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Dun & Bradstreet (NYSE:DNB)

Q4 2011 Earnings Call

February 07, 2012 8:00 am ET

Executives

Kathy Guinnessey -

Sara Mathew - Chairman and Chief Executive Officer

Richard H. Veldran - Chief Financial Officer and Senior Vice President

Byron C. Vielehr - President of North America

Emanuele A. Conti - Chief Administrative Officer and President of International

Analysts

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

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

Korosh Saba - Stephens Inc., Research Division

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

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

Manav Patnaik - Barclays Capital, Research Division

Operator

Good morning, and welcome to D&B's 2011 Fourth Quarter Teleconference. This conference is being recorded at the request of D&B. If you have any objections, you may disconnect at this time. [Operator Instructions] I would now like to turn the call over to Kathy McGinnis (sic) [Kathy Guinnessey], Leader, Treasury and Investor Relations. Ms. McGinnis (sic) [Guinnessey], you may begin.

Kathy Guinnessey

Thank you very much. Good morning, everyone, and thank you for joining us today. With me on the call this morning are Sara Mathew, our Chief Executive Officer; and Rich Veldran, our Chief Financial Officer; as well as 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 questions you have after the call.

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 this material. We undertake no obligation to update any forward-looking statements.

During our call today, we will be discussing a number of non-GAAP financial measures as that's how we manage the business. For example, when we discuss revenue growth, we'll be referring to the non-GAAP measure core revenue growth before the effect of foreign exchange, unless otherwise noted. When we discuss operating income, operating margin and EPS, these will all be on a non-GAAP basis before noncore gains and charges. A reconciliation between these and other non-GAAP financial measures and the most directly comparable GAAP measures can be found in the schedules to our earnings release. They can also be found on the supplemental reconciliation schedule that we post on the Investor Relations section of our website. Later today, you'll also find a transcript of this call on the 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. There was a lot of information in our press release last night. Let me lay out our agenda for the call this morning. I'll begin with a brief overview of our 2011 results and our expectation for 2012. Next, I will provide added details on the MaxCV program, including a delay in one component of the program and its impact on our financials. Following my remarks, Rich will discuss our 2011 results, including the impact of accounting changes and the strategic actions we have taken in Asia to improve profitability in that region. After that, we will open up the call for your questions.

Our full year 2011 results improved from 2010 and were mostly in line with expectations. Specifically, core revenue was up 5% with organic revenue up 2%. Operating income grew 4%. EPS was up 10%, and we generated free cash flow of $252 million.

North America was up a modest 1% for the year, with 2% growth in the second half offsetting mostly flat performance in the first. This second half growth was driven by S&MS and Hoover's, and we expect these businesses to strengthen in 2012. Hoover's, which is replatformed in 2010, is already benefiting from this new platform, as we're seeing an acceleration in innovation-driven top line growth in Hoover's. We've migrated our traditional S&MS products to this new platform and have achieved much higher profit levels than before this change. When coupled with the opportunities in the market for our Data-as-a-Service or DaaS products, you should know that we are very pleased with the progress in North America S&MS and expect stronger performance in 2012. I'll discuss the RMS business momentarily.

International grew 18%, 2% organically due to the acquisition of D&B Australia. Weakness in Japan throughout 2011 was offset by continued growth in our emerging markets. Our performance in China, once again, was very strong, and we expect the recent portfolio changes in Asia Pacific to strengthen that business even further.

For 2012, we expect improvement across all financial metrics, specifically: revenue growth of 3% to 5%, most of which is organic. North America will be at the low end of this range and international at or above the high end; operating income growth of 4% to 7%; margins of around 30%, that is 100 basis points above 2009; EPS growth of 8% to 11%; and free cash flow between $310 million and $340 million.

Stepping back, you'll note that all metrics, other than revenue growth, are in line with the expectations we laid out early in 2010 when we launched the MaxCV program. Revenue growth is about a point behind where we said we would be last July, due primarily to a delay in the MaxCV program.

Let me update you on where we are with the program and we -- how we expect it to impact our results going forward. And when we first announced the program back in 2010, we discussed the 3 key components: first, rationalizing our product portfolio; second, building a web service layer to enable faster and lower cost new product innovation; and third, building a new data supply chain to provide near real-time data for our customers.

