Excessive ambition combined with questionable execution can result in heavy value destruction, even if you happen to be in a growing industry. YouGov Plc (YOU) seems to be proving this point surprisingly clearly. Calling itself Britain’s leading online research company, YouGov has an ambition to become a “truly global business” in an “estimated global online research market of $6.4bln”. Having acquired a string of high price/low profitability companies around the world to achieve “globalisation” YouGov has gutted its profit margin and its share price with it. The answer to the company’s own strap line of “What the World Thinks” could easily be “Not Much”.
YouGov’s business is qualitative and quantitative online research across various specialisms. The research is collected from a panel of respondents who earn a nominal sum for each questionnaire answered. YouGov possesses a special online data collection methodology to generate its work. The results of research have proven their accuracy, efficiency and cost advantage over conventional research agencies. YouGov’s client list is enviable; it includes Google, Coca Cola, Nokia, the CNN, Kellogg’s, the BBC, Transport for London, The Daily Telegraph, The Times and numerous other household names.
The company has a fairly wide geographical spread and runs its business in the UK, in the Middle East via its Dubai-based YouGovSiraj, in Germany and Austria via its Cologne-based YouGovPsyconomics, in the Nordic-Baltic region via its Copenhagen-based YouGovZapera and in the United States via its Palo Alto-based YouGovPolimetrix.
Total revenue for the six months ending Jan 2009 was £22.6m. UK business has contributed 23.2%, The Middle East 18.2%, Germany 34.2%, Scandinavia 16.2% and North America 8.2%. The operating margin was best in The Middle East (35%) and worst in Scandinavia -2.6%. The UK reported a margin of 15.6%, USA 6.1% and Germany came in at 5.8%. These results represent an almost 50% reduction in an average operating margin over the previous reporting period. The cause of this state of affairs is the bloated cost base which had been built up in anticipation of faster expansion; the hope of this expansion has now been dashed with on-set of the economic recession hitting almost all markets around the world. Another reason seems to stem from a differentiated cost model of the newly acquired businesses, particularly Psyconomics in Germany.
Significant investment in infrastructure and particularly in personnel have caused the revenue per employee to slide from £149k to £89k, current head count is around 452.
The profits were further dented by the restructuring cost of £194k which was necessary to restructure UK operations. The adjusted diluted EPS for the six months ending Jan ’09 have therefore come in at 1.6 pence (4.2 pence in previous reporting period). The profitability is obviously dire at an adjusted annual ROE of just 2% (during financial ’08 it stood at 9.9%). YouGov’s own estimation of its Cost of Equity is 12%, assuming this is so we can clearly see the consequences of trying to run before being able to walk.
The company’s capital structure however, consists of equity only and with cash balance being £13.8m (£14m in previous reporting period) the balance sheet has got some fuel in the tank. Liquidity is not an issue either as Current Ratio equals 2.58 (1.98 last reporting period). Total group assets equal just over £92m and total equity is £72.5m (£52.9m last reporting period). The increase in equity is mainly contributed by £13.8m increase in Foreign Exchange Reserve.
Improvements achieved in the working capital department have caused an increase of cash from operating activities; cash in-flow for six months ending Jan ’09 was £2.1m (£1m in previous reporting period). However, the settlement of deferred considerations for previously acquired businesses of £1.8m, as well as investments in software totalling £1.1m have caused the Free Cash-Flow to Equity to turn negative. On the brighter side, YouGov has made a loan repayment of £1.4m in six months ending Jan ’09 to now be entirely debt-free.
Given the company’s predicaments the share price has been unforgiving. In Jan ’07 the stock was trading at its all time high of 199 pence a share, today it goes for 55 pence a share. Equity dilutions, unspectacular acquisitions, poor cost control, increasing competition and current economic climate have all played their part.
Based on company’s net income, re-investment rate and return on equity, the current share price appears justified. To increase its value going forward YouGov must work on integrating the acquired businesses into the group and improving their profitability, while implementing much better cost control measures within entire YouGov group.
Pointers working against the company would include intensifying industry competition (companies such as One Poll or ToLuna), cyclical business (dependant on reasonable economic activity), directors ambition for additional acquisitions (worrisome given past history of acquisitions), and directors’ dealings (in financial ’08 sales of £2.7m to company partly co-owned by directors and £650k to company owned by parents of one director).
Pointers working for the company would include highly recognisable brand name (undoubtedly the most known in industry), total panel of respondents approaching 2.2 million and the fact that the co-founders still own 22.45% of company.
On the concluding note it is fair to point out that the management are trying to reverse their recent poor fortunes. The cost control measures are being implemented with potential savings of around £2.5m a year, new recession-oriented products are being introduced into the market, such as Recession Tracker and Debt Tracker and five senior personnel appointments have been made to make the acquired overseas companies improve profitability. Can YouGov come back to rule online research once again? Let us hope so.
Alec Hajinoff is a full time investor, freelance writer and operates www.onlyprofitable.co.uk
http://www.proactiveinvestors.co.uk
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