Earnings Call Transcript - SCOR Q4 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to the comScore Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Tinker.

John Tinker, Executive

Thank you, operator. Before we begin our prepared remarks, I want to remind everyone that the upcoming discussion includes forward-looking statements. These statements involve our plans, expectations, and prospects as of today, February 28, 2023. Our actual results in future periods may differ significantly due to various risks and uncertainties. These risks and uncertainties are outlined in our 10-K, 10-Q, and other filings with the SEC, which are available on our website and at www.sec.gov. We do not have an obligation to update our forward-looking statements based on new information after today's call. We will also be discussing non-GAAP measures during this call, and reconciliations have been provided in today’s press release and on our website. Please note that we will refer to slides during this call, which can be found on our website www.comscore.com under Investor Relations presentation Events and Presentations. I will now hand the call over to comScore’s Chief Executive Officer, Jon Carpenter. Jon?

Jon Carpenter, CEO

Thanks, John. and good evening, everyone. There have certainly been plenty of changes taking place in the environments where we compete, especially over the last year or so. And when I look back on the last year and in particular, the last seven or eight months or so since I've been the Company's CEO, we've continued to make changes to comScore to better position our company for profitable growth and to better solidify the comScore offerings for the future, and I'm proud of the progress we are making. It starts with building out a world-class team, and we've done that by adding to our already talented team and have added Greg Dale as our Chief Operating Officer; Mary Margaret Curry as our Chief Financial Officer; along with many others that ladder throughout the organization as a result of those changes, including the addition of Steve Bagdasarian, a very talented digital executive who we're excited to have lead Growth and Business Development for comScore. In addition, we made a bunch of really great progress executing on some key product deliverables that are super important to our growth going forward. We expanded key currency deals, delivered 48-hour TV data in every market. We're now the only measurement company to have this capability. And we rolled out the first major update to our digital product in many years. We launched innovation in CCR, where we are now able to deliver a cross-platform product with display and video, across desktop, mobile, linear and CTV all in one report. Our comScore TV product now includes millions of virtual MVPD households ensuring our product offering continues to capture all the ways in which we, as consumers, are engaging with content, including linear TV content, which commands more than 55% of the viewing and still a significant piece of the total advertising spend. And on top of it, we delivered solid results. We grew our top line and delivered $376 million of revenue that yielded $37 million in adjusted EBITDA and our highest margin rate in five years. We're focused on execution, building on our momentum, and I'm more excited than ever about what's ahead. Before we get into 2023, I'll let Mary Margaret jump in and take us through more specifics on 2022.

Mary Margaret Curry, CFO

Thanks, Jon. As Jon just mentioned, we had a great year and achieved growth in both revenue and adjusted EBITDA for 2022. Revenue for the full year was $376.4 million, an increase of 2.6% over $367 million in 2021. Adjusted EBITDA was $37 million, up 16.1% from $31.9 million in 2021, resulting in an adjusted EBITDA margin of 9.8%. When we look at revenue growth by Solutions Group, Cross-platform Solutions revenue grew 13% year-over-year from $145 million in 2021 to $163.9 million. This revenue growth was driven in large part by our local and national TV businesses, which grew nearly 26% and 13%, respectively, over 2021. We also saw growth from our movies business with revenue of $33.9 million, up 10.8% from $30.6 million in 2021 due to a rebound in the business as theaters reopened following the pandemic. Revenue from Digital Ad Solutions was $212.5 million, down 4.3% from $222 million in 2021. The decline was primarily driven by a few factors. In 2021, we recognized revenue related to a multiyear contract for digital measurement in Europe that did not recur again in 2022. Additionally, our Activation business was down nearly 15% from 2021, which we really started to see playing out late in the second quarter as the broader advertising market continued to soften. We also saw a bit of pullback during the last half of the year in our custom digital solutions, which tend to be discretionary and more bespoke in nature. We mentioned these trends in last quarter's earnings call, and you'll see that they've continued into the fourth quarter as we review those results. Total revenue for the fourth quarter was $98.2 million, up 1.8% from $96.5 million in the same quarter a year ago. Adjusted EBITDA was $12 million, down 3% from $12.4 million a year ago, resulting in an adjusted EBITDA margin of 12.2% for the quarter. Looking at the fourth quarter revenue growth by solutions group, Cross Platform Solutions revenue of $42.8 million grew 15.4% from $37.1 million in the fourth quarter of 2021. This growth was again driven by double-digit growth in our local and national TV businesses. Growth in our movies business began to level off in the fourth quarter, growing 1.8% year-over-year to $8.6 million since the majority of movie theaters have reopened in the fourth quarter of '21. Revenue from Digital Ad Solutions of $55.4 million was down 6.8% compared to $59.4 million a year ago. As mentioned before, this decline was primarily driven by the softening of the advertising market, which impacted both our Activation business and our custom digital solutions. We expect that macroeconomic environment may continue to impact revenue from these products as we move into 2023. Turning now to our operating expenses for 2022. In line with our expectations from last quarter's earnings call, our core operating expenses for the full year of $371.9 million came in flat compared to 2021. Looking at our core operating expenses for the fourth quarter, you can see the decline we'd expected as a result of our restructuring efforts announced in late Q3 as well as our continued discipline around cost management. Our core operating expenses came in at $87.9 million in the fourth quarter, down 5.4% from $92 million in the prior year. We're encouraged by the momentum that we're carrying into 2023 as we continue to focus on bringing more to the bottom line. With that, I'll send it back to Jon to talk about where we're headed.

