comScore Inc. Q4 2008 Earnings Call Transcript

Feb.11.09 | About: comScore, Inc. (SCOR)

comScore Inc. (NASDAQ:SCOR)

Q4 2008 Earnings Call

February 11, 2009 5:00 pm ET

Executives

Magid Abraham - President, CEO and Co-Founder

John Green - CFO

Analysts

Youssef Squali - Jefferies & Company

Jason Helfstein - Oppenheimer

William Morrison - ThinkEquity

Karl Kirwan - Needham & Company

Meggan Friedman - William Blair & Company

John Blackledge - Credit Suisse

Jeetil Patel - Deutsche Bank

Sandeep Aggarwal - Collins Stewart

Heath Terry - FBR

James Cakmak - Sidoti & Company

Operator

Welcome to the Fourth Quarter comScore Earnings Call. My name is Manuel and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to, Mr. John Green, Chief Financial Officer. Please proceed.

John Green

Thank you. Good afternoon and welcome to comScore’s earnings call for the fourth quarter and full year 2008.

This is John Green, Chief Financial Officer of comScore. On the call with me today is Magid Abraham, comScore’s President, CEO and co-founder. Before we begin, 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 presentation, as well as any discussions, question-and-answer periods to follow, representatives of the company may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 regarding future events or financial performance of the company that involves risks and uncertainties, including without limitation, the expected strength of comScore's business, customer growth and client's demands for comScore's products, the future quality of client relationships and resulting renewal rates, expectations regarding new products and markets, including Extended Web Measurement, ad effectiveness and mobile media markets and forecasts of future financial performance including related growth rates and assumptions for the first 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 enumerated in the documents comScore files from time to time with the SEC. Those documents specifically include but are not limited to comScore's Form 8-K filed earlier today relating to the subject matter of this earnings call, comScore's Form 10-K for the year ended December 31st, 2007 and comScore's Form 10-Q for the quarter ended September 30th, 2008.

These filings may contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. We caution you not to place undue reliance on any forward-looking statements included in these presentations. We speak only as of today. We do not undertake any obligation to publically update any forward-looking statements to reflect new information after today's call or to reflect the occurrence of unanticipated events.

I will now turn the call over to Magid. Magid?

Magid Abraham

Thank you, John. And thank you for joining us on our fourth quarter call today. We are pleased to have met our profitability objectives for Q4 and for the year, as well as posting a record revenue performance, particularly in light of the challenging economic environment we all face.

Revenue growth in the fourth quarter and for the full year benefited from deeper relationships with existing customers, a broadening of our customer base, from geographical expansion and the value-added provided to our customers from our growing product line.

Fourth quarter 2008 revenue of $31.6 million was up 25% year-over-year and 3% sequentially. While a solid performance, it was slightly below our guidance due to a number of reasons: number one, lighter project business as discretionary budgets tightened even more than we typically see in Q4; number two, the impact of the stronger US dollars reduced our reported international revenue; number three, the budget cutbacks on the buy side of the Wall Street have dampened our ability to replace revenues from the renewal of the Citadel contract on a non-exclusive basis, which was worth $850,000 for the quarter or over 3% points in growth; number four, slower international growth particularly in the UK; and number five, small customer churn that has a 2% to 3% point impact in growth. Importantly, however, subscription revenue, which is the key to the strong visibility of our business model grew 32% in the fourth quarter, to $26.6 million, and represented 84% of total revenue. We also maintained our historical renewal rate at over 90%.

It's important to note that renewals among our medium and large-sized customers were at even higher rates. If we exclude the $850,000 net impact of our formerly exclusive deal with Citadel, revenue growth would have been 29% in the fourth quarter and subscription revenue would have grown by 37.5%. We provide this comparison because it represents an indication of how our ongoing business is going. This is clearly strong performance by any measure.

On the profitability side, strong execution and strict cost controls in the fourth quarter helped non-GAAP earnings and adjusted EBITDA to be inline with our expectation. Specifically, GAAP EPS was $0.67, well above our guidance range, due to one-time tax benefit, primarily resulting from the reversal of the company's deferred tax asset valuation allowance as John will describe later.

Also non-GAAP EPS was $0.18 per share, at the upper end of our guidance range, and adjusted EBITDA was in the middle of our guidance range at $6.5 million. For the full year 2008, revenue was $117.4 million, up 35% from 2007. We earned $0.83 per share on a GAAP basis and $0.73 per share on a non-GAAP basis.

Adjusted EBITDA was $25.7 million, up 43% year-over-year. There were many significant accomplishments in 2008, all of which bolstered comScore's leadership position in the provision of digital marketing intelligence. For example, we introduced a number of new products including Extended Web Reporting, which allows publishers and advertisers to track distributed web content across third-party sites, such as video, music, gaming, widgets, social media. We also grew Video Metrix, our industry leading video tracking service and we acquired the leading provider of mobile measurement and metrix.

Additionally, in 2008 we gained traction with our Add Effectiveness suite of products: Brand Metrix, Ad Metrix, and Campaign Metrix. These tools help advertisers and publishers verify the impact of their ad campaigns. In the current economic environment, ad agencies and publishers increasingly need to demonstrate to their clients the ROI from their expenditures online advertising. Comscore's Ad Effectiveness products help them do just that. Similarly, online portals use comScore's Ad Effectiveness products to measure the effectiveness of ads running on their properties, allowing them to demonstrate value to their advertiser clients.

We believe the momentum in these Ad Effectiveness products will continue in 2009, particularly in view of the current economic climate, as all advertisers look to maximize their financial return from their marketing expenditures.

And finally, we expanded geographically in Europe and in Latin America with a particular focus on Brazil. From a customer perspective, we saw positive momentum in the fourth quarter with both existing and new clients. In the fourth quarter, we added 112 gross new clients, which is inline with historical trends as customers continue to recognize the value that our solutions provide.

