YouGov — All about the data

YouGov has expanded from being an online market research company to one with a broad range of data products and services, with underlying data sourced from its own panel of around five million people across 38 countries. This is a clear distinction from much of the industry and enables the group to work with connected data that provide far richer and more complex outputs. The panel is highly engaged, constantly feeding opinions, observations, enthusiasms and objections into a multi-variate database known as the YouGov Cube. The relationship with the panel also fits well with the tightening data privacy regimes globally, which may compromise other business models. The growth strategy centres on growing the data products and services and orienting the custom research business to use more own-panel data and increase the proportion of long-term tracking business in the mix. The members of the management team are highly experienced, with the incoming CFO having been with the business since 2007.

The share price has performed strongly both recently and over the last five years. This has reflected the improving quality of earnings and the lengthened record of management delivering against market expectations. The current rating is at a premium to the peer average but remains within the peer group range. A DCF shows that the current share price is underpinned, assuming operating margins cap out at FY19 forecast levels and top line growth in FY20-25 moderates to 7%. Any improvement on these assumptions would imply further possible uplift.

The market research industry has changed substantially over recent years while YouGov has an advantage in having started as an online business and therefore had no need for a digital transition. The introduction of tighter data protection regulation may also bring changes and disruption to the industry while providing an opportunity to businesses such as YouGov, whose data is obtained on a “permissioned” basis from its panellists. Data governance will remain an important factor and technological robustness is a prerequisite. With an increase in geographic diversity, there are currency sensitivities as well as geopolitical risk. YouGov’s recent strong growth has principally been driven by BrandIndex and Omnibus, as planned. The timing of investment in further data applications and of their gaining traction in their target markets will influence medium-term growth and margin progression.

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 21 countries and a panel of around five million respondents worldwide. 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 a sizeable sample of the five million panellists, now covers more than 200k variables, have been compiled into a proprietary multidimensional database, or ‘connected data library’, known as the YouGov Cube. As all data are actively volunteered by panellists who give their explicit permission, the impending introduction of the General Data Protection Regulation (GDPR) in Europe, and other data protection and data privacy issues, do not pose a meaningful business risk and, indeed, may create new opportunities for YouGov.

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 largest proportion of revenue is now generated in the US, the world’s largest market for MR (see Exhibit 1 below for 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. This has been recognised by the group’s inclusion in the respected GreenBook (GRIT) Report, in which clients rank and rate suppliers for their innovation. This is itself a reflection of YouGov’s development of a series of products and services that have helped to build its client base and its penetration of major corporate accounts.

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. The five-year corporate plan centres on growing the suite of syndicated products and integrating custom research and syndicated data. These products and services are then being rolled out geographically. 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 growth strategy is unaltered: to develop as a global data and analytics business. This is predicated on meeting client needs through the delivery of connected data. The group is currently three years through its five-year plan, over the course of which it aims to achieve substantial growth – as demonstrated by the stretch targets incorporated in its 2014 Long Term Incentive Plan (LTIP) described on page 10. Over recent reporting periods there has been a deliberate reduction in the group’s complexity in line with the plan to become bigger but simpler. The key element of the growth strategy is to increase the proportion of revenue from the data products and services such that it matches and may exceed that from custom research. Our model shows the parity milestone being reached in the current financial year. There is also an objective to cut away the lower margin and more volatile elements of the custom business. The business plan outlines five further strategic objectives:

Stephan Shakespeare is a co-founder of YouGov and returned to the role of CEO in 2010, after a period as Chief Innovation Officer. Stephan has a clear understanding of the product base and its commercial potential. He refocused corporate strategy back onto exploiting the group’s core research and delivery strengths. Alan Newman was appointed Group CFO in August 2008 and has extensive experience in media and communications businesses, both in operational and consultancy capacities. He put in place improved financial controls and harmonised the group’s reporting and key business processes. Alan will be retiring at the end of December 2017 and is to be succeeded by the current Chief Strategy Officer, Alex McIntosh. 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. Doug Rivers, chief scientist, will also be standing down from the board with effect from the AGM. Doug will remain with the group with an expanded remit, managing its global technology development teams.

YouGov created a new role of Chief Operating Officer in August 2014 with the appointment of Sundip Chahal, to drive the implementation of the group’s procedural harmonisation and manage day-to-day operations. As of the upcoming AGM, this will now be an executive main board role. Sundip 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.