Jon Carpenter, CEO

Thanks, Mary Margaret. Today's consumers are cross-platform, viewing whatever they want, whenever, wherever and however they want, which means as someone who leads a company that's trying to keep up with all the ways in which today's connected consumer is engaging with content and measure it completely in accuracy with speed and in ways that are easy to deliver, it's certainly a massive task. For one, the traditional way in which viewing happens largely via pay TV is definitely facing headwinds. That said, there were more than 80 million households with a pay TV subscription in 2022. While that's under pressure, by 2024 we're still talking about more than 75 million households or nearly 60% of the U.S. based on industry projections. This stat alone is one of the biggest reasons why comScore is differentiated. We have built the biggest, aggregated views of linear TV audiences across the largest portion of the viewing audience in the measurement game today, and man, we're glad we did. Others have tried for years without success. Others can certainly buy the raw material, but only comScore to date has figured out how to stitch it together and create a viable, currency-grade offering. Furthermore, not all linear TV viewing is shrinking. In fact, parts of it are growing and growing rapidly, with the rapid growth in virtual MVPDs. More than 11% of U.S. households had a virtual MVPD subscription last year, and that's expected to accelerate. At comScore, we see this trend and as of January, have included virtual MVPD viewing in our comScore TV offering. This viewing, along with traditional linear viewing is available on our comScore TV product today in all markets, available nationally and delivered within an industry-leading 48 hours. We also recognize that Connected TV viewing is a big piece of how we as consumers engage with content. And as more of that viewing becomes digital, we believe more of the ad spend will start to transact even more programmatically. In addition to our offerings on the linear side, we have a massive footprint on the digital side as well. To put this in perspective, we measure viewing on more than 2/3 of all connected TVs in the U.S. That viewing includes direct integrations with many of the major D2C providers across media as well as ACR technology. Our direct integrations with publishers give us a more accurate, stable and reliable view of the Connected TV viewer. As a result of the shifting ways in which consumers are engaging with their content across devices and platforms, keeping up with how to measure all of that across content and ads has become increasingly more complex. Clearly, traditional means of measuring the activity no longer hold up and media clients are demanding more. From our perspective, solving the challenge requires a couple of key things. First, scale. That is you have a scaled view of audiences across devices and across platforms. Second, interoperability, are you easy to work with and workflow and platform agnostic and finally, speed. Is your offering capable of producing a result in a reasonable amount of time that is actionable. At comScore, we're solving all three, which ultimately allows us to provide our clients with the most complete view of audiences regardless of device or platform for both content and ads. As I've alluded to throughout my comments, it all starts with our unmatched audience scale. We're measuring one-in-three U.S. households through our set-top box integrations. And through our partnerships, we have visibility into Connected TV viewing across more than 150 million screens. We have built a product that is differentiated. Not only do we have the raw material, but we've built currency-grade products that can be relied upon to transact billions of dollars in advertising. These are the inputs, if you will, into the most complete view of audiences in the market today. Again, having the raw material is different than knowing how to aggregate it and turn it into a product offering. At comScore, we've done both, which means, from our perspective, we are the Company that is best positioned to help our clients solve the challenges with today's measurement offerings. And we're doing it in a massive, addressable marketplace. The industry is projecting more than $400 billion of U.S. ad spend by 2024, with 2/3 of it addressable in nature. It's clear to me that the future is all about audiences, whether you're creating content or activating advertising against that content, you're trying to reach audiences. And at comScore, we believe we have the most complete view. It's not far-fetched to imagine a world in which all advertising is transacted digitally and that it will be done even more programmatically. Our ability to leverage our audience scale, be interoperable meaning we're platform agnostic to how our clients want to transact is a critical part of our