During the fourth quarter, we experienced higher churn with smaller customers, many of whom were affected by the difficult economic environment. This brought our net new customer additions to 30 in the quarter.

Our total customer count stood at 1166 at year-end. Importantly, renewals among large and medium-sized customers remained on track enabling us to retain our renewal rates at levels in excess of 90%.

We are pleased to see our mix of new and existing business remain stable in this environment, as both types of customers continue to recognize the value our industry-leading tools for measuring the size of Internet audiences and their behavior.

Looking ahead to 2009, we recognize that global economic conditions are likely to remain challenging and uncertain. On the one hand, we expect the economy to dampen our growth somewhat. For example, we expect to see (inaudible) in our customer's discretionary spending, which will impact our project revenue.

And the sluggish economy is likely to cause customers to slow their investments in newer, less proven market such as monetizing mobile audiences. Our smallest customers are likely to continue exhibiting higher levels of churn and our strong position in the UK could work against us as that economy suffers.

On the other hand, the long-term drivers of our growth remain unabated. For example, the number of websites continue to grow rapidly despite the environment, further we are encouraged by our ability to continue to expand our existing customer relationships and to attract new customers to our industry-leading products.

The success we have had in growing our Ad Effectiveness products has made comScore an important partner as client's ad budgets come under increased scrutiny.

We are delighted to report that we recently signed Viacom as the hundredth customer for video Metrix, our industry leading video tracking service. In addition, our progress in the telecom space now puts AT&T and Verizon among our top ten customers for the first time as ranked by sales volume and we expect the telecom sector to be an increasingly meaningful contributor in 2009.

We continue to benefit from the high visibility with our primarily subscription based business model of course, and we believe that perhaps the most significant factor driving our long-term growth is the improved return on their marking investment at our publisher, advertiser, and ad agencies customers realize from the use of our services.

Our leading market position is confirmed by independent surveys which show that we are the preferred supplier of audience measurement services for over 50% of US companies, a market share level that is double that of our nearest competitor.

In the second half of 2008, we implemented cost containment measures that enabled us to exceed our original EBITDA guidance for the year. We are committed to running a very profitable business and will continue to monitor the market closely, taking appropriate actions should macro conditions warrant.

In summary, we are pleased with comScore's performance in the fourth quarter and full year 2008. We believe our business is better positioned than most to weather the current economic downturn and we remain committed to increasing profitability and cash flow, which will bolster our already strong balance sheet.

Our ability to demonstrate value to our customers and create compelling new products provide us with a confidence in our ability to maintain our high renewal rates, and attract new customers in a broadening set of industries. Perhaps, most importantly, we are confident about our long-term growth based on our leading market position, significant barriers to entry, and compelling market opportunities.

Now, let me turn the call over to John for more specific comments on our financial results and our outlook for 2009.

John Green

Thank you, Magid. Revenue in the fourth quarter was $31.6 million, up 25% year-over-year and 3% sequentially. Within total revenues, subscription revenue in the fourth quarter was $26.6 million, up 32% year-over-year and represented 84% of total revenue.

This large and growing base of revenue provides comScore with visibility into future revenue and the ability to manage our expense and investment profile to deliver targeted levels of profitability. Project revenue was $5 million, flat year-over-year and sequentially, reflecting the impact of our client's tighter year end budgets in reaction to the economic slowdown.

Looking at the revenue breakdown between new and existing customers, as Magid indicated, the trends have been consistent. Revenue from existing customers was up 25% year-over-year in the fourth quarter to $27.3 million and represented 86% of total revenue consistent with recent periods.

Revenue from new customers was up 23% from last year at $4.3 million in the fourth quarter. We also continue to expand geographically with 15% of our revenue in the fourth quarter from outside the US.

Turning to our bottom line results, GAAP net income for the fourth quarter of 2008 was $21.8 million, an increase of 60% over year-ago and $0.67 per share, based on a diluted share count of 30.3 million shares.

Included in our GAAP net income was an income tax benefit of $20.4 million, resulting from the reversal of the Company's valuation allowance against US deferred tax assets from the Company's historical NOL, as well as the charge of $1.4 million for impairment of the value of certain auction rate securities held by the company.

Excluding the impact of the tax benefit and the impairment charge, GAAP net income would have been $1.4 million or $0.05 per share at the high end of the fourth quarter 2008 guidance.

And in non-GAAP basis, adjusted EBITDA was $6.5 million in the fourth quarter, in line with year ago and was within the expected range. The adjusted EBITDA margin was 21% for the fourth quarter, and excluding the impact from the M:Metrics acquisition was approximately 23% for base comScore. Non-GAAP adjusted net income for the fourth quarter 2008 was $5.5 million or $0.18 per share.

We are pleased that all of our profitability metrics were within expected ranges in the fourth quarter as a result of the strong revenue growth and cost containment measures that we implemented last year.

For the full year revenue was $117.4 million, up 35% from 2007, and well above our original guidance for the year with 14% of 2008 revenue from outside the U.S., up from 12% in 2007. For the full year GAAP net income was $25.1 million or $0.83 per share, an increase of 30% compared to the $19.3 million or $0.88 per share in 2007.

Adjusted EBITDA was $25.7 million, up 43% compared to 2007. And the adjusted EBITDA margin was 22% for the full year of 2008, up from 21% 2007. Non-GAAP adjusted net income was $22.1 million, or $0.73 per share, an increase of 36% compared to the $16.3 million or $0.71 per share in 2007.

Cash flow from operations for the fourth quarter of 2008 was $4 million. For the full year 2008, cash flow from operations was $32.3 million, up 52% from 2007. Free cash flow in the fourth quarter was $3.4 million excluding the impact of the M:Metrics acquisition and transition related costs, free cash flow for basic comScore was $5.6 million in the fourth quarter.

