Dun & Bradstreet Holdings, Inc.
Q2 2009 Earnings Call Transcript

Published: 31 Jul 2009

[Operator:]

Welcome to D&B’s 2009 second quarter teleconference. This conference is being recorded at the request of D&B, if you have any objections you may disconnect at this time. All participants will be in a listen only mode until the question and answer session of the call. (Operator Instructions) I would now like to turn the call over to Ms. Kathy Guinnessey, Leader, Treasury and Investor Relations.

[Kathy Guinnessey:]

In a moment we will hear commentary on our second quarter performance as well as our outlook going forward from Steve Alesio, our Chairman and Chief Executive Officer; Sara Mathew, our President and Chief Operating Officer; and Tasios Konidaris, our Chief Financial Officer. To help our analysts and investors understand how we view the business, our remarks this morning will include forward-looking statements. Our Form 10K and 10Q filings as well as the earnings release we issued yesterday highlight a number of important risk factors that could cause our actual results to differ from these forward-looking statements. These documents are available on the investor relations section of our website and we encourage you to review this material. We undertake no obligation to update any forward-looking statements. During our call today we will be discussing a number of non-GAAP financial numbers as that is how we manage the business. For example, when we discuss revenue growth, we will be referring to the non-GAAP measure core revenue growth before the affects of foreign exchange unless otherwise noted. When we discuss operating income, operating margin and EPS these will all be on a non-GAAP basis before non-core gains and charges. Reconciliation between these and other non-GAAP financial measures and the most directly comparable GAAP measure can be found in the schedules to our earnings release. They can also be found in the supplemental reconciliation schedule that we post on the investor relations section of our website. Later today you will also find a transcript of this call on our investor relations site. With that, I’ll now turn the call over to Steve Alesio.

[Steven W. Alesio:]

First of all as you saw from our earnings release, we delivered solid financial results in the second quarter in spite of a continuing difficult economic conditions. In our collective discussion today we will share with you a picture of what we see as a company heading in to the back half of 2009 and how we are leading as we head in to next year. While we will take more than a few words to do so, what you should take away are three things, first of all, the top line in our North America segment of our business is pressured by the economy more than we anticipated but we expect and we are working on that recovering. The second thing you should take away is our focus on profitability is still very much a part of who we are and we expect our margins to hold up well even in this environment and to continue to do so moving forward. The third thing you should take away is that we are a company whose strong competitive position and the financial strength is very sound as we start preparing for next year. I thought I’d put my opening remarks in to a 2009 framework that I spoke of on our last two calls. That is, when we entered the year we anticipated three things

[Sara Mathew:]

I’ll begin with a review of our international business which was up 20% in the second quarter. Now, as a reminder, just two years ago we were struggling to maintain consistent top line growth in this market. Today, we are in a very different place, our international business is a strong contributor to D&B’s top line growth but more importantly this acceleration which was drive through a combination of organic and inorganic investment comes with higher margins and is creating value for shareholders and customers. Let me explain, there are three key factors that drove this shift in international performance

[Anastasios G. Konidaris:]

I plan to cover three areas today

[Steven W. Alesio:]

What you should be taking away from us today are the following, first of all, we had solid financial performance in the first half of the year across really all major elements of our business. Second, from a top line perspective our international business continues to perform very well however our North American business is being impacted more than we anticipated when the year began. We do believe we are addressing the necessary drivers of top line growth to generate improvement as time passes and as the economy recovers. The third take away is we are continuing to do well at managing for operating margins even in this environment. The fourth take away is we are focused on getting stronger and investing for our future. The fifth take away is we continue to be a very healthy company in terms of our core financial strengths. While admittedly we would like our results for this year to be better, we do believe our business is performing very well on a relative basis when we read the results of our peers and just general corporate America. Importantly, when we look longer term, we still very much like our competitive position. We are gaining share in our international sector given our success of that business segment. In North America, we believe we are maintaining share as our competitors have similar economic issues to focus on and we are making a decision to hold on to our customers. So, our position as the world’s leading commercial information player is still very much intact as we head in to 2010 and beyond. Before I wrap up I do want to say a few things to and about our team member. The first is about our senior team, the top 100 people who Sara and I met with a few weeks ago. This team is doing a strong job of leading in this environment and they continue to inspire us by their spirit and their willingness to persevere and find ways to be winning. Finally, I want to recognize the over 5,000 team members we have across the world. We appreciate that even in these times that create a heightened since of personal anxiety, we see this team bringing its’ passion and energy to the workplace each and every day. With that, I’ll now open up the phone lines so that we can take any questions.

