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Dun & Bradstreet (NYSE:DNB)

Q3 2011 Earnings Call

October 28, 2011 8:00 am ET

Executives

Byron C. Vielehr - Head of Strategic Technology Investment and President of North America Operations

Richard H. Veldran - Chief Financial Officer

Kathy Guinnessey - Leader, Treasury and IR

Sara Mathew - Chairman, Chief Executive Officer and President

Analysts

Manav Patnaik - Barclays Capital, Research Division

William A. Warmington - Raymond James & Associates, Inc., Research Division

Carter Malloy - Stephens Inc., Research Division

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Edward J. Atorino - The Benchmark Company, LLC, Research Division

George K. Tong - Piper Jaffray Companies, Research Division

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Michael A. Meltz - JP Morgan Chase & Co, Research Division

Operator

Good morning, and welcome to D&B's 2011 Third 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 meeting over to Ms. Kathy Guinnessey, Leader, Treasury and Investor Relations. Ms. Guinnessey, you may begin.

Kathy Guinnessey

Thank you, Sherrie. 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; and in addition, Byron Vielehr, our President of North America; and Manny Conti, our President of International and Chief Administrative Officer. Byron and Manny will be available to handle any questions you have.

Here's what you can expect on the call this morning. Sara will open the call with an overview of our third quarter results, followed by a brief update on the progress of our Strategic Technology Investment. Next, Rich will discuss our third quarter performance in more detail, after which Sara, Byron, Rich, Manny and I will be happy to take your questions.

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 those 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 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 non-core gains and charges. A 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 Sara Mathew. Sara?

Sara Mathew

Thank you, Kathy, and good morning, everyone. Thank you for joining us today. By now, I'm sure you've had the chance to review our earnings release from last night. Across all metrics, our results were either in-line or better than expected. Specifically, core revenue was up 8%, up 3% organically. Operating income was up 14%. EPS was up 17%, and year-to-date free cash flow was approximately $231 million. North America's top line growth accelerated to 2% in the third quarter, all of which was organic. International was up 28%, up 5% organically due to stronger-than-expected growth in Europe and continued momentum in China. This translated into strong bottom line results, a testament to our scalable business model. As you would expect, we're pleased with this performance.

Looking ahead to the fourth quarter, the largest in terms of revenue, we expect to sustain top line growth in North America and exit 2011 on a strong note. As such, we are confirming 2011 guidance of core revenue growth of 5% to 8%, operating income growth of 2% to 6%, EPS growth of 6% to 10% and free cash flow between $240 million and $270 million.

In addition, we announced a $500 million discretionary share repurchase program, the largest in recent history. We believe that our stock represents a great investment opportunity at this time. As we enter 2012, we will begin to reap the benefits of our Strategic Technology Investment, which will translate into more rapid product innovation and sustained top line growth in North America. We don't believe this upside is reflected in our stock and are creating the flexibility to take advantage of the current pricing.

Moving to our Strategic Technology Investment, we have branded this initiative as MAX CV as we intend to maximize customer value with every dollar that we spend on this project. We're just beginning to benefit from this investment, and all the customer feedback on our product roadmaps are encouraging. Let me provide a few examples focusing on the new product launches in the third quarter and planned releases for the fourth quarter of 2011.

In the third quarter, we had 5 new product launches, most of which were focused on Sales & Marketing Solutions, or S&MS, where our strategy is rapidly evolving. More specifically, we intend to make D&B data available to our customers whenever and wherever they need it. This Data-as-a-Service, D-A-A-S or DAAS strategy represents a large untapped opportunity for us. Customers will have easy access to D&B data, realtime and embedded in their workflow. We expect to see better pricing when we sell our data this way as customers generate strong ROI on the investments they make with us.

Our entry into the CRM space is the first area of focus, and we continue to believe that DaaS will become a $100 million business over the next 3 or so years. We took several important actions in the third quarter towards that goal. First, we expanded our relationship with Salesforce.com to become the exclusive provider of company information for their CRM product. Salesforce will be begin selling D&B data to their customers in the first half of 2012, and we will get our revenue share from this partnership. We believe this will allow us to better penetrate the CRM market due to the minimal overlap of Salesforce and D&B customers.

We also reached agreements with 3 other major CRM providers to make D&B360 available on their platforms. Microsoft Dynamics were signed last quarter, and we've just announced agreements with Oracle and SAP. These alliances will ensure our data is pervasive across the largest CRM systems that cover over 60% of the U.S. market. By selling our data on these CRM platforms, we raise awareness of the D&B brand, and opportunities for our sales force to cross sell into this new customer base. We believe this will help us improve new customer acquisition and drive growth in the years ahead.

Also in the third quarter, we launched a fifth new product, D&B Direct. D&B Direct extends our reach beyond CRM to other areas. Specifically, it will allow companies to embed our data into more of their in-house applications, such as master data management and enterprise resource planning or ERP systems, markets where we do not provide value today. We've signed our first deal on D&B Direct with a very large customer in the U.S. and are optimistic about our potential for future growth in this area.

So in a nutshell, our DaaS strategy is beginning to transform sales and marketing into a more sustainable and predictable growth engine for the company. Revenue from our DaaS products will be recognized ratably, and similar to our risk solutions, we are becoming more embedded in our customer workflows, creating recurring revenue streams with greater stickiness than our legacy S&MS products.

