Dun & Bradstreet Holdings, Inc.
Q4 2012 Earnings Call Transcript

Published: 12 Feb 2013

[Operator:]

Good morning, and welcome to D&B 2012 Fourth Quarter Teleconference. This conference is being recorded at the request of D&B. If you have any objections, you may disconnect at this time. [Operator Instructions] I would now like to turn the call over to Ms. Kathy Guinnessey, Leader, Treasury and Investor Relations. Ms. Guinnessey, you may begin.

[Kathy Guinnessey:]

Thank you. Good morning, everyone, and thank you for joining us today. With me on the call this morning are Sara Mathew, our Chairman and Chief Executive Officer; Rich Veldran, our Chief Financial Officer; Byron Vielehr, our President of International; Manny Conti, our President of North America; and Josh Peirez, our President of Global Products, Marketing and Innovation. Here is what you can expect on today's call. First, Sara will begin with a review of our 2012 results and our plans for 2013. Then Rich will follow with a detailed discussion of our fourth quarter results. After that, the team will be available to take your questions. To manage the time and ensure we get to all callers, we ask that you please limit your questions -- yourself to 3 questions. You can then go back into the queue if you have follow-ups. To help our analysts and investors understand how we view the business, our remarks this morning will include forward-looking statements. Our Form 10-K and 10-Q filing, 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 measures as that's how we manage the business. For example, when we discuss revenue growth, we'll be referring to the non-GAAP measure core revenue growth before the effect 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 noncore gains and charges. You can find the reconciliation between these and other non-GAAP financial measures and the most directly comparable GAAP measures in the schedule to our earnings release. They can also be found in the supplemental reconciliations 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 Sara Mathew. Sara?

[Sara Mathew:]

Thank you, Kathy, and good morning, everyone. Before we begin, let me lay out our agenda for the call this morning. I'll begin with my perspective on our 2012 results and our strategy to leverage MaxCV to improve value for our customers beginning in 2013. This will provide context for our 2013 guidance ranges and the path to return D&B, specifically the North American business, to sustainable top line growth. Rich will follow with a more detailed review of our fourth quarter results, after which I will provide a few closing comments before opening up the call for your questions. Last night, we released our 2012 results. Core revenue was up 1%, operating income grew 4%, EPS was up 11% and we generated free cash flow of $283 million. While these results were in line with our revised guidance and internal expectations, we are disappointed with our performance, particularly in North America, where we took a step back in 2012 after 2 years of steady improvement. I'll discuss North America in more detail in just a moment. Moving to International. We remain pleased with our performance outside of China, where regulatory issues necessitated a shutdown of our Roadway business. International revenue was up 5% for this year, fueled by the rollout of DNBi in Europe, strength in Australia and the benefit of the MicroMarketing acquisition in China. Organic revenue was up 3%. Most important, International margins rose 600 basis points, driven by continued portfolio optimization in Asia and the benefits of our reengineering programs. In North America, revenue was down 1% at the low end of our expectations due to weakness in the risk business, which was down 4% to prior year. This decline was partially offset by better-than-expected growth in our Sales & Marketing business, where we have benefited from innovation behind our Data-as-a-Service, or DaaS, products and continued strength in the Optimizer solutions. Let me address the challenges in RMS and the actions we are taking to stabilize the business in 2013. As we have discussed in previous calls, our Risk Management business has been under pressure all year, and because of the ratable nature of the business, revenue is expected to be down slightly in 2013. Now there are 3 components within the RMS business

[Richard H. Veldran:]