We have met or exceeded all of our key milestones on all the components of the plan except for the data supply chain. First, we've made excellent progress rationalizing our product portfolio. As a reminder, in 2011, as we evaluated which product we wanted to map to our new data supply chain, we aggressively sunset several legacy applications that had a weak proposition or poor profitability. These were primarily in our S&MS and Supplier Risk businesses. We shut down many of our traditional list and label products in S&MS and migrated customers to the Hoover's platform where possible. The migration has gone very well, broadening the Hoover's customer base and allowing us to consolidate all S&MS innovations in our Hoover's development center in Austin. This is benefiting both the top and bottom line across the S&MS business.

Second, the build of the new web service layer is substantially complete, and we have launched several new products, primarily in S&MS, leveraging this capability. More specifically, we have seen a threefold increase in new product introductions in S&MS in 2011 versus the prior 3 years and have done so at a much lower cost. This is resulting in a more stable and profitable growth business in S&MS after years of volatility. We expect the web service layer to be a key driver of S&MS innovation, and as such, we believe S&MS will be the growth driver in North America in 2012.

Moving to RMS. We have just restarted new product innovation after a 2-year hiatus. As is the case with S&MS, our decisions in RMS are focused on long-term growth and sustainable value creation. As context, we made a strategic decision in 2010 to move RMS innovation to a state-of-the-art application development center in Dublin. This was not part of our original MaxCV plan. This move increased our MaxCV cost and slowed the pace of innovation in DNBi.

However, as a result of this move, we have secured significant benefits for D&B. First, the move of DNBi to Ireland will allow us to expand our capability to innovate, as we have in-sourced RMS application development to Dublin. An added benefit is substantial tax savings, which you should factor into your models beginning in 2014. More specifically, D&B's tax rate is expected to go down to 32% to 33% in 2014 and 28% to 29% in 2015 and beyond, as we will create a significant portion of our IP or intellectual property in Ireland.

So in summary, we expect this move to create new value for shareholders while also establishing a center of excellence for RMS innovation in Dublin. The benefits of new product innovation are expected to ramp in the second half of 2012, and as such, we expect RMS growth to be flat in 2012 and gradually accelerate as our Irish team brings new risk products to market, leveraging the web service layer of MaxCV.

Now let me move to the one area of MaxCV that needs more attention, our data supply chain. As you saw in our press release last night, we now expect the project to take longer and cost an additional $30 million in 2012. As context, toward the end of 2011, as we were building out the supply chain, we recognized that our design had missed key integration points between the data supply chain and web service layer. This is disappointing since it was within our control, but we now need to go back and rework this segment of MaxCV. As such, we will not see the full benefits of real-time data access until after the cutover is complete in 2013. Our 2012 revenue guidance reflects this change and is about a point behind where we envisioned we would be last July. You should know we continue to believe that mid to high single-digit growth in North America is sustainable after we complete this project.

To reduce the risk of any further delays, we have developed a less risky sequential project rollout plan. More specifically, we now expect to have a fully functioning data supply chain up and running in one key market by the end of 2012 and at a total project cost of about $160 million. This is approximately $30 million above our previous expectations. Of note, we've already spent $100 million on the project and expect to spend the final $60 million by the end of 2012. Once the supply chain is functional in one market, the subsequent cutover of all products across geographies to the new data supply chain is expected to occur over the course of 2013. All expenses incurred on the cutover after 2012 will be absorbed into our core operating expenses and funded through our ongoing financial flexibility program. Said another way, we will close down the program in 2012, and there will be no additional MaxCV-related noncore charges in 2013 and beyond.

Despite this delay, I am confident in our strategic direction and the capabilities we will unleash once MaxCV is complete. Let me highlight my rationale. First, we have completed more than 2/3 of the project and are already reaping benefits of the program. Second, the most challenging portion, such as the movement of our Data Center are complete, and system availability is at all-time high. Third, we're already building new products, D&B360 and D&B Direct are just the beginning. These leverage the new web service layer, and the products are innovative and have been very well received by our customers. Four, while our RMS progress is slower than I would like, we expect to systemically lower our tax rate, creating greater value for our shareholders. And finally, the benefits of MaxCV are focusing in ways we had not envisioned. This is reflected in the strong free cash flow expectation for 2012 despite the added project cost and lower top line expectation.