While the custom research (CR) business accounted for 56% of FY17 revenues, this is on a deliberately reducing trend (FY16: 61%; FY15: 68%). The nature of the CR work undertaken is also changing away from one-off, complex projects towards data-oriented tracking and in-depth studies building on YouGov’s data products. The more attractive opportunities are those that help to build embedded client relationships through realising the value of panel-generated data, improving the quality of the group’s earnings. The more rapid growth of this data products and services (DP&S) segment (in particular in BrandIndex and YouGov Profiles in Data Products and Omnibus in Data Services) should drive the mix to revenue parity over time. DP&S already generates 59% of adjusted operating profits, up from 52% in the prior year. With the increasing incorporation of its own gathered rich data, YouGov now sees itself as a ‘true internet company’, with its activities designed to take full advantage of the strengths of a web-based model.

YouGov’s growth engine is the Data Products and Services. Activity in Data Products is dominated by key product, BrandIndex, as is shown clearly in Exhibit 2, above. BrandIndex continues its very strong progress, with revenues ahead by 36% year-on-year in FY17 (FY16: +39%, FY15:+ 30%), and subscriber numbers increasing by 150 to 650 in 32 markets (from 27 in FY16). Italy, Spain, the Philippines, Taiwan and Vietnam were added in the year.

BrandIndex is targeted at brand curators in corporate clients, media planners and buyers within media agencies. It appraises sentiment towards brands in their peer space, including ‘buzz’, purchase history and likelihood to recommend, all in real time. The product is syndicated, with YouGov deciding on the sectors and brands to be covered. Some of these brands are global and so are tracked in all markets; some are national and limited to relevant country versions. Subscribers automatically see the data for all the brands covered in the market version that they buy. The additional brand owners included in the analysis who are not (yet) subscribers can then be targeted, with a clear picture already built up of the competitive landscape and their position in it. Being very sensitive to changes in opinion, BrandIndex is also a valuable tool for reputation and crisis management, when reactions can be tracked against events and in comparison to other brands’ reputations post similar events.

YouGov Profiles is also gaining ground rapidly. It was launched in November 2014 and achieved £3.7m of revenues in FY17, with annualised sales running at £7.0m as at the year end. Profiles is aimed at the corporate market/brand curators and at agencies, and is effectively the ‘front end’ of the data Cube. A sophisticated planning tool, it allows marketers to put in place very detailed segmentation of their target audience, far beyond the demographic and location data traditionally available. Profiles’ primary application is in media campaign planning, where it facilitates appropriate targeting by identifying typical characteristics of brand adherents versus the norm. It is being sold on a subscription basis, accessible via an interactive portal and has grown to 125 subscribers worldwide (from 75 last year), many of whom also subscribe to BrandIndex. Bundling these two products together gives a particularly rich resource for agencies and brand owners, and sales of this package have been made to major industry names. Profiles has now been rolled out to eight territories, with France tabled for FY18. The investment in this multi-country availability has been validated by the recent high-profile win at Dentsu Aegis Network business, which selected Profiles as its main tool for its audience understanding, media planning and strategy (in place of WPP’s TGI).

Additional connected data applications are being launched in both data products and services. These tools should allow marketers to allocate their budgets more effectively, with the capability to evaluate campaign effectiveness or test putative campaigns with seed audiences. With the ability to link into BrandIndex, the impact of television or digital campaigns can be tested, while the reach of campaigns can be tested through assessing who has been exposed – an important validation when media transparency is so much of an industry issue. The Data Intelligence Unit has also developed methodologies to incorporate dynamic segmentation and plug directly into programmatic media. There are also new data applications enabling re-contact studies via Omnibus (see below).

Together, BrandIndex and YouGov Profiles account for 97% of Data Products. The division grew by 29% at constant currency in FY17. With the main investment phase for Profiles now passed, the operating margin moved up from 27.1% in FY16 to 29.1% in FY17.

Data Services is also dominated by one offer, Omnibus, which accounts for 94% of segmental revenues, which were up by 30% in FY17 (the same high level of increase as the prior year). Omnibus is the clear market leader in the UK, where it has been available for a number of years and continues to grow at least in line with the overall MR market at +7%. YouGov’s ability to facilitate multi-country projects is bringing in larger, multinational clients and helped overall Omnibus revenues to grow by 23% in FY17. The operation of Omnibus is highly efficient and it is straightforward to incorporate additional business given the degree of automation. YouGov now has more than 1,000 clients for its Omnibus service globally and continues to add both new clients and new territories (often across multiple territories), with Acer, Bertlesmann, E.ON and Allianz Insurance among those joining the roster in the year just reported.

