尼爾森 (NLSN) 2016 Q3 法說會逐字稿

Good morning. My name is Carol and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2016 Nielsen Holdings earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Yaeni Kim.

Thanks Carol. Good morning, everyone, and thank you for joining us to discuss Nielsen's third quarter 2016 financial performance. Joining me on today's call is Mitch Barns, Chief Executive Officer, and Jamere Jackson, Chief Financial Officer. A slide presentation that we'll use on this call is available under the Events section of our Investor Relations website.

Before we begin our prepared remarks, I would like to remind all of you that the following discussion contains forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include comments about Nielsen's outlook, expectations and prospects, and are based on Nielsen's view as of today, October 25, 2016.

We will be discussing non-GAAP measures during this call, for which we have provided reconciliations in the appendices of today's presentation, and will be posted on our website. Our actual results in the future period may differ materially from those currently expected because of a number of risks and uncertainties.

The risks and uncertainties that we believe are material are outlined in Nielsen's 10-K and other filings and materials, which you can find on our IR site, or SEC.gov. As we did last quarter, we ask everyone to limit themselves to one question, only so we can accommodate everyone. Feel free to join the queue again and if time remains, we will call on you. And now to start the call, I would like to turn it over to our CEO, Mitch Barns.

Yes, thanks, Yaeni. Good morning, everyone. On last quarter's call, we talked about the ongoing changes occurring in the markets we serve. As you all know, changes is a source of both challenge and opportunity and we saw both in this quarter.

In our Watch business, our momentum continued with our Total Audience Measurement System. Client adoption continued to grow as digital content ratings grew to syndicated reporting; Digital Ad Ratings expanded to new markets and the industry moved --industry further narrowed in on a new currency definition. We also announced upgrades to our Local TV measure. So we feel great about our progress here.

For our Buy business, emerging markets continued to produce solid topline growth as our investments in coverage and granularity, and our balance strength with both local and global clients continued to pay off. But regarding developed markets, while Europe made good progress in the quarter, our US results were down versus the prior year, as clients looked for more efficiency and productivity in the face of increasingly difficult growth environment.

Earlier this year, as we saw these more challenging trends unfolding, we realigned our Buy business to be more focused in our product development and more efficient in our overhead. More recently, as the trends continued for our clients, we stepped up our efforts to reduce our cost base, reallocate resources and accelerate our investments and initiatives that would help our clients and better position our business for the future.

We have been hard at work on these initiatives and you will hear more about them in a few minutes. But for now, let me say that our Buy business is working through a process of change that's similar to what we've been executing on successfully in our Watch business and we're confident that our Buy initiatives will produce similar results.

Let's look at the financials for the third quarter. At a total Company level, revenue grew 3.6% on a constant currency basis. Revenues in our Watch segment increased 6.7% on a constant currency basis, including an 8.5% increase in audience measurement of video and text.

By segment, revenues grew just under 1% on a constant currency basis, as emerging markets' growth of nearly 9% was offset by a decline in developed markets, driven by the US. Adjusted EBITDA grew 4% constant currency, supported by ongoing productivity and operating leverage, offset in part by our accelerated investments in key initiatives.

Adjusted net income per share grew almost 6% constant currency to $0.74. Free cash flow was a record $353 million in the quarter, up slightly compared to a year ago. We remain committed to driving shareholder value through our balanced capital allocation strategy and we do this by investing consistently in our future growth while also returning capital to shareholders through our dividend and share repurchase program.

During the quarter we bought back approximately $90 million in shares and as of September 30, we had approximately $460 million remaining under our existing authorization. Lastly, in light of our third-quarter results and our outlook for the fourth quarter, we're updating our guidance for the full year, and Jamere will provide detail on this in a few minutes.

Let's look at the segments. First, Watch. If we turn back the clock a bit, it was just a few years ago when the market was still thinking of Nielsen as the television measurement company, As viewing fragmented across screens and digital platforms, we responded with measurement capabilities that followed the consumer. Over time, this developed into what we know today as our Total Audience Measurement System.

The progress we've made is reflected in our Watch business performance. But it didn't happen overnight. It's been a multi-year evolution and our teams have diligently executed on each step, bringing this whole framework to life. And while we've made very good progress, we continue to work alongside our clients every day, adding new features, as clients explore all potential use cases for the data.

It's an exciting time for the industry and for Nielsen. Let's look at some specific highlights from the quarter. In September, Digital Content ratings became available in full syndication, on schedule. This was a tremendous milestone. Publishers, agencies and advertisers are now equipped with powerful daily data that helps them understand the value of content across digital platforms; adoption is growing daily.

The Total Content Ratings, at the direct request of our clients, we made some changes to our original release schedule. The initial step of this schedule occurred on August 1, making Total Content Ratings available on a syndicated basis to all participating publishers. We will broaden that to include agencies at the start of 2017 before making the data available to the entire industry by the end of the first quarter.

In the meantime, we continue to work closely with our clients to help them gain comfort with the comparable metrics in advance of full syndication. Just a reminder, Total Content Ratings include some measurement of subscription video-on-demand, now covering over 15,000 different program episodes, nearly double the number from about six months ago.

On Digital Ad Ratings, we continue to grow and expand. Campaigns in the third quarter were up 45%, reflecting growing volumes with existing large clients as well as very strong adoption from new, smaller advertisers. Across the board, we received growing use of Digital Ad Ratings for guarantees.

We've also made good progress with Digital Ad Ratings internationally. For example in Canada, our penetration among the top 25 advertisers is now comparable to the US. We also recently announced Digital Ad Ratings in Taiwan, our 24th market. In 2017, we'll add eight to 10 additional markets and we'll also upgrade some existing markets to include Total Ad Ratings.

Overall, client adoption and support of our Total Audience Measurement System is steadily growing. As we look out to 2017, our clients remain highly engaged in the effort to move the industry toward a new ratings standard. While the definition of a new currency is not up for Nielsen alone to decide, we're confident that with the clarity and momentum we've built with Total Audience Measurement, it will play an important role in the 2017 upfronts.

In Local TV, we recently announced some important new initiatives that will substantially enhance our offerings in the US by leveraging our investments in return path data from Dish and Charter as well as our currency-grade panel data. We will introduce four electronic measurement across all 210 designated market areas by mid-2017, paving the way for the retirement of paper diaries in early 2018.

