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Dun & Bradstreet (NYSE:DNB)

Q2 2014 Earnings Call

August 07, 2014 8:00 am ET

Executives

Kathleen Guinnessey -

Robert P. Carrigan - Chief Executive Officer, President and Director

Richard H. Veldran - Chief Financial Officer

Joshua L. Peirez - Chief Operating Officer

Analysts

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

Manav Patnaik - Barclays Capital, Research Division

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

William A. Warmington - Wells Fargo Securities, LLC, Research Division

Andre Benjamin - Goldman Sachs Group Inc., Research Division

Peter P. Appert - Piper Jaffray Companies, Research Division

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Brett Huff - Stephens Inc., Research Division

Operator

Good morning, and welcome to D&B's 2014 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. [Operator Instructions]

I'd like to turn the call over to Ms. Kathy Guinnessey, Treasurer and Investor Relations Officer. Ms. Guinnessey, you may begin.

Kathleen Guinnessey

Thank you. Good morning, everyone, and thank you for joining us today. With me on the call this morning are Bob Carrigan, our President and Chief Executive Officer; Rich Veldran, our Chief Financial Officer; and Josh Peirez, our Chief Operating Officer.

Here's what you can expect on our call. Following my brief remarks, Bob will talk about progress on our strategy and the drivers of revenue in the second quarter. Then, Rich will take you through the financial performance in the quarter. After that, we'll open the call for your questions.

Now 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 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 the 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 will 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 a reconciliation between these and other non-GAAP financial measures and the most directly comparable GAAP measures in the schedules to our earnings release, and 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 Bob Carrigan. Bob?

Robert P. Carrigan

Thank you, Kathy. Good morning, and thanks to all of you for joining us today. At the beginning of the year, we laid out our strategy for getting Dun & Bradstreet sustainable revenue growth, and I am pleased to be able to report that our second quarter results point to some early traction on that strategy. In the second quarter, we had revenue growth of 2%, which was slightly ahead of our expectations. We have now posted organic revenue growth for 3 consecutive quarters, and we have the strongest first half of the year since the financial crisis.

Importantly, revenue growth in the quarter was fueled by 2 of the strategic areas we expect to drive long-term growth, alliances and large strategic accounts. Our alliance strategy is to deliver our data and insights to customers directly through third-party applications like ERP and CRM systems. This takes the product development off of our platforms and on to our alliance partners' platforms, where they've already got a relationship with the customer. We expect alliances to be a key driver of revenue growth and long-term margin expansion as we execute our strategy.

In addition to alliances, our strategy is also focused on growing direct sales to large strategic accounts. We already have direct relationships with almost 90% of the Fortune 500 but have low penetration of many of those customers. Our strategy is to grow our business with these customers by organizing our sales force by industry verticals to bring a more consultative expertise to our customer interactions. This is paying off as our revenue gains in the second quarter were primarily from large accounts in North America, in addition to alliances. Sales in the alliances and strategic accounts channels are growing at a much faster rate than the rest of the company and are currently at the pace we need to drive the company to mid-single digit growth in the future.

In 2014, we are upping our pace of investment to drive growth. Back in February, we said that we are investing $70 million to $80 million this year in our growth strategy, which would cause operating income to decline 5% to 9% for the year. In the second quarter, operating income declined 8% due solely to the planned investment in our growth strategy. This was actually better than expected due to our revenue growth.

Now sitting here at the midpoint of the year, I'm really pleased with the progress we are making. Now as a reminder, our strategy is focused on 5 key pillars: investing in our content, modernizing delivery of our content, globalizing our business, modernizing the Dun & Bradstreet brand and creating a more forward-leaning outside-in culture.

Now investing in content is the first pillar of the strategy because this is the core value we provide for our customers and the thing that differentiates us from the competition. As a reminder, content is broader than raw data. When we talk about content, we mean our data, combined with our proprietary analytics and insight, which provides the foresight companies are looking for. While other providers are trying to catch up to where we have been historically, we have upped the game, and our investments are giving us insights that others can't touch.

We have significantly improved the quality, global consistency and predictive capability of our data through our investments. We've hired new data scientists who have uncovered tens of thousands of new variables to analyze, most of which are within our own database and therefore, proprietary to D&B. As such, the predictive insights we are able to deliver for customers are miles ahead of anyone in the market, typically giving our customers predictive lift of over 40%.

We are also focused on making this content available to customers when and where they need it by modernizing delivery, which is the second pillar of the strategy. Customers tell us that our content is invaluable, but they want solutions that are visually appealing, easy to use and optimized for their workflow. Today's technologies, including cloud and Data-as-a-Service and mobile, allow us to meet these needs in ways that were not available before. This marriage of our content with the available technology is how we are modernizing delivery.

We've just talked about alliances, which is one way we're modernizing delivery, but we're also improving our existing products with lightweight APIs and cloud-based solutions and developing new use cases for our products. Now let me give you a few examples to bring this to life. We just released a new version of our Supply Risk Manager, SRM 2.0. The global supply risk market is growing at over 10% a year, and we have had great success with several very large multinational corporations with SRM.

