My feeling is that the uncertainty of the elections in the US, also in the UK and Europe; coupled with the fear of companies to continue investing even for fear of a recession has paralysed the purchase of YouGov services.
Because in the end the company's big bet is the US, where a large percentage of its income and investment comes from.
On the other hand, when analysing other comparable companies, there has not been such a slowdown (YouGov's fiscal year is as of 31 July), although they have commented that the US market is weak.
This is a great point. For me, it's not so much that System1 is taking share from existing YouGov products -- rather it was a missed opportunity for YouGov not to offer the ad test product that System1 are now winning with. It shows how hard it is for YouGov to capture new opportunities as innovations occur in the broader industry.
I only became aware of System1 last week with their stellar results. As I understand it, the entire System1 product is based on testing ads with 150 consumers who are provided by third party panel players (undoubtedly the logos I showed in this report). This could and should be in YouGov's wheelhouse.
YouGov themselves touted an ad-testing example in their FY19 annual report, as part of the new YouGov Direct blockchain proposition. Sadly, YouGov Direct fizzled, and after a lot of wasted internal effort and expense it was basically canned. It has now morphed into YouGov Direct Surveys, a self-service offering with an ASP of less than £1,000 per order, which brings in miniscule revenue but risks cannibalising existing fast-turnaround custom research.
System1 also has Test your Brand, which I imagine treads on the toes of Brand Index. It's a data product that uses SYS1s methodology to rate brands.. I haven't looked at System1 for many years though so I might be talking out of my hat! Don't know if Test your Brand contributed to SYS1s resurgent results.
Is it possible to catch falling knives such as YouGov within a disciplined investing framework?
Yes, it is possible. The' disciplined investing framework' is critical though, viz. a high quality business (sustainable roce, fcf) in the first instance. History provides example of 'glitches': coca-cola, american express, msft a decade ago etc. Today, I think there are examples: Croda, fevertree, paycom. However, in the long-run, the quality of the business and not price paid is the main determinant of success. So, yes it's possible-but important caveats apply!
I'd love to get to know Paycom. I currently know nothing, and couldn't distinguish it from the likes of Paycor HCM, Dayforce / Ceridian, Paylocity, or even ADP or Workday.
Is Paycom differentiated and a potential long-term winner out of its peer group?
Each of the above platforms have their unique features and strengths, so I would characterise Paycom's differentiation as 'narrow' (moat). What attracts me is: the focus on the return on investor for Paycom's customers; the high ownership (founder retains>10%) and the re-investment into a new product, Beti. I think it's the latter which has led to the current market drop (beti cannibalises current revenue streams, but is a long-term differentiator, hopefully enabling paycom to move into the enterprise market). Hopefully, there is the potential for a long-term winner via compounding as paycom re-invests into beti (gross margins are currently ~80%). I'm certain you could do a more thorough analysis Alex. Another company i like is oddity tech (odd), which is arguably more differentiated and a more likely long-term winner. It's newly listed ~1 year ago. There's less information available, but also worth some of your research I suggest. The stock price has been hit by a short seller (but the short report seemed very thin to me).
Many thanks for your comment. I would agree that shareholder register turnover is a factor to watch out for -- often a messy, volatile and prolonged process.
Just on historic FCF conversion, and in case it wasn't clear: the calculation I showed in the post was a highly conservative view of free cash flow, which did deduct all the bolt-on M&A and contingent consideration spend, as well as internally developed intangibles. That is based on my view that the M&A in the previous decade was mainly of the acqui-hire form.
The conversion percentage was high and clean from statutory net profit to this conservative view of FCF, but both absolute numbers were tiny compared to the adjusted and inflated versions that the market prefers to look at.
The company itself defines cash conversion as cash from operations to adjusted EBITDA, which is of little interest to me.
My feeling is that the uncertainty of the elections in the US, also in the UK and Europe; coupled with the fear of companies to continue investing even for fear of a recession has paralysed the purchase of YouGov services.
