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comScore Inc. (SCOR)

Q2 2007 Earnings Call

August 2, 2007 4:30 pm ET

Executives

John Green - CFO

Magid Abraham - Co-Founder, President & CEO

Analysts

Heath Terry - Credit Suisse First Boston

Youssef Squali - Jefferies & Company

Jeetil Patel - Deutsche Bank

Troy Mastin - William Blair & Company

Presentation

Operator

Good day, and welcome to the comScore Second Quarter 2007 Conference Call. Today's call is being recorded. At this time I would like to the turn the call over to Mr. John Green, CFO. Please go ahead sir.

John Green

Thanks very much. Good afternoon, and welcome to comScore's earnings call for a second quarter fiscal 2007 and our first call as a Public Company. On the call with me today is Dr. Magid Abraham, comScore's President, Chief Executive Officer and Co-Founder.

Before we began, let me read the Safe Harbor statement. The comScore's historical information, all the statements, expectations and assumptions contained in the foregoing or forward-looking statements that involve a number of risks and uncertainties. It is possible that the assumptions made by management are not necessarily the most likely and may not materialize. In addition, other important factors that could cause actual results to differ materially include the following.

Business conditions, the amount of growth in the digital marketing intelligence industry and the general economy, competitive factors, the ability to attract and retain key sales, technical management personnel, the pricing, the company's stock and the risk factor set forth from time-to-time in the Company's SEC filings.

comScore takes no obligation to update or correct forward-looking statements. I’ll now turn the call over to Magid.

Magid Abraham

Thank you, John. Good afternoon, everyone. I am pleased to report that we are experiencing great success as we continue to grow our customer base and benefit from accelerating operating leverage in our business models.

The momentum of our products and services in the marketplace help deliver strong financial results that were above expectations going into the quarter. With almost 800 customers worldwide comScore is clearly taking its position as a market leader and enabling the monitorization of digital media.

Second quarter 2007 revenue results were $20.8 million, which is an increase of 23% compared to the second quarter of 2006. That’s also an 11% sequentially over the first quarter of 2007.

Deferred revenue were stood at $26.6 million at the end of second quarter of 2007, which is an increase of 50%, compared to the prior period. That reflects strong sales momentum that we’ve enjoyed in the first half of 2007 and will translate into acceleration of revenue growth in the second half.

Demand for our products was driven by continued strong growth in our existing customer spending on digital marketing and e-commerce. As a result, we were able to continue to grow the size of our customer base as well as the business that we do within existing customers.

Our subscription revenue was 16.3% in Q2, that’s an increase of 29% over the prior period and it accounts for 78% of comScore’s total revenue for the quarter. That’s an increase of 4 percentage points compared to Q2 of ’06.

Project revenue grew by only 3% in Q2 ’07, compared to the same period year ago, due to an unusually strong project revenue in Q2 of 2006. This also reflects a conscious strategy that the company is adopting to convert customers from ad-hoc projects to recurring subscription agreement. Revenue from existing customers totaled $17.7 million that’s an increase of 19% versus year ago. While revenue from new customers was $3.1 million and that’s an increase of 49% compared to year ago.

During the second quarter of 2007 comScore added a net of 33 new customers which brought the total number of customers to 776, that’s a net increase of a 128 new customers compared to the end of Q2, 2006. Within this total customer count the company added a net 41 new subscriber resulting in a total subscriber base of 687 customers, that is a net increase of a 110 subscription base customers compared to the prior year period.

International revenue was $2.3 million in the second quarter that’s an increase of 78% compared to the year ago period, and comprises now 11% of the company's total revenue. During the second quarter we continue to build our robust new product pipeline with the launch of comScore Campaign Metrix.

This suite of products enabled our clients to measure the ROI from their investment in digital marketing campaign and it will contribute to revenue growth in the second half of 2007. In addition we have invested in building a pipeline of new products and we expect to introduce in the third quarter.

We are also investing in dealing, our sales capacity both domestically and internationally as reflected by the opening of the Tokyo office during the second quarter. Which serves to establish our commercial presence in the important Asia Pacific region.

I will now turn the call back to John for a review of the detailed financials for Q2. And after that I’ll make a few closing comments and then we’ll take Q&A.

John Green

Thank you, Mr. Gian. Second quarter 2007 GAAP net income was $1.2 million compared to $1.4 million for the second quarter 2006. Included in second quarter 2007 GAAP net income it is a non-recurring charge $1.3 million related to the revaluation of preferred stock warrant liabilities issued what comes for with the private company. These stories (ph) reflect the increase in comScore’s enterprise value between March 31, 2007 and June 30, 2007.

