased to report strong progress in the third quarter results, even though we believe our reported results do not yet fully convey the underlying strength of our business.

We remain optimistic about our opportunities to continue realizing strong revenue growth with improving margin trends, as we capitalize on our position as a market and technology leader.

Now, I would like to turn the call back over to Ken for his comments on our financial performance in the quarter, and for the outlook for 2012.

Ken.

Thank you, Magid.

Revenue in the third quarter was $64.3 million, up 9% year-over-year.

Excluding our copy testing business, revenue grew 13% on a non-GAAP pro forma basis.

Assuming a constant currency, our revenue growth would have been 15% on a pro forma constant currency basis from a year ago.

Subscription revenue in the third quarter was $53.5 million, up 6% year-over-year, and represents 83% of total revenue, in line with recent trends.

Subscription revenue was also impacted by currency changes and decreasing minimum annual copy testing commitments.

Excluding copy testing impact, a non-strategic business we are evaluating for divestiture, subscription revenue grew 9% from the prior year, and would have grown 11% on a constant currency basis.

Project revenue reached a record $10.8 million, an increase of 27% from the third quarter of 2011 with vCE significantly contributing to its growth.

vCE revenue is reflected in subscription revenue and project revenue, as some customers are doing initial campaigns on a project basis with a goal to eventual long-term subscriptions.

Revenue from existing customers of $57.7 million was up 10% year-over-year in the third quarter, and represented 90% of total revenues, while revenue from new customers was $6.6 million, an increase from $6.2 million a year ago.

We added 45 net new customers for a total customer count of 2,114 at the end of the third quarter.

International revenue at the end of the third quarter was 17.3%, up almost 10% from a year ago, despite a continued weak macro-economic environment in Europe, and exchange rate impacts.

Our top 10 customers represented 21% of revenue in the third quarter, compared to 24% a year ago, reflecting the increased diversification of our overall customer base.

Now, let me turn to expenses.

Our gross margin was 66%, a decrease from 67% in the third quarter of 2011 due to additional costs to support our increasing data collection for our vCE products.

Gross margin was consistent with the second quarter 2012 level.

Total GAAP operating expenses increased 2% year-over-year to $56.6 million -- excuse me to $65.6 million, but decreased as a percentage of revenue with a decrease in litigation expenses, offset by planned investments in sales and marketing to expand our presence worldwide.

GAAP pre-tax net loss was a loss of $1.7 million in the third quarter, an improvement from the GAAP pre-tax net loss of $5.7 million in the third quarter of 2011.

Our year-to-date effective GAAP income tax rate through the third quarter was 35%.

We have recorded a year-to-date income tax expense, instead of recording an income tax benefit for the year-to-date losses for several reasons.

We have several loss generating entities in foreign jurisdictions.

We are unable to recognize a current income tax benefit.

Additionally, we wrote off a deferred tax asset of $2.5 million in the second quarter related to $7.4 million of stock-based compensation for certain market based stock awards that will not be issued since the performance criteria were not met.

The tax expense recorded in the third quarter represents the additional tax charged on the income generated by taxable entities during the quarter.

GAAP net loss in the third quarter was $3.1 million, an improvement of approximately $800,000 from a year ago, and represents a GAAP net loss of $0.09 per basic and diluted share, based on a basic and diluted share count of 33.5 million shares.

At this point overall from a tax standpoint, we project an annual GAAP tax rate of approximately 22% for the full year of 2012.

Also for 2012, we anticipate an annual cash tax rate of 13%, lower than our previous projections of 19%.

We again to continue to hold significant net operating loss carryforwards in the United States, certain states within the United States, and certain foreign jurisdictions, predominately The Netherlands and U.K.

Non-GAAP net income for the third quarter of 2012 was a loss of $700,000, or loss of $0.02 per diluted share, excluding stock-based compensation, amortization of intangibles, impairment of intangible assets, acquisition and restructuring costs, and deferred tax expense.

This compares to the non-GAAP net income of $6.9 million, or $0.21 per diluted share in the third quarter of 2011 with the decrease primarily the result of reversal of tax benefits recorded earlier in the year.

Non-GAAP net income in the third quarter was adversely effected by this tax provision adjustment.

Using our annual cash tax rate, non-GAAP net income on a pro forma basis would have been $4.3 million.

With our varying cash tax rates and non-cash 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, net interest income, and the impairment of intangible assets.