The product allows customers to monitor their supplier base and gives them alerts on changes in the profile on their key suppliers to help them mitigate their supply chain -- risk in their supply chains. The original version of the product was built on older code and as such, was difficult to adapt to increasing demand, and the user interface was dated. So we went out to our customers and worked with them to improve the solution. SRM 2.0 gives them a sleek new graphic interface and improved speed and performance, making it easier for supply managers to access this critical data. Our customers are thrilled with the early view of the new version, and we began rolling it out in the last few weeks.

We're also moving ahead with our cloud capabilities. On our last earnings call, we announced that we purchased a cloud innovation company, Indicee, at the end of April. The team is now deep in the development of a cloud-based DNBi solution. By putting DNBi in the cloud, we will be able to have a globally consistent solution with access to local and global data. And we expect the new solution to help stabilize DNBi in North America by allowing us to upgrade existing DNBi customers to the new solution and also bring them new capabilities.

The real growth for DNBi is expected to come from markets outside the U.S. Today, we have a DNBi version in a few countries in Europe, but the rest of the world is virtually untapped. We expect to be testing the new solution by the end of this year.

We are also developing new use cases for our content. In the second quarter, we launched a brand new field force automation tool, Mobile IQ. We have placed our sales intelligence curated from our data into a unique mobile solution designed for field sales professionals, making them more productive on the road. It combines our content and our customers' data to help a salesperson locate prospects near them using GPS technology. It then lets them qualify that prospect based on their likelihood to buy and prepare for their customer meeting with ample background information on the prospect, all at their fingertips on their mobile device. We launched Mobile IQ on July 1 and have already signed deals with several Fortune 500 companies. Between improving the quality of our existing products, developing new use cases for our data and growing our delivery of content through alliances, we are beginning to move the needle on modernizing delivery.

The next step in serving our customers when and where they want to be served is to globalize the business, which is the third pillar of our strategy. We're making progress here as well. We have about 4,800 employees worldwide. And since the beginning of the year, about 1/3 of the team has been remapped to global functions across the areas of sales, technology, data and product. Now with that work behind us, all of these departments are now aligned in their focus on executing the strategy, sharing best practices and collaborating in new ways to drive results. We are also beginning to see improvements in our sales execution, which helped drive our second quarter performance.

Now I've talked before about how D&B was previously structured as separate companies within a company. By globalizing the business, we are doing away with that construct. And what that means is instead of a North America company with a sales team and separate international markets with their own sales arms, we have one global sales and service organization under a proven sales leader, who is 100% focused on driving top line results and servicing customers. This is very different from a structure with GMs running separate sales organizations, and this singular focus trickles down to all of our sales and service interactions.

Finally, we have just made a big step forward in modernizing our brand and culture with the appointment of the cutting-edge creative agency, Droga5. Droga5 has been a consistent contender and winner of industry awards due to their creative and innovative approach in elevating brands. Some of their accolades include Advertising Age's A-List, Creativity Agency of the Year and Fast Company's World's Most Innovative Companies to name but a few. Their clients include names like American Express, Coca-Cola, Prudential and Spotify. As we work to transform Dun & Bradstreet, it is important that our brand and cultural values are aligned, and Droga5 is helping us to service the key things that make us unique. You will start to see a new external image for Dun & Bradstreet at the beginning of next year.

So we have lots going on, and I'm pleased that we are advancing our strategy and producing top line results at the same time. There's still a lot of work to do, but we get more confident every day that we are on track to deliver our full year guidance of revenue of flat to up 3%, a decline in operating income of 5% to 9%, an EPS decline of 1% to 5% and free cash flow of $250 million to $280 million.

Now let me turn the call over to Rich to go through the quarter in more detail. Rich?

Richard H. Veldran

Thanks, Bob, and good morning, everyone. I'll spend a few minutes discussing the drivers of our revenue and earnings performance in the quarter, and then we'll open up the call for your questions.

Total company revenue for the second quarter was up 2%, which was slightly ahead of our expectations due to the strong performance in North America. Our top line improvement was driven by new product areas such as our Data-as-a-Service offering and compliance and by strong performance within alliances and large global accounts, areas that are core to our growth strategy.

Now let me touch on the segments in more detail. North America, our largest segment, with 72% of our revenue, was up 2%, with a strong 9% growth in sales and marketing offsetting a 2% decline in risk management. The decline in risk management was expected with a 4% drop in DNBi, similar in all respects to what we saw in the first quarter, partially offset by 4% growth in projects and other revenue, where large global accounts drove the growth. New products, including compliance and D&B Direct, continued to perform well, in aggregate contributing approximately 2 points of the growth to total RMS in the quarter.

Sales and marketing grew 9% in the quarter. Traditional products, which represent about 1/3 of S&MS declined 5%. Value-added solutions or VAS, which represent the other 2/3 of S&MS, grew 17%. The biggest growth drivers in VAS were Optimizer, which again was driven by large strategic customers, and our DaaS DRM integration led by Data.com, our alliance solution with Salesforce. New products, which include Data.com, contributed over 3 points to total S&MS growth in the quarter.