For the full year 2008, free cash flow was $18 million, including CAPEX of $6.5 million, most of which is related to IT infrastructure investments to support our global growth. Free cash flow for the full year 2008 excluding the impact of the M:Metrics acquisition was $24 million, inline with our original full year 2008 forecast.

As of December 31st, 2008, cash, cash equivalents and short-term investments totaled $71.5 million, and we held $3.5 million in long-term investments. As I noted earlier, we recorded a $1.4 million impairment charge related to auction rate securities in the fourth quarter and this is reflected in our change in the long-term investments.

Most significant, we continued to strengthen our already strong balance sheet with sizable cash balance, invested conservatively, in combination with strong free cash flow and minimal debt.

Turing to our guidance for the first quarter in 2009, the impact of the economic downturn became more widespread in the second half of 2008. We currently expect the market environment to remain challenging in 2009 as well. That said, we continue to experience strong demand for our products and we are benefiting from our subscription-based recurring revenue business model.

There are several factors that we believe will enable comScore to deliver relatively solid top line growth in 2009. Specifically, we anticipate maintaining high renewal rates, increased penetration of existing customers, further international expansion, and increased benefits from our strong portfolio of Ad Effectiveness products.

Additionally, we will continue to manage expenses closely and are prepared to make adjustments as necessary, based on the direction of the economy in 2009. With that as background, for 2009, we estimate that revenue will grow approximately 15% over full year 2008.

For the first quarter of 2009, we are forecasting revenue in the range of $30.3 million to $30.8 million. Relative forecast in GAAP EPS of $0.01 to $0.02 per share based on an estimated diluted share count of 30.6 million shares. Adjusted EBITDA for the first quarter of 2009 is expected to be $3.8 million to $4.3 million, representing adjusted EBITDA margin of 13% to 14%, at the midpoint of our revenue guidance.

We anticipate non-GAAP adjusted net income for the first quarter of 2009 of $2.6 million to $3.1 million or $0.09 to $0.10 per share. Reconciliation of GAAP net income to non-GAAP adjusted net income and adjusted EBITDA guidance for the first quarter of 2009 is included in a table accompanying our press release. Magid?

Magid Abraham

Thank you, John. As we noted in the 8-K filing made earlier this afternoon, John would be assuming a new strategic role at comScore as Executive Vice President and Head of our Human Resource, Human Capital Department.

John has been a tremendous help in getting the company to be public-ready; leading us through a successful IPO, and our debut as a public company. As we navigate these tough economic conditions, we recognize that our leadership position and growth trajectory allow us to strengthen our people capital by attracting top notch talent on the label market.

John will also help us maximize the effectiveness of our organization. John's prior operating experience at Invitrogen and Marriott as well as his contribution within the management team at comScore prepare him well for this role. John will remain CFO, while we conduct an executive search and will help support financial reporting activities and other issues as necessary after a CFO is identified.

I am excited that John will continue to help guide comScore growth and market leadership in his new role. Let me have John say a few words about his new role.

John Green

Thanks, Magid. I am very excited about this new opportunity to contribute to the next stage of our company's growth. I believe that Human Capital is a very critical asset for a company, particularly in a high performance company like comScore. And as always, I look forward to partnering with Magid and the rest of our management team on maximizing our organizational effectiveness and powerful strategy.

With that said, we are now happy to take questions that you might have regarding the materials that cover during this call.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from the line of Youssef Squali with Jefferies & Company. Please proceed.

Youssef Squali - Jefferies & Company

Yes, thank you very much. Youssef Squali. Hi, John, hi Magid. A couple of questions. First, to you Magid. If I look at your net ads, they've been on a net basis, they've been coming down. I wonder if you can help us try to figure out how much of that is really economy-driven and how much of it may be potentially the beginning of market saturation for the product? I know this is not something that's been out for a long time, but in markets like this, one just wonders.

And then John, your ARPU by our math was down about 4% year-on-year. How do you reconcile that, and the fact that, I think you said, most of the churn came from smaller customers? So, if your smaller customers arguably have lower ARPU, and if you lose arguably all of that, all of them, your ARPU should maintain itself or even go up. So you're losing smaller customers yet at the same time seeing ARPU decline. Can you try to reconcile that for us?

John Green

Sure. As far as the market saturation, as we mentioned, we have gained 112 new customers, on a gross ad basis. And that's pretty consistent with what we have seen historically. So, as far as demand from new customers for the product, the market potential is still there.

I can tell you without equivocation, that the losses that we are seeing among some of the small customers are definitely driven by the economy. All the evidence that I get from talking to our commercial people basically say that people have some companies that are really in trouble, and they just had to prioritize their spending, particularly when they are having funding difficulties.

And to a large degree, that's also something that we have seen in the mobile space as well. In the mobile space, you had a lot of companies that have raised money with the expectation that mobile advertising will take off. Some of that expectation was, I guess, either too early or the economy has snuffed it out. So as a result, we do see that also some of the smaller, newer mobile companies are suffering some of the same trends. But overall, I really don't see a market saturation at all. I think we still have the international market pretty much wide open, and that alone represents a huge opportunity for us.

John Green

And then, as it relates to ARPU, by our estimation the ARPU was sequentially flat with the third quarter and up versus the second quarter. It is impacted by, again, these 112 of those customers coming on-board that had a lower average rate, but still it is going to fuel future growth. That plus the international growth year-on-year where we have our price points are slightly lower than in the US, also serves to maybe keep the ARPU static.

Magid Abraham

Obviously, remember that Citadel was in Q4 of last year. If you exclude Citadel, our ARPU went up.

Youssef Squali - Jefferies & Company

I see. Okay. The 4% negative that's actually year-on-year number, it's not a sequential number. And so, the Citadel comment actually helps. And then lastly, if I may, your Q1 guidance implies flat to slightly down revenue at the midpoint. Is that because of the project revenues component? What are you baking for project revenues in Q1?