In summary, we remain committed to our transformation, and I am confident in the prospects ahead. In North America, growth will be driven by S&MS while RMS will remain flat. In international, we expect strong performance in our emerging markets with a gradual acceleration as the year progresses.

To discuss these and other matters in more detail, let me turn the call over to our CFO, Rich Veldran. Rich?

Richard H. Veldran

Thank you, Sara, and good morning, everyone. As you saw in our press release last night, our fourth quarter results were in line with our expectations, with core and organic revenue both up 3%.

Before I get into the details of the quarter's performance, I want to provide some perspective on a series of transactions announced in our press release last night. These transactions are intended to streamline our business, improve profitability and set us up for continued growth in the years ahead. I'll begin first with the transactions in North America.

As Sara mentioned earlier, in concert with our MaxCV initiative, over the last year, we have sunset several legacy products in order to rationalize our portfolio. In addition, we divested 2 product lines, Purisma and a small supply management consulting business, both of which have little synergy with the rest of D&B. Together, these businesses generated approximately $5 million of revenue in 2011 and will be removed from our core revenue consistent with past practice.

In international, we took several steps to streamline our Asia Pacific operations and drive improved profitability. First, during the fourth quarter, we made 2 strategic moves to strengthen our S&MS business in China. As context, our revenue in China is approximately 60% S&MS and 40% RMS, and the services we provide to our customers enable us to collect data and enhance our database at the same time. This is important given the difficulties of acquiring data in China.

At the end of 2011, we acquired MicroMarketing, a provider of both traditional database and online interactive marketing solutions in China, for approximately $14 million. This transaction enables us to grow our Chinese database by 2.5 million records and scale our operations in this market. MicroMarketing had approximately $11 million of revenue in 2011, and it will be fully integrated into our existing S&MS business in China during 2012. Due to the integration, we will not be able to separate the inorganic contribution from the acquisition from our core revenue going forward. However, for modeling purposes, you can take the 2011 revenue and spread that evenly over 2012. Concurrently, we sold our market research business in China. While this was a fast-growing business with 2011 revenue of $16 million, it was low margin and not scalable.

Finally, we made the decision to partner our Japanese business, similar to the arrangements we've done in Europe. As you may recall, the challenging macro conditions in China have caused reductions in customer spend, driving declining revenue and profit. We do not see our performance in the domestic market improving. Accordingly, we have reached an agreement to sell our share of the high-cost domestic business in Japan to our partner, TSR, while we retained the high-margin cross-border segment. We expect to close this deal by the end of February.

As a result of this transaction, we will lose roughly $64 million of annual revenue. For 2012, despite the lost revenue, the operating income contribution from Japan will be higher, as the royalty stream under the terms of the commercial agreement is expected to exceed our current operating profit level. I recognize that there are a lot of moving pieces here. So to help you model the impact of these divestitures, we've provided a new supplemental, Schedule 7, in our earnings press release that reconciles the impact by geography and product segment.

Now moving on to fourth quarter results. In North America, revenue grew 3% for the quarter and 1% for the year. As a reminder, as we discussed at the beginning of 2011, we adopted the new accounting standard ASU 2009-13 that impacts the timing of revenue recognition on bundled contract. While the impact on our results was immaterial in the first 3 quarters of 2011, it was responsible for about 2 points of revenue growth during the fourth quarter, in line with our expectations. This is a matter of timing only, which will offset about a point of revenue growth in 2012, all of which is reflected in our guidance.

Risk Management, which represents 53% of North America revenue, was flat in the fourth quarter and for the full year. Excluding the impact of the accounting change, RMS would've been down a point in the fourth quarter, consistent with what we saw in the third quarter. DNBi grew slightly in the quarter, which was in line with our expectations in the aggregate. Retention increased by 2 points, but price lifts on renewals of DNBi dropped to 2% as we focused on retaining customers in anticipation of the new product Portfolio Risk Manager that was not available as an up-sell to customers until late December.

Looking forward, we expect RMS growth to bottom out in Q1, as its current negative 1% trajectory is exacerbated by a drag from the accounting change we discussed a moment ago. We then expect gradual improvement in the subsequent quarters as our new products gain traction in the marketplace, and that will get us to about flat for the year.