North America deferred revenue was down 2.5% at the end of the second quarter. As we've stated over the past few quarters, committed sales of Data.com sold through the Salesforce alliance are not reflected in our deferred revenue balance and would have added about 2 points to that total.

Let me turn now to international, which represented 28% of revenue. Revenue in the quarter was flat in both Europe and Asia, which was expected due to a tough comparison to last year when international reported a strong 6% growth due to timing. Overall, our international business is on track as you can see from the first half growth of 4%, which was in line with our expectations when we set guidance at the beginning of the year.

Overall, we're pleased with the progress that we're making to drive long-term growth. We're gaining good traction in the key areas essential to the strategy and see our second quarter results as just another indicator that we are progressing as expected down the field.

Let me turn now to profitability. Operating income declined 8% in the quarter, which was actually a bit better than expected due to the stronger revenue. Our investments are beginning to ramp up, and through the first half, we've spent about 30% of the total $70 million to $80 million that we expect to invest this year. We're investing across 3 focus areas, with 1/3 of the investments going to content, 1/3 to secure modern delivery of that content and the final 1/3 going to innovation, modernizing our brand and globalizing our sales force. The investments in the second quarter was spread pretty evenly across the 3 areas of focus.

Our level of investment will step up quite a bit in the back half of the year, with the remainder of the investments split pretty evenly between the third and the fourth quarters. Given the seasonality of our revenue, with the fourth quarter being a much higher revenue quarter than the third, we expect operating income to be down in the mid- to high-teens in the third quarter and down in the low-single digits in the fourth quarter.

EPS declined 4% in the quarter due to the decline in operating income, partially offset by the accretive impact of share repurchases. And we generated $200 million of free cash flow year-to-date. Turning to the balance sheet. We ended the quarter with debt of $1.6 billion and cash of $286 million.

During the quarter, we repurchased $60 million of stock under our discretionary program, with $20 million left under the $1 billion authorization. Yesterday, our board approved a new $100 million share repurchase authorization to be used to mitigate the dilution from equity compensation program, as well as any discretionary share repurchases. This is an open-ended program with no expiration date. In the past, we have had separate authorizations for these 2 programs, and going forward, we will do both types of repurchases under the same program.

Let me say a few words about our uses of cash. As you know, we generate a lot of cash, and our priorities for this cash have not changed. We'll use cash, first, to invest in our strategy to drive organic growth, which is always the best way to create long-term shareholder value. Second, we will consider using cash for strategic M&A if we believe an acquisition can help us to better and more effectively advance the strategy, similar to what we did in the first quarter with the Indicee acquisition. As responsible stewards of our cash, we hold the bar very high in this regard.

And finally, we've returned excess cash to shareholders through share repurchases and dividends and over the past 2 years, have repurchased almost 1/4 of our outstanding stock under our $1 billion share repurchase program. As we've said on previous calls, we want to maintain an investment-grade rating and have flexibility for potential M&A if it will accelerate the strategy. As such, we'll continue to repurchase shares to offset dilution from equity awards, but we don't currently plan to do more discretionary purchases in 2014 after we complete the $1 billion program. We'll revisit our plans for 2015 capital allocation as part of our normal annual planning process.

And with that, we'll hand the call over for questions. Operator?

Question-and-Answer Session

Operator

And our first question comes from Shlomo Rosenbaum with Stifel.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

I wanted to dig in a little bit more. Clearly, you had a very strong North American Sales & Marketing Solutions revenue. You guys pointed to some -- seeing early signs of success over there. Can you break down for us a little bit how much of the maybe sequential improvement in revenue or year-over-year, however you want to say it, was from the DaaS products versus Optimizer? Trying to just get a gauge as to what's driving more of that revenue growth.

Richard H. Veldran

Sure. Shlomo, let me give you that, and then Josh may want to comment a little bit on what we're seeing and feeling in the market. But overall, if you take in aggregate the -- roughly, I'd say, 3 points of growth were from the Salesforce.com relationship. Optimizer was actually quite strong. You had about 7 points of overall growth there, and then a couple of the other more traditional things declined. The Optimizer piece was really driven by the large customer strategy we had done, in particular, one particularly large deal that was significant in the quarter.

Joshua L. Peirez

Shlomo, it's Josh. I mean, we're very pleased with the performance of the S&MS VAPS in the quarter. It's a segment that's squarely in line with our key strategic areas of focus, alliances and large global accounts. And it's an area where we expect growth, and it delivered this quarter. The alliance channel performed well, as Rich indicated, driven by the Salesforce partnership, and Optimizer was also performing really well with the new add-on project. There is lumpiness in the timing of some of the VAPS projects, in particular, because the size of the contracts could affect any given quarter's performance. And we had some element of that as well that benefited us. We expect the lumpiness to continue, but if you look into the future, as our strategy continues to take hold and accelerates, you can expect to see the underlying growth trend increase in this segment, but also for the lumpiness to continue in any given quarter. And if you look at the first half of the year as a whole rather than just a quarter, you see about 9% in this segment, which reflects a decent view of the current performance underlying the segment if you account for the lumpiness.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. That's great color. Also, was there any acquisition revenue to note in the quarter? And if so, which one did it fall into? Between...

