Introduction
The following discussion and analysis supplements management's discussion and
analysis of
From time to time, Nielsen may use its website and social media outlets as channels of distribution of material company information. Financial and other material information regarding the company is routinely posted and accessible on our website at http://www.nielsen.com/investors and our Twitter account at http://twitter.com/nielsen.
Background and Executive Summary
We are a leading global measurement and data analytics company that provides the most complete and trusted view available of consumers and markets worldwide. Our approach marries our proprietary data with other data sources to help clients around the world understand what's happening now, what's happening next, and how to best act on this knowledge. An S&P 500 company, we have operations in approximately 100 countries, including many emerging markets, covering more than 90% of the world's population, and hold leading market positions in many of our services and geographies.
We believe that important measures of our results of operations include revenue, operating income/(loss) and Adjusted EBITDA (defined below). Our long-term financial objectives include consistent revenue growth and expanding operating margins. Accordingly, we are focused on geographic market and service offering expansion to drive revenue growth and improve operating efficiencies, including effective resource utilization, information technology leverage and overhead cost management.
Our business strategy is built upon a model that has traditionally yielded consistent revenue performance. Typically, before the start of each year, more than 70% of our annual revenue has been committed under contracts in our combined Nielsen Global Connect and Nielsen Global Media segments, which provides us with a greater degree of stability for our revenue and allows us to more effectively manage our profitability and cash flows. See "Business Segment Overview" below for further discussion. We continue to look for growth opportunities through global expansion, specifically within emerging markets, as well as through the cross-platform expansion of our analytical services and measurement services.
On
Our restructuring and other productivity initiatives have been focused on a combination of improving operating leverage through targeted cost-reduction programs, business process improvements and portfolio restructuring actions, while at the same time investing in key programs to enhance future growth opportunities.
On
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Achieving our business objectives requires us to manage a number of key risk areas. Our growth objective of geographic market and service expansion requires us to maintain the consistency and integrity of our information and underlying processes on a global scale, and to invest effectively our capital in technology and infrastructure to keep pace with our clients' demands and our competitors. Core to managing these key risk areas is our commitment to data privacy and security as it drives our ability to deliver quality insights for our clients in line with evolving regulatory requirements and governing standards across all the geographies and industries in which we operate. Our operating footprint across approximately 100 countries requires disciplined global and local resource management of internal and third party providers to ensure success. In addition, our high level of indebtedness requires active management of our debt profile, with a focus on underlying maturities, interest rate risk, liquidity and operating cash flows.
COVID-19
In
We have established a global task force to ensure execution of our key priorities during the COVID-19 pandemic-- the health and safety of our global workforce, maintaining our financial position with ample liquidity, and continuity of critical business processes.
We have taken measures to protect the health and safety of our employees, their families and our clients, with a large majority of our worldwide workforce working from home. We have halted in-store field research and in-person client engagements in many markets and are adapting processes and developing innovative solutions to ensure continuity of critical business processes. In addition, we are sharing retail measurement data with several government entities to support our communities.
We faced increased pressure in both Nielsen Global Media and Nielsen Global Connect in the second quarter. For Nielsen Global Media, this pressure was primarily due to the impact of COVID-19 on sports and non-contracted revenue. For Nielsen Global Connect, this was primarily due to the impact of COVID-19 on retail measurement services in markets that are heavy in traditional trade as well as pressures on custom insights and innovation. These pressures are continuing, though to a lesser extent, primarily due to non-contracted revenues in both Nielsen Global Media and Nielsen Global Connect.
On
We believe we have a sound plan in place to mitigate the financial impacts of the COVID-19 pandemic in the face of ongoing economic uncertainty. We have taken aggressive cost actions to date and continue to closely monitor the situation. We remain well- capitalized, have sufficient liquidity to satisfy our cash needs and will take additional actions as required. We continue to believe that a separation of Nielsen Global Media and Nielsen Global Connect is the best path forward and continue to make operational progress towards separation. As previously announced, the closing is expected to take place in the first quarter of 2021.
For further discussion regarding the potential impacts of COVID-19 and related economic conditions on the Company, see "Part II-Item 1A-Risk Factors.".
Business Segment Overview
We are divided into business units: Nielsen Global Media ("Media") and Nielsen
Global Connect ("Connect"). Media, the arbiter of truth for media markets,
provides media and advertising clients with unbiased and reliable metrics that
create the shared understanding of the industry required for markets to
function, enabling its clients to grow and succeed across the
Connect provides consumer packaged goods manufacturers and retailers with accurate, actionable information and a complete picture of the complex and changing marketplace that brands need to innovate and grow their businesses. Connect provides data and builds tools that use predictive models to turn observations in the marketplace into business decisions and winning solutions. The business's data and insights, combined with the only open, cloud native measurement and analytics platform that democratizes the power of data, continue to provide an essential foundation that makes markets possible in the rapidly evolving world of commerce.
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Certain corporate costs, other than those described above, including those related to selling, finance, legal, human resources, and information technology systems, are considered operating costs and are allocated to our segments based on either the actual amount of costs incurred or on a basis consistent with the operations of the underlying segment.
Critical Accounting Policies
Our accounting policies are set forth in Note 1 to Consolidated Financial Statements contained in the Company's 2019 Annual Report on Form 10-K. We include herein certain updates to those policies.
The estimates of fair value of a reporting unit are determined using a combination of valuation techniques, primarily by an income approach using a discounted cash flow analysis and supplemented by a market-based approach.
