Description

I think comScore (SCOR- $42) is a short.

1. Very high valuation, especially considering weak core revenue growth

2. TTM reported revenue growth doesn’t even look that great at 14% given the valuation, but in reality, core growth is even worse. Taking into account plummeting deferred revenue changes, acquisitions, and accelerating non-cash revenue, growth was only 5%

3. Deteriorating quality of earnings

4. I think 2. and 3. above mean that revenue and earnings will be disappointing in the future

5. High share based comp that accounted for 62% of management’s adjusted EBITDA figure for the last twelve months and heavy insider selling

Business Description

comScore provides digital audience measurement and advertising analytics. In the company’s words: “We deliver digital media analytics that help content owners and advertisers understand--and thus properly value--the composition of consumer media audiences, and we help marketers understand the performance and effectiveness of advertising targeted at these audiences.”

comScore competes with heavyweights Nielsen, DoubleClick (Google) and Atlas (Facebook) and WPP.  comScore also derives revenue from Google, Yahoo, and WPP.

Nielsen minces no words about who it competes with in digital, listing comScore as its “primary competitor in the digital audience and campaign measurement” area.

In light of that, I thought this quote from AdExchanger was interesting: “The general consensus in the TV/video arena is, ‘If we want to reach the true, Holy Grail of cross-device, de-duplicated reach and frequency, there’s only one company that has ownership of this currency and that’s Nielsen.’”

http://adexchanger.com/digital-tv/nielsen-comscore-at-a-cross-screen-measurement-crossroads/

And this:

http://www.mediapost.com/publications/article/222782/google-doubles-down-on-nielsen-brings-ratings-int.html

WPP

April 1, 2015 comScore acquired all of the outstanding common stock in WPP's internet audience measurement business in Norway, Sweden and Finland ("European IAM Business") and entered into an alliance in which the Company and WPP will collaborate on cross-media audience measurement business outside the United States (the "Strategic Alliance").

ComScore issued issued 1.6m shares in exchange for the European IAM Business and the Strategic Alliance. WPP also bought 15% of comScore, or 4.4m shares for $205m.

ComScore generated $4.7m of revenue from WPP from April 1 through September 30.

RENT

Last quarter comScore announced it is buying RENT, offering to exchange 1.15 shares of SCOR for each share of RENT. This values RENT at 6x ttm revenue and 83x reported ttm EBITDA.  The deal depends heavily on synergies. The discounted cash flow analysis in the S-4 resulted in an exchange ratio of 0.4 to 0.8x without synergies and 1.1 to 1.9x with synergies. RENT will represent 15% of the adjusted EBITDA of the combined companies. Deal expected to close in 1Q16.

Valuation

*I think SCOR’s organic/core growth is more like 5%.

**excludes impairments and loss on disposal for SCOR; without excluding these EBITDA was $8m lower

Management adjusts EBITDA to exclude several items, the biggest of which is stock based comp, which came to a whopping 62% of ttm adjusted EBITDA. Management’s adjusted EBITDA for the TTM period ending September 30 was $88.6m. I can barely bring myself to do it, but using this figure, SCOR trades at an EV/adj EBITDA multiple of 17x.

Since 2012 the company generated free cash flow excluding acquisitions of $200m. They spent about $175m offsetting share dilution from their generous stock comp, leaving $25m in free cash flow over 3.75 years for shareholders. So about $7m in FCF per year. Retained earnings are a negative $104m and getting worse.

Why would anyone buy SCOR at 64x reported EBITDA when you can buy GOOG at 19x? Especially when SCORs business is really only growing 5%. See below. Using GOOG’s multiple on SCOR’s ttm EBITDA (adding back impairments and loss on disposal) results in a stock price of $12.

Core Growth Decelerating Sharply, But That’s Not Apparent in Results

There are three factors that are serving to inflate reported growth, or lower its quality: 1) nonmonetary transactions in revenue, 2) revenue from acquisitions, and 3) drop in deferred revenue (see chart in next section).

For a company like this, I like to look at billings, or revenue plus the change in deferred revenue, on a trailing twelve month basis. I then adjust for acquisitions and other funny stuff, in this case removing the revenue from WPP and removing revenue from nonmonetary transactions, which is revenue for which the company will not receive cash. When Rentrak analyzed comScore’s financials, they removed these revenues as well.

This is reflected in reported revenue, but I think it interesting to note international revenue growth is declining rapidly. Some of this is obviously FX.

Deteriorating Quality of Earnings

Deferred revenue additions in the last twelve months were only  $3m. That’s down 62% from $8m added in the same year ago period.

Accrued expenses are declining as a % of recognized expenses. Had this ratio stayed the same as a year ago, EBITDA would have been $25.9m lower.

The company doesn’t break out accrued expenses quarterly. Following is the 2014 year end break out.

Share Based Comp and Management Incentives

Management wants you to ignore stock compensation expense: it excludes it from its adjusted EBITDA figure. But stock comp is of course a real expense to shareholders. The company spent $215m in cold hard cash since the beginning of 2012 on share repurchases that  mostly just went to offset shares issued under share-based compensation plans. Stock comp represented an egregious 62% of management’s measure of adjusted EBITDA for the last twelve months.

Management incentives were heavily aligned to boost revenue and adjusted EBITDA. The CEO’s incentive pay depended 50% on hitting a revenue target and 50% on an adjusted EBITDA target. Since EBITDA is adjusted for stock comp, management is not penalized for more stock comp. Most of the other executives’ incentive pay was 50 to 80% weighted on hitting revenue targets. The company hit 165% of its revenue target and 200% of its EBITDA target in 2014, resulting in the CEO getting paid $17m, $16.5m of that in stock and options awards.

Note the CFO left in April 2014.

Catalyst

Future revenues and earnings are disappointing