Richard H. Veldran

No, there was none. Those were capabilities that we acquired, so the revenue growth is all organic.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And finally, there was a sequential $500,000 uptick, at least the way it looks like to me, in DNBi revenue. Is there some seasonality there? Or is this some traction retaining customers? How should we view that?

Richard H. Veldran

Look, I -- Josh may want to comment in a moment. But we -- at this stage, we continue to see DNBi down for us. So there may have been a slight bit of improvement there, but the reality is we're still about where we expect it to be. And you're really not going to see a big turn until we get the cloud application up and running. What you will see though, over time, is, once that's up, a lot more in terms of global penetration. But the essential run rate is not changing significantly at the moment.

Joshua L. Peirez

I think, Shlomo, if you look at what we view as a capture rate, which is retention plus price lift, those numbers remain pretty constant, with retention in the low-90s and pricing giving us low-single lift. So I don't want to overemphasize any particular 1 quarter $0.5 million type trend. For us, we are focused on making sure we get to the cloud version of the product. We're also going to be doing some enhancements on the existing product just to make sure we keep those rates, maybe get some uptick.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Company, Incorporated, Research Division

And I'm just going to leave off with one question. In terms of getting the DNBi onto the cloud application, are you guys on track for where you thought you would be in terms of being able to get out the beta version and testing and everything like that? Are you still on track?

Joshua L. Peirez

Yes, we remain on track at this point to get the beta version out and to deliver that into market. And we'll be able to share some of those rollout plans in future calls in terms of the particular markets and how we plan to roll it out.

Operator

Our next question comes from Manav Patnaik with Barclays Capital.

Manav Patnaik - Barclays Capital, Research Division

Just on the investments, was there any change in the timing around the investments in terms of making it more back half loaded? And I guess, is there -- I think you guys, obviously, maintained that range of $70 million or so, but do you foresee, like with the higher revenue contributions coming in, that you could maybe increase that, take the opportunity there ?

Richard H. Veldran

Yes. Let me take that. So in terms of our overall plan, it's going as expected. Generally speaking, there's always going to be a bit of a ramp-up as you gear things up. So we spent about 10% in the first quarter, obviously, about 20% in the second. That's 30% year-to-date. And then we expect to really kick it up in the third quarter until the engines are running now, and spend that pretty evenly over the half. Yes, the revenue was a little better than expected this quarter. But as we've said, there is always some lumpiness in our business. So we're going to maximize investments this year, but right now, we still live within a range. And this is why we give a range of investment, which is the $70 million to $80 million.

Manav Patnaik - Barclays Capital, Research Division

Okay. But I mean, this was always the intended ramp in the investments. I thought maybe there's a little bit more of -- there was more upfront investments going in maybe I misunderstood that.

Richard H. Veldran

If you go back to the last call, what we said is that we expected the ramp to really begin in the second quarter, but -- which it did, but now it gears up even more in the back half. Just really a timeline of getting projects up and started.

Manav Patnaik - Barclays Capital, Research Division

Got it. And then, if I could just touch on this rebranding initiative. Clearly, for a 170-plus-year-old company, it's quite a big deal. What is the sort of timeline we should be expecting? Or what are the sort of key catalysts or adds or whatever it might be that we should be looking out for?

Robert P. Carrigan

Yes. This is Bob. So we like to say we're modernizing the brand. I wouldn't call it a rebrand, and what we want is the brand to reflect all the things we're doing for customers today. And so right now, we're working with our agency to speak with customers, and we're in the exploratory phase talking to customers and employees and just getting lots of input there. And the plan is that we will be in market early in next year with our new -- updated or modernized brand messaging. I should also say that we are going through the exercise of not just looking at our brand value, but our cultural values to make sure they are aligned because, as you know, great companies, you really feel the culture in their brand. And so we view those exercises as concurrent. And we're deep in that process right now, and it's really quite energizing. And we've got lots of our employees and customers engaged in this.

Manav Patnaik - Barclays Capital, Research Division

Okay, helpful. And then just one last one, just back to the RMS side of the business. From a macro perspective, I don't think we've really talked about it much and maybe we shouldn't, but just could you help us remind how we should think about the C&I loan environment and how that might impact DNBi? Or is that more just a question that's kind of related to the cloud and retaining the customers?

Joshua L. Peirez

Yes. Manav, we're not looking at the C&I loan volume as being a big driver either way of our performance in the RMS segment. We generally see some trend where there may be consistency there, if you see major swings. But as a practical matter, in any given normal year, with a little bit of swing in C&I loan volume, it does not affect our underlying RMS growth [ph] .