Thank you, Sara, and good morning, everyone. As Sara said earlier, I'm going to focus my comments on the fourth quarter results and the drivers behind our outlook for 2013. Overall, our company fourth quarter revenue was down 1% due to a 2% decline in North America, partially offset by a 3% growth in International. Let me focus first on North America, where the decline in the quarter was driven by a 4% drop in RMS. About a point of the RMS decline was due to the timing of a large government contract that shifted out of the fourth quarter and into the third quarter. We discussed this during our Q3 call. An additional point was due to a change in product mix. Let me say a little bit more about the product mix. Our newer products, like D&B Direct, are largely usage-based, with revenue that's recognized as the customer consumes the data. In the fourth quarter, we saw several large customers shift their spending from projects, where revenue was previously recognized upfront, to D&B Direct, which is usage-based. As a result, we will recognize that revenue throughout 2013 instead of in the fourth quarter of 2012. Ultimately, this is a positive for our business as these customers are now using our newest solutions, and we're more embedded in their workflow. Adjusting for product mix and timing shifts, RMS would have been down about 2 points in the fourth quarter, consistent with our third quarter performance. Now since Sara covered the risk business in detail, I'm going to focus my comments on Sales & Marketing, which was up 3% during the quarter. Value-added products, which represent 75% of S&MS, were up 5%. The vast growth was largely driven by the continued expansion of our DaaS solution, D&B360, which accounted for 3 points of the growth. Growth in value-added solutions more than offset a 5% decline in the traditional product set. Looking forward to 2013, we expect S&MS to grow in the low- to mid-single digit range, fueled by continued strength in our value-added products, particularly D&B360 and Optimizer. Growth in Optimizer will be driven by investments in data, as Sara mentioned earlier, as well as our planned expansion of its market. Currently, Optimizer is primarily used by large enterprises, and we're rolling out an online version designed for the needs of small to mid-sized businesses. Regarding D&B360, we will continue to leverage alternative distribution channels to further penetrate the CRM space, as well as exploring other opportunities to embed our data directly into customer workflows. Finally, Internet, our smallest segment, was down 7% as customers continue to tightly manage expenses. Given the current environment, we expect this level of decline to carry into 2013, and this is factored into our guidance. Now, reflecting on the North American business as a whole, while we did take a step back in 2012, we believe that we're focused on the right levers for long-term sustainable growth. In 2013, we expect our underlying North America sales to grow as the year progresses, and this should translate into an improvement in the revenue trajectory versus 2012. As such, you should expect to see North America deferred revenue balance increase over time as our underlying sales improve. Now let me talk a little bit about deferred revenue trends and how we look at them. It's really the best indicator of the future health of our business. As you know, we do a fair amount of business with the U.S. government, and those contracts are often very large. The timing of when we renew these contracts is rarely uniform. The term can depend on government funding schedules. As a result, we can have a one-year contract that renews for a shorter term to bridge to the next government funding event, or we can have a one-year contract renewed for a longer period to lock in funding. While the overall business with the government is stable and growing, this timing variability can cause swings in deferred revenue in a given quarter. At the end of 2012, our deferred revenue balance in North America was flat on a reported basis However, adjusting for the timing impact of government contracts, which gives us the best indication of the underlying sales trends, deferred revenue was up 1% in line with the third quarter. With that, let me turn to International, which represents 24% of total core revenue. Revenue for the fourth quarter grew 3%, in line with our expectations. Europe and other, which represented 60% of total International, grew 4% in the fourth quarter, primarily behind the rollout of DNBi in Europe and despite the weak economic environment. Since its launch, we have added about 1,500 customers to the DNBi platform, with more than 20% of those new to D&B. In Asia-Pacific, which represented 40% of total International revenue, growth slowed to 1% in the quarter due to a change to ratable revenue recognition of one of our Chinese product offerings, and as we anniversaried the acquisition of our MicroMarketing business. This was offset by some strength in D&B Australia due to higher collection activity. For 2013, we expect full year International growth to be in the low- to mid-single-digit range with a stronger back half as we anniversary the China matter from Q1 of this year. I will now turn to our total company profitability during the fourth quarter, operating income increased 2%, in line with our expectations. North America declined 1% due to increased investment activity, which will continue into 2013. International was up 12%, primarily due to savings from reengineering activities. For the full year, company revenue income was up 4%, in line with our expectations. In 2013, our reengineering program is expected to generate savings of $70 million to $80 million, consistent with our historical range. Since our overall investment levels in 2013 are much higher than in prior years, we expect operating income to decline between 3% and 6%. Let me give you some added context for the decline in operating income. As a reminder, in 2012, operating income excluded $30 million of costs related to MaxCV. Our 2013 guidance includes nonrecurring costs of $25 million to $30 million to deploy the new data supply chain in the U.S. On an apples-to-apples basis, our 2013 operating income would have grown between 0 and 3%, in line with our revenue growth. Now to help you with your modeling, you should note that our investments will be higher in the first half of 2013 relative to 2012, where our investments were more back-end-weighted. As such, we expect operating income to decline in the low-double-digit range in the first half of 2013 followed by low-single-digit growth in the second half. EPS for 2012 was up 11%, at $6.94. This includes a $6 million make-whole premium paid in connection with the early retirement of our April 2013 bond maturities. We were able to take advantage of a low-rate environment and issue $450 million of new 5-year bonds at a 3 1/4% coupon and $300 million 10-year bonds at a coupon of 4 3/8%, thereby locking in favorable rates for a longer duration. For 2013, despite the expected decline in operating income, EPS is estimated to grow between 8% and 11%, driven by the impact of our share repurchase program. Our tax rate for 2012 was 33% and is expected to be slightly lower in 2013. Our free cash flow for 2012 was $283 million, which allowed us to return $549 million of cash to shareholders. Finally, turning to the balance sheet. We ended the year with $149 million of cash and gross debt of approximately $1.3 billion, in line with the expectations we shared with you last year. With that, let me turn the call back over to Sara.

