At its core, information & analytic services is the provision of “information” in various forms, such as data feeds, databases, reports, and analytical tools that are often embedded within its customers’ everyday business processes and decision making. Information & analytic services stocks are classified together in terms of their business/financial model but they do not largely compete against each other as the current public companies serve different end-markets that span most industries. The group is often covered by investors that focus on business services, technology, or the industry that the company services. We believe investors are starting to become more aware of the group in part due to the group’s performance, attractive characteristics, and the increasing focus on data and analytics. We believe Nielsen’s initial public offering at the beginning of 2011 and its recent secondary has helped to raise the profile of the space. We also expect McGraw Hill’s pending separation of its education business from its financial information business to help as well.
Exhibit 1. Primary Industries Served
Company Ticker Primary Industries Served
CoreLogic CLGX Real estate, financial services, government
CoStar CSGP Commercial real estate
Dun & Bradstreet DNB Financial services, diversified Equifax EFX Financial services, mortgage
FactSet FDS Capital markets
Gartner IT Information technology departments across all industries
HIS HIS Oil & gas, government defense and security, chemicals, transportation, manufacturing, tech media & telecom McGraw Hill MHP Capital and commodities markets, education
MSCI MSCI Capital markets
Nielsen NLSN Consumer packaged goods, media/advertising Solera Holdings SLH Auto insurance and repair
Thomson Reuters TRI Financial services, legal, tax and accounting, intellectual property, science and media markets Verisk Analytics VRSK P&C insurance, health, mortgage
Source: Company reports and Wells Fargo Securities, LLC
Information & Analytic Services Provider Framework. Information & analytic services providers have their legacies rooted in traditional publishing and/or news services (Thomson Reuters, McGraw Hill, Wolters Kluwer, Reed Elsvier), information research (Gartner, Forrester) and more data-intensive focused providers such as our current coverage (Equifax, IHS, Nielsen, Solera, and Verisk Analytics). The more data focused Information & Analytic Services providers often provide products/services using data in which they source from publicly available and/or proprietary channels. Value-added services are then applied, which can range from simply organizing the data into different formats to combining data sources, running advanced analytics,
Legacy Rooted In Contributory Models. The more data-intensive information & analytic services providers have their legacies rooted in serving industries that benefit from a contributory model where participants in a particular end market provide the data in order to gain better insight into the industry as a whole. Companies such as IHS (oil & gas), Equifax (consumer credit), Nielsen (consumer-packaged goods [CPG] retail measurement), Verisk Analytics (P&C insurance), and Solera (auto insurance) all benefit in part from this type of model. For example, Verisk Analytics provides information and insight to help the P&C insurance industry measure risk. Individual insurance providers can measure and price risk much more effectively when armed with how the entire market is performing compared to just its current customer base.
Exhibit 2. Information Services Provider Framework
Alliances
Source: Wells Fargo Securities, LLC
Key Themes
The value of information continues to increase. The key underlying secular theme that we believe the group will benefit from is the increasing value of "information" as a competitive differentiator for businesses as the annual amount of data produced grows exponentially and the role of analytics increases. Business ecosystems are becoming more complex and competitive. At the same time, rapid advances in technology have caused a flood of data that managements are drowning under. IDC estimates that in 2011 the amount of information created and replicated will surpass 1.8 trillion gigabytes. Technology has enabled data to be produced in a constant stream from increasing sources such as social interactions, mobile devices, facilities, equipment, R&D, simulations, and physical infrastructure. In aggregate, IDC defines the aforementioned concept as
“Big Data,” which when analyzed correctly can provide useful strategic and operational insights into areas such as user behavior, customer experience, capacity consumption, pricing, fraudulent activity, and security risks. We believe companies will look to information & analytics services providers to help them make better decisions through the use of information.
INTEGRATED RESEARCH & ECONOMICS Head start in riding the big data and analytics wave. The information & analytic services
providers have been working with and using analytics on large data sets to produce more valuable information to help with decision making long before the terms big data and analytics reached hyped status. As such, we believe the group is uniquely positioned to take advantage of these secular themes to spur development of new information and analytical-based products and services. A common way information services providers utilize analytics is to provide tools for customers to drill down into the service providers proprietary data, which can combine information from multiple databases through complex indexing and join techniques. Increasingly, predictive analytics are being built to leverage the service providers’ unique data assets as well as more client specific data to help predict what will happen. Predictive analytics are being used and offered by Equifax to help clients acquire new and manage existing customers based on consumer credit information.
Verisk Analytics offers predictive analytics to help customers better price risk and lower costs by utilizing historical P&C/medical insurance claims, weather, property, and other information.