The company completed its initial public offering on July 2nd, 2007 and on that phase all standing shares of the company’s preferred stock converted in the common stock. And all that then in preferred stock warrants convert in the common stock warrants. Accordingly the preferred stock warrant liability was reclassified in current liabilities to additional trading capital on July 2, 2007.

Due to non recurring nature of this charge and certain non cash charges, we are also reporting adjusted net income that excludes the revaluation preferred stock warrant liabilities as well as amortization and tangible assets results come from acquisitions and stock base compensation expense.

Reconciliation of comScore’s GAAP results to this non-GAAP network is included for the second quarter earnings release that I will send out today. Adjusted net income for the second quarter of 2007 was $3.3 million an increase of 67% compared to second quarter of 2006.

Adjusted EBITDA, which we define as net income plus the benefit or provision for income taxes, depreciation, amortization, intangible assets resulting from acquisition, the stock-based compensation, revaluation of preferred stock warrant liabilities, less interest income or expense and other income was $4.1 million, an increase of 56% compared to the prior year period. Again a reconciliation of comScore’s GAAP results to this non-GAAP metric is also provided in the second quarter of press release.

The company’s adjusted EBITDA margin for the second quarter was 20%, an increase of over 4 percentage points compared to the second quarter of 2006. This margin improvement reflects the operating leverage realized by the business model with revenue growth of 23% outpacing an increase of 16% in operating expenses for the second quarter 2007 as compared to the prior year periods, excluding the impact of stock-based compensation.

Operating cash flow for the second quarter of 2007 was $4.5 million, compared to $141,000 in the second quarter of 2006. Free cash flow, which we defined as operating cash flow less capital expenditures was $3.4 million compared to a negative $337,000 in the second quarter of 2006.

As of June 30 of 2007, comScore had $21.7 million in cash, cash equivalents and short-term investments. In addition, with the completion of our initial public offering, our company raised net proceeds of approximately $76.7 million through the issuance of 5 million shares common stock.

Looking at our balance of the year outlook, our company is forecasting third quarter of 2007 revenue of approximately $21.5 million to $22 million an increase of 33% to 36% compared to third quarter 2006. Company is also forecasting adjusted net income for the third quarter 2007 a $3.3 million to $3.5 million or $0.11 to $0.12 per fully diluted share.

These are an estimated 29 million weighted average shares for the quarter. Adjusted EBITDA for the third quarter 2007 is forecast to be $3.4 million to $3.5 million and increase of 29% to 33% compared to the third quarter 2006 and this includes an estimated $750,000 in incremental public company expenses.

Growth in adjusted EBITDA for the third quarter 2007 is forecast to be in the range 58% to 61% as compared to the third quarter 2006 and excludes the incremental public company expenses. In addition, this adjusted EBITDA projection for the third quarter 2007 includes approximately $600,000 in incremental investment dimensions decided to make in such areas as increasing the size of our sales force and accelerating the role out of certain new products.

This incremental investment reflects our management’s intention to reinvest part of the year-to-date 2007 profit results, which have exceeded our previous expectations, to take advantage of the significant market growth opportunities.

Our Company is forecasting full year 2007 revenue of approximately $85.9 million to $86.7 million or 30% to 31% over comparable 2006 revenue. And this translates into projected acceleration of revenue growth second half of 2007 in the range of 35% to 37% compared to second half 2006.

We are projecting adjusted EBITDA for the full year 2007 in the range of $16.4 million to $16.9 million, an increase of 65% to 70% as compared to full year 2006. We are also forecasting adjusted net income for full year 2007 of approximately $14.7 million to $15.3 million or $0.56 to $0.58 per share on a fully diluted basis based on an estimated 26 million weighted average shares.

We are expecting a total of $1.2 million in incremental public company-related expenses for the third and fourth quarters combined the 2007 and that’s included in the full year 2007 adjusted EBITDA and adjusted net income forecast that I just shared with you.

Free cash flow for the full year 2007 is projected to be in the range of $13.9 million to $14.6 million, an increase of 62% to 70% compared to full year 2006.

With that I would like to turn the call back to Magid for closing remarks.

Magid Abraham

Thanks John. We are pleased with the strong financial results for the second quarter. And also with a positive reception that we received during our recently completed IPO process. We believe that these achievements demonstrate the increasing recognition of comScore’s industry-leading technological capabilities and track record of innovation.