[Sara Mathew:]

Thank you, Rich. Let me close with a few comments on North America. We acknowledge we took a step back in 2012, and we are not satisfied with our results in this market. With the build of MaxCV now behind us, we are in a much better position to return North America to sustainable growth. The underlying business is getting better, and we feel good about our growth initiatives as early market reaction is positive. To discuss our strategy and prospects for the future in more detail, we will be hosting Investor Day later this year so you can experience first-hand the transformation of D&B from a data provider to a data insights and analytics company that delights its customers to informed perspectives and a seamless customer experience. And with that, let me open up the call for your questions. Operator, could you open the lines, please?

[Operator:]

[Operator Instructions] Our first question comes from Shlomo Rosenbaum of Stifel, Nicolaus.

[Shlomo H. Rosenbaum:]

Sara, can you just give us a little bit more explanation as to what was going on with the Portfolio Risk Manager? That was kind of the premier module you guys came out with. Can you just talk about just more detail on the original go-to-market strategy and what you found is working better.

[Sara Mathew:]

Sure. I'll have Manny cover it.

[Emanuele A. Conti:]

Shlomo, yes, so PRM sales did ramp slower than anticipated mainly due to a flawed go-to-market approach. We did make a quick pivot in the second half of 2012 with our go-to-market, and what we did is we took PRM and bundled it into our core DNBi solution. And in addition, we've made additional investments in our underlying data and scores, which powers the DNBi product. While it's still early, our new focus is gaining traction in the market, and we expect the performance to strengthen over the course of 2013.

[Shlomo H. Rosenbaum:]

So are you -- just to focus a minute, are you guys including that as part of the core DNBi product now? Or does it cost more? Just -- I'm trying to understand. You went with a separate module. It wasn't selling. When you bundled it, then the whole product is selling better?

[Emanuele A. Conti:]

Yes. Yes. So you can think of it as versions, so we are bundling it into the core platform and then, obviously, pricing it appropriately for those new features and functions.

[Sara Mathew:]

So just to build on what Manny said, Shlomo, we tried to sell PRM as an independent module, and what we found is that customers view that as a very discretionary purchase. And so offtake was not that good. So there was a very quick pivot in the market largely driven by bundling it into the core DNBi offering. So it made it much easier because you were actually putting more value on the table. And as Manny said, when you add all the data and analytics, this is going to gain traction throughout the year. But we should acknowledge we had a misstep in 2012.

[Shlomo H. Rosenbaum:]

Okay. And could you talk a little bit about how -- just for somebody who's not a tetchy and somebody who's not -- doesn't understand these things to the great detail, how the impact of MaxCV has kind of hampered the growth efforts in terms of innovation and other things that you needed to do in order to drive the top line? And where we are now versus where we were in 2012?

[Sara Mathew:]

Sure. Let me kick that off, and then I'll ask Josh to add a bit more perspective on MaxCV. I'll just be candid and say MaxCV was actually a much bigger transformational effort, and it cost more than I originally anticipated. I own that. But now that we have a global data supply chain completed, we can fuel it with all sorts of new types of data sources. And we're also able to look into the data we have, and we are generating very, very interesting insights. We call this big insight because big data is just interesting. Everybody has it. It's hard to generate insight out of the data we have. That is what MaxCV is creating for us. So when we talked about custom analytics for the large financial services side, that is just one example. I believe the opportunity with our large clients is fairly significant, and that's going to be a growth engine for us going into 2013. To talk a little bit more about MaxCV itself and the innovation that can come off of it, let me turn it over to Josh to talk about the web service layer and how the 2 play together to essentially return us back to growth. Josh?