Looking ahead to the fourth quarter of 2011, our new product launches will focus on Risk Management Solutions or RMS. As context, we've had disappointing results in RMS as we paused innovation on our flagship DNBi product over the past 18 months to move it to our new app development facility in Ireland. This was a difficult but necessary choice. With this move now behind us, you will begin to see a steady stream of innovation in DNBi beginning on the fourth quarter of 2011.

More specifically, we will introduce a new product called Portfolio Risk Manager in North America in the fourth quarter. Since the current economic environment is making credit managers reluctant to extend credit, portfolio insight is becoming an important differentiator in the marketplace. Our new DNBi line extension will automate several key credit work processes, while also combining D&B data with internal customer data to more effectively manage risk at the portfolio level. We'll have our first release in the fourth quarter, followed by a second release in the first quarter of next year.

We will also continue to expand our footprint in the small customer segments with DNBi Pro. Since we launched the product in spring, we have about 1,000 users, double the number we reported last quarter. Of these, 97% were new to D&B.

In Q3, we introduced an online self provisioning product for DNBi Pro where customers can transact online and without the need to talk to a D&B sales rep. Approximately 1/3 of DNBi's Pro customers purchased their products online in the third quarter.

Stepping back, we expect these innovations in DNBi to help RMS grow from flat revenue in 2011 to low single-digit growth in 2012, consistent with prior communications.

So in summary, 2011 is unfolding as we expected. We're pleased with our performance in the third quarter and remain optimistic about the prospects ahead. And with that, let me turn the call over to Rich Veldran for a more detailed review of the quarter.

Richard H. Veldran

Thank you, Sara, and good morning, everyone. Let me take you through the drivers of our third quarter results beginning with revenue. Core revenue for the quarter was $439 million, up 8% from last year. There were 4 key drivers of the improved results: Accelerated growth in North America fueled by Optimizer in S&MS; continued strength in Hoover's, which we re-platformed in 2010; continued strength in China; and stronger-than-expected performance in Europe. Let me provide more details starting with North America, which represents 70% of our revenue.

North America's third quarter core revenue was up 2% after a flat first half, in line with our expectations. Risk Management Solutions, representing 59% of North America revenue was down 1%, consistent with last quarter and in line with expectations. Our flagship risk product DNBi was up 1% in the quarter. We continue to see price lifts in the mid-single digits for DNBi and annualized retention remains in the low 90% range. Growth in DNBi was offset by lower product revenue. We continue to see softness in product revenue as customers remain cautious with spending the current economic environment. These results were in line with our expectations, and we continue to expect RMS to be about flat for full year 2011.

Let me turn now to sales and marketing, which represents 31% of North America revenue. S&MS grew 4%, up from 1% growth last quarter. The strong performance was driven by growth in our value-added solutions, primarily Optimizer, and offset by continued declines from our traditional products. Traditional S&MS, as expected, was down 23% in the quarter reflecting the sunset of our legacy Lists and Labels products. Our value added business was up a robust 22% in the quarter due to continued momentum in our flagship Optimizer product. Optimizer had been a real success for us and has grown in double-digit rate over the last 2 years and is now a $200 million product line.

Let me talk a little bit about why Optimizer offers a compelling value proposition to our largest customers. Managing data across multiple disparate databases is a pain point for customers. Data quickly degrades due to multiple systems with inconsistent data. Optimizer helps our very large customers update, correct and maintain their data to ensure that they have the most complete, accurate and actionable view of their customers and prospects. We expect to maintain the growth of Optimizer as we add more data, such as on small businesses, and make data near realtime through MAX CV. Looking ahead, through MAX CV and DAAS, we can now bring the full value of our database to new use cases, making our data pervasive across multiple systems.

CRM, which Sara discussed earlier, is just one example, and there are many others. Of note, there is very little revenue from our new DaaS product in the results so far in 2011, since most of these has just been introduced. You should expect to see our revenue momentum build as these products start gaining traction in the market over the next several months. With the continued strength in Optimizer and our new DAAS strategy, we expect S&MS to become a key driver of growth in North America in 2012 and beyond.

Our last North America product segment, Internet Solutions, representing 10% of North America revenue, grew 8% in the third quarter, up from 6% growth in the second quarter. As a reminder, we re-platformed Hoover's early last year, and ramped up innovation during the year. We are now seeing the payoff. Revenue has increased every quarter since mid 2010 as customers recognize our improved value proposition. To summarize, North America remains on track to grow modestly during 2011, in line with expectations we share with you at the beginning of the year.

Turning now to International. Revenue for the third quarter increased 28%, up from 24% in the second quarter. Organic revenue growth improved to 5% after 2 consecutive quarters of flat top line performance. Europe and Other, representing 49% of total International revenue, grew at a better-than-expected 5% due to the early completion of several customer projects in the U.K. that were previously planned for the fourth quarter. As such, we expect revenue in Europe to be flat to slightly down in the fourth quarter.

Asia Pacific, representing 51% of the total International revenue grew 65% during the quarter, driven by the acquisition of D&B Australia. Organically, Asia Pacific was up 6%, which was primarily due to double-digit growth in China, partially offset by continued weakness in Japan. As a reminder, we will anniversary our Australia acquisition in the fourth quarter, and we expect Asia Pacific organic growth to be roughly in line with organic growth we saw in the third quarter.

Turning to profitability, total company operating income increased 14%, which was ahead of expectations. North America was up 5% due to the benefit of our financial flexibility actions and improving revenue performance. International increased by 41%, benefiting primarily from stronger top line growth, as well as the timing of investment activity and the acquisition costs for our D&B Australia which were in the third quarter of last year.

