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comScore, Inc. (NASDAQ:SCOR)

February 27, 2013 5:30 pm ET

Executives

Magid M. Abraham - Co-Founder, Chief Executive Officer, President and Director

Analysts

John Egbert - Morgan Stanley, Research Division

John Egbert - Morgan Stanley, Research Division

I'm John Egbert on Scott's Devitt's internet team. I'm pleased to have Magid Abraham, President and CEO of comScore; and Ken Tarpey, the CFO.

Before we started, let me just read through the Morgan Stanley disclosures.

Please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or the registration desk.

So Magid and Ken, could you please start by giving a brief overview of comScore and talk a little bit about your history and primary offerings, who your customers are. And then we can dig into some deeper the Q&A.

Magid M. Abraham

Great, thank you. So comScore is a measurement and analytics company that has to do with helping customers understand the user behavior on all their digital assets, measuring it and make it available for them to optimize their strategy using digital media. We started in 1999 and we were, at that time, using a panel methodology of about 2 million users to be able to measure usage on desktop. And as the web evolved, we got into measuring e-commerce, we got into measuring video, into measuring audio, search, et cetera, et cetera. And all the technological change that has happened in the web -- on the web throughout that time period helped us come, basically, from a position of 0 market share to becoming the industry standard today in terms of audience measurement.

In 2009, we made a major enhancement to our measurement methodology where we asked our website clients to put tags on their sites and tags on their pages, so that every time somebody visits that page, and today, on mobile, would be that app or that mobile web -- mobile-optimized website or video, we will know that, that particular thing was used. So we have 100% accuracy in terms of measuring the tonnage of usage. And we have the demographics and the conversion from cookies to users, that's coming from the panel. So we unified that together to create a -- probably the most accurate measurement method that's available today, in terms of audiences.

We also, in 2010, after we started collecting this massive data, which by the way, we call the comScore Census Network. It's a network that comprises 90% of the top 100 media properties around the world, where -- that allows us -- that are so widespread it allows us to have a comScore cookie on virtually every device in the world. We realized that we're collecting all this data that could be useful for other purposes. So we made a couple of acquisitions to essentially move from a proprietary measurement company to a company that is providing a wide suite of analytical services, leveraging our measurement expertise, sometimes leveraging our proprietary data, but providing a more complete set of solutions for our client base and creating the opportunity to grow our revenue more substantially and create a much better engagement within our client. So in the last 3 years or so, we have been gradually executing this transformation, where we go from measurement that's used in buying or selling advertising or for market intelligence to analytics that can be done on-demand, in real-time, SaaS-based models that are poised to give comScore a new ramp on growth and a much bigger market opportunity.

Question-and-Answer Session

John Egbert - Morgan Stanley, Research Division

Okay, great. Could you talk just a little bit about your international expansion? Starting with your first countries, to your latest. And maybe what your coverage is like, in terms of the panel, from the biggest areas down to the smallest.

Magid M. Abraham

Sure. Of our -- when we talk about we have 2 million panelists, actually more than half of those are outside the U.S. and we were fortunate that kind of the method of recruiting that we had, basically, was not just limited to the U.S. It allowed us to be global from day 1. So naturally the first countries that we targeted were countries where the advertising, the digital advertising spend, is relatively large. So that included the U.K., Canada, countries in Western Europe. In 2011, we made a major push in Latin America, where we're now in all the major Latin American countries and we have either a unique position in the market or we're running as kind of the leading provider. And there is only 1 market that, that's the case and that's Brazil. And then we launched in the Far East. We have India, China, Japan, Australia and New Zealand and then Singapore and a bunch of other countries. So in total we have 44 markets where we provide individually projectable data. Some of the markets are small in size, both in terms of the amount of advertising expenditures that go in that market and therefore the amount of revenue that we generate. And some of the markets also small in terms of sample size. But in a way, in some of those markets, the penetration that we can have, in terms of local sites, is limited to some of the top sites because the ones that can afford paying for our services have got to be the top sites. The smaller sites will just not be able to have a subscription to a premium service like ours.