Sales & Marketing, which represents 39% of North America revenue, was up 5% in the quarter or 1% before the adoption of the new accounting guidance that I mentioned earlier. For 2011, growth from our value-added solution, up 11%, offset declines in our traditional products, which were down 14%. Within S&MS, we began to see the benefit of our new DaaS products which contributed about a point of growth in the fourth quarter. These products were just released last year, and their revenue was recognized ratably. So we expect this category to drive increased growth in 2012 and will build as the year progresses.

Internet Solutions, which represents 8% of North America revenue, grew 9% in the quarter. This is the fourth consecutive quarter of high single-digit growth. As Sara mentioned earlier, we replatformed the Hoover's site and is resonating well with customers, validating our belief that innovation leads to better market performance.

The deferred revenue balance in North America declined 2% at year-end, largely due to the impact of ASU 2009 13. Excluding the accounting change, North America deferred revenue would have been up about a point, slightly better than Q3. This low rate of growth in our deferred revenue balance reflects a shift in product mix towards S&MS, the primary growth driver in North America during 2011. As a reminder, S&MS products have mostly upfront revenue recognition versus RMS, which is mostly ratable.

Let me now turn to international, which represents 28% of our core revenue. Core revenue grew 3% in the fourth quarter, both in total and organically. For the full year 2011, total and core revenue were up 18% with organic up 2%. As a reminder, we acquired D&B Australia at the end of the third quarter of 2010, and it is now part of our organic base.

Europe and other, which represented 48% of total international revenue, declined 2% in the fourth quarter and was flat for the year. As we mentioned on our third quarter call, the early completion of several U.K. customer projects during the third quarter created a headwind in our fourth quarter results.

Asia Pacific, representing 52% of our total international revenue, grew 9% during the quarter and 8% organically. Asia Pacific benefited from strong organic growth in China and India, which, combined, grew more than 20% year-over-year, as well as growth in D&B Australia.

Looking forward, we expect our total international business to benefit from continued strength in Asia Pacific. This strength will be driven by the scaling on -- in the emerging markets, continued growth in D&B Australia and our partnering of Japan. While the macro environment in Europe is expected to remain challenging, we expect a modest pickup from better sales execution and the continued expansion of DNBi. As such, for 2012, our total international revenues are expected to grow in the mid to high single digits.

Now let me turn to our total company profitability. During the fourth quarter, operating income increased 1%, which was in line with our expectations. North America's operating income grew 3% in the quarter and included increased investments in products and marketing to drive top line growth for 2012. International operating income was also up 3%. For the full year, our total operating income grew 4%. Looking ahead to 2012, we expect operating income to be up 4% to 7%. This growth is a testament to the strength of our scalable business model and the benefits we are already seeing from MaxCV on our cost structure.

We are especially pleased with our bottom line expectations for 2012 since we face about a $10 million incremental pension expense headwind and another $4 million of headwinds from foreign exchange. Combined, these factors represent a 3-point drag on operating income growth in 2012, which means that excluding these items, our operating income guidance would have been 7% to 10%. The growth will be lower in the first half of the year and higher towards the back half, due to a greater amount of marketing and investment activity in the first half of the year to support new products in North America.

We were extremely pleased with our expected operating margins of 30% in 2012. While we are not seeing the revenue growth that we expected in 2012, we do expect to achieve our margin target through a combination of lower technology costs and financial flexibility. Our 2012 reengineering program is expected to generate savings of $80 million to $90 million before any reinvestment in the business. To drive the program, we'll incur restructuring charges of $29 million to $37 million, including approximately $9 million to $12 million related to the restructuring of our Japanese business. All of these costs, as well as the final $60 million of spend on MaxCV that Sara mentioned earlier, are included in our free cash flow guidance of $310 million to $340 million, which is a significant increase over the $252 million delivered in 2011.

You can see that our free cash flow is growing faster than our operating income in 2012. About 2/3 of the growth is from higher operating income adjusted for noncash expenses, like pension expense and equity compensation. The other 1/3 is split between onetime items in 2011 such as early paid discounts that we took advantage of in the fourth quarter and higher collections in the second half of 2012 due to the ramp in sales.

In 2011, we returned approximately $200 million in cash to shareholders through dividends and share buybacks. For the full year, we paid dividends totaling $70 million and repurchased $126 million in stock under our discretionary share repurchase program, which was about $50 million more than our original plan going into the year. During 2012, we expect to return a higher level of cash to shareholders. We've increased our Q1 quarterly dividend from $0.36 per share to $0.38 per share, and we expect to repurchase about $150 million to $175 million of shares through our discretionary share repurchase program. As in the past, we will be opportunistic about the actual repurchases.