Starting in 2017, we will also integrate Portable People Meter, or PPM Data, for both in-home and out-of-home viewing in the top 44 markets. This will lead to increased stability, a decrease in zero cells, and richer analytics of Local viewing habits. By including out-of-home viewing in the ratings we'll help our Local TV clients more fully capture the value of this portion of the TV audience that was previously unmeasured.

By the way, just yesterday, we announced to our clients that out-of-home viewing will also soon be credited to the national ratings. We also recently upgraded Social Content Ratings, now covering both Facebook and Twitter in a unified fashion. This upgraded service will replace Nielsen's Twitter TV ratings in all markets, including Australia, Italy, Mexico and the US. With social media playing a growing role in consumers' lives and TV experiences, its value to the media industry will also continue to grow.

Turning to Marketing Effectiveness, we had another strong quarter with constant currency revenues up over 30%. As a reminder, this is the part of our business where we bring together our Watch and Buy assets to help marketers improve their return on investment in advertising.

A large part of this is enabled by the Nielsen Marketing Cloud, which provides our clients with faster access to data and analytics helping them make more informed marketing and media decisions. One recent example of this is our Advanced Marketing Optimization Solution, made available in partnership with RevTrax, a one-to-one digital promotions company.

Kimberly-Clark is one of the lead clients leveraging this new application to continuously update their promotions content, based on real-time changes in consumer behavior, all with an aim of increasing the ROI of their digital promotions.

Also notable is Nielsen Catalina's recently collaboration with Facebook. This deal enables marketers to directly connect their advertising activity to its impact on sales as well as deliver more relevant advertising to target consumers. By combining the largest most representative purchase data set in the fast-moving consumer goods industry with ad exposure information from Facebook begin a deep understanding of how these ads are driving consumers to purchase.

Turning to the Buy business, in emerging markets, our business continues to deliver solid broad-based growth, including double-digit growth across several key markets in Latin America, Southeast Asia, Eastern Europe and India. As a group, these markets drove a lot of runway for continued growth via added coverage, granularity, and increasing penetration of the related analytics that help our clients drive progress in their business. Our investments in coverage and granularity and our balanced strength with both local and global clients continue to pay off.

In developed markets, specifically the US, the environment in which we operate has become more challenging. Large, global manufacturers are the strength of our client base. And as I'm sure you've seen in the recent press, they found it increasingly difficult to achieve growth in markets with growing fragmentation in consumer demand, more competition from smaller and local players, and increased commodity prices.

Together, these factors have led them to seek efficiencies and productivity in their business and our business has not been immune. Our clients continue to value our Core Measurement Services, especially given the growing product and retail fragmentation in the market. But when it comes to analytics, their needs have been shifting.

Clients are shifting away from custom insights delivered via deep dive projects and they are shifting toward every day analytics, often called activation, delivered directly to multiple end-users. Our view is that this is a secular shift, not a passing phase or a cycle that will swing back.

Clients want analytics that will help them answer the question of, what do I need to do this week or tomorrow or even today to drive sales, protect market share, or improve my competitive position? In today's challenging growth environment, that's what's most valuable to them.

Now let me walk you through what we are doing to respond to this. First, you'll see us aggressively moving away from slower growing, non-core services. These moves are enabling us to accelerate and increase our investments in our key initiatives that will better position our business for the future. The most important of these initiatives are Total Consumer Measurement and our Connected System.

Total Consumer Measurement is about following consumers across all retail formats to ensure full coverage of sales. In a changing and fragmenting retail environment, this requires ongoing effort to help our clients understand emerging channels like specialty retailers, hard discounters, direct-to-consumer models, and of course, e-commerce.

Speaking of e-commerce, we've made good progress on our hybrid solution announced earlier this year. It combines high-quality panels with big data to provide broad and granular coverage of e-commerce sales, including on the largest platforms.

Our second initiative, our Connected System, is the bigger of the two. This open system connects Nielsen, client and third-party data, including our core Watch and Buy measurement data, with applications designed for decision-makers in our clients' marketing, sales, R&D and finance functions. This means faster data-driven decisions on everyday questions related to pricing, promotion, distribution, new product innovation, assortment and marketing mix optimization, all in one connected system. This is the key because many of these capabilities already exist as standalone point solutions.

By connecting them all in one system, one that delivers these capabilities continuously every day and directly to end-users, that's what will help our clients reduce their internal costs, while also driving the big step-up in value and speed for their business. And just as importantly, it will significantly reduce costs and improve margins for Nielsen.

Since we first talked with you about the Connected System at our Analyst Day last December, we've been hard at work. Today, it's in the hands of five initial clients, who are working with us to refine the system's design. We've also demonstrated live modules for our client advisory board and others.

From the positive feedback from our clients, coupled with the changes we see unfolding in the market, have encouraged us to accelerate our development schedule and investments. We will expand the availability of the system to 20 to 30 additional clients in mid-2017, followed by a further rollout late in the year.

As that rollout unfolds, you will also see the ongoing development of our Connected Partner Program, that we announced last week. Connected Partners are third-party analytics companies who build apps, and those apps run on our Connected Systems' open platform, providing more usefulness and value for our clients.

These apps amplify the value of the underlying measurement data that is the core of our business. A recent Forbes article referred to this as Nielsen opening its big data treasure chest. We will go into a deep dive on all of this at our upcoming Analyst Day in December.

Regarding the timeline, one way to think about this is that our Buy business is working through a process similar to what we've been executing on successfully in our Watch business. We'll through most of 2017, bringing additional components of the Connected System to market. It will likely not be in until 2018, until the fuller version begins to contribute meaningfully to the performance of our Buy business.

Through this process, we're truly transforming the core of our Buy business. Comprehensive measurement coverage, integrated data and analytics, embedded in our clients workflows, with data-as-a-service and software-as-a-service solutions, directly accessed by our client teams in marketing, sales, R&D and finance. And for Nielsen, a stronger higher-margin business, better positioned for the future.

It's important to note that these benefits will reach beyond our US business. We will leverage this system across the developed world on roughly the same schedule and longer term, it will also add value to our business in key emerging markets. In the meantime, we will continue to realign our cost base, prune our portfolio, and reallocate resources to enable us to accelerate our progress and better position this part of our business for the future.

