YouGov — Data: the connecting currency

YouGov’s interims for H119 showed strong revenue growth of 18% (+10% underlying), with an improvement in adjusted operating margin from 16% in H118 to 19% as the group’s syndicated data model started to demonstrate its value. Cash at the period end was £25m (there is no debt), with deferred earnout consideration assessed at £16m, which we model at £7m for FY20. Our estimates are unchanged at this juncture.

With the interims in April, the group set out its new five-year growth plan. The previous five-year plan (described on page 7, below) draws to a close in July 2019 and the two plans overlap to avoid any ‘cliff-edge’ in performance. The KPIs outlined will form the basis of the long-term incentive plan (LTIP) targets to incentivise senior management through to FY23. These are to:

These are self-evidently demanding (as were those for the prior plan) and our forecasting basis is more circumspect.

YouGov is an online market research and data analytics business, with clients and operations around the globe. It has grown through a combination of organic development and acquisition, with organic growth dominating in recent reporting periods. It now has one of the top 10 global market research networks, with 31 offices in 22 countries and a panel of over seven million respondents in 42 countries around the world. These individual panellists generate data roughly equally from surveys and from information volunteered: likes, dislikes, habits and behaviours, either directly or through their interactions with websites and on social media. This data set is at the heart of YouGov’s offer, and is all attributable to identifiable individuals by YouGov in its data sets but is obviously aggregated and anonymised in the data supplied to clients. This is the key differentiator, as the data are connected in ways not achievable through conventional survey methodology. Rich data from this sizeable sample of panellists now covers more than 200k variables. These have been compiled into a proprietary multidimensional database, or ‘connected data library’, known as the YouGov Cube. All data are actively volunteered by panellists who give their explicit permission, giving very clear compliance with the General Data Protection Regulation (GDPR) in Europe, and conforming with other data protection and data privacy issues.

Started in the UK in 2000, the group has grown well beyond its domestic market and broadened out considerably from its initial best-known political polling activities. The current client base is diverse in terms of verticals and geographies, but mostly falls within three categories: media owners, media agencies and brand owners. The largest proportion of revenue is now generated in the US, the world’s largest market for market research (see Exhibit 2 below for a full geographic breakdown). From inception, YouGov had an online-driven business model and an innovative culture that looks to exploit the value and actionable information inherent in the data it collects and supplies to clients.

YouGov has over 2,000 clients across a wide variety of verticals, including FMCG, financials, technology and marketing services. It has developed a set of tools and services aimed at these brand owners and marketing agencies that help inform their planning and implementation decisions through the data gleaned from its panellists around the globe. YouGov reports its financial results in three components: Data Products (centred on BrandIndex), Data Services (centred on Omnibus) and Custom Research. It also discloses segmental profits by geography, clearly showing the importance of the US operations in driving the financial performance.

YouGov’s products and services are driven off the panellists’ data, which is broad and deep, with constant review of what other elements can be added and is drawn from their interaction with online surveys, online on the YouGov website/app and through passive tracking from those panellists who have opted in. This is single-source, connected data, covering aspects such as demographics, attitudes, lifestyle, brand use and perception, issues and interests and personality. It is collated and stored within a multidimensional data library, the YouGov Cube.

YouGov has also developed an analytics platform (now wholly owned), which it terms Crunch. It has been designed to be easy to use and flexible and, importantly, also allows clients to import third-party datasets.

The segment is currently reported as Data Products, but management has indicated that future reporting will be under the banner Syndicated data, which should be a clearer description (being created once, used many times).

BrandIndex is the group’s flagship service daily brand health tracking product. From £8m of revenues in FY14, it delivered £23.7m in FY18 and grew a further 23% in H119. The US is its largest market and customers range from Amazon to Bank of America and Viacom. It enables clients to benchmark against their competitors and across categories and assess the impact of unforeseen events. It now covers more than 13k brands globally. Profiles was launched more recently, achieving its first revenues in H215. It is an audience planning and segmentation tool, now running in 19 countries, with three more planned this financial year. It delivered revenues of £6.6m in FY18 and £4.9m in H119, up 66% on the comparative period. Profiles enables clients to identify specific audiences and target groups and understand their lifestyles, opinions and preferences, with the objective of planning media campaigns to have the greatest impact. Clients have now all been migrated to the Crunch platform to allow for increased integration.

These two products are increasingly being delivered together in a combination known as Plan & Track as a syndicated subscription, now available in 19 countries. Campaigns can therefore be planned, activated through integration with client/agency platforms, then tracked, making it a powerful proposition.