Equifax, Solera Holding, and VRSK Analytics all use predictive analytics to help detect fraud.
Consumer packaged goods companies are using Nielsen’s predictive analytics to help with areas such as growth and demand strategy, pricing, market segmentation, and sales modeling.
Acquisitions are a major part of the model. As mentioned earlier, many of the information &
analytic services providers were formed based on a contributory data model for a specific industry.
Acquisitions and partnerships have been used very successfully and are likely to continue to be used by information services providers to broaden their reach into new capabilities, geographies, platforms, and industries. It is often the combination of data assets, domain knowledge, and analytics within the cross-section of business processes or industries that can come about through acquisitions and partnerships that provide the most insight and value for customers.
Companies likely will be created, combined, and partnerships forged as a result of the growth of data. Information & analytic services providers are rapidly expanding their analytics capabilities to address existing markets and to enter new markets. We expect new players in the space to emerge that are information providers and or help organizations and governments to improve specific business processes and make strategic decisions by using analytics. Over time, we believe the boundary lines between pure-play information services, IT/BPO services, software, and industry-specific service providers could become blurred as they all compete for customers’ analytics wallet share. However, those companies that control proprietary information should command higher valuations than those that simply provide tools or are focused on company-specific projects, all else being equal. The value derived from analytics is very much dependent on the input data. As such, those that control the information could be attractive acquisition targets to other non information &
analytic service providers. We point to last year’s acquisition of government information services provider Input by the software company Deltek. However, we believe alliances/partnerships between the larger information & analytic services providers, software, and or consulting providers are more viable than large-scale M&A transactions across business types.
Exhibit 3. Data Analytics Being Pursued From Multiple Provider Angles
Data &
Valuation/Investment Considerations
Expect Growth in the High Single Digits With Pockets Much Faster. The information &
analytics services space is not homogeneous so it is hard to forecast an absolute growth rate for the space as a whole. However, we believe investors can get a sense of the growth potential by looking at what enterprises are spending on the tools and services to be able to gain better insight from their own data themselves. We have looked at various forecasts for business intelligence and business analytics software and services spending. Using those forecasts as a point of reference and looking at the near-term growth potential of the public information services providers we believe the space should grow in the high single digits as organizations look to external providers to harness the flood of data to create information and insight to help them navigate the constantly evolving business landscape. However, there should be pockets of much faster growth due to vertical specific or process-oriented dynamics.
Information & Analytic Services: Quality Defensive Growth for Uncertain Times. We view the information & analytic services space as attractive for investors especially during the continued market uncertainty due to its longer-term growth profile and somewhat defensive nature.
The characteristics of the model often include the following:
Strong, if not dominant, positioning within end markets. Information services providers serve a variety of industries with critical information and analytics that are often embedded within its customers’ everyday business processes and decision-making. In many cases the publicly traded information services companies have very strong, if not dominant, positioning within their largest end-markets.
High degree of revenue visibility due to recurring and or subscription-based revenue. Information & analytic services companies can have a high percentage of recurring revenue. Contracts are often subscription-based, which are typically prepaid, or long-term agreements. Revenue tends to be “sticky” with renewal rates in the 90% range due to the information and analytics being embedded within the customer’s everyday processes and decision-making.
Resilient organic growth, which remained positive during the downturn and even better positioned currently. Organic growth for our coverage group during the downturn remained positive except for Equifax, which is highly levered to consumer credit and where revenue is more transactional.
High incremental margin due to operating leverage of a build once/resell many times business model. An information & analytic services business model has inherent operating leverage leading to high incremental margin. Ideally, a vendor produces information once and resells it as many times as possible with little to no incremental cost. Companies continuously add value to existing products and are therefore able to increase pricing, which often far exceeds the incremental investment.
Free cash flow is a major positive for the group. The inherent leverage of an information services company allows for strong cash flow generation especially for companies with high levels of subscription-based revenue as cash is collected up front and minimal incremental working capital is needed to support revenue growth. The group fared very well during the downturn in terms of free cash flow generation. Cash flow generation has been mostly used to fuel acquisitive growth and share buyback, Equifax and Solera Holdings pay dividends, and Nielsen is paying down debt. We expect acquisitions to be the main use of cash for the foreseeable future as most companies cite record pipelines for acquisition targets.
INTEGRATED RESEARCH & ECONOMICS Valuation is never cheap due to the quality financial characteristics of the group.
Investors typically value the group using EV/EBITDA and to a lesser extent price-to-earnings (P/E) multiples. The group’s historical average five-year FY2 EV/EBITDA multiple is approximately 10.0x with a range of approximately 6.0-13.0x. The group’s historical average five-year FY2 P/E multiple is approximately 18.0x with a range of approximately 11.0x-25.0x.