A discounted cash flow analysis requires the use of various assumptions, including expectations of future cash flows, growth rates, discount rates and tax rates in developing the present value of future cash flow projections. Many of the factors used in assessing fair value are outside of the control of management, and these assumptions and estimates can change in future periods. Changes in assumptions or estimates could materially affect the determination of the fair value of a reporting unit, and therefore could affect the amount of potential impairment. The following assumptions are significant to our discounted cash flow analysis:
• Business projections - expected future cash flows and growth rates are based on assumptions about the level of business activity in the marketplace as well as applicable cost levels that drive our budget and business plans. Management updated the business projections in light of the estimated impacts from the COVID-19 pandemic. Actual results of operations, cash flows and other factors will likely differ from the estimates used in our valuation, and it is possible that differences and changes could be material. A deterioration in profitability, adverse market conditions and a slower or weaker economic recovery than currently estimated by management could have a significant impact on the estimated fair value of our reporting units and could result in an impairment charge in the future. Should such events or circumstances arise, management would evaluate other options available at that time that, if executed, could result in future profitability. • Long-term growth rates - the assumed long-term growth rate representing the expected rate at which a reporting unit's earnings stream, beyond that of the budget and business plan period, is projected to grow. These rates are used to calculate the terminal value, or value at the end of the future earnings stream, of our reporting units, and are added to the cash flows projected for the budget and business plan period. The long-term growth rate for each reporting unit is influenced by general market conditions as well as factors specific to the reporting unit such as the maturity of the underlying services. The long-term growth rates we used for each of our reporting units in our latest evaluation were between 1.5% and 2.5%. • Discount rates - the reporting unit's combined future cash flows are discounted at a rate that is consistent with a weighted-average cost of capital that is likely to be used by market participants. The weighted-average cost of capital is our estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise. The discount rate for each reporting unit is influenced by general market conditions as well as factors specific to the reporting unit. The discount rates we used in our latest evaluation of our reporting units were between 11.0% and 12.0%.
These estimates and assumptions vary between each reporting unit depending on the facts and circumstances specific to that unit. We believe that the estimates and assumptions we made are reasonable, but they are susceptible to change from period to period.
We also use a market-based approach in estimating the fair value of our reporting units. The market-based approach utilizes available market comparisons such as indicative industry multiples that are applied to current year revenue and earnings, next year's revenue and earnings as well as recent comparable transactions.
To validate the reasonableness of the reporting unit fair values, we reconcile the aggregate fair values of our reporting units to our enterprise market capitalization. Enterprise market capitalization includes, among other factors, the market value of our common stock and the appropriate redemption values of our debt. We perform sensitivity analyses on our assumptions, primarily around both
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long-term growth rate and discount rate assumptions. Our sensitivity analyses include several combinations of reasonably possible scenarios with regard to these assumptions, including a one percent movement in both our long-term growth rate and discount rate assumptions. When applying these sensitivity analyses, we noted that the fair value was greater than the carrying value for both of our reporting units. While management believes that these sensitivity analyses provide a reasonable basis on which to evaluate the recovery of our goodwill, other facts or circumstances may arise that could impact the impairment assessment and therefore these analyses should not be used as a sole predictor of impairment. Based on our second quarter results and projections, there were no indicators of impairment during the second quarter of 2020. Nielsen will continue to closely evaluate any indicators of future impairments.
The impairment test for other indefinite-lived intangible assets consists of a
comparison of the fair value of the intangible asset with its carrying amount.
If the carrying amount of the intangible asset exceeds its fair value, an
impairment loss is recognized in an amount equal to that excess. The estimates
of fair value of trade names and trademarks are determined using a "relief from
royalty" discounted cash flow valuation methodology, which includes revenue
projections. Significant assumptions inherent in this methodology include
estimates of royalty rates and discount rates. Discount rate assumptions are
based on an assessment of the risk inherent in the respective intangible assets.
Assumptions about royalty rates are based on the rates at which comparable trade
names and trademarks are being licensed in the marketplace. There was no
impairment noted in any period presented with respect to the Company's
indefinite-lived intangible assets. As of the
Factors Affecting Our Financial Results
Acquisitions and Investments in Affiliates
Acquisitions
For the six months ended
For the six months ended
Foreign Currency
Our financial results are reported in
Six Months Ended June 30, 2020 2019 U.S. Dollar 60 % 58 % Euro 10 % 10 % Other Currencies 30 % 32 % Total 100 % 100 %
Fluctuations in the value of foreign currencies relative to the
We evaluate our results of operations on both an as reported and a constant currency basis. The constant currency presentation is a non-GAAP financial measure, which excludes the impact of period-over-period fluctuations in foreign currency exchange rates. We
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believe providing constant currency information provides valuable supplemental information regarding our results of operations, thereby facilitating period-to-period comparisons of our business performance and is consistent with how management evaluates our performance. We calculate constant currency percentages by converting our prior-period local currency financial results using the current period foreign currency exchange rates and comparing these adjusted amounts to our current period reported results. This calculation may differ from similarly-titled measures used by others. In addition, the constant currency presentation is not meant to be a substitution for recorded amounts presented in conformity with GAAP nor should such amounts be considered in isolation.
Accounts Receivable
We extend non-interest bearing trade credit to our customers in the ordinary
course of business. To minimize credit risk, ongoing credit evaluations of
client's financial condition are performed. Effective
The uncertainty regarding the length of lock-downs related to the COVID-19 pandemic and speed of recovery may impact our level of reserves in future periods. We continue to monitor and assess the impacts related to our different clients and will base our reasonable forecasts on the latest information available.
During the six months ended
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