We have a lot of work to do but it's exciting and because we are guided by our clients, we have a high level of confidence in our strategy and the key bets we're placing. Because I know the Nielsen team behind this work, I have a high level of confidence in our ability to execute. We look forward to updating you at our Analyst Day in December. Over to you, Jamere.

Thank you, Mitch. Overall, as Mitch mentioned, our business grew in a much more challenging environment than we have seen in the past few quarters, highlighting the strength of our balanced portfolio. First, let me cover our total Company results for the third quarter. On the left side of the page, our results on a US GAAP basis, revenue was just under $1.6 billion, up 2.5% on a reported basis, driven by solid growth in our Watch segment, partially offset by softness in the developed markets in our Buy segment.

Net income was $132 million. Net income per share was $0.36, which was down $0.02 a share versus the third quarter of 2015. Our net income per share was also driven by revenue growth, margin expansion, and our share buyback program, offset by higher restructuring charges related to further restructuring in our Buy segment.

Moving to the right side of the page, on a non-GAAP basis, revenue was up 3.6% constant currency. Despite a more challenging environment, we still delivered revenue growth, driven by strength in our subscription-based recurring revenue, and solid execution on our growth initiatives. Our Watch business grew 6.7% on a constant currency basis, driven by our investments, continued momentum in audience measurement of video and text, and an impressive growth in marketing effectiveness.

Our Buy business grew just under 1% constant currency, led by continued strength in the emerging markets, which was partially offset by a decline in the developed markets. Adjusted EBITDA was $498 million, up 4% constant currency and adjusted EBITDA margins were 31.7%, up 10 basis points on a constant currency basis.

In the quarter, we continued disciplined investments in growth and productivity initiatives that will generate topline growth and margin expansion in 2017 and beyond. Adjusted net income was $266 million, up 3.1% constant currency, and diluted adjusted net income per share was $0.74, up 5.7% versus prior year on a constant currency basis. Our adjusted net income per share growth was driven by solid operating earnings and execution of our stock share buyback program. Finally, we generated record free cash flow of $353 million, which was up 2% versus a strong third quarter in 2015.

Next, I will move to the segments and provide a little more color. First is our Watch segment. Our Watch segment had another great quarter. Revenue was $761 million, up 6.7% constant currency. Our growth initiatives performed well as audience measurement of video and text was up 8.5% on a constant currency basis.

As expected, audio was down 2.8% on a constant currency basis against the tough comp in 3Q 2015 that grew 11%, driven by timing of deliveries. The business is performing in line with our expectations and generating strong earnings and cash flow.

Marketing effectiveness was up 31.8% constant currency, behind strong results from the Nielsen Marketing Cloud, Nielsen Catalina Solutions, and Repucom, which is now branded as Nielsen Sports. The investments we've made in Marketing Effectiveness continued to drive Watch segment growth and we continued to see strong demand from a broad array of clients

As expected, other Watch was about a 2 points drag on Watch revenues on a constant currency basis, reflecting the impact of our divestiture of the NRG business late in the fourth quarter of 2015. Watch adjusted EBITDA was $360 million, up 7.5% constant currency. Watch margins expanded 33 basis points on a constant currency basis, as we continued to drive operating leverage while investing in the business.

Let me say a few words about a couple of our key initiatives in Watch. First, total audience has strong momentum. Digital Ad Ratings have been widely adopted by the industry as a way of measuring reach and frequency on ad campaigns. In the third quarter, Digital Ad Ratings campaigns were up 45%, led by strong demand from advertisers, agencies, platforms and content owners.

We have added nearly 100 new Digital Ad Ratings clients this year and experienced strong renewals with good pricing from existing clients. Digital Content Ratings, which provide daily measurement of audiences across all digital content types and platforms with metrics comparable to TV, continues to gain traction with key clients for both video and text measurement.

In the quarter, DCR was fully syndicated and we continue to add networks and digital players to an already strong roster of previously signed clients. In fact, we have over 90 brands being measured in DCR, and syndicated clients include A&E, ABC, AOL, BuzzFeed, Discovery and Vice, among many others. Digital Content Ratings is a key piece of our total audience capabilities, and will be a future growth driver for our business.

Our Watch segment remains strong. We are executing on our Total Audience Measurement growth strategy and Marketing Effectiveness continues to deliver impressive growth. We remain confident in our 2016 Watch guidance of 4.5% to 6.5% revenues growth on a constant currency basis.

Turning to Buy, third quarter total Buy revenue was $809 million, up just under 1% on a constant currency basis. On a total segment basis, our syndicated recurring revenue business remained solid. However, our ad hoc discretionary revenue declined. Our business in the developed markets was $542 million, down 2.5% on a constant currency basis, as we continued to see softness and discretionary spend, especially in the US.

Additionally, we are taking steps to future-proof our business by pruning and sunsetting slow-growth, non-core services in developed markets. These actions, along with further restructuring in our Buy segment and accelerating the development of our Connected System, will strengthen our business. As you've often heard me say, we are clearly operating in a two-speed world with significantly higher growth rates in the emerging markets versus developed markets.

In the third quarter, our business in the emerging markets was $267 million, up 8.5% on a constant currency basis. As Mitch mentioned, growth was broad-based across a number of markets. In addition, we saw double-digit growth from multinationals that gives us more confidence that emerging markets will continue to be a tailwind for our Buy segment revenue into 2017.

Buy EBITDA was $150 million, down 3.8% constant currency. In this environment, we continue to invest in a disciplined way via coverage and building out the Connected System, which will drive future growth and profitability in our Buy business. The early read from our initial pilot clients is promising and we are confident that our investment will further strengthen our competitive position.

These key investments, along with an unfavorable mix between our developed and emerging markets' revenue are the key drivers for our Buy adjusted EBITDA margins being down 91 basis points versus the prior year. Based on our year-to-date results and fourth-quarter outlook in developed Buy, we now expect our Buy revenues to grow approximately 1.5% to 2% for 2016.

Moving to foreign currency impact, I want to remind you that we report revenue and EBITDA on a constant currency basis to reflect our operating performance. We generally don't take on transactional risks so this slide focuses strictly on a translation impact for reporting purposes. In the quarter, foreign currency resulted in a 110 basis points drag on revenue. The current spot rates held constant through 2016, and we expect a 170 basis points drag on revenue and a 70 basis points drag for EBITDA for the full-year 2016, which is in-line with the forecast we gave last quarter.

