YouGov FY24 Results
Strategic Shift and Cost Efficiencies Point to a Promising FY25 Amid Operational Challenges
YouGov's FY24 results surpassed expectations, calming fears of further profit warnings, as cost-saving measures and contributions from the CPS acquisition set the company up for a steady FY25.
A shift in strategy focuses YouGov on large enterprise clients, with new cross-selling opportunities and product enhancements planned to drive revenue growth in the coming year.
Despite recent challenges with organizational changes, fraud incidents, and cost adjustments, YouGov's attractive valuation and solid growth potential make it a compelling investment for FY25.
YouGov delivered FY24 results slightly ahead of the guidance set out at its FY trading update. Revenue was £335m and Adj. EBIT £64.5m, both ahead of consensus and my estimates. While this does little to repair the damage of the company's earlier profit warning, I believe investors are still far too pessimistic about YouGov's future.
From reading the sell-side commentary around the results, investors' biggest takeaway was that the company did not warn again on FY25 guidance. There was clearly elevated concern, given shares declined 20% in the two monthspreceding the results. These concerns are completely misplaced. YouGov has such visibility over FY25 estimates that attention should be focused on potential upgrades.
Based on my estimates, the entirety of YouGov's EBIT growth in FY25 can be produced through the additional contribution from the CPS acquisition and its previously announced cost savings. As the CPS acquisition completed in January, the recognition of revenue from Aug-Dec should add £11.5m in EBIT. YouGov has implemented a cost rationalization program, designed to deliver £20m in annualized savings. 70% of these cost savings should be fully implemented during FY25. If you assume it takes them 4 months to implement, cost savings in FY25 should total £9m. After the additional D&A charges, these contributions should see YouGov reach £64.5m in EBIT for FY25. This level of EBIT is just above the current consensus while assuming zero growth in the next financial year. This represents an extremely high level of visibility for FY25.
FY24-FY25 EBIT Bridge
Looking forward
Perhaps naturally, the next question is what potential for YouGov's growth in FY25 exists and what impact this might have on estimates. The visibility here is admittedly lower, but there are some positive signs that FY25 will be a much-improved year for YouGov.
Comments from CEO Steve Hatch suggest a clear intent regarding the customers YouGov is targeting. Hatch mentioned at several points during the earnings call that there were areas that YouGov "didn't want to put its attention into." He also suggested that serving large enterprises and mid-market customers will be the center of attention going forward. This is a bigger strategy update than it seems.
Since announcing its medium-term plan in 2023, YouGov has been operating a dual-approach sales strategy. The company aimed to sell enterprise clients a comprehensive suite of YouGov products, including large tracking studies, all within a single platform. At the same time, a new digital sales process would allow them to target smaller customers who previously found traditional market research too costly. This approach was always going to fail. These two-customer groups have widely different requirements, too much in my view for a single platform. The sales approach itself also ignores several key tenets of platform-based sales.
By seemingly abandoning the aim of growing through smaller customers, YouGov can orientate the entire company behind the process of up- and cross-selling to large customers. Given that its Top 10 customers are generating 6x the revenue of the next 50, getting this right could yield a significant revenue opportunity for the company.
YouGov will also be approaching FY25 with a beefed-up product strategy. I talked previously about how YouGov's competitive position is better than it appears. It appears that there are even more product initiatives planned for FY25. YouGov is supplying demographic data to use in ad targeting, or activation, for the first time. In addition, it is planning a new paid tiering approach to core products, important as YouGov has never pushed pricing for products likebrands index and profiles in their history. While the measurable impact of these initiatives is hard to determine, it is worth remembering that YouGov does have multiple growth drivers in FY25.
It is also worth highlighting that any growth whatsoever could lead to a significant impact on profitability for the company. We have demonstrated that consensus estimates have very little contribution beyond the cost savings presently. What the market is also potentially ignoring is that YouGov's incremental margin in FY25 is likely around 60-70%, due to the company's high gross margins and the cost rationalisation program. This incremental margin level would see every 1% of additional growth add 4% to consensus EBIT estimates. Given that consensus estimates have virtually no assumptions for underlying growth, any growth at all is likely to deliver upside.
Some causes for concern
While I overall see a lot of positives for YouGov heading into the next financial year, though several details in the results did provoke some unease. These are both operational and accounting concerns. I must also admit now that I don't have definitive answers to these concerns, but they are issues I think other investors should be keenly aware of.
First is still the major confusion over YouGov's reporting structure. Since Steve Hatch has taken over, there have been major executive changes, including the departure of the COO, promotion and then dismissal of the EMEA CEO, and further changes through layoffs associated with the cost rationalization program. I am still not confident that a proper organizational structure has emerged from all this change. The earnings call highlighted that senior roles in EMEA, a key underperforming region, are still not filled. Internal senior leaders, previously running functional units,** have been promoted into regional roles. In my view, this will impact the strength of YouGov's sales motion and go-to-market strategy and needs to be addressed.
We also had another example of the confusion at YouGov from the disclosure of significant fraud at the company in H2. YouGov disclosed it had lost £1.8 million in a "social engineering event". A fraud of this type raises a huge number of questions across YouGov's checks and controls, payables, and general management oversight at the company. Questions deeper than what actions have been put in place post this event remain.
Finally, and most concerning in my opinion, is a change to the company's cost reporting. As part of FY24 results, YouGov has reallocated £13.7m of consumer panel cost away from central administrative expenses to costs of sales. This has resulted in a 5ppt fall in gross margin in 2023 and 4% in FY24, albeit with no change to overall margins. YouGov's higher costs of sales raise red flags in their cost structure, challenging my earlier expectations of administrative operational leverage. Both management and analysts remain notably silent on these implications.
COGS/Central cost revision FY23-FY25
Impact on the investment case
YouGov's valuation is now the central point of the investment case. Trading at just 11.5x with 42% EPS growth projected for FY25, market sentiment has hit a floor. This pessimism seems unwarranted given the clear business visibility. Current share prices effectively price in zero future growth - an overly bearish stance in my view. While concerns raised in these results need to be interrogated, YouGov's robust core business and profitable growth trajectory make it compelling at these levels. The deeply discounted valuation justifies increasing positions.