comScore, Inc. Q1 2008 Earnings Call Transcript

May.12.08 | About: comScore, Inc. (SCOR)

comScore, Inc. (NASDAQ:SCOR)

Q1 2008 Earnings Call

May 5, 2008 4:30 pm ET

Executives

Magid M. Abraham, PhD- President, CEO, and Co-Founder

Gian M. Fuigoni- Chairman and Co-Founder

John M. Green- Chief Financial Officer

Gregory Dale- Chief Technology Officer

Christiana Lin- General Counsel and Chief Privacy Officer

Analysts

Jeetil Patel- Deutsche Bank Securities

Jason Helfstein- Oppenheimer & Co.

Troy Maslin- William Blair & Co.

Mark May- Needham & Company

William Morrison- ThinkEquity

Youseff Squali- Jefferies & Co.

Heath Terry- Credit Suisse

Operator

Operator Instructions) I would now like to introduce Mr. John Green, Chief Financial Officer.

John Green

Before we begin, let me read the following statement concerning certain Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Except for historical information, all the statements, expectations and assumptions discussed during this call are forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include a number of risks and uncertainties, some of which cannot be predicted or quantified. 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 results to differ materially include the following: the yearly stage of the market for digital marketing intelligence, and the rate of development of such market; comScore’s ability to effectively expand sales and marketing, comScore's reliance on subscription-based revenues; comScore’s ability to retain existing large customers and obtain new large customers; the inability to sell additional products and attract new customers; dependence on growth of international operations; product obsolescence with technological development; volatility of quarterly results and analyst expectations, and the other risk factors set forth from time to time in comScore’s SEC filings, including but not limited to, it’s form 8-K filed earlier today, relating to the subject matter of this earnings call, and it’s Form 10-K for the year ended December 31st, 2007. ComScore undertakes no obligation to update, or correct forward-looking statements. With that , I would now like to turn over the call to Magid.

Magid Abraham

Earlier this afternoon we released the results of our first quarter ending March 31st, 2008. I am pleased to announce that as our first quarter results show, we are off to a strong start for 2008. We have met or exceeded our first quarter consensus estimates and our own prior guidance. We have also achieved our highest revenue level in our company’s history. This strong top-line performance has driven our continued success in our key strategic growth drivers, which include customer base; maintaining the pace of adding over 50 new products a quarter; and realizing strong growth internationally.

The quality of our client relationship is as strong as ever, as reflected in our revenue growth amongst existing customers of 38%, and a subscription renewal rate that was 93% during the quarter. At the same time, we continue to further develop our new product pipeline. For instance, during the first quarter we launched Ad Metrix Advertiser View. We anticipate that this product will represent a powerful tool for agency and publishers to support their media buying and selling activities as well as comparative intelligence needs.

We now have over 950 customers worldwide, and the demand for our products and services remains strong despite a slow-down of the overall U.S. economy and the challenging capital markets. First quarter 2008 revenues were $26.4 million, representing an increase of 41% compared to the first quarter of 2007. This revenue performance exceeded our company’s previous guidance for the first quarter of $25.9- 26.2 million. In addition, our deferred revenue balance of $36.8 million at the end of March represented an increase of 46% compared to the prior year period.

We continue to make progress in our goal of growing our subscription business, and adding new customers to our expanding customer base. Our subscription revenue was $21.5 million in the first quarter , which was an increase of 48% over the prior year period. This accounts for 81% of comScore’s total revenue for the quarter, and that is an increase of four percentage points compared to the first quarter of 2007, and one percentage point higher than the fourth quarter of 2007, so we continue to make progress in progressing that percentage.

Project revenue of $4.9 million grew by 17% in the first quarter compared to a year ago period. Revenue growth was strong across the board. Revenue growth among existing customers was 38% in the quarter, while revenue from new customers was $4.3 million and that’s an increase of 59%. Increased revenue grew 88% compared to the year ago period, and now accounts for 10% of the company’s total revenue, which compares with 10% of the revenue mix for the first quarter of 2007. We’ve added a net of 53 new customers, which brings our total number of new customer to 948. This represents a net increase of 184 customers in the last twelve months. We now have 854 subscription based customers, which is a net add of 43.25 and 210 for the last twelve months.