It also reflects the increasing customer demand for our diversified portfolio and actionable market insights that comScore provide to support our customers in leveraging the power of the Internet to grow their business. With that we would like to open it to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will go first to Heath Terry from Credit Suisse.

Heath Terry - Credit Suisse First Boston

Thank you. I was wondering if you talk to us about what you are seeing as we go through kind of or start to go through some of the second half renewals from a pricing standpoint particularly not just pricing on an individual basis, but also as you restructure price and to restructure the price some of these newer services that you are offering. What are you seeing on those as well?

Magid Abraham

Well, we continue to have a bit biting environment. I’m not aware of any situations where we have to be under great pricing pressure. In fact when we look at the growth within our existing client base, it is a pretty healthy growth and a good part of that is actual price increases. In terms of some of the products that we’re introducing, a lot of them are designed to create new markets. So as an example of the products that will be coming out in Q3.

We have actually already announced two products, one is a product called Segment Metrix, which is something that allows for which segmentation that our current subscribers are using particularly, the Media Metrix client base. Now, that’s going to be sold as add-on.

Then we have another product, which is Tech Metrix. Tech Metrix is dragging, essentially the desktop environment that consumers have whether it is hardware or software. Now that’s basically, targeting a whole new segment of the market that for the most part we haven’t really been dealing with. What’s coming is qSearch to point out, which is basically, the second generation of qSearch.

We are adding a lot of functionality to that, but what we are expect to make our incremental revenue is by selling that product internationally as well as by broadening the base of subscribers. Particularly, because we are adding new players in a search market such as eBay, Amazon etcetera.

Ad Metrix is a new product that’s to some extent is the targeting new revenue and then another product is comScore marketer. ComScore Marketer is a product that’s design to address the needs of the marketers long sales.

Those tend to be sort of large companies that, those necessarily have big website but they do use the internet for generating business and comScore Marketer is targeting towards those, by and large we don’t really have a lot of them among our existing subscriber based.

Heath Terry - Credit Suisse First Boston

Great. And then next, can you give us an update on where your conservations with IAB stand?

Magid Abraham

There is truly no update I think the process, the process is going forward. Today as a matter of fact we have equal meeting with the MRC and it's a corporative process. We have had a number of positive communications with the IAB in terms of working with the among various things.

But the reasons, well I mean, the profit is going to take its scores and the history on this MRC that’s take anywhere from 1.5 years on the lower end to 10 years on the high end. So this is not going to be a quick process necessarily unless we, and the MRC has lead to basically segment of process into pieces and others individual pieces, which might end up being it is.

Heath Terry - Credit Suisse First Boston

Thank you.

Magid Abraham

Thanks.

Operator

And we'll take our next question from Youssef Squali from Jefferies.

Youssef Squali - Jefferies & Company

Thank you very much. Youssef Squali. Couple of questions. I guess starting with would you John, could you talk a little bit about the seasonality in margins, if I look at your EBITDA margins for Q1, I think it was around 14% jump to 20% in Q2.

I think your guidance implies EBITDA margins about 15% for Q3 and then 19% for year. I guess outside of the heavy investments you're making into sell the market in overseas, can you kind of explain the variation there? And then I have a question for Magid?

John Green

Sure. Again just to point out again that incremental public company costs are reflected in the projected EBIDTA for third and fourth quarters. So, that’s turning depress those margins, that’s margin that’s why we wanted to give more flexibility as to the amount that we had projected and incremental public company cost.

For another side, we have a track record of seeing sequential quarter-to-quarter improvements in EBITDA margins. So, in the first quarter of ’07 in fact we were at 15%, and that was compared to 7.6% for the first quarter of ’06. And so we are getting comparable type of leverage improvement in the second quarter and we anticipate that excluding the public company cost that will be approaching 25% EBIDTA margin by the fourth quarter of ’07.

So the seasonality comes in respect on that, during the first half of the year, where allotting some seasonally high cost such as payrolls, taxes, vacation approvals. We also start ramping up our hiring in the beginning of the year to its executed against our annual operating plans.

So we bring a lot of persons, commercial people on Board, and then we certainly get strong productivity from them in the back half of the year. So we are anticipating similar type of sequential quarter-to-quarter EBITDA margin improvements during the balance of ’07 as well.

Youssef Squali - Jefferies & Company

And I guess, as we look at the business half’07 to ’08 and beyond, we should expect the same type of pattern of seasonality first half to second half to continue, right?

