Brainjuicer (BJU) is a small player in the market research industry. Market research provides information to identify and analyze the market need, market size and competition. Market research techniques encompass both qualitative techniques such as focus groups, in-depth interviews, and ethnography, as well as quantitative techniques such as customer surveys, and analysis of secondary data. The industry is dominated by Nielsen Holdings , Kantar (division of WPP), IMS Health, Ipsos, GFK and Information Resources who together combine more than 40% of total worldwide revenue on marketing, advertising and public opinion research services for all for-profit firms (in total roughly USD 40 bn) as estimated by ESOMAR.
BJU represents a new approach to market research
BJU is a potential disruptor to the market research industry.
Traditional market research as offered by most of the established market research companies focuses on human decision-making by emphasizing the importance and measurement of rational and persuasion based messaging. Their testing methods use metrics to assess perceptions of functionality, likability, purchase intention and brand recall to predict in-market performance. In pre-testing communication to customers the brand proposition is of primary importance with expressing emotions being a minor component. This format is basically based on ideas which were developed by social scientists until the 1970s.
In contrast to traditional market research, BJU’s proposition targets pure emotional seduction instead of persuasion. Based on their approach, instead of brand recall, brand recognition coupled with true emotions is all that matters. So BJU is of the opinion that brand message is less important than most industry participants believe and that on the other hand moving people’s feelings sufficiently is of most importance. BJU’S offerings measure how much people feel – the more customers feel, the more they buy.
BJU uses research conducted over the last decades in Behavioural Science to convince clients to use their products. When reading through BJU’s annual reports you will come across the terms System 1 (fast) and System 2 (slow) thinking developed by Daniel Kahneman and outlined in his book Thinking, Fast and Slow (this book is a must read not only for any value investor but anyone interested in the human mind).
System 1 is a perceptual and intuitive system, generating involuntary impressions that do not need to be expressed in words. This system is fast to react, automatic, associative, emotional, effortless and learns through repeated experiences and gradually over time. System 2 on the other hand is slow to react, effortful, analytical, rule-governed but flexible enough to assimilate and process new information.
BJU argues that by assuming that people are reliable witnesses to their behaviour, consistent in their preferences and able to predict their future behaviour and decisions, conventional market research is still firmly embedded in System 2 thinking. However, Behavioural Economics suggest that people have instead malleable and fluid preferences with individual decisions being influenced more than we realise by others. System 1 thinking means that we often rely on intuitive judgements influenced by the environment around us, the way choices are put to us and the people we are with. It alos means that we are better at predicting what other people will do than we are at predicting our own behaviour.
As Kahnemann points out in Thinking, Fast and Slow, “An important advance is that emotion now looms much larger in our understanding of intuitive judgement and choices than it did in the past.” And he continues that human decision making often “would today be described as an example of the affect heuristic, where judgements and decisions are guided directly by feelings of liking and disliking, with little deliberation or reasoning.” Or to put it with the words of neurologist Donald Cane, “The essential difference between emotion and reason is that emotion leads to action while reason leads to conclusions”.
A closer look at BJU’s product offerings
BJU offers two product categories. Traditional products (“Twist”) using industry standard quantitative research methods adding some new features and unconventional solutions (“Juice”) which according to the company are different from any available technique elsewhere and which challenge traditional approaches.
The following table from the 2015 annual reporting provides an overview about the mix of gross profit from the company’s different revenue streams:
System1 Ad Testing and Brand Tracking are the company’s “flagship services”. They are helping clients to build their brands by pre-testing advertising before it is broadcast, and assessing in-market performance by tracking brand health. Gross profit from ad testing and brand tracking together has grown 31% per annum compound over the last five years.
Predictive Markets is BJU’s best-selling product and it has grown at an annual compounded rate of 18% in gross profit over the last five years. It uses emotional measures, the wisdom of crowds and a game-format to ask people what they feel other people would buy or not buy and therefore to anticipate the likely success of an idea, product or political candidate. According to BJU, the tool has proven highly discriminatory and predictive of winning concepts and avoids the flaws of methods like concept testing: people being unreliable predictors of their own behaviour. The following excerpts of an instructive article I found here, should provide a good understanding of the predictive markets method:
“Unlike traditional concept-test surveys, where researchers try to assemble a representative sample of likely consumers and ask about their personal preferences and intentions, a prediction market relies more on diversity in the participant pool than on representativeness. And rather than ask “What do you like” or “What are you likely to do,” a prediction market asks “What is going to happen?”
