Drew Stydeman, this is Alex Hess. We cover information services, data book, our quarterly primers up here. It's going to be 30 minutes of me asking questions of Jim and Mike. Jim, welcome back.
Thank you.
This is a new reiteration of Ultimate Services Investor Conference with you, Eric and I think.
I think I was sitting here in this thing about eight years ago.
I can imagine. I can imagine. Welcome back. So this is actually kind of a big picture question just to kind of start out with, Jim. As you've returned to this space and you've returned to public markets and NIQ returned to public markets from its previous iteration of public markets, what has surprised you? And I say surprised, I mean things that you were surprised either favorably or unfavorably on as you've begun this NIQ journey.
Yeah. Well, I think the big thing we all know that feels a little surprising is, I guess, the interpretation of what AI is going to do to the whole information services industry. I think I'll start with what's not a surprise. I do feel like in our discussions with our investors, they get that we're an execution machine. They get that when we say we're going to do something and grow X percent and we're going to expand our margins, there's kind of a method behind all of that. They get we're mission critical for our clients. They get that we're the market leader.
What surprises me, though, is a bit of the overreaction to AI somehow that it's going to disintermediate information systems companies when all AI really is a large language model that's searching for the next best word statistically that is based 100% on the data that it's fed. And so it seems like for a company like ours who collects 3.8 trillion terabytes of information and transactions a week, perfect, because we're going to be able to train our own large language models and do our own analytics and take advantage of that in a big way that's going to help our clients and already is. And so I feel like we're performing. We're doing what we said we're going to do. Our clients are very happy with what we're doing. And it's getting overshadowed, but I think the whole industry is getting overshadowed by a bit of fear.
But we're here for the long haul. We're solid. We have a moat around our data. We can get into all that, Andrew, if you want to. And we're just going to take advantage of AI to expand our capacity and our ability to do things for our clients, not for someone to somehow encroach on us.
So we'll definitely hit on AI. Jim, just for some people that might be new, just describe NIQ's kind of data positioning, data analytics positioning within consumer packaged goods and the retail industry, and particularly what makes NIQ a modern information service.
So we are the global leader in consumer buying behavior or consumer insights. And we serve 23,000 clients around the world. We literally do business with every relevant manufacturer in tech and durables and in fast-moving packaged goods. Our mantra, if you could put it in two words, we call it the full view. And what we're saying is we want to have a 360 view of consumer shopping behavior. And that drives our actions. So we invest constantly in getting all the transactions that we can. And that's about 7.2 trillion right now of annual spend of what the consumer is doing. So we get that information, of course, through retailers. We get e-comm reads. We have the biggest e-comm panel in the world. In undeveloped markets, we have a whole network of people that go into the stores and track what's selling and not selling.
And we have consumer panels or demographic consumer panels. And all that adds up to the biggest footprint of any company in the world relative to consumer shopping behavior by far. We bring that into our world. We call it the ecosystem of NIQ. And then we harmonize that information. We code that information to turn it in a way that our clients can understand it. And then, of course, we act upon that with human intelligence and artificial intelligence and deliver that information to our clients through, like you guys probably know, Bloomberg terminals. They have a Discover terminal that's on all the time. And that's what they're looking at because they could see real-time what's going on in their world. We also give it to a machine-to-machine or basically any way that they need to process it.
A lot of this stuff is on, it's just there on demand. And it for sure looks back. And we can tell them what's happened one hour ago, what's happened yesterday with their market share and how they're doing against their competitors. But with the level of granularity we have, we're also enabling them to look forward. So what if I changed my pricing in Brooklyn for my spaghetti sauce tomorrow? What do you think would happen? Would I sell more? Would I sell less? Or is my competitor running a promotion? And should I be running a promotion? So we're into that level of granularity. And that's the intelligence part of our business. And then we have another part of our business called Activate, in which we're doing special analytical studies around innovation.
So I'm X company and I want to put a new hemp drink into the market or a new blueberry drink into the market. How do you think this is going to go, Nielsen IQ? And we use a product called Basies. And now it's enabled by AI, Basies AI, to help our clients understand how this new product might be received in the market. We do pricing and promotion studies. We do shelf, both digital shelf and physical shelf display analytics. And so those are kind of how the two parts of our business go together. And we take up a pretty massive footprint in our clients. And I think it's very easily fair to say we are mission critical. Our clients use this every day to make their day-to-day decisions. They make decisions on how they're going to pay people.