Operator

Our next question comes from Andrew Steinerman with JP Morgan.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

When you talked about your product Mobile IQ, that sounded to me like a relaunch of Hoover's. Surely, we've heard less about Hoover's. Could you just tell me where is the strategy around Hoover's? Is this a notable part of the company strategy?

Joshua L. Peirez

Thanks, Andrew. It's Josh. So first, Mobile IQ is a field force automation tool, which helps the field sales professional be more productive on the road. It has a sleek interface. It leverages our data, the customers' data and GPS technology within the phone or tablet to find, qualify and gather intelligence about sales prospects, which provides mobile sales intelligence. So it's a foray into the mobile space. It allows us to combine these different data sources in ways that Hoover's never did. So we know that this is going to be a key platform for us going forward. It's also complementary to a CRM system. So I just want to emphasize that, that does not replace it or compete with those. And the initial feedback and adoption of that product, as Bob mentioned, has been quite positive, and we're very pleased. Now it also will accompany Hoover's subscriptions, which will allow us, hopefully, to improve some of the underlying performance you see with Hoover's as we give new functionality to those customers. But as a general matter, while we look at the traditional S&MS business and Hoover's, in particular, we're focused on the alliances and the large strategic accounts as part of the key strategic growth for the company. So some of the traditional products, like Hoover's, will still meet important customer needs, but we don't expect them to be a major growth driver for us in the future. But we do expect to see some stabilized performance and to change the trajectory to a flattish, low single-digit growth, which is why we're enhancing that product by allowing those customers to also have Mobile IQ. But we also see Mobile IQ as something that really drives large strategic customers with big sales forces out there in the field and giving them some unique capabilities to combine different datasets and get their salespeople really ready for sales calls.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Right. And Josh, you said other data sources past Hoover's. Could you mention what's empowering Mobile IQ besides from Hoover's?

Joshua L. Peirez

Sure. So if you look at it, the data that we have in Hoover's, it's also the customers' data being able to be brought in, social data like what we have from FirstRain. And then finally, there's also unique datasets in any particular industry vertical that might be relevant. And because we're delivering the data through mobile, we can just pull those from wherever they're sitting. They don't need to be sitting in our Hoover's instance. So in future calls, we'd be happy to share as we're out there talking about particular customers and segments that are using the product, the types of data that we're bringing in. But you can see, for telco versus oil and gas companies, there would be different datasets that might be interesting, which we would never have, but we're able to pull them into the mobile device, combine them and display them for the salesperson on the road.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Okay. And Bob, if I can ask a big-picture question. Now that we are spending the investments for this year even though they are back half loaded, my question is are we sure that $70 million to $80 million investment is enough? And as we look past this year, are we going to have to have another type of spend like that?

Robert P. Carrigan

Look, we're implementing our strategic plan, and we're seeing some early success there. As I've said, this is all about revenue growth. The entire plan is intended to get on a path to long-term sustainable revenue growth, and we feel that the investments that we're making this year will get us on that path. And a lot of it's also just upping our execution and assertiveness in the marketplace. Once we get on that path to growth, we will invest every year through the benefits of growing revenue, and all good things happen when you grow revenue. You create investment capacity to be able to continue to grow and build the virtuous cycle of growth and investment.

Operator

Our next question comes from Bill Warmington with Wells Fargo.

William A. Warmington - Wells Fargo Securities, LLC, Research Division

So a question for you on the timing of moving DNBi to the cloud and when do you think the release of that product is going to come.

Joshua L. Peirez

Sure. Bill, it's Josh. As we mentioned, we expect to have a beta out around the fourth -- the end of the year. We'll be testing that in the fourth quarter, and then we would expect to be rolling out into next year. We will be looking at targeted market-specific rollouts, and we will be sharing that with you in future calls as we do finalize and lock in on those specific plans. We also do continue to enhance the existing DNBi experience for those customers, which we think is important. So we will be adding capability there as well while those customers are waiting for the cloud version.

William A. Warmington - Wells Fargo Securities, LLC, Research Division

Got it. And then I wanted to ask for your thoughts on the competitive intensity in the risk market, whether you're seeing that can get better, the same, worse.

Joshua L. Peirez

Yes, sure. Bill, I think we are seeing the risk market remain competitive. There are lots of competitors who really do target us, but we see it pretty much being the same. We think it's reflected in our consistent capture rates, as I mentioned on DNBi, with the low-single digit -- low-90s retention and low single-digit price lifts that we're getting there. So we think that the competition has remained relatively constant. I do want to emphasize, however, that our strategy is focused on achieving growth beyond the risk market. And so while we do see some competition there, many of the new areas where we're launching products and where we've been in market and where we see the growth of large strategic clients and with our alliances network are areas where we're not seeing the same level of competition and where we're getting some first-mover advantage by being in market. Additionally, in the risk market itself, we have some adjacencies around supply chain, where we've just launched our 2.0 version of Supply Risk Manager, and in compliance, where we have 3 products that are now in market that we see as less competitive and where we've got some more whitespace to operate. This last quarter, they delivered 2 points of growth for the RMS segment, which we've seen now for several quarters in a row.