On this basis adjusted EBITDA was $11 million in the third quarter, above the high end of our guidance range, compared to $10.7 million in the third quarter of 2011.

Adjusted EBITDA margin was 17%, compared to 18% a year ago.

Adjusting for the impact of our copy testing business, pro forma adjusted EBITDA would have been $10.5 million, and was up $700,000 from $9.8 million a year ago.

Turning to the balance sheet.

As of September 30, 2012 cash and cash equivalents totaled $59.1 million, an increase of $8.8 million since June 30, and an increase of $21 million since December 31, 2011.

Our receivables of $52.1 million increased from $50.4 million a year ago due to the growth of our business.

Total deferred revenue was $70.6 million with current deferred revenue of $69.8 million, and long-term deferred revenue of $700,000.

It is important to note that with some customers moving from annual billing to multiple billing cycles per year, current deferred revenue does not fully represent the fully anticipated billing value of current customers over the next twelve months.

Cash flow from operations for the third quarter of 2012 was $8.9 million.

Our capital expenditures were $1.9 million, resulting in a free cash flow of $6.9 million in the third quarter.

Capital expenditures were used to support our expanding infrastructure, and planned lease hold improvements in our New York and Reston, Virginia facilities.

Now, I direct you to slide 12 in our pack, entitled Guidance.

I will now outline our guidance for the fourth quarter of 2012, and the full year of 2012.

Reflected in our expectations for the fourth quarter are revenue declines from our copy testing business, and continued caution due to the fragile nature of the economy, particularly, Europe.

With this backdrop, we anticipate revenues for the fourth quarter of 2012 in the range of $64 million to $69 million, which represents an increase of 2% to 10% over the fourth quarter of 2011.

We anticipate fourth quarter GAAP loss before income taxes of between $3.8 million to $300,000 loss.

We expect adjusted EBITDA for the fourth quarter of 2012 to be in the range of $9 million to $12.5 million.

This represents an adjusted EBITDA margin of 16% at the mid-points of our revenue, and adjusted EBITDA guidance.

Our estimated fully diluted share count for the fourth quarter is 35.8 million shares.

As in the third quarter, fourth quarter GAAP income before taxes will be impacted by a number of non-cash items.

We currently expect approximately $2.3 million in amortization of intangibles and patents, as well as $6.2 million in stock-based compensation.

Looking at the full year, we expect revenue growth of 8% to 10% with revenue expected to be in the range of $250.9 million to $255.9 million in 2012.

Due to the uncertainty on the impact and timing of the planned copy testing divestiture, we believe it is useful to provide pro forma guidance, excluding our copy testing business in current and year ago periods.

As such, we expect Q4 pro forma revenue growth to be 10% at the mid-point of our guidance.

For the full year, we anticipate pro forma revenue growth of 11% to 13% on the same basis.

For 2012, we currently expect approximately $9.3 million of amortization of intangibles and patents, and $23.8 million in stock-based compensation.

We anticipate GAAP loss before income taxes for the year to be in the range of $11.1 million to $7.6 million.

We expect adjusted EBITDA to be in the range of $41.2 million to $44.7 million.

For the full year 2012, we anticipate a fully diluted share count of 35.4 million shares.

A reconciliation of GAAP net income before income taxes to adjusted EBITDA guidance for the fourth quarter and the full year is included in the tables to our earnings press release, as well as in the slides that were provided for this call.

In summary, we are pleased to have exceeded expectations for the third quarter.

We believe our bookings and market momentum reflect the health of our business fundamentals which are not fully reflected in our reported results.

We continue to be enthusiastic about our long-term market position and prospects for continued future growth.

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

Thank you, sir.

(Operator Instructions).

Our first question will come from Mark Zgutowicz with Piper Jaffray.

You may proceed.

Yes, this is John Crowder on for Mark.

First question is, wondering if you could give us sort of a break down of growth in your core media metrics business by geography.

I know in the last quarter you still have some solid international growth with some pockets of weakness in the US markets.

Still, wondering if you could give us an update on the front.

Well, our audience measurement business on a worldwide basis do in the high double digits.

I think that there wasn't really that much of a differential between international and domestic, due to the foreign current impact that effected international growth.

So, we're still pleased with the growth in that core segment of the business.

Maybe I can just follow up on that.

Obviously, we're seeing a fairly sort of rapid progression of traffic from desktop towards mobile, and obviously, you guys have a product and are able to sort of measure that mobile, but wondering if that sort of transition is having any sort of impact on your conversation with customers, as they sort of look out into what sort of products they need from you, or maybe potentially on where they might be allocating the budget dollars towards your products or services.