And they make decisions on where they want to go next.
I definitely agree with the mission critical point because it just kind of reminds us how we got back to mid-single digit growth. Obviously, when I covered Nielsen, the division that NIQ is, didn't have it. And so was it better retention? Was it better pricing? Or were you selling more to the same customer, new customers? What got us back to this mid-single digit growth algorithm?
Sure. And you know this from my previous lives. I'm an engineer. And I figure what drives growth is you got to retain your clients. You got to get price increases. You got to get new clients. You got to upsell and cross-sell new cool stuff to your current clients. And you got to penetrate new markets possibly. So we just said, this is our formula. What do we got to do to make that happen? So we knew when we bought the company that their technology was no good. And that was manifesting in poor delivery to its clients. Still surviving, but shrinking. So we spent nearly a billion dollars on revamping all our creating one data lake, putting in a new platform we call Discover that our clients love. And the result of that is when we went to get renewals, they were happy and not unhappy.
And so therefore, they renewed. Not only would they renew, they would actually pay their mandatory price increases or their cola price increases. So right there, we went from negative to a positive 2.5% growth year- on- year overall. And then the other part of our growth equation is innovation. So we knew our clients needed more coverage in e-comm. We knew they needed more consumer panels, which is demographic data and what consumers are buying. We knew that if we fixed our analytics products, they'd buy more from us because they want to. And so that's driving another, let's say, 1.5%- 2% of our growth. So we had to teach our people how to sell, cross-sell, upsell. And we had to actually have the product. So that's in place. And then we expanded into new markets.
And for us, the small and medium-sized business market, we were completely ignoring. But in our database, we have all the data. As soon as someone sells something, we know they're there. And so we arm our salespeople with leads and with interesting facts to go call these small and medium-sized businesses. And so that business is growing 20% for us actually now. And that combined with penetration in financial services and government and in media is, let's say, adding another 1% of growth. And that gets us to our mid-single steady, mid-single digit growth. And kind of I'm all about using as much science as possible, let's call it, to understand how you're going to grow. And then you do the things that feed those equations for growth. And that's usually really cool products that are really relevant that are helping our clients make money.
A couple of times in your answers, you mentioned panels. You mentioned a quick full view, which you guys also call full view measurement. When I think back again to the olden days of the Nielsen Buy business, one of the big challenges in the power of the consortium was it was missing Costco and Amazon. And you guys have rolled out panel-based products, Amazon sales and share, full view measurement for Costco. Is it fair to say that it's still early days for these products? Or is it already a market success and the road ahead is just tailwind?
Yeah. So our version of those products allows us to get down to the SKU level. So we know the exact product that's selling and when it's selling, what price it's selling at. And those companies in the U.S., we work with Amazon everywhere. And in the U.S., they don't really give out.
SKU level.
SKU level data down to that level. You can look in the past and get market share data kind of at a summarized level. And that's interesting. But what our clients want to do is predict the future. You can only do that with granular data. And so we have come up with a methodology to do that. And we're the only ones who are doing that. And right now, we have about 100 fairly sizable clients who have bought and are using that. And so we have to stay with it.
100 clients with the Amazon product?
Both.
Both.
Yeah. We have to stay with it. None of this stuff is static, right? So we've got to keep at it and keep getting better and better and better at it. But it's already providing our clients clearly see the value in that information.
So you didn't quite say, is it still early days for these two products?
Yeah. Early days.
Or is it like tailwinds?
The products work. And they're being purchased. And so there's a lot of upside as we move forward.
Right. And you're convinced that the integration is being accepted by clients, the combination of consortium data and panel data together.
Yes. Yes. And it's not for sure the panel on demand is a little different where we integrate the market read with who's actually buying. And so I'll try and make an example that is real. Let's say you own Rao's Spaghetti Sauce. We can tell you, here's the Rao's Spaghetti Sauce that's sold in Brooklyn. You're losing share to a new competitor who's also got a branded restaurant brand. And by the way, you're losing it to 50-year-old males who are now buying this new brand. And we can even say, by the way, they're introducing Alfredo Sauce, which is clearly something you should be doing because they're actually buying both products at once. You can only do that with knowing that there is actually 50-year-old males buying stuff and that you get the market read data. So we're able to put those two things together.