[Operator:]

(Operator Instructions) Your first question comes from Michael Meltz – JP Morgan.

[Michael Meltz:]

I think I have three questions, I appreciate everything you said there during the prepared script, presumably the macro environment is better today than three months ago and certainly six months ago. Can you just walk through a little bit more as to when you sense things were weakening? I don’t know if it is different in risk management versus sales and marketing, I just want to understand why the guidance cut is coming now? Then, I have two follow ups.

[Steven W. Alesio:]

Why don’t you give us the two follow ups and then we’ll try and piece them together if they connect.

[Michael Meltz:]

One would be just to Sara’s point, what do you actually expect sales and marketing to decline in 2009?

[Steven W. Alesio:]

Let me touch on the first one is what I took away Michael what’s kind of the macroeconomic context, how do we see that relating to the second half of 2009? So, I’m going to touch on that and Sara will touch on the specifics of sales and marketing but do I have the first question correct?

[Michael Meltz:]

Yes.

[Steven W. Alesio:]

I think what we’ve said, I’m going to put international aside because that business is doing very well as we described so I think your question is really relative to North America. In the context of North America I think what we’ve said is the expectations that we see relative to customer behaviors is just worse than we believe almost three to four months ago now and that has all to do with them slowing down relative to transactional behavior and less activity on the sales and marketing side. That specific customer behavior, as much as we can see it going in to the back half of the year, still looks like it is with us. We do expect when the economy turns around, and again, we have to measure that by when our customer behavior turns around that we will benefit from that with transactions and RMS improving, sales and marketing improving but that will be a function of us seeing our customers’ behavior change. At this moment, we don’t see that yet as we look in to the back half. The flip side of that is we’re trying to stay in control of what we can and what you’ve heard from us is we’re focused on improving our value proposition, we’re focused on the efficiency of how do we go to market. Those are the things that we’re trying to stay in control of so that when our customer behavior changes, we will benefit from that. That’s my response to your first question. Is that sufficient?

[Michael Meltz:]

Let me ask it this way Steve, we’re hearing from a lot of companies that are saying things are better from what they were expecting a couple of months ago and you’re saying things are worse. So, was it you just had a higher bar of expectation for a pickup?

[Steven W. Alesio:]

I would say it this way Michael, in the first part of the year we had an expectation for things improving in the back half of the year in the context of what we see with our customers. We don’t see that improvement. I think specifically what Sara said, using the US, is that we see the sales and marketing as slightly better in the back half of the year and we see the risk management as a little bit worse. So, it’s really that’s it. At this time we wouldn’t be in a space of being optimistic in the second half of the year based on everything that we’re seeing. If things recover faster, things will happen but right now we think it’s prudent to comment on what we can see with our customers.

[Michael Meltz:]

I guess that would feed in to the question then, you’ve given three year targets, it was a different world when you gave them then, you mentioned that you still view D&B, you don’t think you’re competitive position has changed, do you think your growth profile is any different looking forward?

[Steven W. Alesio:]

We don’t think our competitive position changes. I think we’re better off internationally and I think we’re maintaining our competitive position in the North American market. I think relative to the growth targets that we had issued several years ago we said consistently that would have to be in normal economic times and that I can’t predict. We’re very focused however in the medium term of when our customer behavior kind of gets back to improvement, us being in a position to capture that. That’s what I would say on that.

[Sara Mathew:]

I think Steve touched on it but I think the sales and marketing business in the first half was down about 8%. You can expect that to be marginally up, relative to that it won’t be up in positive territory but it should be a point or two better so you will see a slight improvement. That’s primarily because the first half was impacted by timing issues and in the second half we shouldn’t see that. Also, I think you heard me talk about some of the things we’re doing from a value proposition standpoint. We have clearly got things that customers want Michael. The pipeline is certainly there. What we’re seeing is behavior Steve touched on that is very difficult to predict. We have people who signed contracts and then come back and tell us, “You know what, don’t send that over because we’re under severe budget constraints.” The sales cycle has lengthened. To go back to your original question was did we set ourselves with a much higher bar? Maybe, we did but, that’s just who we are. That’s just the way we tend to approach the business and what we’re telling you is the bar that we set for ourselves, it is not becoming clear to us that for 2009 we will not be able to hit that bar and that’s why we have adjusted guidance appropriately.