To ensure a strong start to 2012, we are increasing our level of investment in both product and marketing in the fourth quarter. As a result, we expect operating income growth in the fourth quarter to be flat to up slightly and of course, we remain on track with our full year guidance.

Diluted EPS for the quarter increased 17%. This was due to strong growth in operating income and lower interest expense as a result of the bond refinancing that we completed in the fourth quarter of 2010. These factors were partially offset by a higher tax rate in the quarter. We continue to expect our full year tax rate to fall between 33% and 34%. Year-to-date, we generated $231 million of free cash flow compared to $226 million last year, an increase of 2%. This growth was despite higher cash spending on MAX CV in 2011. We have spent $32 million so far this year compared to $15 million last year. As a reminder, we said that we expect to spend $55 million to $65 million on the project in 2011.

That concludes our prepared remarks. We would now like to open the call for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Michael Meltz of JPMorgan.

Michael A. Meltz - JP Morgan Chase & Co, Research Division

I have a couple of questions for you. Can you talk a bit more about the forward expectations and the momentum? I mean, you made a point of saying-- you're saying RMS could move to low single digits next year. I assume you're saying, given the pipeline, sales and marketing should be a good amount better than that. And I'm just wondering, are you comfortable with what you said previously about getting to a mid-single digit rate next year on consolidated topline and with margins back to where you were a few years ago?

Sara Mathew

Yes, Michael. The last time we took an in-depth view of that was July, and we shared that with you. We're right in the middle of our planning process. We felt it was important that you guys understand that RMS will continue to improve, and it's not going to be a mid-single digit growth on next year. It's going to be in the low singles. Much of our growth in 2012 will come from sales and marketing, and like I said, we're right in the middle of the planning process. We can give you a very specific guidance 90 days from now.

Michael A. Meltz - JP Morgan Chase & Co, Research Division

Are you feeling better or worse about RMS today versus 3 months ago?

Sara Mathew

I am feeling much better about RMS today than I was even 3 months ago because we're now starting to see Ireland become productive, which is -- was a critical component of driving innovation because -- as a reminder, we moved DNBi to Ireland, and we needed to see that team step up and produce. And I'm actually very pleased with what I've seen. I was there last month, and we are just starting to see the innovation pick up when we need it.

Michael A. Meltz - JP Morgan Chase & Co, Research Division

Okay. On the buyback authorization, can you just clarify for us -- it's a big number, but that doesn't necessarily mean that you're going to use it near term. Can you talk about -- is there any expectation that you'll deviate from the $100 million or so target that you have for discretionary repurchase?

Sara Mathew

Well, the reason we've announced it, and we have a track record of completing all the share repurchases we've announced in the 10 years that I've been here, is if you look at our share price today, we expect to buy ahead of excess cash because we want to take advantage of the current prices. So that is actually our intention because we believe it's the best investment for our investors at this point in time. So we will buy ahead of excess cash, which has typically been the principle we've used in the past.

Michael A. Meltz - JP Morgan Chase & Co, Research Division

Okay, but there's-- Okay. And then last question for you. Is the technology spending -- I know you've affirmed all guidance, but can you talk a bit about where you are versus the cumulative spend expectation and over the tenure for the plan, and what percent this year is going to be on the P&L versus CapEx, please?

Sara Mathew

Absolutely. Let me ask Rich.

Richard H. Veldran

Sure, Michael, I'll take that. We've spent a little more than half so far. We're a little more halfway through the project. It's basically on track with what we said. We have been running about 70% OpEx to 30% CapEx. A little bit different than a couple of years ago when we went into it. I think we thought it would be 60-40 at that time. But there's no real surprises there.

Michael A. Meltz - JP Morgan Chase & Co, Research Division

And the $130 million in the aggregate, is that still on track?

Richard H. Veldran

Yes. I mean we'll obviously update next year. But right now, we think we're on track for $130 million.

Operator

Our next question comes from Carter Malloy with Stephens.

Carter Malloy - Stephens Inc., Research Division

So first of all, in the U.S. business, you discussed flat RMS for the year end and modest overall in North America growth in 2011, and so just looking at 4Q in particular, what's the driver of acceleration there?

Sara Mathew

Let me ask Byron to provide some color commentary on what are the drivers. I'll just frame it for you very quickly. So if you think about it, S&MS is going to be our key driver and I'm going to have Byron talk about why S&MS will be a growth driver. And RMS, we've already told you of what to expect. Beyond that, there's one other element that I just want to touch on is, we will be converting over to realtime data on MAX CV investment in the second half of 2012. This should be an immediate pick up in value that all customers achieve, and that will likely play out in the form of higher match rate, et cetera, which is critical for our large customers. So Byron, you want to provide some color commentary on S&MS?

Byron C. Vielehr

In RMS, which I think was the question for the fourth quarter, you're going to start to see it come up a little bit with introduction of a new product, our portfolio of Risk Management product, which we're introducing in the fourth quarter. We've already started to introduce that to customers on the Q4 renewal. And that Q4 and Q1 are big renewal periods for DNBi. So that's going to start to lift RMS up as we talk about into the low-single digits for 2012.

Carter Malloy - Stephens Inc., Research Division

Okay. So we should expect RMS -- hadn't been the $190 million of quarter run rate since I believe '08, but it sounds like that new products and re-signings are going to get us to that run rate in 4Q and will likely stick that going forward?

Byron C. Vielehr

Yes, we think full year for 2011 will be basically flat business. Low single digits for 2012, so gradual acceleration.