John Egbert - Morgan Stanley, Research Division

Okay, great. Could you talk about some of the innovations in cross-device measurement on a user level? So are you able to connect the dots across home PC, a smartphone, tablet and identify the same user across all those different devices?

Magid M. Abraham

Yes. Well, that's actually probably the most exciting trend that's happening in media. It's happening a lot faster than anybody anticipated and it's really affecting all types of media and entertainment consumption. So clearly the web is no longer just a desktop platform. It is desktop, tablets and cellphone. But also, video is no longer just your standard TV, driven by set-top box and with linear programming, but it's also on-demand, IP-based kind of programming that's being developed and delivered to the user on a one-by-one basis, either on a TV or on a tablet or mobile device or a desktop. So it does create an opportunity for more things to measure and it does create a challenge in the sense that a lot of the content owners want to measure their total audience. They see their audience, let's say, shrinking in one place -- take Facebook for example, where the usage is going down on the desktop but it's ramping up very quickly on mobile. And obviously if they are just measured on desktop, it doesn't represent the full picture of what they're doing. But the same applies to TV providers, et cetera. So we have been the lead innovators in terms of doing that. We introduced, in the fall, a -- well, we introduced last year a service called Mobile Metrix that measures mobile usage in the U.S. across-the-board. And then, later in the year, we introduced something called Media Metrix Multi-Platform, which basically measures everything that is consumed digitally for a website or a web owner. So take, for example, Disney. They want to know not only how people use their website but how much time they spend on their video and how much of it is really done on desktop, how much of it is done on tablets or smartphones and we're the first company to be able to do that. Next year, we're adding to it a TV dimension. Next year meaning 2013, I'm still thinking in -- but we're adding for it a TV dimension that complements the online video viewership with the linear TV viewership to be able to provide a complete picture of the reach that people have. Now, I think your question had to do with being able to identify the user across these different mediums. That's a big challenge but -- it's a challenge that has a complicated answer but it's an answer that we have figured out. And we are able, just like what we're doing in Media Metrix Multi-Platform, to de-duplicate the audience and to be able to basically say, "If you have 50 million users, how many of them are, let's say, 40 million may be coming desktop, maybe 20 million may be coming on a mobile device and, unduplicated, it's not 60 million, it's 50 million." So we're able to identify that and identify the overlap. And again, we're the first to be able to do that.

John Egbert - Morgan Stanley, Research Division

Okay. So just staying on mobile for a second. We use your products a lot at Morgan Stanley. We've watched the mobile tools evolve from MobiLens to the Mobile Metrix product you guys put out last year, which seems like it's really getting more and more accurate in the U.S. Can you discuss some of the challenges to mobile specifically? And is it a lot harder outside of the U.S., where we have 2 very dominant smartphone platforms, a couple -- only a couple, really, lesser smartphone platforms that are prevalent, to maybe other markets where there's many more? And how far are you along outside the U.S. compared to where you've gotten in the U.S.?

Magid M. Abraham

Well, I think that, first of all, anybody that we are measuring with our census method, where they put tags on their web pages or their apps, we measure them no matter what country they're in. So then the question is, can we provide cross-industry measurements where some of the sites are not participating in the tagging program? We can measure. And obviously we focused on the U.S. first because it is the largest market and, outside the U.S., we're looking for developing relationships with carriers and ISPs to be able to get, from a network standpoint, a read on the usage. So that's something that obviously involves being able to strike those partnerships and involves being able to deliver a meaningful application or value to those carriers. And that's why we invested in the carrier services portion of our business, to allow us to have an in-depth relationship with some global carriers where, in one shot, we could get measurement in 10, 20 markets. So that's kind of our approach for being able to do it. We -- you saw, for example, in the U.S., we moved from, at the beginning of the year, having 10,000 users that we're measuring on a mobile platform to now 350,000 that will be measured. I'm not sure exactly when that's going to be released but probably in the next 2 months or so. So that stuff, what we have, is huge. We have, in the U.K., actually every mobile user because of a relationship that we have developed with the GSMA and -- so that's doing well. And we're going to basically pursue the rest of the marketplace on market demand.