Magid Abraham

We are looking at project revenue declining, so that's part of it. We also are looking at several hundred thousand and the dollar impact in the dollar. Those are the two key drivers. And then, I think, you would have some explanation of the prior trends. I mean, when you lose, in that sense, we went down from a net 50 customer add to a net 30 customer add. Those are small customers, but in aggregate they contribute 2% or 3% points in growth and that is something that will be with us for 2009.

Youssef Squali - Jefferies & Company

Got it, thanks a lot.

Operator

And, our next question will come from the line of Jason Helfstein with Oppenheimer. Please proceed.

Jason Helfstein - Oppenheimer

Hi, thank you. Can you guys hear me?

John Green

Sure. Go ahead.

Jason Helfstein - Oppenheimer

Thanks, you never know with the mute button. So, three questions. The first question just has to do with, how we think about mobile. Are any mobile revenues in project or is it all in subscription?

Magid Abraham

It's all in subscriptions. As we are, the vast majority is in subscription, not 100%.

Jason Helfstein - Oppenheimer

Okay. So, if you look at the quarter of 2008, you said existing customer growth revenues were up 25% year-over-year. So, does that include any mobile revenues? And, if you backed out mobile, what would that percentage have been?

John Green

It's just in year-on-year. That includes mobile, obviously for the fourth quarter of 2008 but not compared to the fourth quarter of 2007.

Jason Helfstein - Oppenheimer

Right. So, can you back that out? Because obviously, the core growth was lower because that's helping the number. Can we get a clean pro forma for the existing customer growth?

John Green

Again, that's something that as you're aware, we don't breakout mobile revenues separately.

Jason Helfstein - Oppenheimer

Right. Okay. So, I guess we'll talk about expenses. I mean, if I compare this fourth quarter and then just thinking about your margin guidance, it looks like $2 million - $2.5 million of incremental expenses versus first quarter 2008 or about $1.8 million of incremental expense versus fourth quarter and I'm just looking at the delta in the margin and whatnot.

And obviously seasonality has something to do with it, but clearly there is higher level of investment spending in the first quarter. Can you identify what the buckets are versus fourth quarter?

Magid Abraham

Sure. You know, traditionally, in the first quarter we have some financial funkiness to the accounting of vacations, where we over-accrue for vacation at the beginning of the year, we under-accrue at the end of the year, and that obviously, straight line allocation of vacations.

So you have that and then you have the impact of payroll taxes. Together, that's probably at least half the increase that you're talking about. I think that there is also a run rate impact. So our run rate at the end of Q4 is higher than the run rate at the beginning of Q4.

And that contributes to some of the increase in revenue. We have things that we are spending on like the MRC Audit is more expensive this year. We are investing in building our mobile panel.

So, those are the sort of small incremental expenses that in total it would add up. But there isn't really any big item that you can point to. And again, the seasonality is sort of driven by the accounting pattern of taxes and vacations drive a lot of the increase.

Jason Helfstein - Oppenheimer

And so the first quarter guidance, you guys have talked about potentially investing internationally, opening more offices, that kind of thing. So, just to be clear, that you're not planning on spending additional money internationally in the first quarter.

Magid Abraham

That doesn't have a material impact. Again, we continue to expand internationally but not at a significant incremental cost.

Jason Helfstein - Oppenheimer

Okay. Lastly, John, what was currency in the quarter?

John Green

Well, currency in terms of impacting revenue versus our guidance was about $250,000.

Jason Helfstein - Oppenheimer

Okay. Thank you.

Operator

And our next question will come from the line of William Morrison with ThinkEquity. Please proceed.

William Morrison - ThinkEquity

Yes, hi. A couple of questions. One, I was hoping, looks like your first quarter revenue guidance is consistent with what you're expecting for the year. So, I'm wondering if you're expecting flattish growth or like 15% across the quarters or should we expect deceleration 2Q and 3Q followed by an acceleration in 4Q? Just what your assumptions are there and anything you can give us in terms of your assumptions. How many customers, net customer ads are driving that 15% growth, ARPU…?

And then I've got a follow-up.

Magid Abraham

Sure. I hate to go back to Citadel all the time, but Citadel was not in Q4 and was only in half of Q3 this year and contributed to the deceleration of growth rates this year. I think if you look at 2009, that's going to be the opposite impact.

So, as we move forward, the comparison rather to a year ago will become easier in Q3 and Q4. And you are correct that the guidance we provided for the first quarter is relatively in line with what we provide for the year, and that's part of the reason why we think that's going to be of flattish without the sequential decline that you saw in 2008, partially driven by the Citadel contract.

William Morrison - ThinkEquity

Okay. That's helpful. And how many customers are you expecting to add? And you used to give guidance of roughly 50 net ads a quarter. That's obviously shifted down. I’m just wondering what you're expecting for the year?

Magid Abraham

We, sort of the way we build our forecast, really don't build it on the basis of number of customers. We build it industry by industry and bottoms up. So, if I had to basically say what do we expect, we probably should see something in line with what we saw in Q3 and Q4, but again, could that be a little bit different? Yes, it could be a little bit different, but I don't think it really had a material impact on our estimate for Q1.

William Morrison - ThinkEquity

Okay. And last question. Can you give us some kind of a sense, given the margins are coming down in Q1, I know you mentioned a bunch of cuts that won't reoccur in 2Q and the rest of the year. But do you expect margins to be up or down? Do you expect EBITDA to grow faster than 15%, plus at a lower rate?

John Green

Well, we had an interesting debate earlier about whether to give you EBITDA guidance and our lawyers told us that the SEC doesn't really like that too much. Let me just say this. We do have operating leverage in our business and 15% growth is sufficient to have the operating leverage trickle to margins and other profitability metrics.