Our confidence in the outlook for 2008 is reflected in our increased guidance for the full year as John will discuss later. Our investments in new capabilities and new product initiatives and sales forth growth, and international expansion continue as planned, and prepare us well for strong growth for the foreseeable future. I will now turn the call back to John for a review of the detailed financial results for the first quarter, and our outlook for the second quarter and for the full year of 2008. And after that we will open up the call for questions.

John Green

First quarter 2008 GAAP income before taxes was $4.2 million, an increase of 165% compared to the $1.6 million in the first quarter of 2007. GAAP net income was $2.5 million, an increase of approximately $1 million or 64% compared to $1.5 million the first quarter 2007. This exceeds the range of our company’s previous guidance for GAAP net income of $2- 2.3 million. GAAP net income includes a full tax provision at a normalized effective tax rate of 39.9% inclusive of an actual effective cash tax rate which was 1.5% in the first quarter of 2008, as we continue to utilize net operating loss carry-forwards to reduce cash taxes. By comparison, the first quarter 2007 net income included an effective tax rate of 2.9%. GAAP PPS for the first quarter of 2008 was $.09 basic, using approximately 28.2 million common shares, and $.08 on approximately 30 million fully diluted shares. Adjusted EBIDTA was $5.6 million, an increase of 104% compared to corresponding quarters in 2007, and includes approximately $600,000 in public company costs that were not applicable to the company in the first quarter 2007.

This performance exceeds the company’s previous guidance for adjusted EBIDTA for the first quarter of 2008 of $5.1 - $5.4 million. Our company’s adjusted EBIDTA margin was 21%, an increase of over six percentage points as compared to the first quarter 2007, and includes approximately two percentage points attributable to the 600,000 in incremental public company costs incurred this quarter.

Non-GAAP adjusted net income for the first quarter of 2008 was $5.3 million, an increase of 174 % compared to $1.9 million in the first quarter of 2007. Our company’s previous guidance for non-GAAP adjusted net income in the first quarter 2008 was $4.4-$4.7 million. Non-GAAP PPS was $.18 per share, which exceeded our company’s previous guidance of $.14-$.17 per share.

Operating cash flow for the first quarter 2008 was $10.3 million, an increase of $7.1 million compared to $3.2 million in the first quarter of 2007. Free cash flow was approximately $6.7 million in the quarter, compared to $2.7 million in the first quarter of 2007.

As of March 31st, 2008, our company held $103.4 million in cash, cash equivalents, and short term investments. In addition, we held approximately $8.3 million in long term investments. Looking at our company’s updated financial outlook for the full year 2008, we are increasing our revenue forecast to a range of $113-$113.6 million, an increase of 30% compared to full year 2007. This compares to our previous full year 2008 revenue guidance of $112.2 - $113.2 million.

For the full year 2008, we are projected GAAP net income of $10.3- $11.5 million. A normalized estimated effective tax rate of approximately 41% inclusive of an estimated cash tax rate of approximately 4.9% is assumed to be applied against full year earnings before taxes. A GAAP net income projection also assumes that recent general declines in interest rates will result in an interest income for 2008 that is approximately $900,000 lower than what we initially anticipated.

Given these assumptions, we are forecasting GAAP EPS for 2008 of $.34- $.38 per share. We are also increasing our guidance for adjusted-EBIDTA for the full year 2008 with an updated forecast in the range of $26 -$26.5 million, an increase of 48% as compared to full year 2007. This compares to the company’s previous adjusted- EBIDTA guidance for the full year 2008 of $25.4- $26.4 million. The company’s adjusted EBIDTA margin is forecasted to rise to a range of 23%-24%, an increase of two to three percentage points compared to the full year 2007, and this includes approximately one percentage point of reduced margin due to incremental public company costs in the first quarter 2008. We are also forecasting non-GAAP adjusted net income for full year 2008 of approximately $22.8 -$23.7 million and non-GAAO EPS of $.75- $.85 per share.

