YouGov — Finger on the pulse

YouGov’s business model should be reasonably resilient to the impact of COVID-19. The demand for intelligence on consumer attitudes and opinions is likely to have remained firm. The online business model made it comparatively straightforward to transition to remote working. The direct access to the proprietary panel should also have given an advantage over more traditional market research organisations that will have had to make more dramatic adaptations. There may be a greater impact on working capital through extended trading terms, but this will be clearer with the publication of the full year trading update.

In April 2019, the group set out its new five-year growth plan. The key performance indicators (KPIs) outlined 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 previous five-year plan) and our forecasting basis is more circumspect than this.

YouGov is an online market research and data analytics business, with clients and operations around the globe. Its current five-year plan, which runs through to FY23, articulates a vision to create a universal, integrated platform for the ethical and safe sharing of opinions and personal data. This approach clearly demonstrates management’s respect for data privacy and acknowledges that the proprietary panel is central to the ability of the group to conduct its business. The ambition is for the group to become the world’s leading provider of high-quality market and opinion data and insights.

YouGov 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 9.5 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. While it is all attributable to identifiable individuals by YouGov within its data sets, it is 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, where responses are held discretely and recontact studies are more cumbersome. Rich data from this sizeable sample of panellists now covers more than 200k variables. These are held in 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 above 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 and Profiles), 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, accounting for 39% of group revenues and 42% of adjusted operating profit before central costs.

YouGov has also developed an analytics platform, Crunch. This has been designed to be easy to use and flexible and, importantly, also allows clients to import third-party datasets.

YouGov offers a growing range of syndicated data products (syndicated as in ‘create once, use many times’). BrandIndex is the group’s flagship service daily brand health tracking product, now available in 42 countries. It enables clients to benchmark against their competitors and across categories and assess the impact of unforeseen events and now covers more than 13k brands globally across 40 different sectors, segmented by vertical (eg alcoholic beverages, automotive etc). Clients can access their data through a dashboard and download through an API feed if required.

Profiles was launched in FY15. It is an audience planning and segmentation tool, now running in 24 countries. 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. Profiles accesses over 300k variables within the Cube data and is delivered via the Crunch platform.

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 US is the most important market for Data Products and it continues to demonstrate high levels of growth (24% underlying at the half year), with the UK, France and Asia Pacific regions all also performing strongly.

Plan & Track accounted for 89% of segmental revenues in H120, with an increase of 21% over the comparative period. The balance of segmental revenues comes from the new Sports Index and add-on solutions for subscribers such as YouGov Audience Data. Overall segmental growth at the half year of 27% implies that these areas have been growing particularly fast.

YouGov Data Services primarily comprises Omnibus, the group’s online, fast-turnaround survey service. Data Services has grown its revenues from £10.7m in FY14 to £37.2m in FY19. Its historical performance and our forecasts are shown in Exhibit 4, above, with the slowdown in growth for FY20e reflecting H120 restructuring in the Nordics, non-recurring election work in Asia-Pacific and subdued performance in Germany. Omnibus operates in over 40 markets and is market leader in the UK, carrying out over five million surveys per year. 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.

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).

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 increasing the differentiation of its offering through using the connected data that it already has access to within the YouGov Cube and delivering the output through Crunch. This 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 FY19 this had increased to 22%, further pushing out to 24% in H120.

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 key areas – new technologies, geographies and specialisms (including specialist panel) – that leverage and extend the existing product and service set. The following completed deals all clearly fit within this remit:

Performance of YouGov Sport and YouGov Signal may have suffered more from the COVID-19 situation during H220 than other parts of the business. The suspension of live sport for an extended period will doubtless have had an impact on the former, which may now be easing. With the theatrical release of major movies postponed or moved online, and with disruption to the production schedule of new content, the impact on YouGov Signal may last somewhat longer.

Management has identified ‘three strategic pillars’ that underpin its five-year plan. These are Data Integration, Public Data and Ethical Activation.