[Michael Meltz:]

My final question Steve, you mentioned the commitment to total shareholder return, so in the context of your EBIT expectations aren’t going to be where you would like them to be, why aren’t you lifting your repurchase activity? I appreciate you want to keep leverage or Tasios at that leverage but given the stock’s performance today you could easily double or triple what you’re saying you’re going to do on repurchase and it wouldn’t change your leverage materially. Can you talk about if you’re not going to buy back stock aggressively close to $70, when are you?

[Steven W. Alesio:]

Let me just say two things, one I think Tasios said this, I think in the range of $100 to $150 which is our share repurchase range for the year I think we’ve used about $45 million of that roughly so we have a lot more if you will room in the second half. That’s the first thing I would say and that’s quite consistent with Tasios. Second, as you know from your history with us, we’ve always been opportunistic. At times we thought it was going to be this and then it’s been higher and you know that from your history with us as do the rest of our investors. So, you should assume that we’re always mindful of all of the factors that you mentioned including how we’re performing relative to the market, relative to our own expectations, keeping track of capital ratios as you mentioned. So, you should assume that the way we’ve behaved in the past and all the criteria that you mentioned are in our heads as we move forward. We watch that every week, every month, every quarter.

[Michael Meltz:]

Given the way that you buy stock, when do blackout periods come to a completion?

[Steven W. Alesio:]

They usually come to a completion on a day like today so the blackout for us is over today as an example.

[Michael Meltz:]

Meaning that you could be in the market today or no Monday?

[Steven W. Alesio:]

We could technically be in the market today.

[Operator:]

Your next question comes from Carter Malloy – Stephens, Inc.

[Carter Malloy:]

Can you talk more just about your acquisition strategy going forward? Are you going to continue to look internationally are you looking for maybe complimenting technologies here in the US? Then as a follow up Tasios can you give us the actual dollar amount expected from acquisitions in ’09 and ’10 and maybe it would be better if we had it on an international basis as I think that’s where most of it is?

[Steven W. Alesio:]

Let me have Sara address the acquisition thinking and strategy relative to international and North America. I could have Tasios give you the numbers of what we’ve done to date but we really can’t project something forward. Let me have Sara answer that first.

[Sara Mathew:]

In terms of acquisition, we’re in the market always Carter. In international, we’re trying to do two things, first we have to improve data quality so the examples that I talked about were all around improving data quality and at the same time figuring out a way to do that while creating shareholder value. We find that if we either acquire an entity where we already have a large owned presence we find that that works very well or in the higher growth markets where our presence is still so small and you can take China, China was a $5 million business three years ago and it will be over $20 million by the end of this year as an example of how we are rapidly expanding our footprint. The one thing that is very clear to us is our brand in all of these emerging markets are top notched. In terms of how we think of acquisitions, we are continuously looking. We’re looking in international and we are looking in the US. If we cannot find an acquisition that delivers the customer and shareholder criteria which is real value to customers and real value to shareholders, we walk away. All I can tell you is we’re in there, we’re looking and you can expect us to continue to look in both international and the US.

[Steven W. Alesio:]

As far as your question on numbers, all we can answer if it’s helpful is what we have done to date.

[Anastasios G. Konidaris:]

So far this quarter we did about $55 million between ICC and Roadway and then earlier in Q1 we spent about $20 million in QED. So far we’re at $85 million so assume we’ll do in terms of targets about $100 million this year.

[Carter Malloy:]

A $100 million acquisition spend?

[Anastasios G. Konidaris:]

Yes. So far $85, let’s be precise.

[Steven W. Alesio:]

So far $85 million for the first two quarters.

[Carter Malloy:]

I’m trying to figure out the actual contribution to your P&L from the acquisitions you did in fourth quarter last year and then the ones you’ve done so far this year. Then also maybe Tasios you said on the call that you expected it to add 7% to international next year.

[Anastasios G. Konidaris:]

Let me try to be helpful and if we need to follow up with you Carter I’d be more than glad to do so. When you look at it in terms of the acquisitions we did in the fourth quarter of last year and pretty much kind of Q1 this year, on the international side we expect from a revenue perspective that to add about 10 to 11 points of inorganic revenue growth. So, that’s probably going to be about $30 to $35 million on the top line. Bottom line, it’s probably going to be fairly neutral to a slight dilution, that’s how you want to think about that. In the US we did very little, if any, so you have QED primarily that’s probably going to add less than $20 million and it’s going to be slightly dilutive this year and accretive next year.

