YouGov: Trading update improves the set up
Yesterday, YouGov announced a trading update for the period ended 31st July 2024. Last week, I shared some thoughts ahead of the update, expecting the company to confirm a continuation from June's trends. Instead, YouGov reported better than expected trading and a substantial cost rationalisation programme. This has been well received, with shares now up 25% in 2 days. The update also raises positive prospects for future strong performance. Let's take a look at the announcement to see why.
Topline
From Trading update:
YouGov now expects Group reported revenues for FY24 to be approximately £327-330 million and Group adjusted operating profit to be £43-46 million, slightly ahead of our revised guidance communicated on 20 June 2024.
Our Research division saw strong growth in Custom Research, offset in part by declines in Data Services as expected, resulting in the division recording mid-single-digit growth on an underlying basis1 for the full year. The CPS business is continuing to perform well, in line with expectations and the integration is progressing well. Revenue in our Data Products division was in line with the prior year on an underlying basis1, given stable renewal rates and the addition of several new client wins, and we expect to return to growth through a focussed sales approach in FY25.
While the trading outperformance is relatively small considering the reduction of expectations in June, I believe it highlights things are not quite as bad as investors have assumed. The key commentary here is that Data Products has seen stable renewal rates. While I don’t think it has contributed to the slight upgrade, it indicates that the newer competition is not having as large of an impact on YouGov’s current customer base.
As YouGov’s Data products contracts are generally around 1 year, especially amongst new users, their customers have the opportunity to leave for a better offering. The fact that renewals have remained stable, suggests that the new competitors have seen little traction with YouGov existing customer base. The decline in Data products growth is therefore a result of lower new client activity. That is perhaps understandable in an environment were lower commitment products are being aggressively sold with heavy discounting.
Stable renewals rates should alleviate some concerns around the trends getting worse from here. YouGov has now entered the market with an GWI/Morning Consult equivalent product, Category View. The company has also launched new “freemium tiers” for BrandIndex and Profiles, likely to counter discounting. While I am not forecasting an instant return to growth from these initiatives, YouGov has a strong base of existing customers, and the company will have a competitive answer to the new entrants for the first time. We still need to see what growth level is feasible, butFY25 looks to be a very different competitive situation than first perceived.
Mid-single digit revenue growth in the Research segment also marks an improvement from H1 and is likely the source of the better performance since June. As short-cycle Data Services revenue is recognised immediately (versus via subscription for Data Products) it is the only feasible source of additional revenue in the last six weeks of trading. This could indicate a turnaround in market conditions and/or an improvement in sales productivity. However, it is still too early to draw those conclusions, turning around the commercial performance in Research is still the biggest open question mark at YouGov. It is also the biggest area of short-term upside and investors should pay close attention to the segment going forward.
Margins
YouGov also updated the market on its strategic review of the core business:
As a result of the strategic review, the Company identified several initiatives including a reduction in support functions, discontinuing under-performing products, scaling back in certain non-core regions and curtailing third-party supplier costs. We expect these streamlining measures to lead to annualised cost savings of £20 million, of which the Company has taken initial action on approximately £15 million. It is anticipated that about 70% of the annualised cost savings will be realised in FY25, weighted towards the second half of the year.
In the post on 5th August, I highlighted that investors were underestimating YouGov ability to drive cost savings. The company has now announced an 8.6% reduction in its operating cost base. While these cuts are significant it could be argued that given the sources they largely represent efficiency savings. In my view, YouGov is reestablishing its inherent profitability which should again alleviate investor concerns on FY25
A closer examination of current estimates for FY25 can demonstrate visibility YouGov now has into next year. The current Bloomberg consensus for FY25 EBIT is £56.5m. A combination of the low-end FY24 EBIT guidance and the cost savings expected to be realised next fiscal year would see YouGov achieve £57m in EBIT during FY2025. While there will be phasing of these cost savings through the year, it should dispel most concerns about YouGov’s margins and provide a floor to profit expectations going forward.
Whisper it quietly, but YouGov may have become a more profitable business after this cost rationalisation. Given a £8m shortfall in revenue produced a £15m impact to EBIT in FY24, any growth combined with a tighter control of cost base could generate substantial operational leverage from here. Given YouGov is still rated on c14.5x FY25 consensus estimate, I believe investors are still likely behind the curve on where profits could end up if YouGov’s growth outlook improve.
M&A
YouGov also announced a new acquisition, Yabble…
“……a New Zealand based company pioneering the use of generative AI to deliver audience insights. The acquisition will see YouGov acquire Yabble's technology to power new and valuable insights for clients across the world, while also seeing YouGov's data become the foundation of Yabble's industry leading AI platform.”
Yabble is a platform that uses the Chat-GPT LLM to allow businesses to analyse insights data more effectively. My feeling is YouGov has probably acquired Yabble to embed its two products directly into YouGov’s own. Yabble’s Query is a tool that allows users to draw out consumer insights through prompts, acting almost as an AI insights agent. Having this available as a feature within Data Products makes complete sense. Firstly, YouGov continues to disintermediate the research, which has been the root of its success historically. Secondly, providing an agent starts to address a frequent criticism to YouGov platform: the complexity of YouGov’s data. By having a software agent reduce that complexity, it could significantly improve the proof of value to YouGov’s customers.
Yabble’s second product, Count, also gives YouGov an entry into one of the hotter areas of the market research industry. AI is increasingly being used to organise large unstructured data sets into templates that can provide insights. This has gone as far as taking large sets of information to create digital avatars of target customers that can then be questioned to try to understand how customers behave. While Count is currently focused on sentiment tracking, there is an obvious synergy to Yabble being able to access YouGov’s large data set. While we do not attach any expectations to Yabble, YouGov’s effort in AI have likely been jumpstarted by the acquisition.