Exhibit 4. Information Services EV/EBITDA Historical Valuation
Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 6
7 8 9 10 11 12 13
14 Information Services Avg. 5 Yr EV/EBITDA- FY2
Average Line EV/EBITDA FY2 Source: FactSet Research Systems
Exhibit 5. Information Services P/E Historical Valuation
Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 10
12 14 16 18 20 22 24
26 Information Services Avg. 5 Yr P/E - FY2
Price to Earnings FY2 Average Line Source: FactSet Research Systems
C
ASES
TUDY—Nielsen Holdings N.V. (NLSN)
Company Description: Nielsen is a global information and measurement services company that provides clients with an in-depth understanding of customers and their behavior. Specifically, Nielsen provides media and marketing information, analytics, and industry expertise about what customers watch (TV, online, mobile) and what customers buy to help clients strengthen market positions, identify growth opportunities, and enhance marketing and advertising return on investment. The company has a presence in approximately 100 countries, is incorporated in the Netherlands, and is headquartered in New York, New York.
“We expect to continue to grow fast within analytics as we root the insights into the basic information services that we provide.”
David Calhoun, CEO, Nielsen, May 7, 2012
CEO David Calhoun has helped to successfully lead the transition of Nielsen from a mostly U.S.-centric marketing information company to a global information and analytic services powerhouse.
Nielsen, now in approximately 100 countries, provides clients with an in-depth understanding of customers and their behavior. Specifically, Nielsen provides media and marketing information, analytics, and industry expertise about what customers buy and what customers watch to help strengthen market positions, identify growth opportunities, and enhance marketing and advertising return on investment. Nielsen enjoys very strong market share within its two main end markets which should continue as CEO Calhoun believes that competitive barriers over the past six years have actually increased due to the fragmentation of content distribution and the role of big data.
Nielsen Exemplifies the Attractive Investment Characteristics Within High-Quality Information Services Companies as it enjoys (1) high degree of revenue visibility due to recurring and/or subscription-based revenue (~70% of revenue committed entering a year);
(2) high incremental margin due to operating leverage of a build once/resell many times business model; (3) dominant market positioning as a result of unique data assets, scale, and contributory data relationships; (4) attractive free cash flow characteristics inherent in a subscription-based model; and (5) attractive top-line growth opportunities for information and analytics.
Consumer Packaged Goods Industry Relies on Nielsen to Lead the Way Into Developing Markets. Nielsen’s Buy segment provides retail market share data, which is the means by which large consumer packaged goods (CPG) companies monitor business to determine if they are winning or losing in the market. As CPG companies increasingly pursue growth opportunities in developing countries with faster-growing middle class populations, Nielsen is often called on before its clients move into a country in order to provide important market information and analysis. Nielsen has been investing and growing rapidly over the past five years within developing markets as it has doubled the size of that business to over $1.0 billion in annual revenue.
Management expects its developing markets to continue its strong growth in the teens range.
Positioning to Benefit from the Fragmentation of Content Distribution. Nielsen is the dominant provider of market share data for TV as its ratings are the measure of value, or the
“currency,” for the TV industry. The company has been investing heavily for a number of years to extend that market leadership to address the media/advertising industries challenges around monetization and return on investment in a world of content distribution fragmentation and the increasing share of advertising dollars being spent on the Internet. Two of Nielsen’s relatively new solutions to address the above include:
Cross-Platform Audience Measurement—provides audience measurement information for content that is viewed across platforms such as TV, online, and mobile.
Online Campaign Ratings (OCR)—provides audience measurement information to help determine the effectiveness of a branded advertising campaign online.
INTEGRATED RESEARCH & ECONOMICS Nielsen will Continue to Use Analytics and Big Data Expertise to Develop New
Products. Nielsen is continually trying to extrapolate additional insights and create new products from utilizing analytics and combining its information with additional external data sources.
Analytics are prevalent within both its Buy and Watch segments. Within its Buy segment, the company’s new Answers platform enables customers to analyze consumer purchasing information in real time. Within its Watch segment, both of the above mentioned audience measurement tools are examples. Nielsen believes it holds a big advantage over potential entrants into its end markets as its analytics are rooted in the basic information services that it provides, which have been tested over the years, and are the standards for how consumption is measured in the media/advertising and CPG worlds.
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INTEGRATED RESEARCH & ECONOMICS
T ECHNOLOGY
IT/BPO Services
Edward S. Caso, Jr., CFA[email protected] 443/263-6524