Because in the end the company's big bet is the US, where a large percentage of its income and investment comes from.
On the other hand, when analysing other comparable companies, there has not been such a slowdown (YouGov's fiscal year is as of 31 July), although they have commented that the US market is weak.
By the way, great article!
Have you looked at System1 Alex? It could also be nibbling away at Brand Index for example.
This is a great point. For me, it's not so much that System1 is taking share from existing YouGov products -- rather it was a missed opportunity for YouGov not to offer the ad test product that System1 are now winning with. It shows how hard it is for YouGov to capture new opportunities as innovations occur in the broader industry.
I only became aware of System1 last week with their stellar results. As I understand it, the entire System1 product is based on testing ads with 150 consumers who are provided by third party panel players (undoubtedly the logos I showed in this report). This could and should be in YouGov's wheelhouse.
YouGov themselves touted an ad-testing example in their FY19 annual report, as part of the new YouGov Direct blockchain proposition. Sadly, YouGov Direct fizzled, and after a lot of wasted internal effort and expense it was basically canned. It has now morphed into YouGov Direct Surveys, a self-service offering with an ASP of less than £1,000 per order, which brings in miniscule revenue but risks cannibalising existing fast-turnaround custom research.
System1 also has Test your Brand, which I imagine treads on the toes of Brand Index. It's a data product that uses SYS1s methodology to rate brands.. I haven't looked at System1 for many years though so I might be talking out of my hat! Don't know if Test your Brand contributed to SYS1s resurgent results.
https://system1group.com/test-your-brand
Another very thoroughly researched analysis. Thank you Alex.
Is it possible to catch falling knives such as YouGov within a disciplined investing framework?
Yes, it is possible. The' disciplined investing framework' is critical though, viz. a high quality business (sustainable roce, fcf) in the first instance. History provides example of 'glitches': coca-cola, american express, msft a decade ago etc. Today, I think there are examples: Croda, fevertree, paycom. However, in the long-run, the quality of the business and not price paid is the main determinant of success. So, yes it's possible-but important caveats apply!
Thanks very much for the thoughtful comment.
I'd love to get to know Paycom. I currently know nothing, and couldn't distinguish it from the likes of Paycor HCM, Dayforce / Ceridian, Paylocity, or even ADP or Workday.
Is Paycom differentiated and a potential long-term winner out of its peer group?
Each of the above platforms have their unique features and strengths, so I would characterise Paycom's differentiation as 'narrow' (moat). What attracts me is: the focus on the return on investor for Paycom's customers; the high ownership (founder retains>10%) and the re-investment into a new product, Beti. I think it's the latter which has led to the current market drop (beti cannibalises current revenue streams, but is a long-term differentiator, hopefully enabling paycom to move into the enterprise market). Hopefully, there is the potential for a long-term winner via compounding as paycom re-invests into beti (gross margins are currently ~80%). I'm certain you could do a more thorough analysis Alex. Another company i like is oddity tech (odd), which is arguably more differentiated and a more likely long-term winner. It's newly listed ~1 year ago. There's less information available, but also worth some of your research I suggest. The stock price has been hit by a short seller (but the short report seemed very thin to me).
Many thanks for your comment. I would agree that shareholder register turnover is a factor to watch out for -- often a messy, volatile and prolonged process.
Just on historic FCF conversion, and in case it wasn't clear: the calculation I showed in the post was a highly conservative view of free cash flow, which did deduct all the bolt-on M&A and contingent consideration spend, as well as internally developed intangibles. That is based on my view that the M&A in the previous decade was mainly of the acqui-hire form.
The conversion percentage was high and clean from statutory net profit to this conservative view of FCF, but both absolute numbers were tiny compared to the adjusted and inflated versions that the market prefers to look at.
The company itself defines cash conversion as cash from operations to adjusted EBITDA, which is of little interest to me.