William Morrison - ThinkEquity

Okay. Thank you very much, Magid.

Operator

And our next question will come from the line of Mark May with Needham & Company. Please proceed.

Karl Kirwan - Needham & Company

Hi, this is Karl Kirwan in for Mark May. Thanks for taking my question. I was wondering if you could just talk about some of the things that you can do to control costs. I understand there is a big fixed cost portion to your business. What are some of the things that you can do? And also, maybe you could talk about how the UK did do in the quarter and what drag it presented during the quarter. Thanks.

Magid Abraham

Sure. Well, first of all, let me talk about what we have done in terms of our cost control. We have done a number of things. Number one is, we have eliminated or reduced significantly a lot of discretionary spending. So, we have clamped down on travel costs. We've eliminated our sales conference. We have clamped down on compensation increases, bonus increases, et cetera, or bonus compensation overall.

We are limiting headcount increases to essential investments and clearly those are increases that we can roll back if we have to.

We have deferred a number of, what I would call sort of marginal projects or products and marginal activities. In fact, we are taking a hit of about $7,00,000 to $800,000 for the year by eliminating products that we think are non-strategic. And the intent here is to focus our efforts on the other core products and not detract a lot from the effort there, particularly if we have to have limited resources pursuing those.

Longer term, we will, if we feel we have taken a lot of prudent cost control measures. If we see that the economy deteriorates, clearly compensation expense is our largest expense, and it is something that we will take a look at if it comes down to that.

But our philosophy going into this is, that unlike a lot of companies that are basically slashing and burning to be able to get through this, we want to emerge from this stronger than the rest of the pack and as the economy picks up, we want to be able to strengthen our momentum, both in terms of products, in terms of quality of people, in terms of readiness to expand into different markets.

So, from that standpoint, we haven't really run for cover in terms of doing layoffs or things like that. But we have been very conservative in terms of our investment decisions.

John Green

And then your second question about performance in the UK and the rest of Europe, is again, we have the market leading position in the UK. Our business in the fourth quarter in the UK was strong, but it was clearly affected by the worsening economy there as well as the weaker pound.

We are continuing to expand our product portfolio there with ad effectiveness products similar to what we're doing in the US, as well as both from opening up very small offices in Germany and France, as well as selling elsewhere in Europe from our London base. In that we're very encouraged again about the prospects for Europe in 2009.

Magid Abraham

Just to give you a qualification, international revenue accounted for 15% of revenue in Q3 and only 14% of revenue in Q4. So, normally we would have counted on international revenue to give us an incremental juice in our growth and in Q4, I think to a large degree because of the strength of the dollar, but also because of downturn in the European economy, that extra growth did not materialize.

Karl Kirwan - Needham & Company

Okay. And just one more follow-up. In terms of the strange accounting stuff that you guys have in the first quarter, can you put a number on that? How much of those costs are going to be recurring and how much are not?

Magid Abraham

They sum up to zero for the year. Maybe John, can explain them. I can't understand them.…

John Green

Yes . For the first quarter, if you looked at first quarter versus the fourth quarter and the way that we have to account for vacation may have an increase of about $400,000 to $500,000 and then in terms of FICA, probably a slightly larger amount than that, and then as Magid said, for the vacation that equalizes on a full year basis and then payroll taxes, you know how that works. But that certainly serves to historically as well depress our margins in the first quarter versus the rest of the year.

Magid Abraham

So the theory is that we basically take on the full liability of unexpected, sorry, unspent vacations, essentially using the assumption that basically every employee will quit tomorrow. And as the year goes on and those vacations are spent, we actually reverse some of that vacation provision. So what you see in our accounting statements is a not really a straight line allocation, but a bulge in our vacation expense at the beginning of the year and then a reversal of that, in fact a negative variance of that for the second half of the year.

John Green

And it's a very common practice, comSCORE is not alone in how we handle that.

Karl Kirwan - Needham & Company

Sure thanks. And if I could have just one more question. I was wondering if you could give an update on how the ramp-up in the buy side of Wall Street, those revenues are coming along, how those are turning, and where are your expectations? Where do you expect to be by the end of 2009?

John Green

Well, the answer is that there is no ramp up.

Karl Kirwan - Needham & Company

Is it basically zero?

John Green

We get an occasion of one or two contracts. But clearly, the demand that we felt was there in the first half of the year that was built into our assumption in terms of how we were going to replace and grow the revenues that were trading off for the Citadel exclusivity. I mean, as the markets turns, a lot of those budgets pretty much evaporated.

And looking into 2009, our assumption is that there will be a very minimal pickup there, if any. Now, I'm not going to forecast the market, but if the market recovers sooner and some of these budgets come back, then we might have a little bit of upside down.

Karl Kirwan - Needham & Company

Thanks a lot.

Operator

And our next question will come from the line of Meggan Friedman with William Blair & Company. Please proceed.

Meggan Friedman - William Blair & Company

Hi, good afternoon.

John Green

Hi, Meggan.

Meggan Friedman - William Blair & Company

Can you talk about the dynamics you're seeing by vertical, maybe beyond financial services, anything unique or any notable weakness beyond financial services?

John Green

Well, as you know our business is divided into different segments. So we have sort of Internet, media and then we have Fortune 500 companies, and then we have agencies. So it's fair to say that budgets are tight across the board and the approval processes are lengthier. Among advertisers, as you can expect the budgets are especially tight in financial services and in retail, but not so much in CPG, in pharma or in telecom. Those seem to be relatively immune to the pressure.

In general, we see that advertisers are more cautious in spending money on line until they see proof of performance, which in general helps us. But it makes some of our ad performance or rather valuation revenue sort of more project-driven rather than a commitment, sort of a packaged commitment driven, just because people are feeling their way into how much spending they're going to do and how much they can commit to.

