ComScore Looks Worth the Wait

A late-summer IPO may pay off when trading heats up.
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All right, online investors.


, the Internet marketing research firm, has been studying online behavior for years. Now it's finally time to turn the tables and give ComScore a good close read.

Why? The company is dashing toward the public markets, and its prospectus is opening the company up to scrutiny. The good news is that the prospectus gives several encouraging signs that the stock will fare well in the longer run.

Co-managed by Credit Suisse and Deutsche Bank and bearing the


ticker SCOR, ComScore is expected to hit the markets next week, right before the sleepy market months of July and August bring things to a grinding halt until Labor Day weekend.

Since 2000, ComScore has used a multitude of online users, now 2 million large, who choose to install its monitoring software on their computers in exchange for things such as security software or a shot at cash and prizes. The strength of its approach is that it isn't despised spyware; its weakness is that it's self-selective, which is hardly ideal for accurate surveys.

But so insatiable is the appetite for data on who's going where online that ComScore, with its reputation as one of the top research firms, is in demand. Its revenue has been growing steadily and strongly, although the rate of growth has slowed.

After lining up -- and holding on to -- key customers such as


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, ComScore is bringing on more. Customer count stood at 743 at the end of March, up from 703 at the end of 2006.

ComScore is offering 5 million shares in an expected range of $14 to $16 each, putting it on target to raise between $70 million and $80 million. Tossing in the 750,000 shares that underwriters may opt to sell as well, the IPO could end up raising $92 million all around.

At that range, the company will be valued between $383 million and $438 million. Judging from the friendly attitude that the IPO market has had for tech companies going public with losses, a company such as ComScore stands a good chance of gliding through at the higher end of that range.

ComScore's revenue in 2006 grew 32% to $66.3 million. More important, at the operating level, the company moved from a loss of $4 million to a profit of $5.6 million. It posted a net profit of $2.5 million.

The company's income statement reveals that ComScore has an inviting profile: It has a history of losses coupled with a history of strong revenue growth. But for at least a year before the offering, it held on to revenue growth while paring back operating costs.

In 2005, ComScore's cost of revenue was equal to 36% of revenue, and its sales and marketing costs were equal to 38% of revenue. Last year, those ratios were down to 31% and 32%, respectively. That helped move operating costs from being 108% of revenue to 92%.

Judging from the first quarter of 2007, those trends are continuing into this year. Revenue was up 25% to $18.7 million. The pace of that revenue slowdown may become an issue in the longer term, but for now it's being more than offset by lower operating costs.

In the first quarter, cost of revenue fell from 34% of revenue to 29%, while sales and marketing costs dropped slightly from 35% to 34%. Cost of revenue at ComScore include networking expenses and the costs of recruiting and maintaining panels of surveyors. Sales and marketing include its salesforce as well as public relations activities such as conferences and reports, which are often followed closely in the press.

Two more encouraging signs in the prospectus: First, operating cash flow is on the rise. It rose to $10.9 million in 2006 from $4.2 million in 2005. In the first quarter of 2007, operating cash flow was $3.2 million, up from $2.8 million a year earlier.

Second, unlike recent IPO candidates such as


, the money raised is going to support the company's growth, not to line the pockets of pre-IPO investors. While it's a little curious that the company says it has "no specific plans" for the money, it will likely invest in capital spending and acquisitions.

CEO Magid Abraham and Chairman Gian Fulgoni, both founders, are each selling 144,000 shares as part of the 750,000 that underwriters have an option to sell. This will decrease their ownership of the company by a half-percentage point each to 6.3% and 5.1%, respectively. But the $68 million in estimated net proceeds will focus on ComScore's growth, the prospectus says.

In the sleepy summer markets, ComScore's IPO may begin on a weak footing, but if it keeps up its recent trends of improving profit and growing revenue, it should fare well later on.