Moving to 2016 guidance. In light of our third-quarter results and fourth-quarter outlook in developed Buy, we are updating our full-year guidance, highlighted by revenue growth of approximately 3.5% to 4% on a constant currency basis; adjusted EBITDA margin growth of 30 basis points; adjusted net income per share of $2.73 to $2.79; and free cash flow of approximately $850 million.

So to wrap up, our third quarter was highlighted by revenue growth and margin expansion and in a more challenging environment. First, our Watch business has tremendous momentum behind our total audience initiatives and by our subscription-based recurring revenue business remains solid and emerging market growth remains robust while our developed markets business in the US has declined.

But importantly, across both Watch and Buy, we continue to invest in a disciplined way to build a stronger, higher-margin business. In addition, we remain on track to return over $800 million in cash back to shareholders in 2016 in the form of dividends and buybacks. With that, I will turn it back to Yaeni.

Thanks, operator. We will take the first question.

(Operator Instructions)

Toni Kaplan, Morgan Stanley.

Good morning. Buy gross in developed markets, I guess, was the lowest since you started reporting it as a subsegment and clearly, driven by this -- the insights piece. So you've mentioned the secular shift away from custom insights to everyday analytics, and so I was hoping you could give a little more color on the drivers behind the reduced spending.

Are you losing share? Is the competitive environment changing or are customers just tightening budgets? And is there any way to quantify that and basically, in terms of the investments that you're going to be making in buy to address this shift, how much has this impact Buy margins? Thanks.

Thanks, Toni. Let me start and I'm sure Jamere will add. First, with regard to Buy developed, that is the challenging spot for our business in the quarter. But I would even narrower it further for you. Because within Buy developed, Europe grew, the Pacific grew, Canada grew. It's really the US, where the problem is focused at the moment.

And so just to sharpen the focus a little bit, focus on the US. What we're seeing in the US market, let me give you a couple of examples in terms of the external environment that our clients are dealing with. First, if you just focus in on food and beverage manufacturers. 2015, we saw this trend starting to emerge where the small and medium-size manufacturers accounted for about half of the growth in the categories.

Private label accounted for about one-quarter of the growth. The big -- the top 25 players, they counted collectively for only 3% of the growth, in food and beverage categories in 2015. That situation really hasn't changed that much in 2016. The reason why that's especially noteworthy for our business is the strength of our business just so happens to be the biggest global companies, the biggest global players. So you see that reflected in our US results.

What all these companies are dealing with, both food and beverage and others, is a combination of things. Product fragmentation where consumers are increasingly shifting their purchasing to smaller, specialty, more niche products moving away a little bit from the bigger brands. You see retail fragmentation of purchases moving across additional channels. Of course, see the 3G effect sweeping through the fast-moving consumer goods industry, where companies, whether 3G is a factor or not, or practicing zero-based budgeting, they're running their own internal 3G play.

You add up all these things together and that's the situation that our clients are contending with, and you see that reflected back in our results. Now, for us, what that means in terms of their discretionary spend, as I said, they're shifting from these more deep-dive projects that help them think about what they're going to do next year and focused much more on these everyday analytics that help them with activation.

What should I do today or tomorrow or this week? And that's where the shift is happening in the marketplace. So we are realigning our portfolio to better serve those client interests and those client needs and, as I mentioned, we don't see this as just a passing phase that the marketplace is going through. We see this as a trend that will continue on more of a secular basis over the long run.

As we make this shift and as we build up this Connected System, you see us building a very different business, really, frankly. Right now, it's very much a professional services model for Nielsen. As that Connected System starts to unfold more in the marketplace, it helps us to move from a professional service, or people-as-a-service business model to much more as a data-as-a-service and software-as-a-service business model. That all results in us, as Jamere said in his opening comments, having a stronger, higher-margin business. Jamere, what would you add?

Yes, just a couple things on margins. So you did hear our margin dips in the quarter. I would say that the key driver, as I said in my comments, were a bit of a mix issue, as the emerging markets' revenue grew 8.5% and the higher-margin developed markets' revenue actually declined. I would say the second thing, as Mitch said, we are continuing to invest in the Connected Systems and our Total Consumer initiatives to future-proof the business.

So in the short-term, with a softer revenue profile, this obviously puts pressure on margins. But in terms of our long-term productivity drivers, I would say three things. One is, we're continuing to see scale benefits in the emerging markets and there's a focus on profitability. We're running the place with intensity around cost and productivity, as mentioned before, that we have over 4,000 projects that are running inside the Company.

We are invested in our products, our higher-margin products, and I would say the last thing is you've seen us take a couple rounds of restructuring in the second quarter and the third quarter; it put us on the right trajectory going forward. So we're confident, again, that we will expand margins on a total Company basis and we are running in all the right places inside of the Company to be able to achieve that.

Todd Juenger, Sanford Bernstein.

Good morning. I'm -- surprisingly, I will use my one question to dive a little further back into this topic again, if you don't mind. Let me take a shot at seeing if you'll comment on anything to help us size this a little bit. When you used to disclose the Insights line item or Analytics line item in the Buy segment, I think the last time you did that was 2014 and at that point in time, it was -- I think it was about 25% of Buy segment revenue.

So I guess a question is, is that any reason to think that it's not sort of similar to that today? Any comment you make on the relative margin profile of that part of the business compared to the over -- segment overall margin profile? And then as we think about what part of it is at risk, can you help us through -- is all of that revenue pull at risk? Is some of that risk, as you transition to replacing it with this other shape of revenue and just helping us size it in that way, whatever you'd help it say would be really helpful. Thank you.

Thanks, Todd. So in terms of the size of what I will call our Analytics Or Discretionary business, it is probably in the 30% range in terms of our total portfolio, sometimes a little more, a little bit less on a quarter basis, just dependent on what the project pipeline is. I would say a couple of things. First of all, from a -- in terms of what the focus area is in our portfolio, is there's probably 3% to 4% of the Buy revenue that is, as Mitch mentioned, is slow growing or becoming non-core.