As far as publishers are concerned, many publishers are clearly affected by the downturn in advertising and are very careful about spending. The budgets are especially tight among some of the smallest clients. Now, having said that, we have been able to increase our revenue and generate some significant upsells across all three segments. So the trends I'm talking about are sort of overall trends, but we are successful in many, many clients and are still getting a larger portion of their budgets or larger budgets period.

Meggan Friedman - William Blair & Company

Okay. Thank you. And just a couple of follow-ups then on that. So would you say that new customers are more heavily skewed towards project revenue than usual? Or could you maybe put that into some historical context, if the mix there is shifting at all?

John Green

No, I wouldn't say that the mix is shifting. I think that one of the things that really works in our favor is that some of our audience measurement products are a must have. So if you are a viable company and you want to be a serious player in this space, you really need to have our products and therefore, sort of our base Media Metrix business continues going strong.

In fact, it's probably the case project as a way of starting the relationship is typically something that we see with advertisers that’s not sort of the dominant portion of new client relationships.

Meggan Friedman - William Blair & Company

And so that's true even now?

John Green

That is true even now. The one thing that I would say is that the Ad Effectiveness products can come in two flavors. One flavor would be a commitment for the entire year for so many campaigns that people want to evaluate or they could come in as, here is a campaign, let's evaluate it and then three months later there's another campaign, let's evaluate it.

So the way we account for projects versus subscriptions, those types of evaluations will get accounted for as projects. But our aim is to make them recurring and part of the way people look at spending money online.

Meggan Friedman - William Blair & Company

Okay. And, then you mentioned that the selling process, the approvals are taking longer. Are you finding yourselves in more competitive situations, would you say?

John Green

No, not really. Our competitive situation is relatively unchanged. We always grill our people on what do you see out there in terms of competition and I just received an e-mail today from one of our commercial leaders that made me smile. So I'm going to give you a quote from it.

Megan Friedman - William Blair & Company

Good.

Magid Abraham

She said, speaking from just wrapping up iMedia, "we were all over every presenter's slide and our competitors were nowhere. We are in a great position, just a crappy environment." So I couldn't have said it better myself.

Megan Friedman - William Blair & Company

Great. Thank you for that. And then last question would be, if you can give us any update on the percentage of revenue that's under a multiyear contract?

John Green

That's 30%.

Megan Friedman - William Blair & Company

30%. And just in terms of historical context, that's a percentage of revenue, right?

John Green

That's percentage of the subscription revenue that's under a multiyear agreement, that's correct.

Megan Friedman - William Blair & Company

Okay. And what does that look like, including and excluding Citadel, historically?

Magid Abraham

So, last quarter the gross number was 32%, but if you exclude Citadel it was 30%. So it's really flatter to the third quarter, when you take out the effect of Citadel.

Megan Friedman - William Blair & Company

Okay. Great. Thank you.

Magid Abraham

Thanks, you're welcome.

Operator

And our next question will come from the line of John Blackledge with Credit Suisse. Please proceed.

John Blackledge - Credit Suisse

Thanks. I have a couple of questions. First, on the guidance, it looks like it is 5% top-line growth off the pro forma number in the first quarter. So I'm wondering the 15% top-line growth, is that off reported 2008 revenue or 2008 revenue with M:Metrics?

And the follow-up on that is with where you see you’re expecting some acceleration throughout the course of the year, and I know you mentioned Citadel. Easy comp, just wondering what else is there? So that's one question.

And then a couple other questions are 1166 subs at the end of the year, how many were web 2.0 mobile customers? And then I have one or two after that. Thanks.

John Green

15% is off the reported revenue, the 117.4 which includes M:Metrics.

John Blackledge - Credit Suisse

Okay. And then the 1166 customers, how many are web 2.0 mobile, smaller ARPU 25,000 and less?

Magid Abraham

You know, I don't think that we have done a count, but there's probably a couple of hundred of those, but when we have done the math in terms of the total contribution to revenue, it's about 5% or 6%.

John Blackledge - Credit Suisse

5% or 6% of revenues and of the customer count…?

Magid Abraham

They're probably at least 20% of the customer count.

John Blackledge - Credit Suisse

Okay, and then the financial services. Historically you've said it's about 10% of total revenue.

Magid Abraham

Right.

John Blackledge - Credit Suisse

Just given consolidation, given difficulty for financial services firms, where does that number go in 2009? And how much pressure is on your financial services clients across big banks, sell side, buy side, insurance…?

John Green

Well, you can just remember that, that was 10% in total for financial services, about over half of that amount were credit card companies, insurance companies and in fact the business has remained very strong. So it's that other 40% of the 10% that's for the commercial banks and then the buy side.

Magid Abraham

So, there is a spectrum. Insurance is the strongest and we continue to see good growth there, followed by credit card, followed by commercial banks and the worst is basically revenue from Wall Street, which you all know about.

John Blackledge - Credit Suisse

Okay, and just lastly. I know you mentioned the ad effectiveness products brand Ad and Campaign Metrix. You made good in-roads, I guess, in 2008 and you're looking to expand that business in 2009. I'm just wondering whose picking up, who has the budgets; if they have the core Media Metrix product, who has the budgets to pick up those ad effectiveness products? And is there grows year-over-year for those three products, 2009 versus 2008? Thank you for all the questions.

Magid Abraham

Sure. This is actually an area that we are new to, but there is quite a strong practice that two companies in this space have done really well. One is called Dynamic Logic which is part of WPP and the other one is called the Insight Express. Those companies have done quite a sizable business in that.

And I think Brand Metrix in particular is a product offering that goes into that space in terms of measuring the branding effectiveness as opposed to just the transactional effectiveness upon an advertising, which we are unique in doing, but it does that with a twist, which is that we are able to offer some metrics that clients are very interested in, that are not derived from surveys.