Well, actually, the mobile -- this mobile trend represents a good revenue opportunity for us.

We have started selling, in many cases, mobile measurement, mobile audience measurement, to existing media metrics clients on the PC, and that has helped in maintaining a growth, as I said, in the high double digits.

So, I do think it represents a growth opportunity, which is probably in the beginning stages of materializing, starting in the US, and then expanding overseas as cell phone penetration with smartphones increases.

Okay.

And then just looking towards your project revenue, I think, that was a little bit better than expectations here, and I think you called out vCE as being a driver there.

I'm just wondering, some of that is more on a trailing basis.

Did you see sort of a pick up in trailing in the current quarter, or is this really more a factor of starting to get more traction and more comfort level by both advertisers and agencies with using the product across multiple -- more and more campaigns?

I'm going to let Serge Matta answer the question.

Yes, we've definitely seen a huge pick up in vCE sales and vCE bookings.

Sequentially, quarter-over-quarter, we saw an increase of 71% in bookings for vCE.

So, it's definitely very strong momentum, and we -- Q4 is already -- is on the same path.

Okay.

And then just last question is, obviously, you guys have announced sort of a partnership with Arbitron in sort of developing a five screen cross-platform solution, and just wondering if you could, maybe, give us some updates on timeline there, and how you sort of view that product sort of as it approaches sort of a scalable solution as being applicable to your client base.

What sort of holes is that sort of filling across that vCE and some of your other products aren't necessarily addressing at this point in time?

Well, as you know that product that we're developing together with Arbitron is being purchased by ESPN, and we're making good progress in the milestones for that particular product.

Obviously, with vCE Multi-Platform we would be doing, not the five screens as you mentioned, but four screens, excluding radio, and would be doing that by incorporating the digital measurement that we traditionally do, and adding to it data from set top boxes for TV.

So, that is going on as a core initiative at comScore, and we have already analyzed over a dozen brands with this kind of methodology.

The addition of radio to it will probably come into production in the middle of next year, as we put all the components together, and figure out what the total 360 degree view is for a particular consumer in terms of media consumption.

Okay, great.

Thank you very much.

Our next question will come from Matt Chesler of Deutsche Bank.

You may proceed.

Yes, good evening.

Thanks for taking my call.

(inaudible), I just wanted to look at the revenue outlook that you're laying out.

Are these your comments correctly, even on these pro forma numbers for the Q, are they a modest incremental slow down year-over-year relative to the 9% reported number that you just put up this quarter.

Could you just talk generally about the general tone of clients?

Have you seen any change in their willingness to deploy budget?

Just perhaps some explanation for what looks like an incremental slow down, while you're sounding quite positive about some of the more recent trends you're having and traction that you're getting on some of your products.

I guess, I'm not sure about the revenue slow down that you're mentioning here, because a little (inaudible) basis, our growth in Q2 year-over-year was 4%, in Q3 it was 9%.

Sequential revenue grew by 7%, which is a pretty strong growth.

And then when we exclude [day a rack], there is also a significant progression from 8% to 13%.

So, I'm not sure that I'm getting exactly the slowdown that you're talking about.

Maybe you have --

Maybe, I just -- I misspoke.

But you talked about [ex-ARS] revenue growth in the third quarter year-over-year of 13%.

I don't think that's what you're guiding to on a pro forma basis for the fourth quarter.

I think you're guiding to something less than that.

Okay, okay --

The general selling clients and kind of what you're hearing from your client base, given the current environment as well.

Serge, do you want to talk about --

To be honest, we're not seeing any slow down that you're mentioning.

We're not hearing anything from our clients, Matt.

I think on the opposite.

I think in certain areas we see strong momentum in vCE like we mentioned on the 71% growth rate in bookings.

DAx in the US and in Europe continues to do well.

In the US it's doing phenomenal, and mobile in audience measurement continues to do well.

So, I just don't see any -- we're not seeing anything from clients that indicating any sort of slow down.

Okay.

What type of product -- in your last call you highlighted the bookings conversion delay.

Where does that dynamic stand right now for you guys?

Have you made progress against that?

Well, I mean, we have.

I think that the gap is narrowing between the booking growth and the revenue growth, and that's in part reflected in the sequential growth from Q2 to Q3.

I think that the gap will always exist.