John Egbert - Morgan Stanley, Research Division

Okay. Can we talk about some of the acquisitions you made over the last few years? What those have turned into in terms of new products for your business. And I believe that some of those products have had an effect on your financials and that more of the revenue is deferred so it's actually sort of had more of an impact on the lag between bookings and revenue. Maybe you can discuss that.

Magid M. Abraham

Sure. So what I talked about is going from a measurement company that provides primarily monthly data on web usage to we want to be a company that delivers data -- actionable data to you in real time that you can take -- you can use it on a daily basis, on an hourly basis and it becomes an entrenched part of the fabric of how you do business. So a couple of examples like that. One example is, if you are running a digital advertising campaign, we will track all the impressions are delivered during that advertising campaign. We will do real-time verification of whether that advertising is landing on safe -- on brand-safe sites or not. We will also evaluate, in realtime, whether the ad, that was actually served in a particular page, was viewed by the user. Sometimes the ads are at the -- deep down on the page and, unless the user scrolls down, it cannot be seen. And so advertisers need to know not just that an ad server downloaded an ad for me but did a human being see it. And the benefit of this is that it allows customers to be able to monitor how a campaign is doing and make changes in realtime. So if a campaign is missing the mark here, they can reallocate spend from here to here. And -- so that's one example. We built it with in-home technology, as well as an acquisition that we made, a company called AdXpose that provided the verification part of the solution. And the product there is a product that we call validated Campaign Essentials. It is -- we introduced at the beginning of last year. It really grew very nicely and ended the year with a lot of momentum. Another example of an analytic solution is a web analytics platform that -- we bought a company in the Netherlands that had a real diamond in the rough in terms of a really good product, really good architecture, modern, big-data architecture rather than a data warehouse-based architecture. We took that product, we enhanced it, we added proprietary features that comScore can uniquely provide and now we're going to our customers who are buying measurement data from us and are using somebody else for web measure -- for web analytics, to be able to offer them a web analytics solution from comScore. And there are a lot of advantages for that in terms of the unique features but also in terms of the fundamental architecture and scalability of the platform. Again, that's something that allows a user not to basically say, "How's my website doing at the end of the month." You can say how's my particular article, particular video or this feature is being used in the last hour. So it's -- again, that's the emphasis on moving on -- to realtime. That product was introduced -- effectively introduced in the U.S. this year. It established a really nice foothold and a lot of momentum and we're optimistic about its growth prospects here and in its home base in Europe, where the company started. Now, in both types of -- these products, it turns out that there is a difference between the timing of revenue accrual. So in our typical subscription product, when somebody -- when we sign a contract and somebody subscribes to our information, we give them a login ID and they start using the system and, based on GAAP rules, we can start accruing revenue right away. Some of these products, the newer analytics products, require an implementation period. So implementation of the tags on a campaign, the implementation of instrumenting the website to be able to measure it, et cetera, et cetera. And during that implementation period, before the system -- before "the customer is deriving value," you cannot take revenue. And so we have seen a growing differential between our bookings and the revenue that we're able to accrue. So the comparison in 2012 is 19% bookings growth versus 13% revenue growth. So that differential has had an impact on our reported financial results. So obviously, from a revenue standpoint, it looks like our revenue is slower -- is slowing. And that is ultimately, in steady-state, bookings growth and revenue growth would be the same, plus or minus a couple of points. It's not yet the case because of the momentum of these new products and the dynamics -- the revenue accrual dynamics there. The other thing that's affected is margin. So when we sell these contracts, we start actually servicing them and incurring the cost of servicing them right away, even though we can't take revenue on them. And so if you take a 600-basis point differential between bookings and revenue and you say, "In steady-state what is that?" That's 600-basis point in revenue that's mostly dropping to the bottom line. So last year we finished the year at a 17% margin. We -- you normalize that, you add about 5 margin points due to that gap closing and our normalized margin is a lot better than it's actually reported. I think that investors have really struggled with this because this is something that was new and, frankly, was also a bit of a surprise to us when we started kind of forecasting how this is going to grow. Because, internally, we're used to evaluating our sales people on bookings and revenue had a pretty predictable formula in terms of how it followed bookings. And we got burned last year with that dynamic that we didn't fully account for. We think that, that gap will continue as long as these new products are growing at a much faster rate than the rest of the company. But we think probably by the end of 2014 that, that gap should be shrinking and we would be at a normalized growth level. And at that point, the contribution of the additional revenue that will be recognized, in addition to the scale effects, where some of these new products are getting to scale and they become significant contributors to profit, will do really wonders to our margin. This year, we are expecting that these new products that are -- that combine web analytics, advertising analytics and mobile, that these products will account for 30% of our booking. So a lot of investors had a question, which is, "Okay, so you did these acquisition and you're trying to pivot to this broader analytics strategy. How do we know that, that's working?" Well, within 2 years, having the make-up of bookings being about 1/3 is actually pretty good proof that this stuff is working. Now, if you basically said, "How much of the revenue does that account for?" It's only -- it's less than -- it will account probably for about 20% of the revenue this year, just because of this differential in revenue accrual and booking. But there is no question that we as a management team are bullish about the strategy that we have undertaken. We think it's the right strategy for comScore. It increases our stickiness with clients, it increases our ARPU and, eventually, it will increase our margin. We have paid a short-term cost for it, which, ideally, we would have liked to minimize but it is what it is. But going forward we are confident that these new initiatives are gaining a lot of traction, are accelerating and they will give comScore a lot of runway in terms of growth opportunities.