William A. Warmington - Wells Fargo Securities, LLC, Research Division

Got it. And then a couple of housekeeping questions. I wanted to ask about the deferred revenue growth rates. I know that sometimes there are adjustments that you need to make to them-- for different factors. Just wanted to ask how those need to be adjusted and what we should take away from those.

Richard H. Veldran

Sure. This is Rich. The -- there were really no other big significant things other than -- the primary thing is the Salesforce relationship because, obviously, that doesn't come into the equation because we don't carry it on our balance sheet. FX was pretty de minimis this quarter, maybe 10 basis points...

Kathleen Guinnessey

For North America.

Richard H. Veldran

Yes, for North America. Sometimes, it's an impact, but wasn't tremendously impactful in the North America business. We do have Canada [ph], right, at the business.

Operator

Our next question comes from Andre Benjamin with Goldman Sachs.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

My first question with respect to the investments, I know you said that they're split roughly 1/3 content, modern delivery and then innovation and globalizing sales force and the brand investment. Can you maybe talk a little bit more specifically, just so we can get a sense of what's been happening, on what you've already started in the first half versus what's still to come in the second half? I know it's a little early for formal guidance, but any thoughts at least on the direction of revenue growth and spending levels in 2015, given that the ramp in spending is more back-end loaded?

Richard H. Veldran

Yes. I'll be talking about that so we're not going to, obviously, go into 2015 discussion. As Bob mentioned, our expectation is, over time, as revenue grows, we'll be able to continue to fund investments, and that is our plan. In terms of the -- and I'll ask Josh to pop in as well to add some color. But clearly, we've been on the content journey for a few years now, investing pretty heavily so that's much more advanced. We spent a decent amount in terms of content development, bringing the data scientists, a lot of good work there. As you think about the second half, some of the work will be around the brand. We did less of that in the first half. There will be a lot more work around product development. So I'd kind of sequence it as although we spent across all 3, some of the bigger pushes will be the brand work and some of the -- in the second half and continue spend around content, similar to what we have been doing. Anything you would add, Josh?

Joshua L. Peirez

Yes. Andre, I'd just add. The other piece would be with the Indicee acquisition, the ongoing cost of that business, as well as the incremental spend we think we need to get the DNBi cloud version out there, were all reflected in our guidance of $70 million to $80 million. And as reflected in the number so far, that spend is, obviously, a part of what you see ramp up in the second half.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

Very helpful. And then on the sales and marketing side, the growth has been pretty strong there. Are there any particular verticals or size organizations you're finding the most success selling into today versus maybe a year or so ago? I don't know, specifically, maybe, say, tech versus health care or some other vertical or Optimizer or the CRM solutions are tending to do better.

Joshua L. Peirez

Yes. I think, Andre, as we have really focused on having a specialty in the verticals and organizing our teams around the verticals, we're seeing pickup really across a number of verticals. Certainly, in the high tech which is a growth segment, it's one that we see as attractive, also in telco. But it wouldn't be that the other segments are not growing. It really is just having that discipline around having expertise in those verticals, knowing what the customers in those verticals really want and need, that outside-in perspective that Bob has talked about and bringing that perspective back to D&B so that we can deliver our solutions in a way that truly represents what those verticals need. So we're seeing growth really across them, and it's something that we see as a driver of the future growth in the plan.

Operator

Our next question comes from Peter Appert with Piper Jaffray.

Peter P. Appert - Piper Jaffray Companies, Research Division

So at the risk of oversimplification, which is my specialty, feels like the sales and marketing business got some pretty good traction, doing well. Risk management continues to suffer. So I'm just wondering if you could call out what you see is the most important catalyst to getting better performance out of risk metrics -- risk management, rather. And maybe just a timeline in terms of when we could expect to see impact from some of the newer products and when we could see a return to positive revenues.

Robert P. Carrigan

Yes. Thanks, Peter. So look, this is Bob. As Josh mentioned earlier, we're focused on -- when we think about risk, we're thinking beyond business credit. And certainly, with our innovations in supply and compliance and new products, that will certainly help. And then, as we've mentioned, DNBi is also core to this. And we have made the Indicee acquisition, and we're very focused on developing a globally available cloud-based solution today. DNBi, as I said in my remarks, was -- is available in just a few markets around the world, and we view that as an opportunity for us to grow that product and expand into markets that we're currently not in and also upgrade existing customers. So we see the opportunity there to certainly expand in the risk space.

Joshua L. Peirez

And I think I would just add, Peter, without giving you specific dates or timelines, if you think about the new products in the risk space, just to focus on that specifically for a second, that's driving roughly 2 points of growth per quarter for several quarters in a row now. And then you look at DNBi with its current trajectory and this quarter being down 4, consistent with last quarter in all respects. Part of it is just the question of as those new risk products in new segments scale, then that will help overcome some of what we see on the DNBi side. Additionally, as we stabilize DNBi and grow it in the low-single digits as a result of moving to a globally consistent version, where we can actually sell that product to customers across the globe and to global customers themselves, that will also help with that trajectory. It may not all show up in the North American DNBi line. So one of the things we'll have to do is talk about those trends as we service the global strategic accounts in the context of how they're performing.