Each participant in the market is given play money or points to invest in their answers. They answer only the questions about which they have a strong opinion; can invest in the likely failure of an idea as well as in the likely success of one; and invest as few or as many points as they want based on the strength of their confidence in their own predictions. Furthermore, when they invest, they provide an explanation of why they’re doing it. When the market closes, each prediction ends up with a numeric value representing the probability that it will come to pass. If someone invests early and the other investors in the market tend to agree with them (i.e., if the market consensus coalesces around their prediction) then their “net worth” will increase. On the other hand, if the market consensus runs counter to their prediction, the value of their “investment” will decline.
As with a stock market, the theory is that if you enable people to put their (play) money where their mouths are, to invest in their own predictions about the behavior of others (as opposed to what they themselves would be likely to buy or use) based on their confidence in the outcomes, you’ll get a truer picture of what is likely to have value in the real market. And it’s true – gamification elements such as leaderboards and net-worth scores offer participants recognition, reward and status as well as an opportunity to compete. When people have a skin in the game, when they’re invested in the outcome, they commit more thought and attention to the process.”
As the article further outlines, BJU did not invent predictive markets. The method has already been used by the University of Iowa since the late 1980s and also by some large multinational companies including Intel, Google and Microsoft, but as far as I understand BJU was the first marketing research company to offer this method to clients. Additionally, the article shows that results of predictive markets backed by different academic and corporate studies have been as good as if not more accurate than other methods. Moreover, the research suggests that neither large nor necessarily representative sample sizes are needed to arrive at accurate answers. That is important as it enables the predictive markets method to test accurately a multitude of concepts and ideas at a much lower costs than traditional techniques.
Another successful quantitative Juice product is the System 1 concept optimizer. In contrast to predictive markets, where the focus lies on people forecasting the decisions of others, concept optimizer probes for what emotion is evoked by different concepts to test and improve ideas. Hence, people are first asked of what they feel instead of what they think to capture the emotional response to an idea. They can choose between 7 emotions (including surprise, anger, fear, sadness, contempt, happiness and disgust) and neutrality (least beneficial in evaluating ideas). After that, people are asked why they felt that way which is in line with traditional concept testing. Based on how people feel, BJU benchmarks the ideas from one to five stars ideas. Historically only 6% of ideas reached a top five star rating. So far BJU has tested more than 40,000 new product concepts providing the company with a substantial database. A more detailed product description including a case study of Nutella & Go can be found here.
Apparently, the company’s Twist products contribution to gross profit has declined over the years. They represented 15% of 2015 gross profit, down from 50% in 2010. Management has communicated to investors several times that the conventional twist products will only temporarily contribute to the company’s operations to pave the way for the company’s unconventional products.
Moreover, according to the latest reporting, Twist products do not provide the company with a particular strategic advantage and in general are not conducive to ongoing repeatable revenue streams. They are also less standardised and less scalable than Juice products.
Juice Generation Qualitative contains consultancy projects. While the size of the particular projects can be large, the flow of work is rather lumpy. The focus of this product was to intensify relationships with senior marketing people to support the growth of the higher margin quantitative Juice products. However, this has not worked out well. Therefore, management is letting the projects winding down. Further projects will be conducted by an outsourced team.
The marketing of BJU’s products takes time and efforts
BJU’s target clients are predominantly in the consumer goods and services sector and they combine a group of the world’s largest buyers of market research. BJU’s products are focussed on the client’s innovation process for new ideas. According to the company, around half of the target clients’ market research spend is applied to new ideas and this segment is underserved by BJU’s competitors. From a historic perspective, BJU’s clients are also less affected by economic up and down cycles due to relative stability of demand for their products and services.
BJU is no in its 17th year after foundation but still has a very small share of its addressable market. Though BJU is now working for many of the world’s 20 largest buyers of market research, the company has been struggling to win preferred supplier mandates. A mandate is where a large client nominates a single supplier to do all of a certain type of its research on an on-going basis and they can be worth several million GBP in revenue per year. Interestingly, according to management clients are moving more and more away from mandating single suppliers and revenues from the two existing mandates have remained below expectations.