Turning to the balance sheet, we ended the year with $84 million of cash and gross debt of $965 million. We remain comfortable with our gross debt level in about a $1 billion range.

With that, I'd like to turn the call back over to Sara.

Sara Mathew

Thank you, Rich. So to summarize, our 2011 performance was in line with expectations. Our North America Sales & Marketing businesses, including Hoover's, are performing well, fueled by the strength of our value-added products, innovation for MaxCV and the replatformed Hoover's business.

RMS is flat due to the lack of innovation on our flagship DNBi product as we move application development to Ireland. We expect to see gradual improvement in RMS as we benefit from a return to innovation in DNBi and anniversary the headwinds from the sunset of legacy applications. International is expected to grow behind investments in Asia Pacific.

Looking ahead to 2012, we have an achievable plan and remain confident in our strategic direction. We are already seeing the early benefits from MaxCV and customer feedback on our DaaS products is extremely positive. Our 2012 performance is an improvement over 2011, with a step-up in organic revenue growth, operating income and free cash flow despite the higher investment behind MaxCV. This is a testament to the operating leverage of our business model and provides a view into the potential for further acceleration and shareholder value as our top line improves.

And with that, let me now open up the call for your questions. Operator, if you could open the lines, please.

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 about 100 questions. I'll try to keep it to 3, though. Sara, can you speak some more about the delay in MaxCV? And then just walk us through exactly what -- I mean, I don't want to use the bad vernacular, but what's not working versus what you thought it was going to be. And when you actually flick the switch, what market are you going with first and what type of guidance are you going to be -- or updates you're going to be giving us throughout the year? That's my first question, then I have 2 follow-ups.

Sara Mathew

Sure. So let me talk about exactly what happened. Towards the end of the fourth quarter, it became apparent that some of the integration points were not fitting together as we had hoped. So as a bit of context, in the original plan, we had the work streams working independently, and we assumed that they would connect because the plan have been done as one plan and then broken down into work streams. So we quickly realized that, and this was towards December end, that there were a couple of issues where the entire data supply chain would not come up altogether. So what we did immediately is we paused to better understand exactly what our options were. You should know that if you think about MaxCV, Michael, from the time we launched the program, there have been many additions the project. So the DNBi move to Ireland was not planned, nor were any new products beyond dnb.com planned in the original MaxCV. So we had incurred additional costs, all of which, we believe, were the right things to do. So the budget was tight enough that we did not believe we could handle, at this late stage, a change within the $130 million. And as you can also imagine, when it's a late-stage change, not only do you have the throwaway of the costs already incurred, you have to go back complete the redesign and build. The approach we are adopting is one market, and we will prefer not to announce what that market is for competitive reasons. We will provide updates at every quarterly call to let you know how the market is progressing relative to our expectations on end to end. The advantages of going to just a one-market approach is it really allows us to test and learn in a controlled environment. So once we get that one market working, it's like flipping switches. The cutover of all the other markets are going to be much easier because it follows the same process, the same process of the files that come into D&B and all the different formats, the global input handlers that convert them into topics of data and then the web service layer that allows us to access it for our products. So I actually believe that this approach is a lower approach. And you could say that, yes, with the benefit of 20-20 hindsight, why don't we use this approach to go from the beginning? Well, that's par for the course. I don't have a good answer for that. So what we also did, and that's the other piece that you should know, is we got outside experts, people who have had a lot of experience with complex tech projects, to do an independent review. And they feel very comfortable with the design, and I have weekly touch points with the team. So I want to make sure I answered all your questions around what happened, when did we know. And the team has really been working all of January, working through options, and there were essentially 6 we looked at. And this looks like actually the best example because it is an end-to-end task making subsequent cutovers fairly easy.

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

Okay. Follow-up for you on marketing. In terms of the expectation in 2012, can you specifically -- you're saying -- I'm sorry, North America, you're saying towards the low end of the 3% to 5% risk flat. What does that actually mean for Marketing growth, and is the primary driver salesforce.com?

Sara Mathew

Byron?