[Carter Malloy:]

Then also you guys talked about a sharp reduction in the transaction volumes, I was wondering if you’ve seen the same related drop in usage in D&BI customers? And, if so, what their – I know Steve you alluded to some of them coming back and having pricing conversations with you and I’m just wondering if I’m a D&BI customer that signed up last year and I’m paying more and essentially using it less, what does your conversation sound like with those customers?

[Sara Mathew:]

D&BI our usage is not an issue at all. D&BI usage is up, up very healthy as is all of the other aspects of D&BI. But, let me talk about the transactional usage, just remember transactional usage is when you don’t have a subscription contract but you can use more on an as needed basis. We started to see this occur in the first quarter but you should remember we had a sales force that we had brought in to D&B and we were pretty confident that we could start to turn the trajectory around. The second quarter was marginally better but clearly it’s apparent to us that these trends will eventually play out in revenue in the back half because remember this is upfront commitment customers have made to us so we do have visibility in to what is likely to happen over the course of the year. In terms of connecting that to the external environment, it seems to correlate very closely with the level of new credit applications and new credit activity which is down double digits as I said in my prepared remarks and that is about what has happened to our transactional business. To counter that, what we are trying to do is go back and look at what customers need. What they need in this environment is better portfolio analysis and I’ll be just candid, we were slow to market and slow to get in front of this trend and we are only now doing it. We have a scalable version of D&BI and once again, the benefits we won’t fully receive until 12 months from now so that’s the nature of the business.

[Steven W. Alesio:]

Carter, the only thing that I would add to that because I think it’s a strategic question is one of the reasons we kept pushing subscription in D&BI is because when we get there we find ourselves embedded. So, even in this environment, as Sara said, people are using that far more than they ever were even in this environment versus the transactional where they are making those decisions more ad hoc, they’re not using them. So again, it’s strategically why we’re interested in that product line continuing to grow.

[Carter Malloy:]

So not on a penetration basis but on a customer-by-customer basis the amount of usage is actually up?

[Steven W. Alesio:]

Yes, that’s why we keep pushing for penetration.

[Carter Malloy:]

Then lastly just real quick can you guys talk about your new contract with Acxiom and some of the efficiencies you expect to gain there?

[Steven W. Alesio:]

I assume you’re referring to the contract from a datacenter perspective?

[Carter Malloy:]

Yes.

[Steven W. Alesio:]

This is really part of our financial flexibility and as you know we had outsourced this to [inaudible] several years ago I think it would be 2002 or 2003, I don’t have that year exactly right but back in the early 2000s. As it was coming up for renewal we were once again trying to look for two things

[Operator:]

Your next question comes from Daniel Leben – Robert W. Baird & Co., Inc.

[Daniel Leben:]

A couple of times you guys have made the comment about looking to hold on to customers, I just want to get a sense of what’s going on out there in the market in terms of pricing pressures specifically on the transactional said? And, are there some unique things you guys can do to try and get some more services in to some of these clients in order to retain them even though the pricing is actually going down on the individual products?

[Steven W. Alesio:]

Let me just touch on that and if Sara wants to add something to it she will. First of all, because of our presence across the market it is important to us that we do retain as many customers as possible so strategically that’s how we think about it because we are such a leader in our space. What we said and what we are doing is we continue to try to work with customers relative to the scope of what they’re trying to get done and trying to in many cases to bundle as much as we can in to that in order to actually do the best we can for ourselves, for our shareholders as well as for them and because we have low marginal cost the bundling is relatively a cost effective process for us. That said, we have to be mindful of what customer’s budgets are and their budget pressures and so that’s how we think about it and that’s probably as much to do with the project side of our business than anything else. So, that we’re very focused on strategically. That would be the first half of the answer to your question. From a transactional side, let me just have Sara touch on that?

[Sara Mathew:]

What do you mean on the transactional side?

[Steven W. Alesio:]

Do you mean on the risk side of that Dan?

[Daniel Leben:]

Yes.