Carter Malloy - Stephens Inc., Research Division

Okay, sure. And then on the new products, and this is on either side of the house, but on decision [ph] 360 and some of the new Data-as-a-Service, you guys said that's $100 million overall for DAAS over the next 3 years or so. I'm assuming that's $30 million a year, not $100 million. I just want to be correct on that.

Sara Mathew

That is correct. We'll ramp up to $100 million.

Carter Malloy - Stephens Inc., Research Division

That's really helpful. And then on the other side is DNBi Pro, which seems to me to have gotten a lot of traction in the market already. Where do you guys see the opportunity on that and the potential penetration of that product?

Byron C. Vielehr

As we said, we're very pleased with it. We have about 1,000 customers on it. We also released, in the third quarter, an online capability to buy it online. About 30% of the 500 new customers that come from the online capability. We think that's going to continue to ramp. While it's a relatively small dollar amount because it's a smaller ticket item, I think as we talked about before, the entry point into that is about $400. We're selling it significantly above that. So the dollars aren't going to be huge, but it's going to be a big driver of customer acquisition for us. And if you flow it out over the next couple of years, we think that's a big pool of customers we can then upsell into a higher ticket item. So we see sequential growth in DNBi from a customer acquisition perspective continuing through 2012.

Kathy Guinnessey

Carter, it's Kathy. I just want to jump in on something because I think there was a little lack of clarity on the $100 million over 3 years. That was not $30 million a year. It is going to grow to eventually in 3 years, should be $100 million a year product line.

Carter Malloy - Stephens Inc., Research Division

And lastly, one other thing is on your deferred revenue, you guys have a bit of a slowdown this quarter. Is that any particular read on DNBi? Because if I'm stripping out international acquired growth in that business, it looks like it may have actually gone a little negative.

Richard H. Veldran

Let me talk about that, Carter. There's a couple of things just to keep in mind if you followed our business. The first, in the quarter itself, S&MS was a little heavier quarter versus RMS. The S&MS business, as you know, tends to be more upfront. So you've a little bit of a mix issue going on. The second thing is in terms of seasonality. The fourth quarter and the first quarter are really our big RMS subscription renewal period. That's when you really build the deferred. Third quarter is by far as our lightest both in terms of sales and deferred balance. So it's not as indicative of the deferred in health of the business as you're going to see in the fourth quarter.

Carter Malloy - Stephens Inc., Research Division

Got it. Just because of the absolute number is on a smaller base.

Richard H. Veldran

Yes, it's a lot smaller. If you go through, it's a [ph] short course.

Operator

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

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Just to follow up a little bit on Carter's question, when you look at the deferred revenue growth from the quarter, what would that be on an organic and constant currency basis year-over-year?

Richard H. Veldran

Yes, so a couple of things. And again, as you know, we always adjust for any abnormal things in the quarter to get to the underlying state of the business. FX was a couple of points in the quarter. So it would have been negative 2 without it. However, there was 1 big deal, a $13 million deal that was in the second quarter of last year, which actually renewed in October this year. So it actually moved into the fourth quarter. Adjusting for that, you get back to flat. So that's just the timing shift. That's a ratable deal. It doesn't impact revenue, but it does impact the timing of the deferred balance for the September then October.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

And then when we look at DNBi Pro with the ramp and that, when is that going to get to the point where we're really moving the needle on revenue? Are you thinking about that in second half, '12, '13? When does that really start turning things for you?

Sara Mathew

Probably towards the end of '12 and into '13 because if you remember, this is to close a critical gap we had at the low end for small customers who would like to essentially be part of the D&B franchise, but we had no offering at that level. So this is a small ticket item. It is -- you get 15 reports for $399, although our selling prices are well above that. This is one that we believe is critically important to bring new customers into our franchise because we nurture and grow them up into a better offering within the company. So it will be '12 to '13.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

When you look at those 7,000 wins, were those largely competitive takeaways or are these people that are completely new to risk products?

Byron C. Vielehr

They're primarily completely new to risk products. 97% of them are new to us. So it's not people that are in the franchise today and we're moving them over to the product, which is exactly where we're aimed at. This is a new customer acquisition game. Most of them are small businesses that don't use credit products. And so we're trying to grow the market of people who use credit products and getting them in a low price point items, trying to help them understand the ROI of using a credit product for decisioning. And then, obviously, upselling them into the DNBi, the rest of the DNBi suite, is the strategy.

Sara Mathew

Just remember, it's a very low-penetrated item across the board. So your penetration in this segment is well below 5%. So this is part of actually growing our franchise there.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

And then last one for me. Just on the new products, as you're rolling these out, the enhancements to DNBi. How are you thinking about, on an individual user basis, kind of the pricing lift and enhancements you can get from these enhancements?

Byron C. Vielehr

The portfolio risk manager is sold as a module, and DNBi -- it's really aimed at customers that have bigger portfolios of account. I mean, the way the product works is customers upload their data into the platform. We run some analysis on it and combine it with our data as well as benchmark data, and then, with one click, they can get a series of portfolio analytics on it that allows them to understand the performance of the portfolio and do some executive reporting. Depending on the size of their portfolio, we charge different amounts for it. But it's aimed at a specific part of the DNBi customer base that is below our existing modules and should drive overall lift in the customer base.

Operator

Our next question comes from Shlomo Rosenbaum from Stifel.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Could you talk a little bit more about what's going on with the Salesforce.com relationship and where that stands and how you expect that to develop? That seems to be a pretty exciting part of the story.