The balance of segmental revenues comes from the new Sports Index and add-on solutions for subscribers such as YouGov Audience Data.

Data Services will be the other reporting segment, combining the existing data services and the custom research business. Over the last two to three years, the nature of the custom business has been realigned to integrate it with the syndicated data already available within the group and to have the outputs delivered in Crunch. This has meant some blurring of the boundaries over what is custom research and what is a data service (£1.6m of revenue was reallocated from custom research to Omnibus in H119).

Omnibus is the group’s online, fast-turnaround survey service. It has grown its revenues from £10.7m in FY14 to £25.6m in FY18 and delivered particularly strong growth of 35% in H119, boosted by the additional revenue referred to above plus that from acquisitions. It has over 1k customers globally and is market leader in the UK. Its international panel and capability is increasingly attracting multinational clients, looking for multi-country, high-quality studies. Named clients include Dentsu Aegis, eBay, Lidl, Sony and Vodafone.

Custom Research has often been characterised as the cumbersome, commodity/lower-margin, lower-growth part of the business (and the industry). The scope of the work carried out varies greatly, from one-off studies, through heavy-duty, large-scale tracking studies for individual clients to syndicated studies for multiple clients. YouGov has been moving to differentiate its offering through using the connected data that it already has access to within the Cube data resource and delivering the output through Crunch. Increasing integration with the syndicated data is leading to a more heavily engineered solution and a marked step up in operating margin. In FY14, custom business generated a margin of 14%. By FY18 this had increased to 24%.

Management has identified ‘three strategic pillars’ that will underpin the new five-year plan described below. These are Integration, Public Data and Activation.

Integration relates, as described above, to fully integrating the custom research offering with the proprietary data and toolkit, with a heavy emphasis on tracking studies. Further, it also encompasses technological integration and client service, so making the YouGov element more central to the clients’ internal processes.

Activation involves taking data and using it to drive advertising campaigns. It creates targetable audiences for advertisers – a process that has traditionally been separate from research used to understand markets and plan campaigns. YouGov has developed a solution that allows advertisers to buy scaled ‘lookalike’ audiences based on the characteristics of its panellists. It is now moving to the next stage, giving advertisers the ability to interrogate panellists’ opinions and data directly (through YouGov Direct). This is only possible because these panellists will have permissioned each specific use, via their own dashboards, with accountability enabled through the YouGov blockchain encryption process. YouGov Direct has undergone successful pilots with encouraging feedback (click-through rates were four times the average for equivalent campaigns, with high conversion rates) and outputs in H119, with a second trial having commenced in February 2019 with six major advertisers participating. Full launch is expected in H219.The Public Data element addresses the question: what is in all this for the panellists? Panellists will participate partly for financial gain (although rewards are relatively modest), and partly to feel ‘heard’ when the results of surveys that they have participated in appear and generate coverage in the public domain. YouGov’s brand strength, reputation and media relations ensure that media mentions are well ahead of UK competitors and are growing strongly in the US, which helps recruit and engage panellists. Management aims to increase the utility of group data in the public sphere by making the website a destination in its own right to determine public opinion. https://yougov.co.uk/ratings/overview/popularity is the starting point for this exercise, with the objective of becoming ‘the Wikipedia of opinion’, using all Cube data.

The new five-year growth plan sets out management’s ambition to become the world’s leading supplier of proprietary panel data, with the largest (and most engaged) panel. It aims to be used by every public-facing company and organisation as well as being used as a resource by the general public as a ‘Wikipedia of opinion’.

The targets for the new LTIP through to FY23 are to:

It is not specified that these targets should be achieved by organic growth, so acquisitions may form an element of the top-line growth, but with any dilution tempered by the inclusion of an EPS target. These are to be the targets tied to the LTIP for incentivising senior management, the details of which are currently being settled, but which will also include detail on personal objectives for the executive directors in addition to the corporate targets.

The earlier LTIP (2014), now approaching the end of its term, was both generous and demanding, requiring 25% five-year CAGR in adjusted EPS to pay out in full (ratcheted at lower levels of growth), subject to five-year average operating margin having been over 12%.

We would anticipate that the conditions for vesting for the new proposed scheme will also be challenging.

The bulk of YouGov’s historical growth has been through organic means, which has suited the model, based around own-panellists’ data. Over recent periods, there have been more opportunities to supplement this through modestly-sized acquisitions. There are three areas identified – new technologies, geographies and specialisms (including specialist panel) – that would work to leverage and extend the existing product and service set. The following completed deals all clearly fit within this remit:

Prior year acquisitions added £5m of revenue and £0.1m of operating profit for the six months to 31 January 2019.