[Joshua L. Peirez:]

Thanks, Sara. Shlomo, so if you think about what we've built with our new data supply chain, there's really 2 components to the MaxCV investment. First is the underlying data supply chain, which allows us to add more and new types of data, and also allows us to generate new analytics and insights very quickly and bring those smart data in a much more cost-effective way than we've been able to in the past. You're going to start to see us bringing out these new analytics in Q2 of this year on DNBi as well as in our broader risk product suites. So we're very excited to get those into market. The second piece of the investment was focused on a services layer which allows us to innovate on products more quickly. And we have to have that out in the market earlier in the investment cycle of MaxCV and have been able to create products like D&B Direct and D&B360, which are performing well in the market off of our new services layer. Those products have not yet received the benefit of the new types of data and new analytics, which we anticipate them receiving during this year. And now we're also able to take all of our development resources internally in our team and focus them solely on growing the North American business rather than on the underlying infrastructure build that they've been focused on for the last couple of years [ph].

[Shlomo H. Rosenbaum:]

So is that complete now? I mean, are we at the point that you could take the people -- a lot of the effort that had been working on the MaxCV, it really focused them on growth? I mean, you still -- there seems like there's $25 million to $30 million of investment required still this year.

[Joshua L. Peirez:]

Shlomo, the investment for this year is focused on deploying the data supply chain to the customers in the United States so that they receive the benefits of the investments we've made. So yes, those resources are now focused on delivering to the North American customer base the products as well as the data analytics that we're able to provide with our new capabilities.

[Operator:]

Our next question comes from Andrew Steinerman, JPMorgan.

[Andrew C. Steinerman:]

I wanted to focus on the small business segment of RMS and particularly DNBi Pro, which I know was launched a couple of years ago. I wanted to know if there's much difference between the performance of your smaller customers and your larger customers and particularly how your offering is working in the smaller businesses?

[Sara Mathew:]

Sure. Let me have Manny talk about that. Manny?

[Emanuele A. Conti:]

Yes. Sure, so as we -- we did launch DNBi Pro and we do offer DNBi across all of our customer segments, and we're experiencing our retention and uplift rates in the DNBi at platform pretty much held up throughout this year. Certainly, we understand that our competition does come at us with lower-priced offers while we compete on value. And we're directly addressing that by -- through the investments that we're making, through the foundational data investments, which is also generating new scores. We're also able to now begin to bundle some of the modules that we talked about and adding value into the new core platform. So we've pretty much seen DNBi perform pretty consistently throughout the year.

[Andrew C. Steinerman:]

Right. And I was asking, was the performance amongst small businesses much different than your larger customers?

[Emanuele A. Conti:]

No. We don't really see a big difference between the 2 sets. If you were to look at DNBi, it's serving small to midsized customers. When you get into the really large sets or the really large companies, they tend to use and consume our data and analytics rather than need a platform.

[Sara Mathew:]

Andrew, the large customers clearly grew in 2012. We feel very good about our performance there, and that's where most of the innovation went in 2012. You're going to see us take that to the lower end in 2013 to improve that part of the business, which clearly could get better.

[Operator:]

Our next question comes from Carter Malloy of Stephens.

[Carter Malloy:]

So first off, on MaxCV and the deployment cost this year. I think you guys answered this already, but what should we expect the incremental cost to be in 2014 and beyond? In other words, is this something that's -- this invest program going to continue in terms of deployment costs or update costs, or we're looking at a net savings of $30 million next year?

[Sara Mathew:]

There could be some small amounts in 2014. We haven't finished all of our planning. Remember, there are multiple ways we can actually deploy the benefits we're bringing to market. We have built a global data supply chain. We can build products off the web service layer going directly against the global data supply chain. The question we have to really grapple with is to decide how much of the old products do we actually want to move to the new data supply chain. We've made a decision in the U.S. We are going to essentially ensure that all the products get the benefit of the new global data supply chain. With the other markets, we will take that one at a time, but we expect it to be significantly lower than what it was, than the $25 million to $30 million, in 2013.

[Carter Malloy:]

Okay. And then, Rich, can you give us just an absolute debt and cash update as well as the EBIT guidance? I just want to make sure, taking into account the adjustments for last year, that we're standing correctly on the absolute EBIT guidance.

[Richard H. Veldran:]

Sure. Absolutely. So let me start with the EBIT guidance. As we mentioned, we're minus 3% to minus 6%, and that's off of the $520 million. However, if you make the adjustments for making it apples-to-apples with MaxCV that was out of base this year, it would be 0 to plus 3%. So hopefully that's helpful. On the debt side, we're at about $1.3 billion right now in terms of debt, and we have about $149 million. Most of that is outside the U.S. We don't really maintain a cash balance in the U.S.

[Operator:]

Our next question comes from Dan Leben, Robert W Baird.

[Daniel R. Leben:]

Just on the -- going back to Shlomo's question, just thinking about modules versus enhancements to DNBi as you do additional product development. Is the idea of rolling out new modules, is that kind of something you're going to completely walk away from or are there still products out there that would justify an entirely different module?