And so that's basically the business that is starting to accelerate for us and there is plenty of room for us to go without that entire pie expanding. In fact, it is likely that even if that total pie shrinks, our business will continue to grow strongly, just because we are focused on it. Our first year was to basically get the marketplace familiar with the product. It is a good product. We have some significant advantages and I think that that momentum and the market awareness and acceptance will only help us grow our share and grow our business overall.

John Blackledge - Credit Suisse

Thank you.

Operator

And our next question will come from the line of Jeetil Patel with Deutsche Bank. Please proceed.

Jeetil Patel - Deutsche Bank

Yes, thanks. Hey guys, a couple of questions. I guess, as you look at your kind of revenues that you have visibility on for 2009, can you just remind us what percentage of your business is already contracted for this year? I guess, may be as a percentage, I don't know, I guess the 15% growth that you're talking about?

And then second is the visibility as you look at on a multi-year basis, let's say 2010 increasing relative to years past, given I guess, your ability to sell some of the new marketing products out there?

Magid Abraham

Jeetil, if we take a look at our full year 2009 revenue projections based on the backlog that we had at the end of 2008 and then continuing this 90% of renewal rate off of our subscription revenue, we have visibility in about 72% of our full year revenue guidance and that's in line with where we were a year ago starting out 2008. So that backlog is strong.

Jeetil Patel - Deutsche Bank

And then as you look at the following year, has that visibility increased relative to what you thought in years past as you've been able to cross-sell some of the new products?

Magid Abraham

Certainly, again with the continued strong subscription revenue growth as well as multi-year agreements of over 30%, that visibility longer term has definitely strengthened. That plus, just want to remind you, that because of the strong multi-year revenue growth, which we have pricing in there, that also enables us to get some real pricing year-on-year, even in these types environments.

Jeetil Patel - Deutsche Bank

Okay. And, can you talk about the UK? Obviously some seem like the most challenged market out there. But I guess, what is the response, kind of reaction or kind of how have agencies and publishers been responding in that particular market on some of your newer products and just growing the contract size that you have, relative to broadly non-UK markets, say in Europe?

John Green

Well, typically our European product roll-out sort of lags our roll-out in the US. And, there is probably a 6 to 12 months lag between when a product is available here versus availability in Europe.

So, to give you an example, this year we started providing Video Metrix in Europe, whereas last year that wasn't available. But we're just starting to make Brand Metrix available in Europe.

And, so that momentum that we saw in the US is not something that was available as an upsell tool for our people in the UK. There will be an extra growth generator. Same thing with Ad Metrix; it does require some set ups in terms of classification of advertisers, classification of brands that are part of the report.

And so typically, we get it started in the US and then once we perfect it, we move it forward. So up until this point, it's probably fair to say that they've been selling the core base audience measurement products. They have more of an opportunity this year to sell custom projects, ad effectiveness related projects or products.

Jeetil Patel - Deutsche Bank

Okay. Thank you.

Operator

And our next question will come from the line of Sandeep Aggarwal with Collins Stewart. Please proceed.

Sandeep Aggarwal - Collins Stewart

Thanks for taking my question. One question on the project business. Did you have a broad base weakness or is there any particular client who did not come through in terms of project side weakness? And if you can, maybe compare and contrast project business trends for US versus international?

John Green

I don't think we can trace it back to any single client. It's just basically the sum total of parts of different industries where you would normally see higher Q4 spending and this year we actually saw project spending down relative to Q4 of a year ago. And either relatively flat or slightly down relative to Q3, I also don't remember know exactly what the numbers were.

Magid Abraham

Slightly down.

John Green

Slightly down. And so there isn't really any particular client that we can trace it to. Sorry, what was the other part of your question?

Sandeep Aggarwal - Collins Stewart

Just project business trends, US versus international?

Magid Abraham

Their project revenue is driven solely in the US with its little bit of project revenue outside.

Sandeep Aggarwal - Collins Stewart

Okay, and last question. Out of these 112 gross new customers you added, roughly what percentage of these total new gross additions were the small and medium businesses? Or maybe the one which accounts for $25,000 or less for the annual contract size?

John Green

It's pretty widespread, actually, knee-deep in terms of the 112. It's pretty widespread in terms of the size of the customer. We continue to penetrate quite a few mid and large sized customers as well.

Sandeep Aggarwal - Collins Stewart

See, because I think last quarter you mentioned that customers, who paid you for $25,000 or less annually, accounted for 4% of your revenue. And I think if you are using perhaps the same definition, I think Magid, you mentioned that now they account for 5% to 6%. So, I'm just trying to see where is the disconnect.

Magid Abraham

Actually, there isn't any disconnect. I may have misquoted the number, but it is in the low, single digit range.

John Green

It's a 4%.

Sandeep Aggarwal - Collins Stewart

Okay. Thank you.

Operator

And our next question will come from the line of Heath Terry with FBR. Please proceed.

Heath Terry - FBR

Great, thank you. I was wondering if you could just give us a sense, you mentioned the higher costs due to the audit related to the MRC certification. Can you give us an idea of how long you think those costs will continue and when you should have some resolution to that audit? And then, is that expense purely the result of complying with the request for information and such for the audit, or are there changes that they're asking you to make that are driving those expenses as well?

John Green

It's primarily the fees for the personnel that does the auditing. Some of the changes that they're asking for in terms of procedural changes have very minimal impact on costs. Now, as far as how long the audit's going to take, we have five pages of the audit. We finished two. We're in the middle of the third one. So, probably we're in it for probably another 12 months.

Heath Terry - FBR

Okay.

Magid Abraham

The fees are overall inline with what we had estimated when we started the process.

Heath Terry - FBR

Okay. It's just going to be more expensive this year versus last year?

John Green

Right, just more work.

Heath Terry - FBR

Right, and is there a tangible benefit that you're expecting to get once this is resolved and comScore is able to show MRC certification?