And just a couple of examples, if you look at a year ago, we would provide you data and analytics for things like helping retailers optimize store locations in a world where bricks and mortar is under pressure and e-commerce is actually growing. We were providing you data and analytics around video sales and retail channels in an environment where consumers are moving to a more streaming digital consumptions, providing data and analytics around alcoholic beverages moving through wholesaler channels.

So these are some examples of a very broad portfolio for Buy and as we look at our resource allocation, as we look at the discretionary nature of some of those data sets and those analytics, we're actually going to move away from some of those. It's 3% to 4% of the portfolio and we're going to be aggressive about that and replace that with things that are more future-proof and things that are actually in our Connected Buy System Platform, if you will.

In terms of the margin profile, the analytics or ad hoc or discretionary projects have tended to be a lower-margin profile than the overall business. So as we think about moving forward in our future to a Connected Buy System that is much more data-as-a-service or people-as-a-service oriented, then the margin profile will certainly improve overall for the Buy business.

What I will add to that, Todd, is when we look at all the different analytics and as you described, in insights-type capabilities we have in our portfolio, some of them are still doing incredibly well. And we see a pattern in terms of which parts are performing better versus which ones are struggling in the current environment.

Here's the characteristics of the things that are doing well. If the analytics capability is connected to our core measurement data, that's a positive. Second, if it is more focused on activation or these everyday analytics kinds of questions, that's a positive. Third, if the talent required in that analytics area is similar to the talent that helps us be successful in our core measurement business, that also tends to do better within the Nielsen portfolio.

So we have a number of analytics capabilities that perfectly fit that profile and no surprise, those are the parts that are performing really well. And then we have a number of others that don't fit that profile and those are the ones where we have some decisions to make and we've already started to take those decisions, as Jamere recounted.

One of the things I will add to this picture, which I hope will be helpful, Todd, is why you might be wondering, why is this showing up more in the US than it is in other places? Well, the fact is, the US revenues, a bigger percentage of our US revenues are the discretionary services. In fact, it's about twice as much, slightly more than twice as much of our US revenues come from the discretionary services as compared to Europe, where it's a much smaller percentage.

So that's why you see it showing up in the US and that's why our focus is currently centered on the US but we're transforming our Buy portfolio, really, for the entire developed market world and ultimately, a lot of these moves that we're making in particular with the Connected System will benefit our business in the key emerging markets as well.

Tim McHugh, William Blair.

Thanks. Just one more on this topic, I guess. You talked about for Connected Buy, the kind of the timeline, but what pace do you -- or how long will it take to make this transition in areas where you're moving away from the business over time? And how long will this be a headwind and how quickly do you want to move away from those areas?

The last thing we want to do is set expectations too aggressively and the timeline I described in my opening comments, I think is exactly the right way to think about it, which is -- well, first of all, let me start with we already have an initial version of this system built and in the hands of five initial clients, so I want you to just realize that this is real. And it's something we've been working on now, for the better part of the year and even before Analyst Day last December, when we first talked about this with our investors and analysts.

We already have it in the hands of five initial clients. We have live modules that are already usable. We demonstrated those for our clients. We have great feedback so far. In fact, our clients are already thinking through what it's going to mean in terms of implementation on their side. That's the kind of reaction we've received so far.

We'll roll it out to 20 to 30 additional clients by the middle of 2017 and by the end of the year is when we think we will be prepared for a more full roll-out to all clients who want to start to make the shift to transition to this Connected System. So we're certainly hopeful that it will start to have some impact on our business in 2017, but I think the better way to think about it is it will start to show up meaningfully and significantly in our business, especially the financial results in the 2018 timeframe.

One other thing to add to that, just put a maybe reference point on that. I mentioned in my opening comments that I think it's exactly the right way to think about it. While it's a slightly different system that we're building, and a slightly different set of client needs that we're addressing the magnitude of this and the execution required to do it properly, to do it in a way that really fits with what our clients needs.

It's very similar to what you've seen us work successfully through on the Watch side of our business, as we developed a Total Audience Measurement framework and roll that out to our clients over the past couple of years. So, look, we know how to do this. We have the teams in place and they are very focused and excited about the task in front of them.

We have a huge opportunity to drive this stronger, higher-margin business for our future, to take costs out of our clients' business, on their side of the table, and you give them a lot more value and a lot more speed.

Manav Patnaik, Barclays.

Thank you. Good morning, gentlemen. I just wanted to, again, touch on Buy here, but in terms of the sequential changes you've seen, because the revenue backdrop you described doesn't seem that new. The margin investments in Connected and the Total Buy System, what have you, that isn't new as well. So Q over Q, what really changed? Especially since, I think Jamere, maybe you just said the analytics side of it was lower margins, so I would presume you would have the flex to offset that so I'm just a little confused quite honestly and what changed over the quarter?

So, a couple of things. First of all, if you're looking back to the third quarter of last year, you saw our developed markets business grow 4.8% constant currency. As part of that discussion, we said that we saw a pretty strong discretionary environment. We have not seen that since then and if you look at our results in our developed Buy business space, they sequentially are going any other direction.

And part of that is because that stable -- or I would say the environment in the third quarter last year actually ran a little hot. I would say that environment has slowly started to erode, and we're starting to see the dynamics that Mitch and I have discussed in the call today. From a margin standpoint, again, you have a couple of dynamics there. One is -- you have sort of the mixed shift between our developed markets revenue and our emerging markets revenue, that certainly plays into the numbers.

The second thing, as I said, is we are continuing to invest in our growth initiatives and a softer revenue environment, is going to fuel that margin pressure. But more importantly, we've taken the actions, if you will, that will put us on the right trajectory from a cost standpoint. First of all, as I said, a couple of rounds of restructuring that you saw in the second and the third quarter numbers.

We'll continue to work on our productivity initiatives. We are investing in, and actually emphasizing the faster growing higher-margin pieces of the Buy portfolio and so we have a lot of confidence around -- in that story and what that will mean for us going forward.

And what I will add to that, Manav, is that you're right; it's not new. But we've always viewed this part of the business as lumpy. Some quarters up, some quarters down. I think what it comes down to is we're just not thinking of it so much that way. This -- some of these characteristics, we're not viewing as lumpiness. We're, as I said, seeing the more secular shifts.

We just reached the conclusion that it's not viable for the long-term to keep running after these short-term revenue opportunities and keep trying to chase these and work our way through the lumpy nature of this part of our business. Instead, a much better future is about investing in something that transforms our product portfolio, that takes some of the lumpiness out of this part of our business, that better fits with what our clients need and where their needs are evolving toward, and that's what that Connected System is designed to do.