Byron C. Vielehr

Sure. Michael, this is Byron. S&MS will be mid single digits. A piece of that is our relationship with Sftc. We're feeling pretty good about that. They started selling in December. They really don't have a fully robust product. That's going to come in the second quarter and will ramp through the year. The other driver of that is our other Data-as-a-Service product, so D&B Direct and D&B360. Once again, they're all ratable. We're building the pipe on those products outside of the Sftc footprint and will ramp throughout the year. And I guess the last piece of it is the Optimizer product's been performing quite well, and we anticipate strong performance through 2012 as well.

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

Okay. And then, Rich, for you, what's CapEx guidance for '12 versus the $53 million in '11? And then on the tax rate, what exactly -- besides just saying the word Ireland, what exactly are you going to be doing to structurally push the tax rate down another 300, 400 bps?

Richard H. Veldran

Yes. Let me talk about -- I'll take the tax rate first, then I'll come back around. The -- over time, we will be moving a significant portion of the IP and the -- and actually revenue source to Ireland. When we do that, you'll have -- you'll take advantage of the lower Ireland tax rate on the revenue that's actually got the IP and the source from there. It's primarily going to be in the risk space that we move that data, and it's going to be over a period of time. So you're going to see the biggest impact in 2015, because, by then, you will have moved DNBi over and redone the IP in Ireland. And the effective tax rate is pretty significantly different obviously, between Ireland and North America. On a CapEx side, I'm not giving specific guidance. We -- as we've told you, we typically spend in the 4% range-ish core CapEx. I don't see anything that's different from that as we go forward.

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

But is part of the free cash flow gain because of lower CapEx year-over-year?

Richard H. Veldran

A little bit of -- was this year. For next year, let me talk a little about the free cash flow. There's really 3 things going on as we look at '12. First of all, if you just hit the midpoint of our range for operating income and take the midpoint for free cash flow, right, if you do that, it's roughly 28 73, so a $45 million increase. Of that, about $15 million is from noncash items. So we had an increase in pension than I mentioned. It's $10 million dollars. There's also an increase in equity costs, which is also noncash. So you got a piece of that. We also had about $25 million this year of early-pay discount that we took advantage of. There are a number of vendors out there who wanted to be paid early. It made perfect economic sense for us to do that. So we had, I'll call it, a onetime blip in this year that helped us out. Yes, it's not unusual for us to do that. I mean, in every given year, we'll take a look at better position at the end of the year. And if it makes sense and if there's folks offering it, we'll take advantage of it. The other piece is as sales ramps up during the year, we'll actually collect -- potentially collect ahead of the revenue. And the reason is, when we sell an annual contract, people don't pay us over 12 months. They actually pay us within the first 1 to 3 months of that contract, so we actually collect the cash pretty early. So as we ramp up sales next year, on a ratable product, you're going to start to see increased collections in the second half of the year. And those are the real items.

Operator

Our next question is from Shlomo Rosenbaum of Stifel, Nicolaus.

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

I'm going to try and limit myself to the same amount as Michael. And just -- can you get into a little bit more the growth year areas in salesforce.com, D&B360? The ramp-up with salesforce.com, at least, came out, I believe, in December. And in terms of the product, it seems like there's a product something out there for $125, something for $25 a month. Is there any early indication on the take-up of the products?

Sara Mathew

Sure. I mean, currently, what we're seeing in the fourth quarter from salesforce.com was really de minimis. But let me ask Byron to step back and just give you the context and the ramp you should expect from the relationship.

Byron C. Vielehr

Sure, Shlomo. They've come out and said that the ticker price on their product is $125. That came out of one of the conferences publicly not that long ago. They sold a small amount in December, so they're really early in the ramp. And what they've done out of the gate is they've taken some of our data and they've integrated into their Jigsaw product. It's not as robust as our D&B360 products. They are building a more robust product, which we'll see in the second quarter. I think on the back of that, it's really going to accelerate into the back half of the year.

Sara Mathew

We are very excited about our partnership with Salesforce, you should know that, primarily because of a very large customer base that will now have exposure to D&B products and the opportunity for us to cross-sell on the back of that introduction to D&B. And so when we think of Salesforce, we're really quite excited about that partnership. And we think it's only beginning, and you won't really see the full benefits, I believe, until 2013. But there will be a very different ramp because they are certainly hot to sell the product.