Magid Abraham

Not only first half to second half, obviously when we start talking about ’08 guidance, we will give you little bit more flavor on that. But the cost seasonality that John talked about is definitely there. The variable that tends to either mitigate or accelerate that is what is expected in terms of project performance if we have a great quarter, then that will mitigate from the cost increase or the other way around.

But I think for the entire year, we’re very happy with where the margin is going to net out and given the increases that we’re looking at for ’08, we think we’re going to have very margin in ’08.

Youssef Squali - Jefferies & Company

Okay. That’s great. And then my next question, last question is I guess you really only had one publicly traded comp or competitor and that ratings now they were taking out. They are in private hands. Can you comment on what you are seeing out there from competitive landscape, and just the fact that they are now in private hands, does that helped you or does that hurt you?

Magid Abraham

No, it’s difficult to tell. We have not really seen any change in the competitive environment. So if you were to ask me what happen or what’s happening now in the marketplace compared to what was happening six months ago. I’ll be happy actually to tell you that there is any difference that we can perceive. Going forward one can only speculate, but that's not really what we get concerned about when I did just focused on doing our business and other subject of stuff.

Youssef Squali - Jefferies & Company

Okay. Thanks a lot.

Magid Abraham

Let me just say that some of the stuff that we are introducing, we have introduced or we are introducing is actually fully unique, so they are unique product in the marketplace. The stuff that we have already announced in Q3, the stuff we're planning and announcing and the pipeline of new products.

Most of them are really unique product that comes for a long-end offering to the marketplace.

Operator

(Operator Instructions) And we'll take our next question from Jeetil Patel from Deutsche Bank.

Jeetil Patel - Deutsche Bank

Great, thanks. Hey guys, can you talk about just your revenue contribution that just coming from Ad networks and Campaign Metrix here in the second half of the year. What types of adoption rates do you think as you released. Do you think you end up getting there in course of your guidance and have a quick follow up?

Magid Abraham

We haven't really done a forecast actually, we not prepare to talk about the forecast on a product-by-product basis, but despite to say that a number of our large clients that has science what we call it API deals where they have the ability of automatically answering instead of campaigns and then getting the results that on an automated passion.

That expected to take into gear in the second half and we are result in a lot of added revenue. We also see the overall ad effectiveness market, which includes both the publishers, the ad networks and advertisers that also continues to be based on.

John Green

Right so. Again Jeetil and we are not give the product specific revenue results or guidance but we would that said ultimate the new product launches will have some contributional be the small one for revenue in the balance of ’07 or ’08 a standard contributor for next year and beyond.

Jeetil Patel - Deutsche Bank

Couple of questions. Can you discuss, how many new product subscription-wise do you think you’ve plan on releasing on yearly basis steady status you go forward, maybe it helpful for it just to get handle of it going to new products that are in layered into existing subscriber base or being up sourced into the customer base. That’s very…

Magid Abraham

Well, I think my expectation would be five to six new products that will be introduce this year. We actually introduce more but it’s hard to forecast what would be coming down in ’08 and what are we were to maintain the same rate of new product activity.

We know that we are going to have some new product activity in the mobile area for next year. But there are lot of things that we are doing next year that are basically like peeling the onion, we’ll peel one layer and cannot be quickly leave to another layer that we will see over the new products.

Jeetil Patel - Deutsche Bank

And how do you look at rolling out new subscription products in terms of you know what products you rollout or you look at? I am jumping deeper into. Is it based on customer feedback or just the database that you built-up at this point I guess. Can you elaborate little bit more on how you create new products or how you identify them in the business? Thank you.

Magid Abraham

A lot of what we do is customer driven. So, we do have a very rich database. And clients are not always aware of what we have, but they do ask questions and when they ask questions, we can go back and say either we have this or not. So one example is Tech Metrix, its data that we’ve been collecting for a long time. But one major client started acting for it often formation about it then we just started well.

This is something that we can release. Things like Campaign Metrix are definitely driven by client demand. The Ad Metrix products was to some extent a response to the technology change going into AJAC (ph) where page views are sort of being undermined and we are looking at ad views as one of the Metrix that would be a substitute for that.

But they do have a lot of new occupations and so for the most part of that 80% of our products are based on customer feedback. One of the things that is different starting in ’07 is that in the past we did not have a formal product management organization.

So in some cases, we would introduce a product and would remain sort of a specialty product within the client group that invented there, and this year would being a lot more systematic on taking products, productionize them, launch them.

We are obviously hoping and this is one of the things that we’ve actually invested in heavily this year or obviously hoping that the systematic classic marketing of our new products is something that will help us, will increase our penetration within existing clients and in last this is increasing subscribers.