For the second quarter of 2008, we are forecasting revenue of approximately $27.1 -$27.4 million, an increase of 30-32% compared to the second quarter of 2007. Additionally, we are projected GAAP net income of $2-$2.3 million for the second quarter 2008; GAAP PPS for the second quarter 2008 is projected to be in the range of $.07 to $.08 per share on a fully diluted basis. Adjusted EBIDTA for the second quarter 2008 is forecasted to be $5.8-$6.1 million, an increase of 40%-48% compared to the second quarter 2007. The adjusted EBIDTA forecast for the second quarter results in an adjusted EBIDTA margin of 21%-23%, up one to two percentage points compared to the second quarter of 2007. Despite the effect of approximately two percentage points of reduced margin due to incremental public company expenses. Furthermore, please keep in mind that our company historically has seasonally high costs as to percentage of revenue in the first half of our fiscal year, based on such items as higher payroll taxes, vacation accruals, and a ramp-up of hiring primarily in our sales force and technology groups to support anticipated revenue growth. We expect a similar pattern in 2008.

We are also forecasting non-GAAP adjusted net income for the second quarter 2008 of $4.7-$5 million, with non-GAAP EPS for the second quarter 2008 of $16-$17 per share. I will now turn the call back over to Magid for closing remarks.

Magid Abraham

I want to reiterate how pleased I am with the strong start to 2008, including the revenue and earnings momentum, and the increased operating leverage. The company’s performance speaks for itself and we are excited about the prospects of building upon the success as we support our customers in leveraging the internet to grow their business and as we expand comScore’s footprint on a global basis. Looking ahead to the balance of 2008, we are excited about the prospect of entering the [inaudible]in the second half of 2008. We will also continue to make advances in both our new and established products that will help us to expand our industry leadership position to the further benefit of our customers and shareholders. With that, I will open the call now for questions.

Question-and-Answer Session

Operator

Our first question comes from Youseff Squali with Jefferies & Company.

Youseff Squali- Jefferies & Company

First question to Magid, and then John. On the economy, you raised guidance, so that certainly bodes very well for what you are seeing out there, but are you seeing any increase in sales cycle or conversion? Due to hesitation as we have heard from other companies out there?

Magid Abraham

No, not at all.

Youseff Squali- Jefferies & Company

How easy do you think it will be for you to pass on the single-digit price hike that you typically come up with every year?

Magid Abraham

We continue to be able to do that. I think that the top end of what we are charging in terms of 10%-11% price increases for one year renewals, we are getting a little more push-back for that. But we are able to continue increases prices and that is factored into our plan.

Youseff Squali- Jefferies & Company

And John, any chance you can speak to revenues from new product, say the ones from last year you launched 10+ products. Just for us to gauge your success with these introductions and back into growth of the core products? Any help there would be great.

John Green

The new products, those launched over the last twelve months, comprised about 11% of our bookings for the first quarter.

Youseff Squali- Jefferies & Company

My last question is about the Google [inaudible] and I was wondering if you have seen any kind of backlash from it? Maybe you can speak to churn. I think you have talked about your renewal rate being 93%. What was it last quarter, and where do those 7% go after they leave you?