strategy, and we have a massive digital footprint that can and should fuel the programmatic ecosystems. All of this adds up to meaningful short-, mid- and long-term growth shoots, including currency expansion across both local and national, which ladders nicely to our cross-platform offerings. We're also delivering on privacy for digital and programmatic solutions. And ultimately, what we've built extends beyond the current client base into new channels, think gaming and retail media networks. I'd like to think of an example of a national brand advertiser who's running a linear campaign across the top markets and a retail media network who are saying, hey, we can provide additional incrementality and performance if you ship part of the budget. Our data, the comScore footprint, across all markets can help that advertiser understand whether or not they actually got the incremental reach they were looking for and give them insights on how to adjust their campaign mid-flight across markets. That's an example of the power we've built. Look, retail margins are super thin and the role that measurement can play in helping determine the effectiveness of the dollars put to work can be incredibly impactful. On currency expansion, we've talked about our opportunity here starting with local. We've been crystal clear that this is a big opportunity. We grew by more than 25% in 2022 and have an installed base across the vast majority of the major station groups that command the bulk of local TV advertising. We estimate that just right now 20% of it is transacting solely on comScore as the currency, which means there's plenty of greenfield here for us to continue to grow, and we are laser-focused on unlocking that opportunity. Our priorities and growth drivers remain clear and we know what we need to do. Our path forward this year is consistent with what we have been sharing in the last couple of quarters, and we feel great about the momentum that's being built. We clearly talked a lot about our local story, but the reality is our capabilities extend far beyond local. The strength of what we've built supports our national business as well. In 2022, this part of our business grew 13%. We work with nearly all of the major network players, 85% of them subscribed to our offerings today. Similar to local, our national strategy looks very similar and our opportunity is equally as large. I look forward to sharing many of the exciting things that we have in the works across our client groups as we go throughout 2023. There's no doubt a lot of focused execution and product development is well underway that is in support of what we're talking about today. Our priorities are clear, the growth opportunity over the next 12, 18, 24 months is significant, and we're laser-focused on delivering for our clients and our shareholders. So look, our focus in '23 boils down and it's pretty simple, and it's building off of what we've done to date. It starts with currency and cross-platform expansion that builds on the foundation we have with our local and national clients and the progress that we've made. Second, we're also focused on growing our digital business, which includes accelerating our digital video and programmatic offerings. And finally, there is ample opportunity for us to expand our offerings to new channels, where we can engage the segments of the market that aren't directly thinking about traditional measurement at all but care deeply about reaching their target audiences across screens and platforms. So before I hand it over to Mary Margaret, from our vantage point, comScore is the only company with a complete view of audiences that is able to power the future of audience-based advertising and we are heads down focused on delivering and monetizing against that capability. With that, let me turn it over to Mary Margaret, who will share the financial profiles we're keying up for 2023. Thank you.

Mary Margaret Curry, CFO

Thanks, Jon. Based on current trends and expectations, we believe our total revenue for 2023 will grow by low to mid-single digits over 2022. As Jon just laid out, there are a number of factors driving growth in 2023, including our continued focus on currency expansion in local and national TV, the return of consumers to movie theaters following the pandemic, the continued growth of our predictive audience products as well as cross-platform and new channel opportunities. All of these are anchored by our proven, syndicated revenue model that provides a predictable, repeatable revenue stream. For adjusted EBITDA, we expect the margin rate to be better than it was for 2022, crossing into the double digits for 2023. We believe this will put us on a path to meet our goal of exiting 2023 with a 15% quarterly margin run rate, enabling us to generate free cash flow to reinvest in the business. With that, I'll turn it back over to Jon for closing remarks.