Sara Mathew

I think it's a very exciting part of the story. As you know, Salesforce has selected D&B to be the exclusive provider of commercial data. And for a period of time, as you know, we went head-to-head in the market, and then we came together and realized that, that was probably not the best thing for us to do, and us collaborating would be far more effective. Collaboration made a lot of sense because we have about a 5% overlap in our customer base, and we see this as a really good opportunity to bring new customers to know about D&B through the Salesforce application because we will be branded within the Salesforce application. So the product which is Data.com will be native on their platform. It will be sold by Salesforce, and we will get a revenue share. Now as you know, we have built up a $50 million pipeline over the course of 2011, which we gave up to them, but from a bottom line perspective. So from a value creation perspective, we believe this is a much better way to go. And in the long run, you will actually see a much larger topline as well because it will go deeper within that franchise, and we will be able to take advantage of the growth that they are seeing in customers. Now that's just a piece of it. Remember, Salesforce is 15% of the CRM business. There are -- the other suppliers that were equally interested in what D&B can provide. And Shlomo, none of this would have been possible without the MAX CV investment and the web service layer, which is what enables us to take our data and put it in different places so that customers can access it without having any friction at all. So we're very excited about the Salesforce deal, even as we're excited about the other 3 which we're just starting to build pipe with SAP, with Oracle and with Microsoft Dynamics, all in the CRM space.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

So the exciting part of this is a lot of it is market expansion opportunity. And I understand that. One of the things I just want to probe is in terms of -- this is going to be a product which is not something that is sold by your own sales force, and can you just talk a little bit about how Salesforce is incented to really sell this and how the price points will be attractive to you guys, to D&B?

Byron C. Vielehr

So the Salesforce product is being sold by Salesforce as a small overlap of their customer base with our customer base, less than 5%. And so it's going to put D&B-branded data in front of the Salesforce.com customers, and obviously, we have pricing agreements with them to make sure there is support for price levels in the marketplace. Our sales team is going to sell the SAP, Oracle and Microsoft products, which represent a big piece of the marketplace. So there's ample market for us to go sell our value proposition to the rest of the CRM piece. In the Salesforce deal, the pricing is on a per seat basis consistent with the pricing model that Salesforce uses.

Sara Mathew

We get a guaranteed minimum, as you could imagine, regardless of what price they sell it at.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

From your talks with them, is that amount that they've talked about with you in the Salesforce an attractive price level for the clients?

Sara Mathew

Absolutely. Customers get a lot of value. It's an immediate ROI because you eliminate a whole bunch of admin support that is responsible for keying. And that keying is often inaccurate. So the Salesforce product won't be out until that end of the first quarter of 2012. And clearly, in terms of pricing, this is now their pricing decision. We are just guaranteed a minimum in terms of what we get.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

And when you think about the Salesforce deal, the Oracle, SAP deals, how much of that is contributing to your expectations for really good estimates growth in 2012?

Sara Mathew

Byron, for North America?

Byron C. Vielehr

Yes. It's going to ramp slowly. So these are all ratable products, as Sara had mentioned. The Salesforce product is really coming out in the first quarter and will start to ramp. And we've just put these products into the marketplace. So sales will build in 2012, the revenue is going to show up slowly towards the back of the year. Overall though, as we've talked about, S&MS is going to be more of a driver growth in North America, and that's on the back of, later in the year, the DAAS strategy, but also a strong performance in Optimizer. We've seen double-digit growth in the Optimizer product and continue to be very pleased with it and see runway with that product.

Sara Mathew

Shlomo, what you want to think about sales and marketing is we've always had a lot of success with Optimizer. That's been growing at double digits. When you think about Data-as-a-Service strategy, you're able to take the benefits of Optimizer, which really are provided only to the largest customer, to a much broader customer segment really riding off of other people's platforms that are already embedded and in place within these customers. So we really see it as a market expansion opportunity, as you discussed. And as you can imagine, we're all very, very excited because this is just the beginning of what could be much more pervasive use of D&B data. And I also want to highlight one other thing we discussed, which is D&B Direct. You never heard us talk about D&B Direct, so I'm going to have Byron talk about D&B Direct in just a minute. We've already had our first sale with a very large customer who purchases Optimizer today. So would you want to talk about D&B Direct?

Byron C. Vielehr

Sure. In contrast to D&B360, which is a product that's snapped in to big CRM platforms, D&B Direct -- a pipe of data that exposes our back end capability through MAX CV to some of our largest customers. But to the extent that they have processes, internal processes that may be a big ERP solution or an internal platform that they've built, D&B direct allows them to easily get our data into that decision process. It has a lot of flexibility, and I think, over time, what we're going to find is that D&B Direct takes us to a lot of new spaces and, as Sara had mentioned, allows our data to be much more pervasive, particularly with our largest customers.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So if I understand that correctly, Sara used to tell me that if someone wanted a direct feed, then there was a lot of work that had to be done on the technical side. And this should kind of free that up and make it go a lot quicker and cheaper. Is that how I should think about that?

Byron C. Vielehr

Shlomo, this is Byron. That's exactly right. We have historically had pipes into our back office. The big FIs use it that way, but it's been very proprietary, and basically we vend out data packet. It's difficult to implement for the first time. D&B Direct uses a real industry-standards from an interface perspective. So it's easy to set up, easy to get the data out. It also exposes more capabilities, not just a pure data pipe. It has other types of capabilities that we have on our back end that they can use as well. So we see it as a path for new business with big customers, and also the customers that are currently using our data pipe -- it gives them additional capabilities, so we see some upsell opportunities there as well. We recently did a deal in Q3 with one of our largest customers, who's been buying a lot of data from us, and they bought a D&B Direct, a component to it as well, expanded the relationship pretty significantly because they see other opportunities to use our data in their internal processes.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then the Optimizer growth in the quarter, does that portend loan growth, or how are you guys thinking about it? I usually understand it as kind of a cleansing ahead of customers going ahead and doing some marketing. Is that the way I should think of it?

