Description

Comscore is a forgotten equity that has largely been univestable for most institutional equity investors since its recapitalization with the issuance of $204M in 7.5% convertible preferred stock in 2021.  The company has since suffered from poor governance issues and its equity capitalization has declined to below $100M pushing it out of all major market indexes.  I believe the company’s business has reached an inflection point where its fundamentals are improving to a degree that is creating tremendous equity value above its $204M in 7.5% convertible pfd stock and ~$30M in additional deferred preferred dividends.  The improvement is creating an incentive for preferred holders to eventually convert their preferred into common stock at some discount to the $2.47 pre split or $49.40 post split conversion price. 

In addition, the preferred holders also have a right to call for a one time special dividend in the current amount of $45M that is declining every year at $15M per year. The dividend may only be requested and paid if the company can reasonably pay it by borrowing at a “non distressed rate” according to the preferred language.  The earliest the company could do that is probably early 2025 at which point the amount would be down to $30M.  The company will likely have to compensate the preferred holders some amount for this dividend and roll it into the face amount that will be converted into common equity. Clearly, there is dilution coming in my opinion. However, at current prices under most reasonable scenarios common shareholders should do very well from current levels.

What is Comscore?

Comscore is an ad measurement company that competes in a duopoly market for traditional advertising media with Nielsen and also competes with a number of ad tech startups in the growing digital advertising market.  The company has an enormous trove of data that it collects and through its analytics delivers valuable solutions for a variety of clients.  I believe its data across platforms that include local TV, national TV, online, social media, and IoT data, provides a strong moat around its ability to deliver solutions to a diverse range of customers including:  local and national TV broadcasters and content owners, cable companies, mobile phone operators ISPs, social media platforms, ad tech platforms such as Trade Desk, ad agencies, large brand advertisers targeting consumers (CPG, auto etc), movie studios and movie theaters and some smaller verticals.  This is a great visual of its deep customer base.

The business is broken into two segments:

    Digital Ad Solutions provide measurement of the behavior and characteristics of audiences across digital platforms, including computers, tablets, mobile and other connected devices. This solution group also includes custom offerings that provide end-to-end solutions for planning, optimization and evaluation of advertising campaigns and brand protection across digital platforms, including transactional outcome-based measurement driven by our Activation and Comscore Campaign Ratings ("CCR") products.

    Cross Platform Solutions provide measurement of content and advertising audiences across local, national and addressable television, including consumption through connected (Smart) televisions, and are designed to help customers find the most relevant viewing audience whether that viewing is linear, non-linear, online or on-demand. This solution group also includes custom offerings that provide end-to-end solutions for planning, optimization and evaluation of advertising campaigns across platforms. In addition, this solution group includes products that measure movie viewership and box office results by capturing movie ticket sales in real time or near real time and includes box office analytics, trend analysis and insights for movie studios and movie theater operators worldwide.

Inside these two segments are a number of smaller segments.  The complexity in the company’s various businesses makes its business difficult to analyze in terms of what is growing and what is shrinking.  The lack of clarity in presenting its business and the difficulty for non industry specialists to understand its products, creates an additional hindrance to gaining investor attention.  The company is trying to improve the presentation of its various segments to investors but as can be evidenced by its conference call, even sell side analysts who have followed it for years have trouble understanding the various levers in different products driving revenue performance.

Revenues last year declined as the company saw declines in its custom solutions business and linear TV networks business.  Both these units are clearly exposed to the secular decline in linear media and the weaker macro environment for traditional media companies.  This weakness masked the company’s expanding cross platform business where it has a strong edge over newer pure ad tech solutions that lack cross platform ability and don’t have nearly the same depth of data that the company does.  In 2024 the company is expected to overcome continued weakness in those segments and resume top line growth.  The top line growth will be driven by its cross platform digital business along with its very strong local TV/digital business where its breadth of data is second to none.  

In 2023 Comscore saw revenue decline yoy by 1.3% to $371M.  It now expects to start growing again and the midpoint of 2024 guidance has revenues growing a modest 3% yoy.  The company is in the middle innings of a significant tech spend to improve its tech stack.   Despite the significant spend after years of neglect, it still managed to cut costs by 5% in 2023 and improve EBITDA margins to 12% or $44M.  It expects to continue to increase spend this year by $5-$8M and gave 12-15% EBITDA margin guidance.  I believe the 3% top line guidance and especially the EBITDA margin guidance is sand bagged after mgmt missed its initial top line guidance in 2023. The company is also trying to renegotiate an unprofitable data licensing agreement with Charter that was signed along with the preferred investment. (It is paying Charter more than $10M per year). The potential savings here could be at least $3M per year which would all drop to the bottom line.  (A successful resolution to this dispute could be prerequisite towards fixing the balance sheet).

The company has two businesses that I believe warrant special mention:  its monopoly box office data business and its growing tech businesses Proximic and CCR.

1. The box office unit is a stand alone business that operates as a monopoly with revenues in the low 30’s millions range and EBITDA margins of about 30%.  This business is non core, throws off a lot of cash, and does not have any synergies with the remaining businesses.  In time, if a strong bid of say 10-12x EBITDA emerges, I believe this business can be sold for $100-$110M.  At this point there is little incentive to do so until it can fix its capital structure and governance issues.