So we're not running after those short-term revenue opportunities as much in the quarter and that will continue going forward. That allows us to reallocate and enables us to reallocate resources to go faster and do more as we develop this Connected System initiative. So you see all of that reflected in the results in the quarter and our outlook going forward.

Kip Paulson, Cantor Fitzgerald.

Thanks for taking my questions. Just a couple for me. Starting with Watch, Marketing Effectiveness growth picked up nicely in the quarter. How much of this was driven by Marketing Cloud or actually, versus Nielsen Catalina?

And could you give us a sense of how fast Marketing Cloud is growing? I believe actually it was growing at a roughly 40% clip a couple quarters ago and then second, if I could, how much of the $100 million reduction in the free cash flow guidance would you attribute to underperformance in developed Buy versus increased investments? Thank you.

Thanks, so just to give you a little bit of color on our Marketing Effectiveness business is up 31.8% in the quarter and as you know, we did have a couple of inorganic things in there, with Nielsen Sports and Nielsen Catalina solutions that had us growing probably closer to an 18% organic number. The things that we're really excited about in Marketing Effectiveness, first of all, is the Nielsen Marketing Cloud or escalate; it's up double digits.

Nielsen Buyer Insights is up double digits, as clients continue to look for our data sets to help them build ROI solutions. The Nielsen Catalina solutions is up about 18% organically as well. So we continue to be impressed with the growth that we're seeing in Marketing Effectiveness and it's provided a nice tailwind for our business.

In terms of the free cash flow outlook for the year, so just a couple things. One is, as you alluded to, most of the revenue shortfall actually is within our Buy business and so that's a big driver of it. So you have a couple of things rolling through the numbers.

One is, just reduced EBITDA outlook, particularly for the developed Buy regions. The second thing is that we're continuing to invest and actually, our investment profile is slightly higher than what we began at the beginning of the year and that is a -- both on a Watch and Buy stores. So on the Watch side, you've seen us acquire and begin to integrate set-top box data for all the things that we're doing with our Total Audience Measurement initiatives.

We've talked about moving away from the paper diaries and bringing more electronic measurements to the marketplace. That's certainly rolling through the numbers and then we had a big year in front of us in terms of bringing DCR and DAR to the marketplace, and growing that piece of the business.

The last piece is growing the investment profile associated with our Connected System and our Total Consumer initiative. So a combination of lower EBITDA expectations and the -- a slightly higher investment profile for some of the key growth initiatives and the future is driving it.

One other thing I would add to that is we're probably going to be at the upper end of what we gave as a cash restructuring number and that's focused on the fact that in the second quarter and the third quarter, we've taken a couple actions in our Buy business to set us on the right trajectory for the future. So those are the things that are driving the number from a free cash flow standpoint.

Brian Wieser, Pivotal Research.

Thanks very much for taking the question. I was wondering if you could talk about the grand total of organic growth for the quarter to try to dimensionalize that? And maybe relatedly, was there any kind of on the organic side from DCR and TCR to revenue in the quarter?

From an organic standpoint, we had about a 1.5%, just a little over -- a little under 1.5% of revenue. contribution, with a combination of Nielsen Catalina Solutions and Nielsen Sports, or Repucom, offset by NRG. So those are the numbers from an organic standpoint. And then the second part of your question was around --

Contribution from DAR --

From DAR and DCR. So from TCR and DCR, still early innings there. We've had -- the syndications just taking place. As you know, we've had a number of clients looking at the data for awhile, so the revenue contribution is immaterial in the quarter and again, I expect that to be a much greater contributor in 2017 going forward.

What I'll also say though, as we've said in the past, Digital Ad Ratings, Digital Content Ratings, their presence in our portfolio completely changes the discussion when we are renewing our contracts with the big media companies. So while Jamere's comment is more focused on the direct incremental revenues, which mostly come from digital first players in the marketplace, if you could imagine, which I don't really choose to do, but if you can imagine what our contract renewals would be like with the big media conglomerates if we didn't have Digital Ad Ratings and Digital Content Ratings and our Total Audience Measurement System.

It would be a completely different picture than what you see rolling through our numbers in the quarter. That's, by far, the more significant contribution that those products make in our Watch business right now. And the other parts we love as well. We love it just as much but it's, at the moment, not quite as big.

Dan Salmon, BMO Capital Markets.

Good morning. Just one question, each on the Buy and Watch segments. Mitch, could you just refresh us on where your relationships with Amazon and Alibaba stand in terms of their participation in various byproducts? And then just on the Watch side, a bit more of a minor one.

Perhaps just an update on status in the audio market, both progress on your own initiatives as well as perhaps your comments on the competitive environment, as we know the industry is looking for a co-op collective solution, or has initiated that, as you obviously have another independent competitor there. I would just be interested to hear an update on that as well. Thank you.

Sure. Thanks Dan. First on your first question related to Buy and e-commerce. We've continued the development of our e-commerce solutions in the US, where we're bringing together some of our panel data, some other third-party data and big data sources, altogether in a hybrid solution, that allows us to cover the rapidly growing e-commerce channels, both the extensions of the brick-and-mortar players and the pure play e-commerce platforms, including the largest players out there.

We're bringing that forward to the marketplace and by the end of this year, that will be in the hands of a growing number of our clients and start to roll through our business in a more full way in 2017. That's the US. And we have similar solutions that employ, basically, the same design, it depends on the country, in 11 other markets where e-commerce sales are significant around the world.

With regard to Amazon, they -- no change, really, in their status. In terms of their willingness to share their sales data, like retailers typically do with us, as we measure fast-moving consumer goods, they still prefer to remain on the outside of that collaboration model -- cooperation model that typifies our Retail Measurement Service.

Like we've done with Netflix on the Watch side of the business, we find other ways to measure the activity on those kinds of platforms. We've done that very successfully on the Watch side,, covering Netflix and other subscription video-on-demand platforms and we're able to do it on the Buy side as well to measure what's happening on Amazon's platform.

With regard to Alibaba, we continue to be very closely in touch and active with Alibaba in the China market as well as Tencent, and Sina, and Baidu, a lot of the other really big players. In the US, we have same: Facebook, Amazon, Netflix and Google. In China, they have their similar four or five major players and we're active with all of them.

