Disappointing quarterly results that led to revised downward guidance, a strategic review of its Buy segment and the year-end retirement of longtime CEO Mitch Barns have led Wall Street analysts to lower their stock price outlook for Nielsen Holdings.
The company's financial performance and the upcoming management change were dubbed "significant negative surprises" by Pivotal Research analyst Brian Wieser in a note, where he placed Nielsen's new price target at $27 for year-end 2018, down from $35.
Dan Salmon, an analyst at BMO Capital Markets, said in a note that "we believe the risk/reward has changed due to Emerging Buy deceleration." He added that Barns’ retirement and strategic review for Buy mark "a shift away from a long-term vision for 'closing the loop.' While corporate actions could unlock value, the long-term vision of Watch operating solo is less attractive to us." BMO dropped its price target to $24 from $38 on lower estimates and a lower multiple, owing to incremental secular pressure.
One component being watched closely on the Watch side is Marketing Effectiveness, as outcome-based metrics are increasingly important to clients measuring the impact of campaigns on purchase behavior.
A $400 million annual revenue sub-segment, Marketing Effectiveness grew 6%, or 1% on an organic basis in the second quarter with Wieser noting significant deceleration from 17% organic growth in the first quarter. Management, according to Wieser, pointed to the EU's General Data Protection Regulation, or GDPR, along with the consumer data privacy landscape and an underestimation of the impact on targeting and its data suppliers working towards compliance as reasons for the slowdown.
Salmon noted that "while the issues resulting from GDPR impacted Marketing Effectiveness during the quarter (and not measurement), we believe lower second-half Watch guidance bakes in conservatism for the digital measurement business."
For his part, Wieser believes that in looking past 2018 "it’s difficult to be overly confident that mid-single-digit growth will eventually resume." Based on the company’s recent trajectory, 2019 might be particularly challenging as it would be "a surprise if the Buy segment resumed growth in the face of the uncertainties associated with a strategic review and as any GDPR impact on Watch segment revenues will persist until at least the third quarter of 2019," he said.
Barnes on the company's July 26 earnings call said Nielsen "saw increased pressure on clients spend in the developed markets in 2Q and as multinational spending weakened further. And our guidance assumes a similar environment to what we saw in the second quarter."
Salmon pointed to strong margin expansion within Buy led by the company’s efficiency initiatives, Watch cost efficiencies tied to the adoption of Gracenote Inc.'s technology and an acceleration in the adoption of Digital Ad Ratings and Digital Content products as factors that will impact Nielsen's fiscal fortunes.
Wieser said competition from data research firm IRI "probably won’t let up and a reinvigorated comScore Inc. adds further risks to this outlook."
Still, he said, Pivotal continues to "hear favorable perspectives on Nielsen versus its competitors from customers we interact with and continue to believe that they are held up as 'the gold standard' versus its peers. Of course, if the market wants more silver than gold (to extend the metaphor) we recognize that Nielsen’s business is less assured."
Nielsen reported net income attributable to shareholders of $72 million in the second quarter, down from $131 million in the year-earlier period, with results shaped in part by $65 million in restructuring charges. The company significantly lowered its guidance for the year, pointing to net income of $340 million to $360 million from previous guidance of $535 million to $560 million.