[Emanuele A. Conti:]

Yes, good question, Dan. So, look, I think there is going to be, for the most part, a shift in our go-to-market approach. Most of our modules will be bundled into the core platform. That said, there will always be -- there may be some instances in which there may be customer segments that we do sell it on a stand-alone basis. But I think -- thinking about various examples in the marketplace, like an iPhone if you will, you see different versions, an iPhone 1, 2, 3, coming out, but then they do sell some accessories. So we expect to have a similar model going forward.

[Daniel R. Leben:]

Okay. And then we've always talked about annual price lifts from DNBi. Does this -- how should we think about this new strategy in terms of increasing the annual lift you're getting from pricing by upselling versions?

[Sara Mathew:]

We think DNBi in the long term will be exactly where we've always said. It's in the low- to mid-single-digit range. So it's going to stay there. It is not the credit -- if you look at the segment, it is not the growth market it used to be. That said, we believe we can grow faster, and a decline is certainly not acceptable. We're actually very pleased with the way the price held up despite the fact that we had very limited innovation and we had a misstep on execution. So you should expect that to continue, and we will continue to report on that every quarter. We do believe by shifting the gain from a price conversation, which is what competition is trying to get us to do, we've got to really play the value game, which is putting value on the table. And that is resonating well in the market. That's part of the pivot that Manny just discussed a little bit earlier, and we're actually quite encouraged by what we see so far in the marketplace.

[Daniel R. Leben:]

Great. And then last one, you mentioned 2013 tax rate higher. Exactly how much higher is that, and what should we think about that rate?

[Richard H. Veldran:]

Dan, it will be slightly lower. So we're at 33% this year. We expect this to be a tad lower next year.

[Operator:]

[Operator Instructions] Our next question comes from Bethany Caster of Raymond James.

[Bethany Caster:]

First a question for Rich. You mentioned that the newer products are usage-based. Do you think you'll see an introduction of seasonal revenue patterns? What would they look like? And what would that do to deferred revenue growth?

[Richard H. Veldran:]

Actually, what -- so, yes, the newer products, Bethany, are -- tend to be more ratable in nature and more usage-based. What that will actually effectively do over time is smooth our revenue because as you get a more ratable-type project -- product, the revenue smooths out during the year. Today, you see a little bit of seasonality in the fourth quarter. We have a lot of project business. That should actually temper down over time.

[Bethany Caster:]

Okay. And then, Sara, with MaxCV behind you, can you talk about your successes at adding records? We've seen that number tick up, and I wanted to hear more about what they look like now. And as part of that, can you give us a sense of the size of the companies you collect records on? For example, how would you break them out between small, medium and large-sized companies?

[Sara Mathew:]

Sure. So let me ask Josh to talk about the data base and the progress there.

[Joshua L. Peirez:]

Thanks, Sara. Bethany, so we have been focused historically on growth of the database. We have an unparalleled number of records businesses, both active and inactive, that we report on. However, our focus now is on developing better insights on those companies to further the competitive mode that we have with our competition on the quality of the data that we deliver, particularly on those records that matter most to our customers. And so you'll see our focus really around deepening the record, having new types of information and being able to create new types of analytics. So Sara mentioned in her prepared remarks comments around the analytics we'll be launching this year, which really are focused on delivering 30% or greater impact to our customers from what they're able to do with our data. And we believe that we can drive those numbers even higher in the future, and that that's the real value in the future. Today, the database itself is over 230 million records, and so we've done a good job growing it. In terms of the size of the companies we report on, we report on companies from the smallest in the world to the largest in the world. Our goal is to cover all companies that our customers are interested in.

[Bethany Caster:]

Okay. And actually, you segued right into my next question, which is, now that the MaxCV is behind you, can you talk about the scope of the investment that you'll put into collecting data and performing analytics on it? I guess we were a little surprised that this would require more investment. I just wanted to get a better sense of the scope.

[Sara Mathew:]

So let me have Josh build on that. I'll kick it off. So think about it

[Bethany Caster:]

Okay. All right. My last question was about your shares outstanding at the end of the year. What was the number as you exited the year?

[Richard H. Veldran:]

It was 41.3.

[Operator:]

This concludes the question-and-answer session. Back to you, Sara, for closing comments.

[Sara Mathew:]

Thank you, operator. For all our investors and team members on the call, I want to say thank you. We will talk to you in about 90 days. We're signing off. Bye-bye.