As the business continues to scale globally, the cost of investment in technology and panel – as well as overheads and sales resource – will decrease as a percentage of the whole. The group has put in place group ‘centres of excellence’ for technology (in Warsaw) and for panel and data operations (Bucharest and Mumbai) that have allowed for standardisation as efficiency improves. Data operations overheads reduced from 5% of group revenues in FY13 to under 2% in FY19. The next stage is set to involve:

Stephan Shakespeare is a co-founder of YouGov and returned to the role of CEO in 2010, after a period as chief innovation officer. He has a clear understanding of the product base and its commercial potential. He refocused corporate strategy back on exploiting the group’s core research and delivery strengths. Alex McIntosh is group CFO, replacing Alan Newman who retired in December 2017, having previously been chief strategy officer. Alex has been at YouGov since 2007 and was initially corporate finance manager before taking a leading role in strategic planning and innovations, working alongside Stephan. He led the development of YouGov Profiles, the media planning and audience segmentation tool launched in 2014. The executive team is completed with Sundip Chahal, chief operating officer. He has been with the group since 2005, when he joined YouGov’s UK Data Products & Services business, having previously worked for Ipsos and Research International in the UK. In 2007, Sunny became UK Head of BrandIndex and Omnibus, and in 2010 was appointed CEO of YouGov’s Middle East and North Africa region, overseeing the development of the Asia Pacific business after its acquisition in January 2014.

There are six non-executive directors, with well-known media figure, Roger Parry, in the chair.

The market research industry is estimated to have been worth $45.8bn in 2007 (source: Statista), the latest year for which figures are available. The US remains the largest market, at around 45% of the total, with Europe accounting for 35%. The top dozen market research companies accounted for over half of total industry spend in that year, with Nielsen the largest by some way, with published revenues of $6.6m.

At the bottom end of the market, commoditisation has continued as more market research has migrated online and as tools and resources have become increasingly available. With automation also helping to drive down pricing for basic product, the focus for driving industry profits has increasingly moved towards adding value by making the outputs as relevant and usable as possible for those commissioning them.

The largest competitors – although business models are differentiated – would be US companies such as Gartner, ComScore, Forrester and Nielsen and European groups, including Ipsos and Kantar (WPP). YouGov’s business is increasingly focused on marketing activities and increasingly built into its clients’ workflows, giving it a greater degree of differentiation and resilience. Long-term tracking studies are particularly ‘sticky’, due to the history that is built up, and can be impossible to replicate. The group’s connected dataset and panel resource also give it flexibility and an advantage in the time taken to commission more traditional research studies.

As well as the changes in the market backdrop outlined above, the following factors may also come into play:

We have looked at YouGov’s valuation in the context of a range of global peers. The shares have performed well over the year to date and continue to hit all-time highs. The share price has climbed from 119p five years ago, a CAGR of 34%; +25% over 10 years. There has been a wide range of share price performance across this peer set, reflecting their varying business models and differing spheres of operation. YouGov’s rating is clearly at a premium to the peer average but remains just within the range on EV/EBITDA multiples. We note that YouGov’s last reported EBITDA margin is visibly above the peer group average.

We have also looked at the share price on a reverse DCF basis, varying the medium-term growth assumptions and the EBITDA margin, fixing the WACC at 7.0% and using a terminal growth rate of 2%. The current share price of 526p indicates that if the EBITDA margin were not to advance over FY21–26e ahead of the 19% that we are forecasting for FY19 and onwards, then FY21–26e top-line growth would be running at 16.6%. Revenue growth over the five years to our forecast FY19e was at a CAGR of 15.8%.

It is worth bearing in mind that the revenue target CAGR under the new five-year plan is 19% and the objective is to double adjusted operating margin; that medium-term CAGR would imply an EBITDA margin of 18%, the level that we are modelling for FY20 and implying no further expansion. If the EBITDA margin were to increase to 25% in the medium term, the implied valuation would increase substantially, to over £8.

Our April update note commented on the H119 results, which showed a strong trading period, with 18% revenue growth (10% underlying). This is a blend of +34% from Products & Services with +4% from Custom. More notable, though, was the step-up in adjusted operating margin from 16% in H118 to 19% as the syndicated data model starts to show its value. We made minor adjustments to our numbers at the time and there is no further change at this juncture.