John Egbert - Morgan Stanley, Research Division

Okay. Can you talk a little bit about the competitive landscape and how's that's evolved as you've entered some of these new areas from your acquisitions? And then maybe some of the big competitors, how you feel you’re positioned, from your core products down to some of the newer analytics products.

Magid M. Abraham

Sure. So traditionally the company that we had the biggest competitive overlap with is Nielsen. And over time there are certain countries where we evolved to become kind of the dominant standard in those countries. There are a lot of countries where we are actually the only company that's providing measurement. In the U.S., I think we have made a lot of progress and most -- the vast majority of companies use us as their primary measurement data source. Now, in some of the new product areas, we have -- Nielsen has introduced a campaign measurement service, which competes with our campaign measurement service and analytics. And there was a fierce competitive battle on that during 2012 that probably slowed our momentum in the beginning of the year but we were able to recover it towards the end of the year. And then some of the other products -- and there are a bunch of niche companies in that space, by the way. But smaller companies and one-point solutions. So ultimately that's not a big area of concern for us. In web analytics, the entrenched players are Adobe, with Omniture; IBM, they have a few products that target to different vertical markets; there's Webtrends, which is probably actually the granddaddy of web analytics but it has been a flat kind of product that hasn't been scaling lately. And I would say the biggest advantage that we have here is that we're the new kids on the block. We have a low-cost structure and we have an architecture that allows us to answer any question that people have because we are storing our data like a search engine does, which is at the very lowest level of detail and we can create -- respond to a query or a question by assembling data on the fly. A lot of the existing solutions rely on pre-aggregation of data. So if the question can tap into a pre-aggregated data set, then you can answer it pretty quickly. If the question does not do that, then you can't answer it without having to go and modify the database, which can take weeks and can be expensive, time-consuming and obviously not timely. So that's the advantage that's driving that. We still have a pretty low market share in that area, being a new entrant. But we're very pleased with our competitive win and we think, at least in market segments where comScore has an established relationship with clients, we have a pretty good chance at being able to win that business from those clients.

John Egbert - Morgan Stanley, Research Division

Okay. So we have a few minutes left. I guess we should open up for the questions. I think we have some mics around.