That's like a holy grail for some. I was with a big, very big client before we bought the company. And he said, Jim, if you could do one thing, do that. And so we did that. And it's not just in the U.S. It's all around the world.
Right. It's not a secret that when you look at the consumer packaged goods side of your client base, it's been a tough year for them. Does that make your execution any more challenging, selling into them, serving them?
No. Again, back to this Bloomberg terminal. They use our information, whether things are going good or bad. They need to know what's going on. They're not going to cut back on the use. So in good times, they may be flush with cash and say, look, what we want to do is invest in innovation. And so we have something called Basies and Basies AI, which allows them to understand how quickly a customer segment might buy their new product and then get into it. So there's a lot of spending there. They still might be doing pricing optimization. When times are bad, they will probably use our information to understand where they can stop investing in advertising. We're a minor part of their spending relative to advertising. So basically, they're leveraging what they spend with us to save more money where they're spending a lot more money.
It doesn't really pay for them to say, you know what, I'm just not going to do that this year. And so even in our activate business, we're not seeing some demand fall off.
Yeah. That's what I wanted to jump in. So most of your business is subscription. But where there is more transactional is your activation business. You grew it in the third quarter a little bit more than the first half of the year. I definitely remember the comments from your team on the conference. Good fourth quarter on the activation side. My question is, is this just you executing? Or do you actually see demand starting to rebound from the customer standpoint, let's say, on their own?
Yeah. I don't know if we ever saw it not there. So there's a few dynamics you probably understand. So we're selling ad hoc reports. While you're working with a client, they might change their mind halfway through the process and give you new requirements. Of course, you could charge more. But it may move the revenue recognition into another quarter. So some of these fluctuations are just the way our clients move. The demand is always there. And so we're not seeing any real decline in demand. Part of it is execution. And I think we still have a ways to go to manage our sales pipeline like I would like to see it, to manage our fulfillment pipeline like I would like to see it. But that's inevitable. We're just going to do that. I thought I'd just make a comment about activate.
There's this, I think, theory that with AI, it's going to somehow allow all these entrants into the market who are going to take away our analytics business. And someone asked me, are you getting new competitors? And the answer is, for the wrong reason you may not think about, we're getting new competitors because AI is letting us get into new areas where we couldn't really afford to be before. And so AI is making our engineers 40% more productive. It frees up CapEx. It allows us to do more innovation. And so we're starting to say, hey, you know what, you don't need to spend $2 million running that with this big consulting company. You can maybe spend $500,000 with us running this new we can do the analytics. So Andrew, I think we're actually expanding our ability. And I'll just say this. It's our data.
We can innovate all day long in that data. We don't have to pay an extra nickel. And the more capacity that AI frees up our engineers to do more stuff, we're just going to keep expanding our capabilities. So AI is enabling that part of our business.
So I definitely understand that your activation business, which is 20% of revenues, is a tech-enabled analytics business. And you could take business away from consulting firms. But would you still agree that there's more AI risk in your activation business than your intelligence business, which is really kind of a data business?
I just can't agree with you there. I think.
Yeah. Okay. Fair enough. Keep going.
If we do a bad job, absolutely, we can get our lunch eaten. But if we stay with it, number one, and we use that freed up capacity, I mean, this is not a joke number or whatever. Our engineers are 40% more productive using cloud. And so we're just like any other company. So that's freeing up CapEx. That's allowing us to say, where do we want to apply that? And we know what's going on inside our clients because they have to tell us how they're using our data in other analytics. So we're allowed to do what we want to do and look towards new avenues for growth. So if we do a bad job, yes. If we do a good job, we can actually use it to expand our footprint. And maybe, Andrew, I just add one comment there, isn't it?
When we look at that activation business, that's 20% of our revenue. Of that 20%, 80% of it is highly reoccurring, as I'll define it. Highly reoccurring being same clients, buying similar products, same three years in a row in terms of thinking about it. So they're teed up in terms of what those projects are going to look like. So it's not all ad hoc and not in place.
Right. But Mike, you still think I should keep my eye on the activation business? Well, it's reoccurring the way you just defined it. It's not subscription.
Correct. Yeah. We keep our eye on it. You should keep your eye on it. I agree. 100%.