The issue is that once you reach more of a steady state there will be some offsets that will happen when you begin a contract, and there is a lag in revenue accrual.

But on the back end of the year, there will be a benefit relative to a straight line revenue goal.

So, we expect the gap to continue to improve, but it's hard to forecast at what rate.

We also know that the mix of our business that incorporates these new products is going to get higher.

So, in terms of affecting the overall growth that revenue lag, even though it's improving, will still, given the mix of the business, still manifest itself for a while.

Do you have a sense yet, we're one month into the quarter.

It's a decent portion of this quarter, but there's still quite a bit left, particularly, the holiday season.

I know a number of your clients have minimums on vCE contract.

Do you have a sense as to how much of those in aggregate may get deployed to be recorded in the fourth quarter versus going to be recognized over the remaining life of the commitment period?

We are expecting to see strong revenue recognized for vCE between Q3 and Q4.

I don't really --

And we're seeing more and more, Matt, we're seeing more and more larger packages coming in.

So, we mentioned last quarter a Microsoft vCE.

We've had sizable deals from Kellogg's that came in.

We have Starcom.

So, we're seeing more and more, much more sizable deals that clients are now have tested it, and now are going towards the buying all in, or larger amounts of campaigns, once post-trial.

And again, the USA Today announcement that they have made includes a commitment to measure a large number of their campaigns that they do that they will sell on a guaranteed viewability basis, and that's something we think will -- will be picked up by more and more publishers as some of those publishers are taking the initiative to say -- I'm not going to wait for the entire market to adapt -- to adopt this new currency, i.e., I think it's an opportunity for me to differentiate myself, and deliver a quality advertising experience to my customers.

Okay, thanks.

Just one quick one for Ken.

I just saw you guys drew on the credit facility, yet you had a nice positive cash flow in the quarter.

Can you provide any explanation for why you did that?

Sure, I'm happy to do that.

That's really a temporary measure to help us.

We are in the process of combining or collapsing some of the acquired subsidiaries internationally, principally, Euro-based subsidiaries, into comScore operations in those countries.

And in order to do it efficiently, we drew down temporarily on our line [prep] for Euros for the necessary inter-company resolution transactions we need to do.

By the early part of this month, we'll be paying back about 40% of that, and over time, we'll kind of keep reducing that.

It's really just to help us a bit with simplifying our international subsidiary structure, and balance the swings from a currency standpoint.

Thank you.

Our next question will come from Shyam Patil with Raymond James.

You may proceed.

Good day, Mr. Patil, your line is open.

Can you hear me?

Yes, we can.

Okay, great.

This is Brandon Pickett filling in for Shyam.

My first question just comes around sort of the competitive environment you guys are seeing for your internet measure products.

Has that gotten any more competitive, or has it gotten less competitive over the past twelve to eighteen months for you?

For the basic measurement product, we maintain a strong position as we have always done both in the US and internationally.

We've made a lot of progress in Europe, Latin America, and Asia in the last year or so.

So, I think that what is really probably the biggest hindrance on the development of this business internationally right now is the economic conditions and uncertainty rather than competitive environment.

I also note that the foreign exchange fluctuations impact that business disproportionately because that's basically the majority of the revenue that we achieve overseas.

Got it.

And then, I was just wondering if you could talk a little bit about how we should be thinking about margin expansion going into 2013.

I know you guys aren't providing guidance yet, but --

Well, I mean, I think that we are now reporting the revenue growth with a gap of 7 to 8 percentage points relative to bookings growth.

As that gap narrows and translates into revenue, at least half that translation will go to margin.

So, that's one factor that we could take into account.

There are also, as we get all these products streamlined and -- we will get more efficiencies from our sales investments, both behind these new products and internationally.

And that we also think will help our margin expansion.

Our goal is to look at this year as an exception as far as where the margins are ending up being in the 16% to 17% range, and we think we have the potential of doing it by translating more of the new sales from new products into revenue.

Okay, great.

And then I have one just quick question.

What was the gross adds for the quarter?

Sure.

It was 175 gross adds in the quarter.

Right.

Thanks so much.

Thank you.

Thank you, ladies and gentlemen.

This concludes the question and answer portion of today's conference.

I will now turn the call back to Dr. Abraham for any closing remarks.

Sir.

Well, thank you, Operator, and thank you very much for your participation today.

We look forward to speaking with you again in the near future, and I hope everybody is safe.

Goodbye.

We thank you for your participation.

You may now disconnect.

Have a great day.