YouGov has an enviable long-term record of revenue and EBITDA growth, which has been predominantly achieved through organic means. Since FY10, revenue has increased 164% (a CAGR of 12.9%) and EBITDA margin increased from 10.3% to 21.0% as the business has scaled up, investing in product and improving operational efficiency.

We currently model on a divisional basis, between Data Products, Data Services and Custom Research in the manner that the group has presented itself over recent years. As the boundaries become more blurred, with increasing integration of other tools into the more traditional Custom business, the group is planning to change the disclosure to segment between Syndicated Data and Data Services. YouGov Plan & Track (ie BrandIndex and Profiles in combination) will be the main element of the former; Omnibus and Custom Research will be presented together as Data Services. On this basis, the FY19e revenues would split roughly 30:70 Syndicated Data: Data Services, while operating profit splits nearer 40:60, with segmental margins of 38% and 25% (before central costs) respectively.

With multi-year syndicated BrandIndex/ Plan & Track subscriptions, dashboards incorporated into client workflow and a growing proportion of Custom Research being in large-scale tracking studies, the level of recurring and repeatable business continues to build (although this is not a proportion disclosed as such). Deferred (subscription) income at end FY18 was £12.5m, up from £10.7m at the close of the prior year.

In the short term, margin growth is constrained by the need to invest in technology and panel but also in sales and marketing. The new five-year plan, though, includes a target to double adjusted operating margin. There are several keys to driving the operating margins forward, but at the core, it is all about engineering the data, integrating and delivering it through the universal platform outlined above. This is particularly true of the custom business, increasingly using the syndicated data already available within the Cube. Having one analytics system, Crunch, also greatly increases the efficiency in the system. With the elements of the Cube and Crunch now in place, management is placing greater emphasis on its clients, putting in place global key account management, some of whom are already employed within the group to grow its larger, global accounts.

Changes to definitions for adjustments

To date, management has excluded amortisation of intangible assets charged to operating expenses and separately reported items from its adjusted operating profits. From the reporting of FY19, this will be changed to include amortisation of intangible assets charged to operating expenses and share-based payment charges where relevant. This is an appropriate change and should answer some previous external criticism and make it easier to reconcile the published numbers with market forecasts.

In FY18, YouGov generated cash flow from operations of 119% of adjusted operating profit (FY16: 130%, FY17:130%), giving it a five-year average cash conversion of 123%. The growing level of subscription-based income is also increasing the deferred element of those annual subscriptions, benefiting the working capital position. The group continues to invest in its software and in its panel. Our forecast for the current year is for capital expenditure of £10m, up from £8.2m in FY18, with a slightly lower level of £8.8m anticipated for FY20e. Investment on internally generated software was £2.3m in H119 (FY18: £3.9m, FY17: £3.4m, FY16: £2.6m). The other major component of capex is panel recruitment, at £2.2m in H119 (FY18: £2.8m, FY17: £3.5m). Ensuring the panel is an appropriate size and in its constituents is crucial to be able to deliver the timely and robust data in each territory, so there will be a need for higher levels of spend, particularly when moving into new geographies, or ahead of specific events, such as the US mid-term elections.

Strategic acquisitions are also on the agenda. To date, these have incurred modest upfront costs but are already making a notable contribution to revenue, lifting the first-half organic growth from 10% to a group-level advance of 18%.

In FY18 £0.9m was spent and a further £0.2m in H119, with short-term contingent consideration of £6.2m and longer-term contingent consideration of £9.8m shown on the half-year balance sheet. We are forecasting spend on acquisitions of £4.5m in FY19, with £7.0m earmarked for FY20, reflecting the timing of payments.

With the strong financial position, the level of dividend cover has been reviewed by management and reduced from 6.3x to 5.4x (on adjusted earnings), giving an increase from 1.4p to 2.0p. With the forecast growth in earnings, the dividend should also increase in both our forecast years.

As at the half year, the balance sheet had £25.0m of net cash (there is no debt), down from £30.6m at the year end. In the six months, though, the group spent £2.3m on acquisitions, a similar amount on continuing development of the technology platform, £2.2m on panel recruitment and £2.2m on property, plant and equipment. The total deferred consideration payable on future earnouts now stands at £16.0m, which is clearly very comfortably covered by operating cash flow.

Our modelling indicates a cash balance of around £31m at end FY19e, rising to £33.5m by the close of the following year despite acquisition spend of £4.5m, followed by £7.0m and share buybacks of £3.2m in FY19e followed by £1.5m in FY20e.