Byron C. Vielehr

Yes, it's used for a couple of things. So Optimizer is a big slug of data. We get a customer file, we cleanse it, we match it and we append it, and it goes into a big data warehouse at a customer. That's used for a series of things. Choose from marketing if they're doing outbound marketing, territory assignments, but in many ways, it's used for sales and marketing effort. The data typically doesn't get down to a CRM platform, which is why we like D&B360. But there's clearly consumptions going up on the platform, marketing starting to come back. And externally, we're also seeing CapEx is going up in the world of tech. So people are starting to accelerate large tech projects, and we see that from some of the large technology processes, and they want good, better data as part of their projects.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

And I just want to go back to one of the answers that was given beforehand just in terms of the deferred revenue. The growth, the flatness was attributable, but to seasonality, and I'm just trying to get my hands around how to mesh that with the year-over-year growth rate being attributed to seasonality.

Richard H. Veldran

Yes, I mean it's a couple of things. First of all, the mix issue was within the quarter, so it was a much heavier S&MS quarter. The seasonality is just really getting to around the sense of how important that quarter is on a per basis versus the others. But the real flatness is a mix issue that I talked about first.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

So it's basically flat because that hasn't been as big a focus, and growth has been coming from Optimizer?

Richard H. Veldran

Yes, if you think about within the quarter, the biggest grower, right, was our S&MS business and Optimizer that tends to be more upfront revenues with less deferred. The biggest piece of our deferred business tends to happen in the fourth quarter and the first quarter, where you actually sell most of your subscription business.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

But realistically, I mean, there's nothing else to read in that, just a flatness, right? Because year-over-year, that's flat. The [ph] growth is S&MS, and that doesn't flow into that one. That's an indicator of RMS, which is flat. And that's what you're saying.

Richard H. Veldran

Sure. Look at RMS. RMS has been flat this year. We've said it'll be flat.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay, I just want an idea. I just want to make sure I'm understanding that clearly.

Richard H. Veldran

Yes.

Operator

Our next question comes from Bill Warmington of Raymond James.

William A. Warmington - Raymond James & Associates, Inc., Research Division

I wanted to ask about, on the RMS product development, whether you think you'd be able to leverage the new products developed for North America across other geographies.

Sara Mathew

We absolutely are already doing this. For the portfolio risk management product that we discussed earlier, that I spoke about in my prepared remarks and Byron's talked, it really came from Europe. So you're already seeing that. And I think with the app development facility in Ireland, they're developing products for the world. You're going to see greater convergence. This was all part of what we want to do is to get to few platforms with a much faster rapid cycle of innovation. And that's really what you're going to see more. That is the new D&B. You're absolutely right.

William A. Warmington - Raymond James & Associates, Inc., Research Division

Got you. And then to bring up the topic of the share buyback again, how much of the $240 million to $270 million in annual cash flow that you're generating do you expect to actually put towards that $500 million? And then will you draw on your new expanded line of credit to do the buyback as well?

Sara Mathew

I wouldn't even think about the new line of credit as being connected to share repurchase. Because we have plenty of capacity available within D&B to actually easily accommodate $500 million of share repurchase. It won't be all done within one year, but at these prices, you're going to see us accelerate share repurchase more than we would've normally done in the last couple of years. But we want to take advantage of the current prices because we think it's a great opportunity to get the stock at what we believe is a great deal. So in terms of the mechanics of exactly how much we will repurchase every quarter, we'll report on that at the end of every quarter and then we'll be happy to take your questions around should you have bought more, should you have bought less. But right now, we felt that we needed the flexibility because we sort of ran out of it in the third quarter.

William A. Warmington - Raymond James & Associates, Inc., Research Division

And then one housekeeping question for you. The $8.3 million loss on investment?

Sara Mathew

Rich?

Richard H. Veldran

Yes, let me take that. We made an investment about 3 years ago in a boutique R&D firm with the advent of MAX CV, that's not really relevant to us anymore. So we ended up writing off that investment.

Operator

Our next question comes from Peter Appert from Piper Jaffray.

George K. Tong - Piper Jaffray Companies, Research Division

This is George Tong for Peter Appert. I know you touched on this earlier, but I wanted to get more color on the performance in North America RMS growth. How much of the slowdown would you say was attributable to the Ireland transition and how would you characterize the overall customer spending environment for that particular segment?

Sara Mathew

Sure. Two questions. In terms of Ireland, I would just say that RMS is in line with expectations. So we're not surprised by the RMS performance. But yes, the reason why we expected that performance is because we decided to move DNBi to Ireland. I believe that was a difficult but was a very important decision we made because we now have critical mass in one single app development facility, and I think that's critical to get innovation moving. So DNBi has had no innovation for 18 months, and DNBi for the quarter, I think, was about $109 million versus $107 million last quarter. So that would be up about 2%, mid-single digit price lift are maintained quite well. Retention has not changed, but that 2% growth of DNBi is insufficient to cover the losses elsewhere. Now let's talk about where we're losing. We're losing about a point from Sunset, we didn't discuss it again this quarter because we talked about it at length in the last quarter. So clearly, a critical component of getting RMS to grow is DNBi innovation has to increase. And you're just starting to see it. You'll see in Q4. You'll see it again in Q1 and beyond. Beyond that, we had a gap at the low end, which I will tell you the DNBi Pro business is doing well, and that should start to ramp. And the final piece is C&I loan volumes. They have bottomed out, and they are growing. They have grown since April consistently over prior every quarter. They are way off the 2008 levels -- I mean 2007 highs, but they're still growing. And that bodes well for renewal season, which we get into in the fourth quarter. So in its totality, hopefully that helped frame the RMS conversation. Now as we renew, and we renew strong in the fourth quarter and into the first quarter, our business is ratable. So as a result, you won't see all of it show up immediately, and that's the rational for the low single digits next year. But in terms of how we feel about the RMS business and our strategy and our plans to return to growth, I would say I feel very good. Byron, would you?