Byron C. Vielehr

Shlomo, when you look at the customer base is there's actually a very small overlap of customer base. It's only about 5%. And so as they ramp up their penetration to their customer base, we're going to have lots of customers that are not ours, that are theirs, that are using D&B data and seeing D&B logos in their Sftc products. And that, I think, is really going to give us the opportunity to go sell the rest of our value prop into that customer base. Long term, we see that as a growth driver for our business as well.

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

But the question I have on -- just on that is the Salesforce guys are going to be the ones selling it. So is there any way that you have to reach over to the customer beyond just having your logo in there? Will there be any kind of sharing of who's getting the products so you can kind of market that any further?

Byron C. Vielehr

Absolutely. We're getting a list of all of the customers they sell. It comes to us on a monthly basis. So -- and we're in the process of operationalizing that. But all of those leads will come into my sales force, and I'll be able to facilitate a call from our reps into their customers. So that's absolutely the path we're going down. We think the cross-sell is a big part of the opportunity.

Sara Mathew

You should view it as a partnership between us and Salesforce. We jointly designed to just create better value and a better experience for customers. And just remember, Salesforce is 15% of the market. The other vendors for which we are building products is a much larger piece of the market, and that's still early stages. We're just beginning to build pipe, so you really have seen no impact through Q4 from D&B360.

Byron C. Vielehr

And, Shlomo, the other thing that's important, and it's very early in this relationship so I don't have a lot of proof points around this, but we have seen a couple of customers where they bought data.com. They're getting access to our data in their CRM application, and that's leading them to, "Gee, I need a data file or something else." So we -- out of the gate, they're seeing other opportunities within their footprint outside of CRM. We think that's a great pattern. And as Sara said, it's a partnership so we're trying to drive that, this further sale.

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

And just a follow-up on the question that Michael was getting at. In terms of the growth in S&MS, there -- it seems like it's Optimizer, like you guys said, it's run very well, and then you have these products that are coming out. Is there a way that you guys want to split it? It seems like the Optimizer, we're kind of already seeing the growth in the numbers. Some of these other ones, is there a pipeline number you want to give us in terms of just getting comfortable in terms of the growth rate for 2012?

Byron C. Vielehr

Sure. If I look at D&B Direct and D&B360, my pipeline's over $20 million at this point.

Sara Mathew

And building.

Byron C. Vielehr

And building.

Sara Mathew

So if you recall, Shlomo, just as a piece of context, right about the time we did the Salesforce deal, we had a pipeline in between $50 million and $60 million that we essentially extinguished. It was unfortunate because had we had that pipeline, perhaps we would have had a little stronger results in 2012. But we felt, for the long term, that was the right thing to do. So you can expect this new pipeline to build and then our salesforce to start to sell the product.

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

Okay. Then a -- just a couple of housekeeping things. What is the 2011 EPS number? After all everything is said and done, that you're going to be growing off of -- when you take out all the divestitures and stuff?

Sara Mathew

Should be the reported number.

Richard H. Veldran

Yes, the reported number. So on Schedule 2, it is the actual reported number. We don't -- remember, we don't adjust any of the EPS or operating income or free cash or anything else for the divestitures. The only reason we adjust the revenues is to give you an understanding of what happens to the underlying revenue growth rate. Any profit or earnings that we lose from the divestitures, and clearly we lose some because they were profitable in the aggregate, we make up for that through additional reengineering.

Sara Mathew

Yes. The point that we want you to take away, Shlomo, is we are very focused on creating shareholder value. And if we start to restate our operating income, free cash flow and EPS, then, clearly, you have lost something. And we wouldn't really consider that kind of a divestiture, unless, of course, there were reasons that were far beyond, that it would be very apparent why we would want to get out of it. The Japanese business partnership, which is the primary change and the primary reduction in the top line, is largely a partnership. So we're not exiting Japan. We're not discontinuing business in Japan. We're just going to create a smaller and higher-growth entity and create more value in the process because we have to retain access to Japanese data.

Richard H. Veldran

So just to cap it back off, the $500 million in reported operating income for 2011, that's a number will grow off of. The $6.25 in EPS, that's the number we'll grow off of.

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

Okay. And then DNBi international. You're having some issues in the U.K. in the middle of the year. Has that been kind of worked out?

Sara Mathew

Yes. Manny?