[Sara Mathew:]

On the risk side there are two pieces to it. D&BI is probably the best example of product that is fairly standard that we could give you specific pricing outcomes and as I said in my prepared remarks, that was up in the high single digits and in line with our expectations. On the transactional side, as I also said, it’s an upfront commitment and as we’re seeing declines in usage, we’ve reflected in our guidance that that will ultimately translate in to lower revenue. But, there’s one other point I want to make to add to Steve’s commentary. We don’t sell widgets so it’s very hard to talk about pricing per unit. Customer activity has shrunk and so what we do is we sit down with them and we desculpt the activity that we are planning with them and we give them fewer deliverables. This allows them to do what we would describe as the minimal level of market activity so that they can continue and do what’s minimally required but, we’re also in some cases giving them less. But, we do believe when their marketing activity resumes, when the economy recovers we would just be in a better position since we were with them through what would be a period of economic pain.

[Daniel Leben:]

Just to shift a little bit, Tasios you gave us a little more insight in to the additional cost savings that you’ve embedded in the guidance versus the original 2009 plan?

[Sara Mathew:]

This is additional cost?

[Daniel Leben:]

The revised cost saving target for 2009 relative to the original plan.

[Anastasios G. Konidaris:]

Let me tell you how we think about it Dan. When you look at our revised guidance you kind of take the middle point of the revenue range and then you would see the new guidance implies $60 million less in revenue. Then, what you look at from an operating income perspective, operating income declined about $35 million so we actually increased our operating expense savings or financial flexibility in the remaining six months by $25 million. It was $25 million plus covering additional investments.

[Daniel Leben:]

I guess the other question I had was on the tax rate, what are the drivers for the tax rate coming down?

[Anastasios G. Konidaris:]

There are a couple of things, first you have kind of mix of income between international and North America with international accounting for a greater portion of our net income and in general international has a lower tax rate than the US. The second thing is over the years is kind of thoughtful tax planning that we as well as other companies are doing.

[Daniel Leben:]

Then just the last thing, something we’ve seen from some other companies out there is that they’re seeing that Europe is slowing at a rate behind the US. Are you concerned that when we look out potentially in 2010 that that could be a drag on the international business?

[Sara Mathew:]

I’m going to just very quickly paraphrase what I said in my prepared remarks. The European business is performing well and by that if you want to think of Europe it’s in the mid single digit range, we feel very good about it given the economic conditions. All other markets are up to prior year and if we go back to where the growth is coming from there are two primary sources. The first is cross border data, the need for cross border data is acute and it is actually pervasive through all of Europe. Our focus on customers who want cross border data which has really been the focus of our international strategy has moved that along so we’re well positioned in the market. The second thing is that we did have a products portfolio manager that is available through Europe and that business is up significantly. What that product does is it allows customers to actually take a look at the risk within their current customer base and their current accounts. That’s where the growth is coming from. We do see looking ahead that Europe will continue to maintain solid growth. We don’t expect high growth, the high growth really comes from our markets in Asia. If you look at the domestic-to-domestic business in Europe, and that’s built in to all these numbers, it is down so we are experiencing it but because of our positioning and our products we’re actually doing better than the norm.

[Operator:]

Your next question comes from Carter Malloy – Stephens, Inc.

[Carter Malloy:]

I just had a housekeeping question, what are your foreign exchange assumptions for the year? I know that rates have quite a swing favorably for you guys?

[Anastasios G. Konidaris:]

I’m going to say they’re not favorable they’re at least not as bad as last year. Let’s kind of talk about Q2 first, so Q2 top line was about $13 million negative fx and as you heard from me operating income was a -$3 million. When you kind of look at Q3 I would expect Q3 drag on the top line to be about $14 to $15 million and on the bottom line about $3 million to $4 million. Then in Q4 I would expect, because that’s when the dollar began weakening last year, I would expect the foreign exchange to be significantly less, somewhere between zero and the -$15 million that I mentioned about Q3. All in rest of year top line probably down $20 to $25 and a negative operating income internationally by $2 million.

[Carter Malloy:]

So you take the $20 to $25 and add in last quarter and that gets you close to your [inaudible]?

[Anastasios G. Konidaris:]

Exactly. As you remember now, our guidance is on a per fx basis number one and number two, foreign exchange headwind on the bottom line has already been factored in, in our operating income guidance.

[Operator:]

I am showing no further questions at this time.

[Steven W. Alesio:]

I would thank all of you for joining us. Goodbye for now.

[Operator:]

This does conclude today’s conference. Have a great day.