Integration relates, as described above, to fully integrating custom research and client service with the existing data products and tools, with a heavy emphasis on tracking studies. Further, it also encompasses connecting the uses of YouGov’s data – creating new value from existing data and customisation for clients, opening up new revenue streams and making the YouGov element more central to the clients’ internal processes. This may involve a new product, YouGov Recommend+, which enables marketing professionals to evaluate a range of factors such as brand image, brand values, emotion and consumer personality to track Net Promoter Scores.

The Public Data element addresses the question: what is in all this for the panellists? Panellists 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’s objective is to become ‘the Wikipedia of opinion’, using all Cube data. As a good example of this approach in practice, YouGov has established a partnership with Imperial College in London during H220, providing public opinion and behavioural data relating to COVID-19 to public health researchers for free. The underlying data is made available on GitHub.

Activation involves taking data and using it to drive advertising campaigns, creating 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. The next stage allows advertisers 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, hence the description of this being ‘ethical’ activation. YouGov Direct is already available to clients in the US and the UK and is being rolled out to other geographies.

There are several different aspects to the investment programme:

The five-year growth plan put in place last year set 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 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.

Management’s new LTIP is tied to the achievement of the new five-year plan goals. Nil-cost options will be granted in October 2020, 2021 and 2022, subject to meeting personal targets. The key performance metric is adjusted earnings per share, using FY19 as the base year, on the following basis:

This is underpinned by the requirement for the operating margin to be at least 15%.

Stephan Shakespeare is a co-founder of YouGov and has been CEO since 2010. He has a clear understanding of the product base and its commercial potential, refocusing corporate strategy back on exploiting the group’s core research and delivery strengths. Alex McIntosh took over as group CFO in December 2017, having previously been chief strategy officer. He 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 $47.4bn in 2018 (source: Statista), up 3.1% on the prior year and with a 10-year CAGR of 3.8%. It should be noted however, that this figure does not include the broader data analytics and insight market, which could be worth as much again. The US remains the largest market, at around 44% of the total, with Europe accounting for 35%. The UK remains the second largest market, but this partly reflects the amount of multi-market studies that emanate from this territory. The top 10 market research companies accounted for over half of total industry spend in 2018, with Nielsen the largest by some way, with published revenues of $6.5bn (FY19 revenues were down 0.3% on the prior year). Medical research specialist IQVIA was the second largest, with $3.9bn of relevant revenues.

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.

YouGov’s most significant peers – 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. Only GlobalData of the global peer set and Cello Health have also had positive share price performances over the year-to-date, with Cello having received a cash bid of 161p on 1 July, 44% ahead of the then price. The average peer share price is 19% lower than it started the year. YouGov’s rating is clearly at a premium to the peer average but remains just within the range on EV/sales and EV/EBITDA multiples, surpassed only (again) by GlobalData. On a P/E basis, YouGov is priced higher than the peer set. We note that YouGov’s last reported EBITDA margin is visibly above the peer group average and its long-term growth record and high levels of cash conversion are clearly attractive.

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 790p indicates that if the EBITDA margin were not to advance over FY22–27e ahead of the 23% that we are forecasting for FY21 and onwards, then FY22–27e top-line growth would be need to be running at a CAGR of 25%. Revenue growth over the five years to our forecast FY21e was at a CAGR of 12.5%.

It is worth bearing in mind that the revenue target CAGR under the five-year plan is 19%. If that revenue CAGR were to be achieved, the current share price would suggest that the market anticipates that the EBITDA margin would improve to 26.3% over the medium term.

Our March update note went through the H120 results, which were provisionally released as a trading update, before formal publication in April due to the disruption to markets as the COVID-19 lockdowns came into force. These showed a robust set of figures, with sales of the group’s data products well ahead: 27% on an underlying basis. The results from Data Services, principally Omnibus, were less impressive, with revenue up 3% (7% underlying). This period included difficult trading in the Nordics business, a tougher comparison in Asia-Pacific (there was an election benefit in the prior period) and a more difficult German market.

Continued growth in the proportion of higher-margin project work in Custom Research helped propel adjusted operating profit to £8.0m, representing an operating margin of 23.6% in H120 from 22.0% in the comparative period.

The group continued to expand in the US (47% of H1 operating profit before central costs), where interest in the presidential elections should build over H220 and H121.