Byron C. Vielehr

Yes, Sara. I think you covered all the major points. We are focused on putting value on the table at DNBi. We have a couple of releases coming up and continue to scale DNBi Pro.

George K. Tong - Piper Jaffray Companies, Research Division

That's very helpful. Related question, what do you believe is the sustainable growth rate for North America RMS once you get beyond this transition period, say in 2012 and beyond?

Byron C. Vielehr

I think beyond the current economic environment, it's a mid to high single-digit business.

Operator

[Operator Instructions] Our next question comes from Edward Atorino.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Did I just read or see that there's a little bit of a stretch out in the strategic investment timetable?

Sara Mathew

No. I don't know where you would have read or seen that. A couple quarters ago, we said second half of 2012, and that's pretty much on schedule.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

On the new products, are they in the market? Are you already selling this stuff? Are you sharing revenues, or it's all yours?

Sara Mathew

Byron?

Byron C. Vielehr

Our Salesforce agreement is consummated. We're in the market with our old Sftc [ph] product, which we're in process of shutting down. Sftc [pj] is building a new product. They have a release of it coming out in the first quarter. Relative to D&B360 for SAP, Oracle and Microsoft, we are in market with a product that's just announced, and D&B Direct were in market with -- as I said, we did a deal, a fairly large deal in Q3 on that product. But just at the beginning of ramping those products up.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Are all the revenues yours, or are you sharing revenues anywhere?

Byron C. Vielehr

All the revenue on the SAP, Microsoft and Oracle products, we are selling it. With the Sftc [ph] deal, they are selling it, and there's a royalty payment to us.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Is that normal margins on that stuff or...

Byron C. Vielehr

The royalty payment from Sftc [ph] is going to be a very high margin because we don't have any selling costs and development cost in R&D. We just have a data piped into them.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Right. In terms of subscriber totals, reading the text on the press release, I think it slows down a little bit at DNBi, and traditional subscriber levels, is that right?

Sara Mathew

When you say DNBi, DNBi was $109 million in revenue for the quarter versus $107 million. It's been a slow grower. It's been a slow grower this year. We kind of anticipated that going in. But if you say traditional, are you talking about subscription versus non-susbcription?

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Yes, subscriptions, yes. Subscription totals.

Sara Mathew

Yes. That was about 69% versus -- if you're looking sequentially, yes, there was a slowdown. And you'd have seen a similar slowdown due to seasonality a year ago.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

It's not any sort of change in the basic demand curve there?

Sara Mathew

Well, DNBi is up. It's just not up as much as it used to be. It's probably the best way to describe DNBi, which is the biggest part of the subscription base.

Operator

Our next question comes from Manav Patnaik from Barclays.

Manav Patnaik - Barclays Capital, Research Division

A few quick questions. Firstly, on the new products clearly, your technology investment seems to be panning out and some of these new products seem to gaining traction from what you're seeing. I just wanted to get what sort of longer-term visibility do you have with once the tech investment goes through in terms of being able to set yourselves targets for new product contribution every year. And just somewhat related before I get -- these 5 new products you said you launched this year, just wanted to clarify what they are, I guess. Is it Pro, 360, Direct and then the other 2 would be?

Sara Mathew

Let me count them off for you. So we did Oracle, SAP, Microsoft. Those are 3 different products. We did D&B Direct and we did the DNBi Pro retail. DNBi Portfolio Risk Manager is really the fourth quarter. So we didn't count it. I think that's actually the largest launch in one quarter. I mean, these are launches, which is, the product's ready and ready to sell. So you haven't actually seen much revenue for it. Manav, the one way to think about it is the investments in MAX CV and the benefits you're getting from it is not reflected in our numbers as yet. It is de minimis right now because it's ratable and it's -- we're just at the beginning. Our business, we believe, without MAX CV would have been a low-single digit grower, and that's sort of what we're at right now. So when we think in terms of visibility and why we're excited about the future, it's because once these start manifesting in the top line, you should see our growth rates lift. In terms of how do you measure it, I think highly innovative companies have 20% of their revenue from products introduced in the last 3 years. That would be my benchmark. Am I there? No. Am I even close to there? No. And neither was I in the last 10 years. So there was one time where we were close, and that is when we did DNBi. We have not ever done, repeated that, since then. And in order to repeat it, that's why this investment is so important to step up the pace of innovation so we actually get more new products. In 2012, towards the end of 2012, we should actually introduce that metric. We'll probably set ourselves targets, and we'll hold ourselves accountable to getting to that aspiration of getting 20% from products introduced in the last 3 years. That's really, that is the intent. We haven't set it right now because we have to get the build down, obviously.

Manav Patnaik - Barclays Capital, Research Division

I guess on the D&B Pro products, I guess, generally around the market -- I mean, one of your competitors yesterday was talking about taking a lot of market share, and you guys are talking about 97% new sign-ups. I just wanted to try and clear up the disconnect there.