Wait. Mike, since you jumped in about activation. So something, again, I'm going to go back to that comment on the call. And I know your COO said it on the call that we expect a good fourth quarter in activation. Does that mean the same as the third quarter growth? Like, was the third quarter good growth in activation? Or does that mean better than the third quarter? I don't know how to define the word good.
Well, good is a it's an eye to beholder in terms of a definition, I guess. But in terms of the.
Was the third quarter good growth?
I mean, was it improved from where we were in the second quarter?
Right.
Right? And so what we would look to see with that improvement, we'd look to see a similar type of growth pattern looking at the fourth quarter.
Right. That's what I thought you meant. And Jim, I'm not sure you shared with the group here. So when investors ask you, have you seen new startups in your activation space? And I heard you say, of course, we're going into their space. We're seeing the consulting firms. But have you seen what I'm really asking is AI-enabled new startups as competitors?
There's always folks that know this industry that maybe specialize in the Bevel analytic thing here or whatever. In our contracts, you can't take our data and use it without us knowing what's going on. So we know what's going on. And guess what? We get a piece of the action because we just put that in our contract. So we know what's going on. And we know there are players that take certain bites of the apple. But we haven't seen them really impinge upon our activation pipeline.
But no impressive AI startup in this space stands out to you as like, oh, we have to keep our eye on that one.
Not that I would mention.
Yeah. You're probably about to acquire it too.
Yeah. Actually, that's.
I understand that. Here's a kind of amusing question. When you look at your client base, those that really embrace your AI capabilities, is that cohort of your kind of AI-forward customers using more of NIQ's data than just call it a control group that's just your traditional customer?
For sure, more of our data. And an example is I was in London with a client a couple of weeks ago, very forward thinking on AI. They're using some of our I won't say which ones. I don't want to give anything away. But they're using some of our AI products sooner than anyone else. And they're pressuring us to do more faster because it's helping them accelerate their pace of innovation well beyond where they've done in the past. But they're also big users and forward thinkers in their own right, and very curious and doing what I believe are the right things to take advantage of it.
Right. And do you think you could share in that upside? Because when I think about the beauty of NIQ, and I'm really talking about your intelligence business, 80%, it's a lot of fixed subscription. And so if they're using your data more, are you going to share in that upside that they're getting more? How about NIQ?
Yeah. So a couple of ways. Our activation business, or let's call it SANI.
Agreed.
So we built something called Basies AI. And Basies is a product that we put a little electronic cap on a person. And we can see how their neurons are snapping when they see advertising or they see a new product or they hear certain words. And it helps our clients understand how they're going to is this product going to be any good? We've taken the whole history of that and put it in a large language model. Now, companies, I think Unilever is letting us talk about this, companies, they're taking like 50 ideas and running it through that in a week or even less than a week as they iterate and boiling that down then to their top three ideas. So they're paying us for that service.
But then when they really want to make the final, final decision, they do need real live humans because we don't have all the recency bias built in our database. So TikTok influencers, all that stuff hasn't really been built in. So then we kind of get more revenue early. And then they're still running the big reports. I don't know if I answered your whole question.
I think you did. Yeah, yeah, yeah. It's like, are you going to share in the upside?
Oh. On the intelligence side, about two and a half years ago, we kind of anticipated this. And we made sure our contracts were very clear that you can't use our data to build our language models. You can't build our data to build IP that you can't keep without buying our data. And you really can't use our data to replace what we're already doing in analytics.
And you think you're very good at tracking that, right?
Yeah. I think we're good enough. But if people are intentionally going to try and not follow a contract, that's pretty serious stuff. But we do watermark our data. We know where it's at all the time. And we communicate all the time what the rules are. I think any information company, if they're not doing that, should be doing that.
Right. So Mike, one of the things at the time of the IPO that I was a little, let's just say, watching was it was kind of early in the free cash flow conversion journey. Obviously, I feel a little bit better after third quarter. But should we expect a big uplift, a meaningful uplift in what you guys define as gap free cash flow in '26 and '27? After the third quarter, are you more encouraged about the uplift ahead?
I am. When I think about it, Andrew, when we announced the third quarter results, we increased our free cash flow. We had stated we would be 245- 275 million of free cash flow in the second half of the year. We delivered 224 million of free cash flow just in the third quarter alone. And therefore, we took our guidance up to 280 million for the full year, which gets us to break even. And then, as you asked about '26 and '27, if you break even, it's moving in a very positive direction. Just adding.