Magid Abraham

I think last quarter was 92%. It is a pickup in the renewal rate. We have a fair amount of 2.0 companies, and some of these companies change their business plan and go in a different direction. Some of them may go out of business. As a result you always have something like this. We also always see situations where you have a marketing organization, a sponsor that may leave the company, or changing priorities, etc. Again, we continue to see very few competitive losses. As part of the Google question goes, this was a much bigger deal in the press than it was among our client base. We had one client question about it, and that question was to give him an explanation of what the differences were. As you know we made a concerted effort to try and put the real facts and comparisons out there. It is unfortunate that we are not the only victims of the press running away with the numbers without too much thought, and at first glance the comparisons that people looked at are an annualized basis, say 2% growth, and [inaudible]reported versus 20%. That was an absolute apples-to-oranges comparison. That was comparing [inaudible]in surge compared to global domestic [inaudible]and partner sites, etc. When you do the actual apples-to-apples comparison the numbers are a lot closer, and furthermore the softness that we saw in the [inaudible]in the U.S. was indicative of a flat U.S. quarter. Both from a qualitative and a quantitative perspective we got it right, and despite this episode where you would think that comScore was off by a mile, we were not. We were pretty close, we are proud of our estimates and we stand behind our data.

Operator

Your next call is from Mark May of Needham and Company

Mark May- Needham & Company

The question is the deferred revenue. The deferred revenue accelerated significantly. I wonder if you could provide some color as to what drove that in terms of either particular new products or new verticals. I apologize if this has already been touched on.

John Green

The deferred revenue reflects the great efforts of our sales team in terms of continuing to build our backlog, both further penetrating our existing customers, adding new customers, as well as seeing a big uptake due to new products. The 46% increase versus a year ago is in line with the 46%-50% type of growth rates that we have seen for the past four quarters. It is a strong indicator of our future growth prospects.

Mark May- Needham & Company

Can you contribute that to any one particular product, category of products, or customers?

John Green

No, it’s just our overall strong efforts in terms of our sales team.

Magid Abraham

It is really strength across the board. No matter how you slice our business, all the revenue segments we look at, the strength was pretty evident across the board.

Mark May- Needham & Company

Can you comment on renewal activity that took place during the quarter, and any changes that you saw generally in terms of pricing or length of contract, or number of products, things of that sort?

Magid Abraham

We continue to push up the length of contract terms. That adds 35% for the quarter. As far as price increases, we continue to be able to pass on price increases in the range of 6%-7% on a first-year basis, and I would say 3%-5% on a multi-year basis.

Operator

Your next question comes from William Morrison with ThinkEquity.

William Morrison- ThinkEquity

I notice that revenue per customer looks like it is down sequentially for the first time in several quarters. I was wondering if you could touch on why that was down after growing for the past several quarters. Secondly, I want to ask why your guidance for the second quarter implies a dramatic deceleration for the year, and I am just trying to understand why growth would slow from 41% to 20% over the next three quarters. Are you expecting a slow-down in other areas of your business?

John Green

That total revenue part is not really a total indicator. If you look at the existing customers, our growth was up by 38%, so the reason why the AR PU is slightly down is because of our success in adding new customers. Magid gave you those figures before. Over 184 total customer increase over the past twelve months, and 210 total subscribers. We think that we are doing great in that regard.

Magid Abraham

As far as the trends in the second half, our guidance for Q2 is a growth of 30%. In Q4,we expect the Citadel agreement to be either significantly modified or totally discontinued. Notably the exclusivity feature of it will go away. That is going to open the door for us to sell our products to a much broader array of investors, particularly on the buy side and particularly among the venture capital community, which we are prohibited from doing that now.

The impact on revenue is that as we build that pipeline of new sales, given the way the revenue gets amortized over a twelve month period, there is a net impact on revenue of about $1.3 million.

John Green

$1.3 million in the back half of 2008, starting in August. That has an impact of 2% points of growth in the third quarter as it’s $460,000 lower, and then it is $925,000 lower in the fourth quarter which has approaching a 4% point growth impact.

Magid Abraham

I would also add that we had an exceptionally strong third and fourth quarter in 2007, so the comparison is a little daunting. The momentum of the business continues to be very strong.

Operator

Your next question comes from Troy Maslin of William Blair & Co.

Troy Maslin- William Blair & Co,

A question on MRC accreditation. I heard some buzz in the channel that there may be some forthcoming for a competitor. I am not sure if you have any visibility there. If accreditation did come for your primary competitor first, would that have any impact on your ability to sell? And where do you stand with regard to MRC accreditation?