I was in China last month and with our teams and part of that also included a meeting with the most senior leaders at Baidu and talking about how we're going to continue to broaden our relationship there and Alibaba continues to be very active and a key focus for our business in the China market.

On your -- on part B of your one question, Dan, with regarding audio, and the competitive situation in the industry, first on audio, we are still thrilled with that business. It's exactly what we expected: low single-digit growth, strong free cash flows, you're now seeing a scheme to leverage from the audio business in a new way, leveraging the PPM measurement capability to add more effective sample size to our Local TV measurement over on the video side of the equation.

And then we're continuing to pursue international wins in the Radio Audience Measurement business through the capabilities we have. We have some of those in our history and there's a few more opportunities in front of us. The other thing we're doing there is obviously continuing to bring our analytics portfolio to the radio industry to help them better entail their ROI and penetration story in the marketplace.

On the cooperative -- industry collaboration that's going on to try to prop up a competitive alternative uses ACR technology, Automated Content Recognition technology; I think that's when you are probably referring to. Look, we're very familiar with that kind of technology; we have it ourselves already in our tool bag.

We know what it's good for and how -- what it works well for and we also know quite a bit about implementations. So we are staying focused on our strategy and -- on Audience Measurement and Currency Grade Measurement that the marketplace trades on. It has a representative panels that represent all the key segments of the marketplace in a manner that's always been important. Currently is and will remain important enough. That's what Nielsen is about and that's easier said than done. We know that from experience.

Ryan Cary, Jefferies.

Good morning. One more on the Buy business. While it's understandably too early to give any 2017 guidance, how should we be thinking about the growth rates in the developed markets beyond 2016, even just directionally? Clearly, you're doing a lot to evolve business. Just trying to gauge how long to take for the developed business returns to more historical growth rates? Thanks.

Let me start, maybe Jamere, and then maybe you'll add. Look, especially for the US, we're planning for it to continue to be a tough environment next year. So we are starting there. And then we're -- basically you add our cost base, our allocation of resources, our investment in our key initiative, and with that as a starting point. If the environment improves, than that's going to be great but if it doesn't, we're building a plan with that tough growth environment in mind.

Again, because we don't see this as a -- just a cycle that the market is passing through. That's our judgment of what we're seeing in the marketplace; we see it as more of a secular shift. We're designing and transforming our product portfolio accordingly.

We will give more color in December at Analyst Day but what I'll say, from a total Company standpoint, is you've all seen our long-term growth framework. What we guided for this year was in-line with our long-term growth framework and I would say, just based on what we're seeing in developed Buy that we're planning for a year that's just at the lower end of that growth range. And again, we will give a lot more color at Analyst Day. We're working through our 2017 operating plan over the next few weeks and we will fill out the picture then.

Tim Nollen, Macquarie.

It does seem like this is fairly important initiative you're taking on and it will be -- effects beyond the Q3 just reported. We have Q4 guidance; I expect you're not going to give much on 2017 yet, but your restructuring charges, as you mentioned, Jamere, are going to be towards the upper end. How will you be reporting restructuring and other below-the-line items after this year?

That's a great question. So as many of you know, when I took the CFO job in 2014, I voted myself as a plain-vanilla Gap kind of CFO and we're [marked] us towards that path. Obviously, a couple of things.

You've -- those of you who followed our business over the last few years know sort of where we've been consistently, with things like restructuring and one-time items, cash taxes, et cetera. So we've reached a point in our cycle and our maturity that we know pretty much where those line items are going to come in and quite frankly, we feel comfortable being measured against them, and so we'll us provide a lot more clarity around how we will guide going forward at our 2017 Analyst Day.

Tom Eagan, Telsey Advisory Group.

Great. Thank you. Just a follow-up on developed Buy business. We saw the same light organic growth in the US business versus other markets at several ad agencies this past quarter, namely OMC and IPG. Is your business a leading indicator of theirs or vice versa? And then additionally, how would you describe or explain the dynamics for the -- for your competition in that business? Thanks.

I don't know that we're a lead versus theirs or vice versa. I think it's the same wallet and a lot of the same dynamics. Within our portfolio, we do know that there are some parts that do tend to see these kinds of swings in the marketplace sooner than others. For instance, we've always seen that in our innovation analytics part of our business, that tends to swing down or swing back up as the lead indicator of some of the other discretionary services in our portfolio.

But as a whole, I think our broad portfolio and the broad portfolio of services that the media and advertising agencies provide will probably moving more similarly to each other rather than one being lead versus the other.

I think it's indicative of the environment. When we talk to our clients, particularly as I talked to CFOs at our clients, they're all very focused on every line item of the P&L, just like we are, and agencies aren't immune. The discretionary parts of our business aren't immune. So I think it's just indicative of the environment that you're seeing.

Jeff Mueler, Baird.

On the long-term framework, you've also provided us for margins. You've talked about a lot about margin levers. It sounds like you still think you have to pull, but just wanted to gauge your sense of comfort with the long-term margin framework you previously provided, and is it reasonable to expect that it may be below that pace of expansion, at least in the intermediate-term, call it, 2017, 2018, as you go through some of these changes? Thank you.

As I said, we're currently working through our 2017 operating plans over the next few weeks or so, and we will certainly fill out the picture at December Analyst Day. Here are the things that I have a lot of confidence in. The first is that in our Buy business, we will continue to see scale business, scale benefits from the emerging markets and that's certainly a tailwind for margins. The intensity around cost out and productivity has not waned inside the Company.

We've got a very strong deck of productivity projects that are going to produce margin expansion for us inside the Company. I would say the third thing is that the restructuring efforts that you saw us take in the last couple of quarters are going to give us the right trajectory. Again, we will manage the margin expansion inside the total Company. You will see us guide to what that is and we will balance that with the real window of opportunity that we have here to accelerate this journey that we're on in our Buy business and accelerate the growth initiatives that we have in our Watch business.

Bill Warmington, Wells Fargo.

Good morning, everyone. So I wanted to ask about the new rating standard and assuming it's ready in time for 2017 upfronts, just ask about the direct and indirect revenue opportunity for you guys in terms of pricing modules and so on. And then as part of that, I just wanted to double-check the Watch guidance that you've given for the segment. It had been 6% to 7%, I believe, and I just wanted to double-check that.