And you're saying free cash flow moves with momentum?
It does. And with margin improvements. So we're 300 basis point improvement in our EBITDA margins between Q3 '25 versus the prior year, which about 200 basis points of that's coming from our GFK integration and 100 basis points coming from our continued fixed cost base at 80%. And with that 5%- 6% revenue growth, you're seeing that drop to the bottom line. So EBITDA growth. And then we're turning it into cash. And we're at a break-even point. And then an inflection point is we move forward into '26 and '27.
Okay. Great. So you just mentioned GFK. So let's pivot to tech and durables. I know the party line is for GFK, it's tech and durables versus consumer activity. You're going to run the same playbook as you did in core and IQ. And so my question is, what inning are we in with tech and durables in terms of driving synergies, the revenue opportunity? And the thing that I'm really waiting for is, when will your tech and durables growth start to support enterprise growth, tech and durables growing as fast as your overall organic revenue growth?
Yeah. So what inning are we in? Maybe the sixth inning, maybe a little further as far as the internal integration. So right now, when you see what we call our one-time integration costs, they're really severance-related and dual running costs. So we're having to run our back office systems until we retire. We're cutting over. So that'll extend a little bit into next year. So you're going to start seeing the real synergies rolling in as far as the cost synergies. The business, as you know, when it came out of the gate, a little soft. We spent a whole year arguing with the European Commission about whether we could buy it or not, which speaks to the power of the combined asset. It is now contributing to growth.
What do you mean by that? It's growing in line with the overall?
It's getting in line with the overall.
Closer, you mean?
Very close to.
Very close.
Yeah. Very close.
Wait. Would you call it mid-single digit?
Yeah, I would.
Yes. Oh, I didn't know that. First half, you called low single digit. So.
Well, yeah. I think your definition of mid-single digit.
Four to six.
That's it.
Four to six.
It's in there.
Yeah. Oh, wow. I think that's notable. Okay. Just keep going. So how would you define success for tech and durables? What should we watch?
So success is to continue that sustained growth following the same revenue growth equation that we've done for the rest of the business. So believe it or not, activation was something we maybe underestimated the potential. So GFK didn't have the tools that we had at NIQ to bring analytics into that customer base. So we think there's quite a bit of upside there as we teach our people how to cross-sell, upsell. We've really integrated the whole sales motion into the over. We don't separate. There's one person running France. There's one person running Western Europe, not CPG and tech and durables.
Right. Right. So maybe, Mike, I'm going to ask you the same question. How do you feel about GFK? I surely remember when you came to NIQ, let's call it not GFK, you really had to get your finance organization to kind of tell you the truth. Sometimes it's not always pretty. Do you feel like the finance professionals at GFK are telling you, hey, this is practically where we're at and not overpromising?
Yes. I do. We have integrated the business 100%. So the GFK individuals that were historical businesses as our treasurer, Epsnet, it's really been integrated in the NIQ business. So I feel very comfortable in terms of understanding what's going on and what's happening. We have combined the general ledgers. We have one general ledger in terms of how we operate the business since it's overseen by one group today. So I feel very good about it, Andrew.
Okay. Okay. That sounds good. How about a quick point, Mike, on capital allocation? I know, obviously, the priority is deleveraging. And I know you're going to say it's your first priority. But I just wanted to ask, is there room in capital allocation as we head into next year for other things besides for deleveraging?
Yeah. I mean, we're continuing to look at accretive M&A. We've done a couple of deals this year, which we announced our GastroGraft deal, which is an ingredients business that we're able to bring into our distribution network and continue to leverage. And we also have bought a business in Brazil that equally is in the logistics area. And we're able to look at that and drive that across the board where it's highly accretive. We don't see any gaps that we've had in the business or geographic pieces that we're worried about. So yeah, we will look at deals. But we are focused on our debt paydown and make sure we deleverage ourselves. We had targeted being less than 3.5 by the end of this year and less than 3 by the end of '26.
But we think we can still look at those types of shareholder activities and make sure we still meet our debt commitments.
Way to be. Thank you very much, Mike and Jim.
All right. Thanks.
Thank you.
Thank you.
Thank you. Oh, thank you. Was that for me or for Jim?
For you. Yes. You got a star. Good job.
Thank you very much. Great to see you.