Jon Carpenter, CEO

Thanks, Mary Margaret, and thanks, everyone, for joining this evening and online. We've got a tremendous opportunity in front of us. And I couldn't be more excited about our growth prospects and the value we'll create for shareholders. Thank you. And operator, let's open it up for questions.

Operator, Operator

Our first question comes from Laura Martin with Needham & Company.

Laura Martin, Analyst

So my first one, Jon, is about time. So you guys have gone from like two weeks to 48 hours, which is a big job, and that's really impressive. My question is, is it enough? Because a lot of your new competitors are real time in the midst of the ad campaign. So do you need to continue to shorten that window?

Jon Carpenter, CEO

Thank you for the question, Laura. We always strive to find ways to be faster. We've received positive feedback from clients regarding our ability to deliver our comScore TV product in all markets within 48 hours, and we believe this generally meets the needs of most of our clients. Nevertheless, we will continue to seek improvements in speed, but we are pleased with the 48-hour delivery timeframe that positions us well in the market for the majority of our client base.

Laura Martin, Analyst

Okay. And then my second. Sorry, go ahead.

Mary Margaret Curry, CFO

One thing to note is that adjusting in-campaign ad measurement differs significantly from thinking about ratings; meeting real-time ratings is somewhat distinct from wanting to monitor a campaign. In our ad business, we are certainly adopting many real-time strategies. However, the rating aspect operates differently. To echo Jon's point, it's important to find the right speed for the appropriate product and use case.

Laura Martin, Analyst

Okay. My second question is about the product fee. I think it's great that you're incorporating ratings of the virtual MVPDs into the product, but it seems a bit late. This leads me to ask you, Jon, whether you think this company has truly prioritized product development. Am I mistaken about that? If not, how close are you to achieving the design speed and market readiness that you believe would make you competitive?

Jon Carpenter, CEO

Thanks, Laura. Greg, do you want to take that?

Greg Dale, COO

Sure. For comScore, one of the changes we're making with the management team that we've brought in is really getting us back to that product first and product-led mentality. I think in the past, comScore was known for innovating and really driving kind of changes in the marketplace. And that's a focus for us as we move forward in having the needs of the market and what we need to be driving from a product perspective come first. So I think you're going to see more of that and those types of changes coming as we move forward.

Operator, Operator

Our next question comes from Jason Kreyer with Craig-Hallum.

Jason Kreyer, Analyst

Jon, I wanted to go back to that 24-hour topic. So how does the benefits of this manifest in the business? Like does this allow you to do a better job of bringing in new customers? Or is this going to help with client retention? Or are there some other benefits that maybe we're not thinking about?

Jon Carpenter, CEO

Yes. Thanks, Jason. I mean, forgive me for the simple answer, but it really is all of the above, right? Speed matters across the board. And so everything that you just pointed out it benefits across the landscape for us from a client perspective.

Jason Kreyer, Analyst

And then maybe one for Mary Margaret, but on the expense side of things. Just as we move from Q4 into '23, should we assume there are incremental cost reductions from here? Or was most of that already absorbed in Q4?

Mary Margaret Curry, CFO

Yes. I think we're still looking at that. That's still a focus for us moving into '23. I think if you look at the restructuring plan that we put in place in Q3 of 2022, there's still a bit of work left to be done there. We're also, as we're moving forward, looking at ways to strategically continue to manage our costs, which are going to help us get to that increased adjusted EBITDA margin for 2023.

Jason Kreyer, Analyst

Okay. I would like to ask one last question for Jon. Can you discuss the current fundamental trajectory of the business? Additionally, how confident are you in fulfilling existing obligations on the balance sheet as you progress over the next couple of years?

Jon Carpenter, CEO

Jason, just to make sure I understand. Your first question is just around the growth profile of the Company. How do I feel about that, except the one being about the balance sheet.

