Nielsen hosted its annual investor day on Thursday, introducing guidance for 2018 and 2020, demonstrating several initiatives while also announcing key pieces of news. New explicit guidance for 2018 called for Buy segment revenues between -1% and +1% based upon a developed market decline of -2% to -4% and emerging market growth of +8% to +10%. Watch segment revenues are forecast to rise by +5% to +6%. These figures were in-line with our prior expectations. Margin guidance for a reduction of 60bps contrasted with our expectation for improvement next year, as the company's planned internal investments will more than offset operating efficiencies. The combination of those efforts are intended to lead to a +4% CAGR through 2020 (including 0.5% to 1.0% of annual growth from M&A), also in-line with our prior expectations, albeit with higher adjusted margins than we previously forecast at 35%. This compares with our prior 33% forecast, although that forecast did not include an expectation of restructuring activity in the years leading up to and including 2020. As the company now intends to incur ~$280mm in cumulative restructuring costs between 2018 and 2020 – if we included those costs in adjusted EBITDA margins, a ~35% figure in 2020 would plausibly end up back around ~33%. Initially more concerning to us (and to investors, as indicated by the stock's declines early in the day) was the company's newly articulated goal of $2.00 per share EPS in 2020, substantially below prior forecasts (ours was at $2.56). Our model presumed taxes would fall towards a 25% rate over a multi-year period, while Nielsen effectively assumes no changes in its targeted 38.0-38.5% book tax rate for this year and next. Of course, if the status quo held, Nielsen could well continue paying cash tax rates that remains substantially lower than the book tax rates. Overall, taxes account for the bulk of the difference between our prior expectations and where 2020 guidance. Implied expectations for higher interest expenses were a more meaningful negative factor not explicitly considered in our prior model. In short, while the new guidance was meaningfully lower than our prior expectations on the headline, for practical purposes it was only slightly lower.
Notable news related to set-top data from Comcast, which Nielsen will include in its local TV audience measurement product, supplementing data from Charter, DISH and AT&T. We believe this is the first instance of Comcast licensing its data in this manner. Press reports from two years ago indicated at that time, Nielsen was willing to pay $100mm annually for exclusive access, although undoubtedly the amount Nielsen is paying is much less than this amount now, given the successes Nielsen has had in securing other data-sets. Beyond the likely product improvements this means for the local business, we think there are more important strategic considerations around Comcast providing access to its set-top data given Comcast's past flirtations with entering the measurement business. The news may also be positive to the extent that it reflects a deeper ongoing relationship with Comcast, one of Nielsen's largest customers, and helps ensure that despite public criticisms Nielsen often faces, the companies maintain a deep and often inter-dependent relationship. To further illustrate an expansion of this relationship, Nielsen's presentation slides indicated that NBCU is now subscribing to Nielsen's out-of-home TV measurement service now, alongside Fox, Turner, ESPN, CBS and the NFL Network.
Management also announced an expanded relationship with Wal-Mart, describing it as transformative, and involving a tighter reliance by Wal-Mart on Nielsen data, making it as a core element of Wal-Mart's supply chain. The opportunity for Nielsen is that Wal-Mart may encourage manufacturers to rely on the same data for purposes of optimizing the manufacturer-retailer relationship. Wal-Mart is also providing Nielsen with access to Jet.com data for e-commerce measurement, improving Nielsen's product in that sphere as well. Expenses will be front-loaded, with revenues expected towards the back half of 2018.
Overall, the enhanced investments next year are supportive of higher-probability long-term revenue and profit growth. However, accounting for the costs associated with these efforts in our model, we arrive at a slightly lower price target, now $38 vs. $39 previously. We continue to rate the stock HOLD.
VALUATION: We value Nielsen with a DCF, using a 6.4% near-term discount rate, a 11.5% long-term discount rate and long-term 4.0% growth.
RISKS include macro-economic trends, the rising availability of less-expensive research solutions (which could impact Nielsen's discretionary services) and the potential that Nielsen's status as the provider of a TV advertising trading currency could be threatened.
FULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE: NLSN 11-10-17.pdf
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