Again, the group is not sitting back on its success. YouGov has been extending the range of services that it is offering, in particular adding value through segmentation, increasing the degree of automation in the submission of questions into surveys and by giving more flexibility in the way that output is delivered back to the clients. A new self-service survey tool, Collaborative Insights, has been developed to allow quicker survey build both within Omnibus and as distinct custom projects, as well as having the capability to bring both together within a single dashboard.

It is also planned to deliver Omnibus survey results through the Crunch analytics software. Crunch facilitates the configuration of the output according to client requirements. It allows very large data sets to be searched, examined and analysed extremely quickly (measured in milliseconds), with the output available in flexible formats, including visualisation, dashboards and automated reporting. It also allows clients to combine and analyse data from other sources as well as that flowing from YouGov’s data products. This ability is enabling YouGov to differentiate its offer through incorporating elements of its other activities – such as adding market positioning/reputational data from BrandIndex or by accessing specialised niche samples derived from data from the existing panel, such as key corporate influencers. These additional elements are also allowing the group to pitch for more substantial pieces of business. Notable larger clients include ITV, Google, HSBC, Ford, Sun Products and Microsoft, with Bausch + Lomb, Mastercard, M&C Saatchi, Sony, SEE and Virgin Money added during FY17.

Custom research still represents the majority of revenues, but was overtaken by the operating profits generated from Data Products and Services in FY16. However, the focus of the custom research business has been changing towards projects and product-level trackers that utilise the group’s existing panel data and the YouGov Cube resource. This is already improving the quality of the achieved earnings and moving it away from the most commoditised and therefore competitive parts of the market. There is a shift from the generally ad hoc studies, building out the multi-client or syndicated studies and/or full research programmes. The latter are particularly attractive for tracking studies and research under multi-year contracts in an industry dominated by relatively small and one-off contracts. The sales effort is now focused on increasing the share of clients’ spend, for example by increasing the number of geographies covered. The move to focus custom research on the core panel-based services led to flat revenues (at constant currency) in FY17, with underlying growth in the US (+7%), the UK (+4%) and Asia Pacific (+28%, but obviously off a lower base) and reductions most notable in Germany (-37%). However, there was a good improvement in operating margins, from 12.6% in FY16 up to 14.8% in FY17. Our model anticipates further progress through FY18 and FY19, albeit at a less spectacular pace.

MR market in stronger growth. Esomar’s annual Global Market Research Report estimates that global turnover of the traditional market research sector was $44.5bn in 2016. This was up 2.3% (inflation-adjusted), which is the highest pace of growth since 2010. Adding in newer research methodologies, such as data analytics, the estimated market size globally for research in 2016 was $71.5bn. The US remains the largest market by a substantial margin (44%) with revenues of $19.5bn, followed by the UK (15%) on $6.6bn and Germany (6%) on $2.8bn. Africa grew the fastest in that year, ahead by 22.7%, while Asia Pacific grew by 7.8%. Japan overtook China to become the largest market in the region. Growth was slower in the biggest markets of the US and UK.

There is a relatively small cohort of large players globally, with the 10 largest companies taking a 47% market share. These include Nielsen, Kantar (WPP), Quintiles IMS (focused on healthcare), Ipsos and GfK. In terms of client segments, the US market’s largest sector was media and entertainment (25%), followed by pharmaceuticals/healthcare at 21% and consumer non-durables at 13%. This latter is the largest client segment in the UK market at 30%, followed by government and non-profit (14%) and telecommunications and ICT (10%).

Growth of big data. One of the significant changes in market research over recent periods has been the growth in big data analytics, broadening the market well beyond its traditional remit. Big data has been defined by Gartner as “…high-volume, high-velocity and high-variety information assets that demand cost-effective, innovative forms of information processing for enhanced insight and decision making”. The use and gradual commoditisation of these methodologies has undermined the economics of the large-scale, non-digital survey and prompted considerable change in the industry. Some of the largest traditional suppliers have struggled to realign their business models (and their overheads) to a market that increasingly expects both low-cost and rapid project turnaround. The MR industry used to operate very much in a supplier/provider mindset. While garnering feedback and insight from the market was an onerous and time-consuming task, this worked reasonably well. With the huge growth in the availability of big data and in social media analytics, the ground has shifted and the collaborative model, where the MR company works alongside the client to bring them closer to their customers, has gained traction.