Magid Abraham

We have not heard anything of the sort about accreditation of a competitor. There are five phases to the accreditation and the MRC is going through it methodically. We are part way through a number of phases. Phase I has been totally completed, and my understanding is that it went well. From what I hear indirectly, is that we are actually further ahead than anybody else. That is the information I have, unless I am missing a piece of news that you are privy to, I think we are doing very well on that.

Troy Maslin- William Blair & Co.

Do you think it does provide a meaningful advantage if somebody does gain accreditation with a significant lead time over another player?

Magid Abraham

I think as long as you are in the process, there isn’t really a meaningful advantage one way or the other. Unless it is clear that you are hopelessly unable to get that accreditation, which is not the case here.

Troy Maslin- William Blair & Co.

And last quarter you characterized your guidance as conservative, and I am curious if you would still characterize it that way, or if the environment has tempered your optimism at all?

Magid Abraham

We would like to think that our guidance is cautiously conservative, just to make sure , we don’t really see any impact from the economy on our business, and should that change, we don’t want to come back and disappoint investors by missing our guidance. As we move forward, we are confident that this is a guidance that we should be able to meet or beat.

Troy Maslin- William Blair & Co.

A few questions on international strong growth. Could you give us some info on any particular products that might be driving that, or any markets that are particularly strong there? And the nature of the customers who are really adopting your international sales. Is it existing customers you have in the U.S. who are global customers, or if it’s more regional or local companies?

Magid Abraham

Actually, our existing customers that we have in the U.S., with headquarters in the U.S., that revenue gets counted as part of U.S. revenue, based on the way we define revenue. For the most part, the revenue that you would see reported under international is revenue from customers domiciled outside the U.S. That basically says that we are having quite a bit of success in converting local players. Our business in Canada is strong; our business in the U.K., France, and Germany is strong. Actually the majority of the growth is happening in Europe because we are facing greener territory there. We do have some significant advantages that help us as we attack the European marketplace. As you know, we offer coverage in more countries than anybody else has. We also offer regional coverage that will provide people with a total European number as well as a worldwide number. So for companies that operate across Europe, that is an important advantage. Furthermore, we are able to track for a particular site, the audience that not only comes within the country of that site, but also from outside the country. Take for example a French site. There are quite a few people who speak and read French outside of France, and your typical French site has 30%-40% of its audience coming from outside of France. The ability to be able to report on that is I believe pretty significant, if people want to be able to track not only the domestic French audience but their total audience.

Operator

Your next question will be from Jeetil Patel from Deutsche Bank

Jeetil Patel- Deutsche Bank

On international, is that coming from publishers that are international in nature, or is that coming from the agencies? I want to understand if you are penetrating the publisher community, which will entail going after the agency market after that. I am trying to understand where you are seeing most of the wins today, and are they competitive in that they are coming out at the expense of others in the category, or are they new wins? And second, in the quarter-over-quarter internationally, it was slightly down sequentially. Was that more of a function of a currency translation, or projects, or something else?

Magid Abraham

The client mix is strong both on the publisher side and the agency side. We actually tend to prioritize agencies first, because we know that if the agencies adopt the usage of our product then the publishers will follow. We tend to have the pattern of our sales be agencies and then major publishers, followed by second-tier publishers and smaller publishers. I think that is a pattern that we have had in almost every country that we deal with. As far as the growth rate internationally, there was an extremely strong growth rate across the fourth quarter in both Canada and the U.K. In the first quarter, Canada went back to a normal growth rate, and Europe was in excess of 100% growth. Canada went back down to a roughly 40% growth. Which is not unexpected because Canada is relatively speaking, a mature market for us. We are the only service up in Canada, so there really aren’t market share gains that you can make, like we can make in Europe.

Troy Maslin- William Blair & Co.

And in Europe, are those new customers that have never used data measurement, or is that coming at the expense of net ratings?