Magid Abraham

Well, I think there are two tangible benefits. One is that clearly it's a barrier to entry. It's something that takes a long time. It's pretty costly. So, it adds to the various two entry in the industry. And then second, it's sort of removes some of the noise that exists in the industry in a sense that as you know, there is always some debate about server side numbers versus panel numbers and when a third party audit goes through, what's going on in terms of panel methodology and its eventually they make whatever improvement they're going to make.

And at the end of the day, I don't think it's really going to make a big change in terms of what the estimates are. It will help the noise die down a little bit.

Now, the one thing that I do want to mention is that, starting with Video Metrix, we have moved into a new methodology of audience measurement that we're calling person-centric hybrid measurement and it's essentially a notion of using the panel data for what the panel data is best providing, which is demographic composition, usage rate, person level measurement.

But then also leveraging the fact that on the server side you have the ability, subject to certain conditions, to be able to count the tonnage of consumption pretty accurately, so for instance, you can measure page views if you are pretty careful about what page views, what pages you're tagging and you remove non-user requested traffic, you can eventually count page views and the error on that can be virtually zero.

So, with Video Metrix, we are essentially combining a census measurement from tagging all the video streams that are out there and then panel measurement in terms of what we see, who the people are. It is something that really works in our favor because it's requires having a large panel like we do. And it is something that will also work pretty well internationally, where some of the panel sample sizes are smaller and the addition of sensor spaced measurements can help make the numbers a lot more robust.

So, our first step in that is Video Metrix. Our second step is, we're experimenting in Canada, actually we are moving in Canada towards this. We have about 30 publishers that have signed up, signed on to the program. By the way, this is a purely voluntary program. It's not dependent on everybody participating. And we expect that the reporting base on hybrid measurement will start late in the second quarter.

And as we perfect and iron out some of the methodology wrinkles that are associated with this, we will look at expanding it wherever it makes sense to expand. And I think that's the reason, why I bring it up in the context of the MRC audit is that, the whole notion of comparing server side versus panel side, this hybrid measurement, again, makes it smooth because we will be able to use the server side as an element of the estimation.

Heath Terry - FBR

Great, thank you.

Operator

And our next question will come from the line of James Cakmak with Sidoti & Company. Please proceed.

James Cakmak - Sidoti & Company

Hi, good afternoon. Specifically, on the cost management side, can you talk a little bit about the sales and marketing line? How much of that is fixed salary versus variable marketing expense?

Given your name recognition as it keeps growing in the market, do you see pulling back there on the marketing spend in 2009 and if so, by how much?

Magid Abraham

Well, first of all, within sales and marketing, we have 126 quota carrying sales people and we did add quite a few. We added, in fact including M:Metrics, well over 30 in 2008. So, we're going to be benefiting from those people coming onboard and being productive in 2009.

We do see pockets that given the strong growth potential that we are going to be judiciously adding a few more quota carrying people in 2009. On top of that, we have a great client service team that's also in that area.

The bulk of the expenses are compensation are related there based on what the overall momentum of the organic growth of the business is, plus the growth potential is that we are not considering pulling back in terms of our sales force.

And on the marketing side, as you know, a lot of the marketing that we have in the business is from the very strong brand awareness that we have out there and the fact that in terms of press citations, comScore is mentioned well over, on an annual basis, I think it's about 75,000 times. So that's very strong marketing for the overall brand.

But on top of that, we do have some selective direct marketing in the business that has been very effective for us and that we continue to plan on spending that prudently in 2009.

Magid Abraham

That is one of the levers that we have in terms of costs is obviously some trade shows and things like that, or things that we can scale back on, and we have to some degree, but we can do more if we have to.

James Cakmak - Sidoti & Company

Okay. And the top line guidance from the first quarter, it is down sequentially. I know you commented on the currency and just the macro issues. But are you seeing a slowdown in the first quarter run rate for gross customer additions, or can we expect something per historical trends of about 100 plus?

Magid Abraham

I mean, I think we will probably see slightly lower number of gross additions, just because you think that some of the new customers out there may be having difficulties getting funded. And because of the cautious expansion that we're adopting relative to international markets where we can get new revenues.

On the other hand, I may be surprised. I was surprised actually that we did get 112 new customers in Q4 but I think, if I had to guess, I would say that that number will go down.

James Cakmak - Sidoti & Company

Okay. And the gross adds that you had in the fourth quarter, I guess the geographic location of these customers, you mentioned the big push in Latin America, Brazil, Europe as well. Were these mostly domestic customers or lower ARPU internationals?

John Green

It is about 65% in the US.

James Cakmak - Sidoti & Company

Okay. And how much lower would you say is the ARPU on an international basis? Are we talking 25% lower?

John Green

About 30% lower.

James Cakmak - Sidoti & Company

30%. And…

Magid Abraham

Domestic to international? Is that your question?

James Cakmak - Sidoti & Company

Yes.

Magid Abraham

Okay. Yes.

James Cakmak - Sidoti & Company

And in the release you mentioned deals with Verizon and AT&T now top 10 customers. Are these in the neighborhood of 5% of revenue type customers?

Magid Abraham

No, not quite to that level.

James Cakmak - Sidoti & Company

So I guess the Microsoft is still the only one above that 10% threshold?

Magid Abraham

Right.

James Cakmak - Sidoti & Company

Okay, And lastly, on your non-GAAP guidance for the first quarter, what cash tax rate were you assuming for that?

John Green

About 6%.

James Cakmak - Sidoti & Company

Okay. Great. Thanks a lot.

Operator

And at this time I show no more questions in queue. I would like to turn the call back over to management for closing remarks.

Magid Abraham

Okay. Well, I want to thank everybody for participating and asking good questions. We, John and I, will be available over the next couple days for answering additional questions that people might have. Thank you very much and until the next earnings call.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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