2. Proximic and CCR are its fast growing cross platform tech offerings that are doing about $40M in revenues and grew 34% in 2023 accelerating to 50% growth in Q4 yoy growth.  These two businesses are likely to keep growing at more than 35% again this year with upside to that.  Margins in these businesses are also much higher than its more traditional businesses.  The company is taking share from startups such as VideoAmp who were growing rapidly through unprofitable operations and are now near insolvency. Comparably growing and profitable businesses such as DV are trading at ~8x revenues.  Looking forward to 2025 this business could be at a $75M run rate or higher.  At 8x revenues it could be worth more than SCOR’s current EV of ~$330M (including $30M in deferred pfd dividends).   

Addressing Capital Structure - Elephant in the Room

Before Comscore common equity can become investable in the public market again its governance and capital must be fixed.  That is, we need common and preferred to be fully aligned.  

Status quo - A common shareholder who commits equity capital to Comscore through common share purchase is not getting representation in determining his or her pro rata share in the company’s strategic direction or economic returns due to the preferred shareholder control of the board of directors.  In connection with their preferred equity investment of $204M, Charter, Liberty Broadband, and Cerberus each received 2 board seats or 6 of 10 total board seats.  Each owns exactly a third of the preferred (Cerberus also owns a 2% equity stake).  Through their board majority they can direct the company in any direction they choose. As such, why should anyone commit capital to common equity if their ability to direct the company’s future, in proportion to their stock ownership, does not exist.  Clearly, if the company is to regain fair value in public markets this structure needs to be fixed.  Fortunately, there is an avenue for pfd holders to convert their shares into common at $49.70 a share.  The conversion price is dramatically higher than the current market price making any conversion a seeming pipe dream.  However, I believe the current equity price is illusory as its tiny market capitalization and governance issues have made price discovery here largely non-existent (The current share is particularly depressed as it has fallen 20% in a week after its second largest holder , Weiss Multi Strat, announced it is shutting down its fund and liquidating).  This is a convenient belief of course given my common equity holding and I offer the following “analysis” to show why I believe this to be the case.

In my view, if the company achieves the midpoint of its revenue guidance this year and hits the midpoint of EBITDA margin guidance it will have ~$53M in 2024 EBITDA (I believe they will come in higher on both ends).  The company will be completing its heavy tech stack investment cycle this year and operating FCF conversion should soar to 70% later this year and higher in subsequent years. If these what I presume to be modest targets are met, I believe 10x EBITDA should be a fair multiple for this business.  This is fair given Comscore’s strong market position and largely irreplaceable trove of valuable data.  At 10x EV/EBITDA or $530M, the implied equity value, assuming $235M in pfd debt is ~$61 per share on a 4.8M share count.  

If the company continues to show 2025 growth, which I believe it will, we can see a path to $65M+ in EBITDA in 2025 as margins continue to improve due to better business mix and tech spend normalization.  At a 10-12X EV/EBITDA multiple we would have a $650M-$780M EV.  The point of looking out to 2025 is to illustrate potential value, especially as it pertains to the value of the conversion option by preferred holders to common shares.  In the status quo, preferred holders are holding a 7.5% debt security, which is below market rates at this point in time.  The only way to realize a higher return on their investment is to facilitate the improvement in the company’s value and to convert into common equity to capture that increase in value.  

Converting $235M ($204M in face and $30M in deferred divided) into shares at $49.70 contractual right would result in the issuance of ~4.7M shares thereby increasing shares outstanding to ~9.6M.  At a $530M valuation those shares would be worth ~$55 each or cumulatively $259M in value vs. $235M in face value.  At a $650M EV those shares are worth $318M or a 35% gain from $235M in current face amount.  This exercise clearly indicates the only way for preferred holders to achieve much better rates of return is to eventually convert after creating room for the company to grow by deferring dividends.  This to me shows that preferred holders are aligned with common holders in the long term.

The above exercise would be the best of all world’s for common shareholders but is not realistic in my opinion.  The preferred holders hold the right to the special dividend and given the very low stock price they should be able to drive a conversion at a lower price vs. the $49.70 contractual right.  If we assign $25M in NPV to a potential special dividend and add that to $235M in preferred debt, we have $260M in theoretical face that has to be converted. I believe a reasonable range of conversion prices is $35-$40 ($1.75-$2 pre split).  At those levels the implied equity dilution works out to ~6M-7.4M shares.  The fully diluted share count in this scenario rises to 10.8M-12.2M.  The implied per share equity value at these share counts and a $530M EV works out to $43 - $49 this year and potentially much higher in 2025 depending on growth.  At the high end of dilution the value of the common shares issued to preferred holders (7.4M) would have a value of $318M vs. $260M in “full face value” (includes NPV for potential special dividend).  This is a 22% gain from current value which in reality in the current structure is too high for pfd holders because they can’t force the payment of the special dividend with the pfd debt at the top of the capital structure.

Conclusion

The aforementioned scenario illustrates that the choice is clear for preferred holders - convert to common but drive the lowest conversion price possible.  In my view, given the incontrovertible improvement in the business in the past 2 years, we are now aligned with preferred holders and the only question is when and at what price will convergence to one class come.  Independent directors supposedly representing common holders led by Bill Livek should be driving for the highest conversion price possible.  The potential addition of Matt McLaughin as a director nominated by activist investor 180 Degree Capital would be a welcome added protection for common holders aside from adding a veteran tech industry veteran to the board.  

Catalyst

Renegotiation of Charter Data Agreement

Preferred stock conversion to common equity