Unknown Analyst

I wonder what pricing -- you can address pricing from a bunch of different vectors. The traditional source, the fierce battle, the new products and then sort of bundling, if you wanted to sort of be traditional, go-with-the-new and what-I-get-for-that bundle.

Magid M. Abraham

Sure. In terms of our core audience measurement services, the pricing dynamics depend on kind of what we have, what product line extensions we have. So, for example, this year, Media Metrix will benefit from the fact that introduced Media Metrix Multi-Platform. And so if you really want to just limit yourself to you in a desktop or usage on a desktop, then you will get your normal 3% to 4% price increase. But if you want to opt for looking at the cross-platform measurement, there is a surcharge where you'd have to pay a 20% increase. And then there is also the opportunity -- and that will give you kind of a top-level summary of what the -- what's your unduplicated audience by mode of interaction. But if you want to drill deeper into how much of it is tablet, how much of it android, how much of it is iOS, and have a -- more decomposition, then you would have to buy an option called Mobile Metrix that will give you that level of detail. So that's -- kind of in our regular business, the pricing dynamics are favorable this year. In the new product areas, as you know, the -- and you stated it correctly, if a client -- the early client will always try to get a pricing advantage because they will help you with publicity or they will become a reference client or this and that. And that is a phenomenon that usually happens in the first year and then you start getting out of it. So we certainly have experienced that in 2012 but we think we are going back to a more normalized pricing structure in 2015 and beyond.

Unknown Analyst

I wanted you to comment on the impact of Do Not Track.

Magid M. Abraham

The impact of Do Not Track. It's kind of too early to tell. So far we haven't really felt the impact for it. And the reason is that, unless you are a person that is really paranoid about privacy and you take the time to basically register or be -- or change the settings to be part of Do Not Track, you go with the default and inertia favors the default. So it is, I think, very wise of the FTC, in terms of protecting the Internet, to establish rules that would say, if you want to not be tracked then you have the ability of doing that. But instead of making the default Do Not Track and the -- having the opt-in be something that would require proactive action from the user, in which case you would only get a tiny fraction of the users that will opt-in. The opt-out protects the ability of players in the Internet market to have the majority of the population still something that they're able to collect information to conduct business and do, in our case, measurement and analytics. There is obviously a controversy about Microsoft and their Do Not Track and the fact that they made Do Not Track the default. That's a question that's in dispute right now. One of the things that we have worked really hard with the FTC on is that, when -- for -- if you are not doing behavioral advertising, if you are kind of doing measurement for market research and for kind of analytical purposes, then there is an exemption. Kind of like what happens in telemarketing, where the Do Not Call made an exception for political polling and for market research polling. So we can make a very strong case that what we are doing is necessary for websites to kind of understand their users but in no way we are collecting data that we are either sharing at an individual level or using it to target advertising, which is typically the area of concern that people have had about privacy.

John Egbert - Morgan Stanley, Research Division

All righty, I think that's all the time we have. I guess if it's quick, or maybe talk offline.

Unknown Analyst

[indiscernible] linear TV and the Mobile Metrix. Can you give us an indication of your potential in terms of the TV [indiscernible] measurement. Nielsen is this talking about that but it sounds like it's taking them a while to get that standardization. Are you a player in there with this product or is this more on the content side?

Magid M. Abraham

We are a player, we are -- we have access to 5 million set-top boxes, where we are looking at the usage of -- the linear TV usage. And we have developed methodologies for looking at the overlap between desktop, mobile and linear TV, to be able to create an aggregate, unduplicated picture of usage across these. Now, we have one big network, ESPN, that has signed up for a pilot on this. If that is successful, and we hope to deliver that by maybe the end of the third quarter -- if that is successful then that will give us the impetus to become a -- probably a supplementary TV rating service. But our main purpose in doing that is to be able to provide cross-media measurements. We're not trying to be a TV currency. If we become a TV currency, then that's great. That's upside but it's not part of what our forecast or our business plan is.

John Egbert - Morgan Stanley, Research Division

All right. All right, thanks a lot.

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