Peter P. Appert - Piper Jaffray Companies, Research Division

So for the cloud version of DNBi, really the leverage comes from the international revenue opportunity?

Joshua L. Peirez

Yes. So I think as I shared on the last call, we see the opportunity in DNBi to grow in a few ways. One, we do think it can stabilize the existing customers, help a little bit with retention and sales lift -- same-store sales lifts with those customers. But the biggest opportunities we see are in new markets, where today we have only a transactional product. And being able to move those customers onto a subscription product that has all of the global data and the great user experience that we're able to provide, will give us lift simply by moving those customers from transactional to subscription. We also see an opportunity with customers who have a need for this type of a product in multiple markets, where, today, they can only get this product from us in the U.S. or maybe 1 or 2 other European markets for them to be able to service their entire risk department on the same product. And so that will give us growth on those same customers but in markets where we're not able to service them this way today. Those are where we see the big drivers. We do also think it will allow us to innovate much more quickly and add some adjacencies. Things like collections could be added to the product very quickly, for example, and we think that'll help us to grow the product.

Peter P. Appert - Piper Jaffray Companies, Research Division

Is all of this sufficient to get you to positive revenues for the RMS segment in 2015?

Robert P. Carrigan

Well, Peter, just for us -- I just want to also bring it back to -- I appreciate the focus around DNBi. And certainly, as you could see, we're very focused on this and focused broadly on risk. But we've got our sights set on solving commercial big data problems for our customers, and we view that market as a much larger market, a $20 billion market, and we're very focused on that larger pie. And so while we're making -- we certainly are doing all we can to make improvements in the risk business and making real strides in areas like supply and compliance, and certainly, we've talked a lot about our plans for DNBi, the opportunity -- the larger opportunity is significant, and that's what we're trying to position ourselves and work with our customers to help them across the enterprise in multiple areas where they're using data to help advance their business objectives.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay. One -- just one other thing. The -- can you talk about traction you're seeing with other CRM vendors beyond Salesforce, maybe the Sugar deal you announced last quarter?

Joshua L. Peirez

Yes. So again, we're relatively early in the market with them. We are starting to gain some traction, and we're not in a position to speak about some other things that may be in the works. But we do look forward to being able to share more alliance strategy work as we go forward. But we're reporting the number in the S&MS line, in the S&MS VAPS line. We're very pleased with the results there, and it is driving a large part of our growth going forward. So we're pretty excited about that.

Operator

Next question comes from Jeff Meuler with Baird.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Let me maybe ask Andrew Steinerman's question in a little bit different way. If I kind of look at what the back half run rate spend on the initiative spend is, it sounds like that would -- and if I run rate that out for a full year, I think it would be about 40% higher on an annual basis than the $70 million to $80 million. So the question is, is that the right level to think about being kind of the normalized spend run rate? Or is the $70 million to $80 million more the normalized spend run rate on initiatives because maybe the back half is heavy on kind of the branding rollout or something along those lines?

Richard H. Veldran

Yes. Look, I -- without getting overly specific, I would think of that $70 million to $80 million that we're spending this year, at that level, roughly embedded in the base over time. Some of the stuff is onetime, but some of it isn't, some continues, and there's obviously a timing ramp. So if you think of that as essentially as the $70 million to $80 million being in the base, then on top of that next year, we will spend some other things around new types of investments that we'll pay for out of revenue growth. But that's really the way to think about it because every product is different. Some are timed later, some are recurring, some are not recurring. But $70 million to $80 million is a reasonable proxy for what you'd expect to be into the base next year.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Okay, that's helpful. And then I -- maybe if you could just help me think about this or characterize this. So it sounds like the growth is either coming all from or largely from the alliances and large strategic accounts. If I look at the rest of the business, should I more think that it remains stable and you're kind of getting acceleration in the alliances and large strategic accounts? Or is the remainder of the business getting worse, getting better?

Richard H. Veldran

Look, generally -- on a rough scale, the rest of the business is flattish to slightly down, and then the rest of the -- and those pieces are growing. Over time, which you'll expect, right, is the rest of that business is -- when you turn DNBi and things like that, you'll begin to see that stuff ramp up as well. So that's where some of the engine will come from.

Operator

Our next question comes from Brett Huff with Stephens.

Brett Huff - Stephens Inc., Research Division

On the large deals that you're talking about, I guess, 2 kind of questions on that. How much visibility -- or what can you share with us in terms of forward-looking opportunities there? I'm not -- I don't know if you want to talk a little bit, give us some color on the pipeline, things like that, so just some characterization there. And then, can just give us -- the second part of the question is can you just kind of characterize for us how that's happening? Is it a function of your new sales force structure? Is it a function of just a more aggressive sales culture? Is it a new product that's driving new conversations to get a share of wallet? Can you give us kind of both of those angles on the large deals?