Jason Kreyer, Analyst

Yes, it's all kind of wrapped together. I mean it seems like fundamentals are starting to trend a little bit more positively. As you look at the obligations you have against the preferred stock, how do you feel about those options that you have today?

Jon Carpenter, CEO

So look, I feel like we've got a better run company today than we've had in a long, long time. We are laser-focused on growing both the top line as well as creating a more profitable company going forward. And both of those things fuel cash flow generation that's going to go back into the business and allow us to reinvest in areas where we want to invest that are going to move us forward. And so I feel, overall, I feel really, really bullish on where we've come from and where we're headed.

Operator, Operator

Our next question comes from Matthew Thornton with Truist.

Matthew Thornton, Analyst

Maybe two, if I could. Going back to the prior conversation around the way to think about linearity around margins in '23, I think you talked about aspiring to that 15%-plus exit rate for the year. Obviously, we just did about 12% in the fourth quarter. Should we extrapolate the 12%? Or is there some linearity that we need to think about from a cost and margin perspective as we think about '23. And I guess just related to that, Mary Margaret, you talked about free cash flow in '23. I think you alluded to that being positive. Is there some type of conversion that you're working towards when we think about adjusted EBITDA conversion to free cash flow. I guess that would be the first question.

Jon Carpenter, CEO

I’ll take the first question, and Mary Margaret can add in later. From a competitive standpoint, we believe our company is well-positioned. We see ourselves as having the most comprehensive understanding of audiences within this ecosystem, which prepares us well for the future direction of the industry. Although we will encounter other competitors with their own solutions, we are confident in our position and feel that the completeness of our offering significantly distinguishes us from our competitors.

Mary Margaret Curry, CFO

Yes, that's correct. I believe you should consider historical trends. It's true that although we finished the year with a 12% margin in Q4, that doesn't indicate where we will likely start Q1, given the cyclical nature and timing of our business operations. Regarding free cash flow generation, we are aiming to reach a point where we can generate a substantial amount of free cash flow to reinvest in the business. We experienced some free cash flow in 2022, which contributed to our restructuring efforts in Q3 and Q4. Achieving a consistent 15% run rate by the end of 2023 is crucial for us, which is why we are so focused on this goal.

Matthew Thornton, Analyst

Okay, that's helpful. Maybe I'll sneak in one more question before I return to the queue. Jon, you mentioned the macro impact on the business, especially concerning some of the transactional and project-based revenue. Can you remind us if the cost rationalization program had any effect on revenue? Specifically, were there any product lines or markets that were eliminated that we should consider when reflecting on the long-term revenue base? Is there anything you would highlight regarding that?

Jon Carpenter, CEO

No. The actions we've taken haven't affected the top line. Our approach for the rest of the year focuses on resource allocation and optimizing our technological architecture and infrastructure according to our established priorities. That’s our main focus, and our cost initiatives are centered around this goal. We aim to scale more profitably, and the actions we've implemented are aligned with this objective. The initiatives you’ll see throughout 2023 will reflect this broad goal.

Operator, Operator

Our Next question comes from Surinder Thind with Jefferies.

Logan Schuh, Analyst

This is Logan Schuh on for Surinder. Going back to your 2023 guide of low to mid-single digits, I was just wondering how the growth cadence looks throughout the year, if it's going to be more second half or kind of consistent throughout?

Mary Margaret Curry, CFO

Yes. I think that you'll see more weighting of that growth in the back half of the year for sure.

Jon Carpenter, CEO

I would add that when considering the ad-supported aspect of our business, it tends to grow over the course of the year. In the first quarter and early part of the second quarter, we experience a quieter period, but that side of the business will begin to increase throughout the year. Our syndicated TV products generally remain stable year-round. The fluctuations we see each quarter are primarily driven by custom work we provide for clients, which can lead to some variations from one quarter to the next. However, the syndicated TV offering remains quite stable throughout the year, in contrast to the digital side, which has growth patterns influenced by the cyclical nature of the ad market.

Operator, Operator

Thank you. And that concludes our Q&A session. I'd now like to turn the call back over to Jon Carpenter for any closing remarks.

Jon Carpenter, CEO

All right. Well, look, thanks, everybody. We really appreciate the time, and we look forward to talking to you all soon. Thank you.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.