Changes to regulatory environment. The GDPR comes into effect on 25 May 2018 and will bring extensive changes to the working practices of the marketing services sector. The new data protection legislation alters how the system of consumer consent works, requiring permissions to be opt-in with clear and distinct affirmative action. The GDPR also contains prohibitions on processing customers’ data unless explicit permission has been obtained. In contrast, YouGov has a permissioned model in which panellists are already told and give explicit consent to how their data will be used. This provides a competitive advantage, including over the tech companies such as Facebook and Google.

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 74p five years ago, a CAGR of 44%. The rating is clearly at a premium to peer average, but remains within the range, with the US stocks tending to trade at higher valuations than those quoted elsewhere.

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 3%. As can be seen from the table below, the current share price of 321p indicates that if the EBITDA margin were not to advance over FY20-25 ahead of the 16% that we are forecasting for FY19 and onwards, then FY20-25 top-line growth would be running at 7.2%, which would be lower than we anticipate. Revenue growth over the last five years was at a CAGR of 14.4%.

We updated our financial model on the publication of the FY17 results in October and there are no further changes at this juncture.

From 2009 to the end of our forecast period, revenue will have grown at a CAGR of 11%. Over the years FY15-17, that growth rate speeded up to 19% as the strategy to invest behind the data products and services gained traction in its target markets. Our forecasts assume that the pace of growth for BrandIndex and Omnibus eases back a little from the last couple of years (see Exhibits 6-9 below), with YouGov Profiles and the new data applications starting to move the dial, but with the reorientation of custom research towards own-panel and more profitable work dampening the overall top line progress slightly.

This change in the mix has been lifting operating margins, as shown in Exhibit 5, above, and should continue to do so. With a much higher proportion of productised offer (and 24/7 data processing and analytics resource based in Romania), the business model is inherently more scalable. The incremental costs on additional sales of data products and services are relatively insignificant. Staffing has been reoriented with fewer ‘traditional’ researchers and more sales people and data analysts.

We show adjusted earnings consistent with the company’s methodology. The group capitalises and amortises over three years the costs of investment in panel and in software development. This amortisation is added back in addition to any amortisation on acquired intangibles.

YouGov has an LTIP scheme set up in 2014 designed to incentivise the executive directors and a small group of key senior managers. It is based on achieving demanding earnings per share growth targets (CAGR of 25%) over the five-year period ending 31 July 2019 as well as an average operating profit margin of 12% over that period. Participants are conditionally awarded nil cost options in three equal tranches over FY16 to FY18, dependent on reaching personal targets set in each previous financial year. At EPS growth of under 10%, there is to be no grant; full payout requires 25% EPS CAGR. Although the awards are high in terms of salary multiples and number of shares (particularly for the CEO), the triggering thresholds are particularly demanding, with no grant if compound EPS growth is below 10% or if operating margin is below the 12% average threshold. This plan has led to higher share-based payments, but this is stripped out of our definition of normalised operating profits. Compound growth in adjusted earnings per share was 21% for FY14-17. Our model currently shows a CAGR from FY14 through FY19e of 19% and operating margin running at an average of 13.5% (improving in each year).

In FY17, YouGov had operating cash conversion of 130% (FY16: 130%), giving it a five-year average cash conversion of 122%. 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. Both of these investments stepped up in FY17, with £3.4m spent on internally generated software (FY16: £2.6m) and £3.5m spent on panel recruitment (FY16: £2.0m). Ensuring that the panel is appropriate in 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. The largest increase in panel in FY17, though, was in the UK, so as to ensure that the spread was sufficient to run the MRP referred to above to model the outcome of the general election on a constituency-by-constituency basis. Our model anticipates capital spend running at £7.0m in both FY18 and FY19.

With the strong financial position, the level of dividend cover has been reviewed 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.

Goodwill accounts for £43.6m, the largest single element of which relates to the US. Other intangible assets include £5.6m of internally developed software and software development and a value of £4.2m for the consumer panel. Trade payables of £29.4m include £10.7m of deferred income, up from £9.4m in the prior year.

Net cash at the year-end was £23.2m, up from £15.6m at the end of FY16. The group’s only debt was a small bank overdraft of £0.3m. With the strong cash flow described above, we would expect this balance to increase, with our modelling resulting in net cash balances of £28.4m at end FY18 rising to £36.3m by end FY19.