I'll take the first one, and Jamere will cover the second one for you. Bill, thanks for the question. On the currency definition, I commented on that earlier. Maybe just a thing to add, we had these series of meetings with the industry. The most recent one was last week. It continue -- we continue to narrow in on the definition and there's a lot of reasons for us to be confident that our Total Audience Measurement System is going to play a big role in the 2017 upfronts.

Let me tell you what we're hearing though also, not just what Nielsen thinks but what some of the key industry players think. One example is Rino Scanzoni. He's a Chief Investment Officer at GroupM. He was quoted a few weeks ago saying something like, we're looking forward to making the Total Audience to currency in the next upfront and then what he said was, we have to go there. There's 10% to 12% more audience if you factor in the viewing on these other devices.

His voice is really important because what -- he was central to the C3 Metrics, 10 years ago, when that was converged on by the industry and has since served as the definition of the currency. So that's how we know he's thinking about the Total Audience and new definition of the currency for the 2017 upfront. David Poltrack, Chief Research Officer at CBS, he was just more direct. He just said, we're definitely moving forward. That was his attitude toward it.

So I think the keys to this way of thinking for these key industry influencers are the fact that we've passed the syndication point for Digital Content Ratings at the end of September. We are on the path for fully syndicate Total Content Ratings by the early part of 2017. Already in full syndication for the participating publishers.

We're just going to add agencies and other members of the ecosystem in the early part of the year. Those are the last key pieces in the puzzle. So we've delivered on those and that's why I think everybody is pretty confident in terms of this measurement system, and some sense of what that new currency definition is going to be playing an important role in the 2017 upfronts.

In terms of our Watch guidance, this year, we guided 4.5% to 6.5% and you see us on a year-to-date basis, be at about 6.3%. For the fourth quarter, the only thing that, for those of you who are modeling, have to adjust for, is that remember, we lapped the EPS consolidation in the fourth quarter last year and we're also lapping the NRG divestiture in the fourth quarter. So those are the only material adjustments that you need to make and I think they're in the right ballpark.

Ashwin Shirvaikar, Citi.

Good morning, Mitch and Jamere. I wanted to go back to the Buy business. I think of it as a data tools and people. I would say that the issues that you currently have are on the people-based side of it. These are expensive resources that you have from a consultancy and such, there's -- and as you do the restructuring, as we go through that, I just want to figure out what are we talking about in terms of eventual headcount jobs? What are we talking about in terms of cash restructuring associated with that? And then as you move to Connected Buy and build out an ecosystem, how are the economics going to work with regards to how you share across the system?

So, thanks for the question. I'll start and I will let Mitch chime in. I think your characterization of our business is exactly right. What the Connected System does is it transitions our Buy business to look a little bit more like an services business than it does today. Currently, for a lot of things that we've been talking about, we have more of the people-as-a-service business mix than a typical (inaudible) services company.

And so the implication is that we have higher-margin business post the transition as we will have more opportunities to fill data-as-a-service and software-as-a-service business. As Mitch said, that should add tremendous value and reduce costs on the client side and it should help us be more efficient and more productive in terms of how we deliver that service to our clients. So it's an exciting transition for us.

The idea of people remains every bit as important in that future business model versus how they have been important businesses historically. What we will mean is a different mix of people, with a slightly different set of skills, and different roles inside the business. As our system, Connected System, this hugely important initiative that we're focused on is developed, it will be connected directly to our clients business processes and systems, whereas right now, there's a lot of manual intervention required both on our side and on our client's side in order to draw full value out of these data resources that we provide to our clients.

So it creates a lot of efficiencies, both on our side and on our client's side and that's back to our point about this is a stronger, higher-margin business, more valuable to Nielsen and more valuable to our clients. That's the transition we'll work through. It's not a flip the switch kind of impact though.

It's a gradual transition that will evolve over time; we've done some restructuring already. If we get to the point where we see the next move that needs to be made on that front, of course, you'll see us do it.

Doug Arthur, Huber Research.

Mitch, in terms of the national TV out-of-home measurement roll-out, how significant could that be to growth? Is it modest or more than modest?

Part business modest. It will be a very important addition to our capabilities for certain clients and not so important for others. For instance, if your March Madness, if you're one of the networks that's carrying March Madness, it's a big deal. If you're CNN, if you're CNBC, these kinds of networks, this is a big deal. But others that are -- maybe their programming is more serial-based genre, or sitcoms, things of that nature, this isn't as high a priority for those kinds of networks.

So you'll see it work its way through our client portfolio accordingly. It will all add up to being a modest impact on our business. But that's what's required when you take on the task of measuring the Total Audience, you can't just go for the easy parts, or the more efficient parts. To really live up to that standard and to fulfill that vision you've got to take it all on and this is part of that.

This concludes our question-and-answer session. I will now turn the call back to Mitch Barns for closing remarks.

Just to take one minute before we wrap up, to share a few closing thoughts, in terms of how I see the overall picture. Watch business, again, we continue to be thrilled with the progress, the syndication of Digital Content Ratings, and the path we're on for full syndication of Total Content Ratings.

The overall Total Audience Measurement System is gaining adoption and well-positioned for the 2017 upfronts. On top of that, the improvements that we're rolling out for our local TV ratings business, our Watch business, on a roll. Marketing Effectiveness, strong growth, more than 30% in the quarter.

Our Buy business emerging remains solid, even within developed, Europe, the Pacific, Canada, all turned to be solid quarters of growth. The US is where we had the decline. The tough environment. We've talked about where judging needs to be secular shifts. And we're responding accordingly in terms of the magnitude and the pace of the changes we're making in our business to reduce our cost base, reallocate our resources, accelerate our investments, in particular, in this Connected System that helps us move from what today is much of a people-as-a-service business model to be much more of a data-as-a-service and software-as-a-service business model in the future.

All of that adds up to a stronger, higher-margin business for Nielsen going forward. We are going to continue to update you on our progress on the Connected System front on future calls and of course, at our December Analyst Day, much like we have done with Total Audience and its development over the past many quarters. Thanks, again, for everybody for tuning into the call. Thanks for your questions. We look forward to talking with you in the days and weeks ahead.

This concludes today's conference. You may now disconnect.