John Green

Both. To give you a context, if you recall, at 50% of our total net increase of 189 customers in 2007 came from international. And international also comprised abut 50% of our new customer growth in the first quarter of 2008.

Operator

Your next question comes from Heath Terry of Credit Suisse.

Heath Terry- Credit Suisse

To take the international question from another angle, can you give us an idea at this point what percentage of your customers in the U.S. are actually subscribing to your international product? What kind of appetite do you feel there is for an expansion of those products? Specifically, if you could talk a little more about the comScore Marketer program, the service you launched in October of last year, to get to a lower ASP or AR PU broader client base, and what kind of success you are seeing specifically for that product?

Magid Abraham

As far as the U.S. customer base and their appetite for international data, we have segmented the market into two classes. The customers that have local operation like Google, Yahoo, Microsoft, and AOL. Those are customers that have a strong interest in getting country-by-country data and they do. I think that all of them actually buy every single country that we can offer. Then you get into other customers that don’t really offer local language versions, but nevertheless they have quite a bit of audience that comes from outside the U.S. We have a service called World Metrix, which is providing a summary of the world wide audience of the site, so a site can be looking at their U.S. audience and their worldwide audience. A lot of U.S. sites can have anywhere from 30%-80% of their audience coming from overseas.

So a lot of sites buy not necessarily the country-by-country data, but they buy world data and the U.S. data. We also see a pattern going the other way, where we see some sites that may be operating strong in a local country, but want to buy data on a world wide basis, but also in the U.S. or some other country.

Second part of your question, the pipeline for comScore Marketer is building very strongly and it is really accomplishing it’s objectives, hitting the [inaudible]and drawing to us customers that are not traditionally customers that we have pursued. As the pipeline builds we are converting those people into existing customers. We expect the contribution of comScore Marketer to reflect the growing pipeline which actually continues to have a really strong momentum.

The one comment I want to make about comScore Marketer is that it is a product that is dependant on high sample size, so when we look at the potential for exporting products from the U.S. to international, we look at products like Ad Metrix, Brand Metrix, some of the Ad’s effectiveness products as being more natural for exporting to other countries, and we are working feverishly at doing that. It is pretty clear to us that there is quite a bit of demand for us, and one of the things that we have gotten chastised by our sales force outside the U.S. is that when we issue press releases we don’t necessarily specify that the product is available only in the U.S. and that raises the appetite for a product internationally for a product that doesn’t exist there. So, clearly there is an opportunity and we are actively pursuing it.

Operator

Your next question is form Jason Helfstein from Oppenheimer.

Jason Helfstein- Oppenheimer & Co.

I think you said that 11% of your first quarter revenue is from new products? To get a sense of your level of conservatism, are you assuming that percent ramps through the rest of the year, or is your guidance based on straight-lining and if there is increasing demand for new products that should be upside to numbers?

Magid Abraham

If you look at the growth among our existing customers it is very strong, if you look at the growth among new customers it is strong, our existing product contribution to the revenue will increase. So is our ability to grow the rest of the business. Yes, we do expect that a percentage will increase, but it is topping the healthy growth that we currently have in the rest of the business. We will benefit from both trends.

Jason Helfstein- Oppenheimer & Co.

Do you think that 15% of full-year revenue could be from new products, or do you not want to get that detailed?

Magid Abraham

We try to build our forecast mostly on a client-by-client and a segment- by-segment basis. When we get bottom up forecasts, people are really giving us a forecast of what they think their customer base or territory will be able to absorb. The secondary analysis that we do is what product area. I would be hard-pressed right now to tell you where the forecast for the rest of the year breaks down by product. But judging from the pipeline and the growing interest in the product we expect continued strong growth in many of these products.

Operator

That is all the questions in queue. Mr. Abraham I would like to turn the program back over to you for any additional or closing remarks.

Magid Abraham

I would like to thank everyone for listening to the call. As always we are ready to answer questions, both from the analysts that have the questions as well as investors who may be on the call and have additional questions. We look forward to the second quarter results.

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