BJU’s big challenge is to gain a more significant share of the clients’ market research spend. While the potential for growth in market share significantly outweighs potential declines in the overall market, market share growth is not easily done for two reasons:
First, clients’ switching costs are high. Clients need consistent data over a prolonged period of time to be able to compare data points. By switching to another market research company new survey data might not be comparable with the older one. In addition, switching to a competing research company will produce ramp up costs for the client while the service performed by the new research company might be very similar to the former one as they both use the same traditional market research methods. Nevertheless, as I described above BJU offers a new approach to market research. This might incentivize potential clients to take the burden and switch to BJU because they have been convinced of BJU’s superior methods.
However, and this is the second reason, BJU’s challenge is in selling its new methods into large and mostly conservative clients and dislodging long standing traditional approaches. Most of this comes down to habit. Clients are used to an established language and standard questions making it easy for them to discuss and interpret the research. For instance, for many potential clients it seems hard to believe that ads with little or no obvious brand message can produce great commercial effects by just triggering people’s feelings. Moreover, market research often works as an insurance policy to prevent the marketing department from doing folly things. To the contrary, BJU tries to promote market research as an “enabling” policy helping the marketing department to improve its work. According to BJU, Behavioural Science is now becoming a more mainstream phenomena within the marketing world with the large research groups trying to adopt to the new language. Interestingly however, while the incumbent large research groups are now offering emotional measures, they “are not using emotional data to change how they measure results. Nor are they changing their model of how advertising works, because that would be to admit they’ve had it wrong for decades and render useless their huge normative database of redundant persuasion-based measures. Without changing their model of interpretation, no amount of new emotional measures will improve their recommendations, and we believe this will reveal itself over the same time period BrainJuicer’s emotional and more predictive model becomes associated with increasingly famous ad campaigns.” (From the 2013 annual report)
BJU recently started offering some products on Zappistore, which is an online self-service platform for buying research services. According to management, it is a low cost means of making their services more available, and is highly scalable. It has minimal on-going cost other than the revenue share with Zappistore.
You can make your own judgement by watching a number of the most successful adverts listed below, where BJU was involved in the development:
- Cadbury Gorrilla ad
- 3 Mobile Moonwalking Pony
- Guiness Wheelchair Basketball
- John Lewis MontyThePenguin
- 3 Mobile Singning Kitty
The odds of being a durable business are quite high for BJU
BJU is bringing innovative products to the market which are not easily sold to clients. So what is BJU potential to survive or even prosper in its industry?
BJU is getting noticed. First, they have a charismatic founder and CEO who is strongly promoting the company’s message. Second, for a company of this size they have already won a large number of awards including being named Marketing’s Market Research Agency of the Year for several years and GRIT’s most innovative for the 4th time in a row in 2015. For instance, GRIT’s ranking is based on 3,565 responses from industry clients, suppliers and agencies. Hence, the industry’s appreciation for BJU seems to be a real testament for the quality of BJU’s products. In addition, the successive winning of awards over many years indicates that BJU is not a short term story fading away soon, but is being recognized as an established organization in its industry. Consequently, BJU might have been able to create a brand in its industry signalling innovation, creativity and flexibility which does not only attract potential clients but also talented employees. BJU is working hard to keep this reputation alive. It has been spending between 7% and 10% of revenue for product development over the last couple of years (with all of these expenses being reflected in the income statement).
According to BJU, the company owns one of the largest normative databases of emotional metrics. These databases are what research firms use to calibrate the results of their surveys, and they take many years to build and have significant value. From the 2014 annual report: “The more projects we undertake, the more our normative database of emotional metrics will grow, the greater the validation of our solutions, the more credible and valuable our solutions will become. The more we hone our techniques and expand their applicability, the more difficult they will be to replicate. The longer we work for our large clients, the more we will demonstrate the value of our research, and the closer the relationships we will forge. The more we recruit at entry level and promote and develop from within the more we will nurture our culture as we grow.”
Large established competitors could replicate BJU’s approach by embracing the thinking of behavioural science. However, this would also mean that the established market research companies had to negate at least a large part of their existing measures which are based on their own extensive normative databases. Management outlines in the 2014 annual report that “Copy-cat challenges to BrainJuicer are more likely to come from smaller agencies. However, it would be hard to replicate our techniques, given the need to copy our question types (which, in some cases, have copyright protections), develop the algorithms which translate respondent feedback into meaningful scores, validate the scores, populate the normative databases, and then explain to clients why the techniques are the same as a competitor’s.”