At the time of the publication in March, we applied a 10% revenue reduction for the remainder of the forecast year. The only further adjustments we have made at this point are to reflect the implementation of IFRS 16, which we omitted to do at the time and which boosts EBITDA but makes little difference lower down the income statement.

YouGov has an enviable long-term record of revenue and EBITDA growth, which has been predominantly achieved through organic means. From FY10–FY19, revenue has more than trebled (a CAGR of 13.4%) and operating profit margin increased from 8.9% to 13.5% as the business has scaled up, investing in product and improving operational efficiency. For H120, the operating margin was 14.8% from 12.6% in H119.

With multi-year syndicated Plan & Track subscriptions, dashboards incorporated into client workflows 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). At the half-year results, management referred to a newly-signed strategic multi-year contract with a major German-based financial institution – obviously significant enough to warrant a specific mention.

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 and 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 YouGov Cube. Having one analytics system, Crunch, also greatly increases the efficiency in the system. The emphasis now is on managing the client relationships more effectively, with global key account management.

We have now restated our FY18 and FY19 numbers for the implementation of IFRS 16, which adds £3.1m to EBITDA. The adjustment to normalised PBT is just £0.1m.

The only change to our FY20 numbers at this stage reflects the IFRS 16 application. We made a cautionary 10% reduction to our H220 revenue estimate on publication of the interim results. We have now published our provisional FY21e estimates, which assume a relatively cautious 8% top-line progression. We have built in further improvement in adjusted operating profit margin from 13.9% to 16.0% in FY21e as the benefits of the Centres of Excellence and the increased added value within Custom Research take effect.

As indicated within the sensitivities section above, we can see that the pandemic is likely to have been both positive and negative repercussions. On the plus side, the need for quick and reliable gauging of public mood and attitudes will have stimulated some demand. However, some commercial clients may have rescheduled, reconfigured or postponed work as they reappraised the scale and timing of their marketing spend. New business may have been more difficult to procure and payment terms may have extended.

YouGov has a particularly strong record of cash conversion. The group quotes its cash conversion against adjusted EBITDA, so using the figures restated for IFRS 16 implementation for FY19 and FY18, this gives a conversion rate of 111% and 113% respectively. At the half year, the figure was 93%, up from 69% in H119.

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. FY19 was a higher year for capital expenditure, with £12.2m spent mostly on software and panel. £7.7m was spent in H120, split £4.2m on panel investment and £3.5m on software. For the full year, we have pencilled in a spend of £15.0m, with £16.5m for FY21e. Ensuring the panel is an appropriate size and appropriate in its constituents is crucial to be able to deliver the timely and robust data in each territory, so there is a need for higher levels of spend when moving into new geographies, or ahead of specific events, such as the US presidential elections.

Strategic acquisitions have also been on the agenda. To date, these have incurred modest upfront costs. SMG Insight, now YouGov Sport, had performed so well that management accelerated the completion. £7.4m of deferred consideration was paid in H120. There is now an expected total of £13.2m of deferred consideration payable in respect of future earn-outs attached to acquisitions. We have £8.6m identified for payments in our FY21e cash flow.

In normal years, the group pays only a final dividend, in December. A decision on a payment for FY20 is therefore still some way off and the world may look very different by then. Given the strength of the balance sheet, we are assuming that there will be a dividend, but that it will be at the same level as FY19 (4.0p), rising to 5.0p in FY21e.

As at the half year, the balance sheet had £27.2m of cash (there is no debt), down from £37.9m at the year end. During those six months, the group spent £7.4m on deferred consideration for acquisitions, the £3.5m of software and £4.2m on building panel referred to above.

Under IFRS 16, the group’s lease liabilities are now shown on the face of the balance sheet. These totalled £9.8m at end January, of which £2.5m were short term and £7.3m were longer term. Even if these are considered as debt, the net cash position remained very healthy at £17.4m

Our modelling indicates a cash balance of around £33.9m at end FY20e (a net £24.1m on an IFRS 16 basis), and around £30.9m for the following year post the acquisition spend of £8.6m and £16.5m of capex that we have pencilled in. We do emphasise, though, that there is a far higher degree of uncertainty over our projections than normal.