Richard H. Veldran

Yes. Let me talk a little bit about the way we view the pipeline. So obviously, the large deals take -- they have a fairly long sales cycle to them. So as you know, because we talked about it pretty extensively, we have good relationships with most of the S&P 500. We don't -- we're not deeply penetrated in many of them, but we have deep relationships. So we're in there. We're working the bigger deals coming up with some of the new applications. But that sales cycle takes a while, so we won't share with you what the pipeline looks like. But clearly, you can expect that the sales force is out there. They're working these. And we have some visibility to what we expect to happen over time. Let me hand it over to Bob to talk a little bit more around sort of the strategic aspect of that.

Robert P. Carrigan

Yes. So in terms of the question you had about our sales force and how we're dealing with these large strategic accounts, there's certainly a greater focus around this, and I would say that we're upping our game and our execution against these. We've made a couple of key hires and now have a new head of global accounts. We have a new head of sales effectiveness. And under our global sales leader, Mark Geneste, we are making a lot of progress in moving more and more of our focus and resources against our verticals. And our goal is to continue to kind of graduate accounts into doing business with us more deeply in our verticals and then, where appropriate, to grow them globally. This is a big opportunity for us. We view this -- as I said earlier, we're doing business with the majority of the Fortune 500 already, and the opportunity to grow and expand those relationships is significant.

Brett Huff - Stephens Inc., Research Division

And can you give us -- just one more final question on that. Can you give us an example of -- you said there is one particularly large deal, I think, this quarter. What was the sort of spurring point that really drove the closing of that deal, if you could just give us just as a for instance.

Joshua L. Peirez

Yes. Brett, it's Josh. And what I'll do is give you a more general set of products and how we drive that rather than just one thing. And -- but it will give you a flavor, and certainly, this is what drove the instance as well. So the expertise in this space is critical, being able to really understand what drives the growth for those customers, right? So the conversations are very much about ROI for them and how we're driving growth for them. And we have a number of tools that are newer in our new product sets today that were not there before that are allowing us to have different conversations. So products like D&B Direct, which is a highly flexible API-based product, that those customers can use to customize where they want our data in their environment and how they want it to work and can build in individual types of scores or analytics that they'd like to see in a particular workflow, allows us to have a very different conversation with them, where it's not having to give them a plug-and-play one-size-fits-all product. Additionally, the product offerings we've built in the compliance space, as well as the custom analytics work that we're able to do now that we've brought on all these additional highly talented data scientists, allow us to have conversations, where we can talk about the great value of combining their data with our data and any other data sources and building analytics that are then customized to really deliver for them based on the datasets that matter to them. And that pulls through other pieces of the sale for us. So we're able to now, with these strategic accounts, package these multiple offerings together and give them the pieces that truly add value. And then having the sales force that truly does specialize in these verticals, as Bob mentioned, they can bring it to life for them. Additionally, Optimizer does continue to be a growth engine for us with these large accounts. And as we're able to deliver them more and richer datasets, that drives up the Optimizer line overall. We would emphasize, again, these are big deals with long cycles. That underlying growth rate we talked about in the S&MS VAPS line of about 9% for the first half represents where we think we generally see that business today versus any individual quarter, which could have lumpiness as one of these deals comes in.

Brett Huff - Stephens Inc., Research Division

Okay, that's helpful. And then on the buyback, I think you mentioned that you had $20 million left. It sounds like you expect to complete that, but then you're going to take a pause on the buyback. Given how you have outlined your capital deployment priorities just, again, earlier in the call, should we take that as an indication that there's some interesting M&A that you may want to keep some dry powder for? Or what -- how should we take that decision?

Richard H. Veldran

Well, let me start and then hand it to Bob. The -- yes, just to put it to context, let me start with the rating, right? So we're at the lowest rung at the moment of investment grade. It gives us about 0.5 turn of leverage, give or take. So the fact is the best use right now, we believe, is to look at some M&A. And we have an active pipeline. We typically do. I'd say it's more extensive than it typically is. I'm not saying we're about to pull the trigger or anything, but it's certainly something that we want to look at. And we want to give ourselves some flexibility to have that without being constrained by not having capacity.

Robert P. Carrigan

Yes. And the lens through which we're looking at M&A is really, again, around how do we advance the strategy. We talked about the key strategic pillars around content and modernizing delivery of that content and globalizing our business. So we're evaluating any potential deals with -- through that lens, and we're not looking to buy revenue. We're looking to drive organic revenue growth and develop the kind of capabilities to be able to do that.

Operator

[Operator Instructions]

Kathleen Guinnessey

Okay. Operator, we're just about coming up to an hour, so I think it's probably a good time to end the call. And I thank everyone very much for your interest and your great questions, and we'll talk to you next quarter.

Operator

Thank you for participating in today's conference. You may disconnect at this time.

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