Highly profitable business with slowing growth rate
Edit 3/23/2016: ROCE = EBIT / (non-current assets + working capital + other net current assets)
Revenues grew at a cumulative average growth rate of 22% over the last ten years. Growth rates have been slowing down over the last three years.
36% of revenues are coming from the US, followed by the UK (34%), Continental Europe (16%), Asia (8%) and Brazil (6%).
As I have shown above, the product mix is changing with growth in Juice products substituting for declines in Twist products. With 85% of revenues now coming from Juice products, one could expect that the drag effect from Twist products will become negligible in the future. Hence, it will be interesting to see whether the company will be able to return to higher growth rates in the coming years. According to the latest annual report, the shift to Juice products has also enabled the company to largely avoid the price war on Twist products that continues among the large traditional research firms.
Management also differentiates between the proportion of business which is “ongoing” (sole supplier and regular usage) as opposed to “ad hoc” (one-off projects). In 2015 “ongoing” accounted for 27% of gross profit.
Revenues are seasonal with a high proportion being earned in the final quarter, because many clients are using up budget allocations towards the end of the year. For instance, in 2012 the seasonal increase in November and December fell significantly short of that experienced in the previous year. Limited revenue visibility combined with high operating leverage can lead to temporary underperformance as in 2012.
Net profit would be substantially higher (up to 50%) when adjusted for product development expenses. Even without any adjustments made, return on capital employed is still looking excellent.
The business is highly cash generative with average free cash flow conversion rates above 90%.
The company managed 994 projects for 243 different clients in 2015. BJU earned 7% of its total revenue from the largest customer.
The graph below provides an overview of some KPI’s (revenue per employee, revenue per client, revenue per project) in GBP ‘000:
Strongly committed management team and investor friendly capital allocation
BJU was founded in 1999 by John Kearon with the goal to improve the usefulness and efficiency of quantitative research. At that time BJU was one of the first online research agencies, when according to management many heads of research at major multinationals refused to accept that online would become mainstream. Today, online has become accepted and accounts for over 60% of all quantitative research worldwide.
Management takes a long term view in its decision making. In their 2013 report they mentioned that their time horizon is “essentially forever”. John Kearon is holding roughly 31% of the company’s equity and has emphasized many times that BJU is not for sale. Other executives are holding 2.5% of shares outstanding.
Management compensation looks acceptable with the three key executives earning base salaries below GBP 200 k each. In addition, they have a bonus potential of up to 50% of base salary. Moreover, they have been granted share options for roughly 1 m shares (current shares outstanding 12.7 m). Roughly 60% of granted options vest provided that BJU meets performance criteria based on a substantial increase in earnings per share over a three year period commencing in 2014 (at least 25% compound annual growth for full vesting, and at least 15% compound annual growth for any vesting), backed by a share price underpin of GBP 5.051.
In terms of capital allocation, the company is returning surplus cash (over a cash buffer) to shareholders either by paying out special dividends above ordinary dividends or by way of share buy backs if the price is attractive. In their 2014 report they have also mentioned that they might consider acquisition targets where they complement their offerings. In 2015, they aborted a potential acquisition due to “valuation issues”.
With a market cap of GBP 35.0 m (at the time of my investment) no debt and net cash of GBP 6.3 m BJU trades for less than 10 times earnings (adjusted for net cash).
Generally speaking, share prices of market research companies have recently underperformed the major indices. The fear of potential declines in the overall market due to less spending from consumer goods companies and the entrance of low cost operators into the industry seem to discourage potential buyers. Over the last 12 months, BJU’s share price lost roughly one quarter of its value. However, BJU seems to be less affected by overall market declines due to its small size and its non-standard product offerings.
Growth expectations for BJU have come down aftter three years of stable revenue generation. The market penetration of their products takes time. However, the company continues to generate high returns on capital coupled with very good quality of earnings. Over the next years, the almost completed substitution from Twist to Juice products might unveil the return to revenue growth. If that is the case, the characteristics of the business will allow for substantial margin enhancement. As the business requires little capital to grow organically, shareholders can also expect increasing capital returns.
However, the current valuation does not require any growth at all to justify the current share price as shareholders can participate in the company’s future operations at a high single digit annual return.
On February 10, 2016, I bought a 3% position for the portfolio at 275 pence per share. From today on I will further increase the position to 4% of the portfoli0. Edit 3/21/2016: Limit is 310 pence per share.
The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always please do your own research!