John Green

And so beside the new products going forward, just give me a sense to the success we’ve had in up selling to existing customer base. You take a look at our total subscriber group starting for the 12 months rolling July ’05 to June 30th of ’06 and then take a look at the growth in that group over the next rolling 12 months that would end June 30 of '07.

We were able to increase revenue by 33% there so, that’s through a combination certainly of pricing, but even more so in terms of our strong commercial team up-selling further products and services for that group. So as these new products come on Board, that’s shows you the tremendous up-sell opportunity that we currently have as well as the addition of new customers.

Jeetil Patel - Deutsche Bank

I apologize, but one last question. You look at the segments of the marketplace, which you can go after. Where do you think is the next level of growth ahead? Do you think its retailers, is it small to medium size businesses or do you think its agencies? Thank you.

John Green

We think that we are back to surface in the Fortune 500 or the Fortune 1000 space. We have been successfully able to penetrate some of these companies, but we do have lots of opportunities to broaden our footprint there.

On the Media Metrix side, we’re enjoying it’s surge of new client activity that’s really driven by, I guess all the Web2.0 companies that need Media Metrix to be recognized by the advertising agencies in the marketplace.

We have international, you know, that’s growing fast, but it’s still growing from a small base. We’ve talked about comScore marketer addressing the long tales of marketing, which is basically going into Fortune 500 to probably the Fortune 5000.

And that represents perhaps a couple of thousand customers that we can go after, with a price point that’s different in the price points that we typically charge the mainstream Fortune 500 companies, but certainly with a Media Metrix likes delivery that has gross margin or incremental margin in the 70% to 80%. That answers your question?

Operator

(Operator Instructions) And we’ll take our next question from Troy Mastin from William Blair & Company.

Troy Mastin - William Blair & Company

Yeah. Thank you. Good afternoon. It’s a really two part question related to the M&A environment. First from a competitive standpoint several of your competitors have been acquired regionally and I am curious if that having any impact on the competitive landscape, on a sale side.

And then with the M&A that’s gone up with many of the online agencies some of the other online players has that impacted your to be inside in any positive or negative actions? Thanks.

Magid Abraham

So when you say our competitors have been acquire lately, why you’re thinking that specifically?

Troy Mastin - William Blair & Company

Really reference to that ratings cycle in to the Nielsen Company and then Hitwise combining with experience?

Magid Abraham

Yeah. Okay. I thought you are also taking about policy, but I will talk essentially we answer the question about NetRatings within the Nielsen Company. You know Hitwise is I think on the same growth that they have been on the -- basically positioning themselves not as an audience measurement company, I don’t think for instance agencies would use them for audience measurement purposes.

But where they are strong is in measuring smaller size and what I call the marketers long tail and that’s what comScore marketer, that’s the segment in comScore marketers designed to do. So, I’d expect that we will see more competition with it was not necessarily because they are now part of experience, but because we are going to have a product that we compete directly with their offering and throughout the segment.

Now at the same time, we do business for the experience and we work with them and there are seven divisions of experience (ph) that we count our strength. So, it’s a broad world of competition and we take advantage of it. As far as, agencies things like DoubleClick being acquired by Google or Avenue A being acquired by Microsoft.

I don’t think any of these transactions have closed, so we early haven’t seen an impact, probably the only impact that we have seen is that all the other smaller networks are feeling so bullish now that they are buying more. But we will see how things announced when these big transactions are consummated.

Troy Mastin - William Blair & Company

Okay. Great. And then maybe one more question related to the composition of your new customers ads recently versus more historically has the vertical make-up changed in any meaningful way?

Magid Abraham

We are enjoying in our gross within the Media Metrix client base, which is basically allow these work to point out company, so that's an area that growing strongly. We are also one of the best growth areas versus the telecom verticals.

It has a lot of impact potential yet and it's not necessarily as much a result of a conscious change in the midst rather than we are just going after this now and a year ago or year and a half ago we were not so much.

Troy Mastin - William Blair & Company

Perfect. Thank you very much.

Magid Abraham

Thanks, Troy.

Operator

(Operator Instructions) And at this time we have no further questions. I would like to turn the conference back over to your presenters for any additional or closing remarks.

Magid Abraham

Well, I would like to thank everybody for their questions, obviously this is, as our first public quarter, we value a lot of the questions and the feedback. We hope to see you again or certainly talk about our guidance for Q3 and Q4 and deliver on those quarter and thank you very much.

John Green

Thank you.

Operator

And this concludes today’s conference. We thank you for your participation. You may now disconnect.

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