Sara Mathew

Sure. Byron actually watches competitive losses and tracks them very closely. So I'll have him talk about it.

Byron C. Vielehr

Sure, Manav. Let me talk to about it directly. We obviously watch the competitors very closely. I track all the deals that are lost, as well as wins. We lose some, and we win some. I think you're referring to the Equifax release. We, in the third quarter, we don't have any deals over $100,000 that we've lost in our risk business. And so we can't point to that, to Equifax. As I said, at the low end, which is where we've seen growth with the Vis IQ [ph] product, as well as some of the Equifax. We're growing rapidly with DNBi Pro. That's why we introduced that product to have a low-end offering. We feel very good about it and the growth is accelerating on it.

Manav Patnaik - Barclays Capital, Research Division

Lastly, Sara, just like you talked about before on the C&I loan environment -- I mean, clearly it's been growing in the last 13 weeks, let's say, but I guess it's still relatively low volumes, but how, I guess, optimistic you are in terms of sort of the renewal process based on those volumes going to your, I guess, biggest renewal season?

Sara Mathew

So what we do is we look at the growth of products like SBRI , which is transactional in the FI space. And that is up double digit. Okay, now this is a small product for us. But the point is that as C&I loan volumes go up, all transactional products -- SBRI is probably the best example -- is responding and growing a, if actually at a higher rate than the C&I loan volume. So clearly, the FIs are lending, and when you do Commercial Lending, you actually come to us. The product they tend to use the most is SBRI. Beyond that, we do not get any benefit because we're subscription based, and that subscription was locked in a year ago. So it takes a while before you actually are able to have a conversation. And the conversation we have is one of value. The value is not just about more usage, the value is also other things like other functionality we put on the table. So we believe with Portfolio Risk Manager, with the C&I loan volume are improving, we should have a good renewal season, and we would like to see that list move up beyond what we've been at, which is the mid single-digit rate. That's really what we want.

Manav Patnaik - Barclays Capital, Research Division

And one last question, actually. We were focusing on the $500 million share buyback program you talked about. You guys obviously have enough capacity to do that. I'm just curious on how you want to balance that with your dividend policies, as well as maybe just remind us how you guys look at how you increase that.

Sara Mathew

Sure. I'll have Rich talk about dividend. [ph]

Richard H. Veldran

Sure. Yes, I mean, we take a look at dividend every year. Right now, our yield is a little over 2%, more or less in line with the S&P. So we're pretty comfortable with where we are. But we do like to return the mix of share repurchase, as well as dividends. So we will continue to do both over time.

Manav Patnaik - Barclays Capital, Research Division

But what's been the policy, I guess, what do you look for in terms of wanting to increase the dividend?

Richard H. Veldran

We generally make those decisions once a year. We have increased, but marginally, I'd say, over time. We tend to look at a payout ratio, but we look at op income, we do a variety of things before we make our final decision each year.

Sara Mathew

Typically, we made sure that our dividend growth are connected with our operating income growth. We also then triangulate to look at yield and payout ratios. We found that if we stuck with the payout ratio in the midst of a MAX CV investment, we would actually be lowering dividend. We chose not to do that because we clearly throw off a tremendous amount of cash. We have a very scalable model, and cash just comes right off the top. So we have plenty of room to have both the dividend. We will accelerate share repurchase a little bit because we, quite frankly, think the prices are really good. And the plan is really to ensure that all of the cash goes back to the investors and then -- a time right now where we think we should be very opportunistic with the stock where it's at.

Operator

Our next question comes from Shlomo Rosenbaum from Stifel.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

One last one, just -- the deferred revenue thing has been beaten a lot but I'm going to add one more blow to it. You talked about the contribution of FX and things like in the one contract that moved around. Could you also talk about what the contribution of Australia acquisition was to deferred revenue in the quarter?

Richard H. Veldran

Yes, it had a minimal impact year-over-year because don't forget, we actually closed that deal on the last day of the quarter last year. So Australia was in last year's balance sheet. So it's in the deferred.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So was in the deferred last year, and it's in the deferred this year, and any growth in Australia just was kind of de minimis.

Richard H. Veldran

Yes, I mean, there'll be some growth in Australia, but that's not the driver there of the acquisition.

Operator

Our last question comes from Edward Atorino from Benchmark.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

I've got a question on the operating income. In 2010, it shows $14.4 million from Europe this year, you got $15.5 million from Europe and $4.9 million from Asia Pacific. Is that Australia, the $4.9 million?

Sara Mathew

The $4.9 million is Asia Pacific, which would be everything including Australia.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

There was none last year?

Richard H. Veldran

Yes, we had some deal pause last year as well that would be embedded in Q3. That's when we did the acquisition for Australia. So last year's Asia Pacific, it was a little bit suppressed by about $3 million.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

But the income statement has no number.

Byron C. Vielehr

It's 0.

Richard H. Veldran

Because it ended up being 0 last year.

Operator

I have no further questions in queue.

Sara Mathew

Okay, well thank you, Sherry. And in closing, I want to take a moment to thank our team members for the numerous contributions in the third quarter. It was a quarter where much was accomplished to pave the way for future growth. Your hard work, your focus allowed us to launch 5 new products in the quarter. This is the most productive in terms of innovation since we became an independent company in 2000. Thank you for your hard work and commitment to D&B. And with that, we're going to sign off. I want to thank everybody who participated on the call. We look forward to reconnecting in about 90 days.

Operator

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

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