Emanuele A. Conti

Shlomo, yes. We're very pleased with the second half performance of our DNBi. If I were to look across Europe, and U.K. is a major portion of it, we saw that we added, in all of '11, about 450 customers, of which we added almost 200 just in the fourth quarter. And we're seeing price lift similar to what we received in the early days when we launched DNBi in the U.S. And on top of that, we're getting about 1/3 of all of our customers are actually new customers who are migrating customers from current product to DNBi, but we're also bringing in new customers to our franchise. So second half performance, clearly, we see a big uptick, which we're happy about.

Operator

Your next question is from Carter Malloy of Stephens Inc.

Korosh Saba - Stephens Inc., Research Division

It's actually Korosh Saba for Carter. I got a few questions for you guys, starting off with the rebounding C&I index and continued price improvement. Can you help us understand the thinking behind flat RMS growth for 2012?

Sara Mathew

Sure. Byron?

Byron C. Vielehr

Sure. The biggest driver around the flat RMS growth is really lack of innovation on DNBi. I mean mid-2010, we made a decision to move DNBi to Ireland for a variety of reasons. One is we wanted our new tech center to -- that understands all the new technologies as part of MaxCV to work on the rebuild of DNBi, and then, of course, the tax advantages that Rich spoke about. What that resulted in is, in 2010 and 2011, we've not had a release on DNBi. So the customers have really have not seen innovation. And our historic recipe was to continue -- since it's a subscription-based product, continue to innovate on the platform, and that drove retention as well as lift. So that 2 years has slowed down the lift on DNBi. We're getting back into innovating on the platform. So our Portfolio Risk Manager product, which came out at the end of -- the middle of December, was the first new release on that platform in over 2 years. We do think that's going to give us the ability to up-sell customers into it, and will improve both retention and lift. But it's a fully ratable product, so it flows into our revenue very slowly and so you'll start to see it in the back half of 2012. That's the primary driver of growth in RMS and why it's flat in 2012.

Korosh Saba - Stephens Inc., Research Division

Okay, great. And then a few follow-ups on MaxCV. Can you guys give us a couple of examples of new products that are resulting out of the initiatives, and then what we can expect out of margins in 2013 and beyond?

Sara Mathew

Sure. Let me take the first one, and then 2013, I think we should wait till 2012 is complete. But you should know that as top line accelerates, we naturally increase margins. So I'll just give you that as something to think about. But the new products you've already seen, the 6 versions of D&B360 that have been launched with Microsoft, with Oracle and -- who am I missing?

Byron C. Vielehr

SAP.

Sara Mathew

And SAP, thank you. Those are examples. The other really good what is HP Direct, which is using the web service layer to crack open our database to people who want to actually access our data directly. So this is D&B Direct. What did I say?

Kathy Guinnessey

HP Direct.

Sara Mathew

Did I say HP Direct? I apologize. It should be D&B Direct. Thank you, Kathy. What we do is we allow customers now to take our data and put it into other systems like their ERP systems and their MDM systems, which are new markets for us, places that we were not able to access in the past. Previously, if a customer really wanted to get that data plan, you would have to FTP a file over to us, and then we could use the Optimizer product to essentially handle it. So these are just beginning of examples of new products, and you can expect more. The other place that I would talk about is Hoover's. Now Hoover's example, I want to start by saying the Hoover's replatform was a precursor to MaxCV. It was not part of the original MaxCV expense. We just decided to replatform and see what we could do with innovation. And this has been a really nice turnaround in Hoover's. What you're seeing is a steady stream of innovation, call it about a new product introduction every quarter, so new value brought to the market every quarter. And that's what eventually you should see from all of our, what I would call, point-of-arrival new platforms in the post-MaxCV world. So you're already seeing this in the marketplace. Does that help?

Operator

Our next question is from Dan Leben of Robert W. Baird.

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

Just a follow-up on the last question. If we looked at it in a vacuum, bringing the MaxCV out from noncore into core, just absent revenue growth or margin expansion outside of that, what are the cost impacts of that transition, if any, that we should be aware of?

Sara Mathew

It should be small, Dan. It -- that's just why we believe it'll be easily absorbed within the normal financial flexibility program. Remember, getting the end-to-end supply chain working is we're not building a supply chain for one market. We are building a global supply chain, really testing it in one market. So whatever the amount is, we have high-level of sizing, it's certainly going to be small. So we don't believe that is anything to worry about in terms of our ability to absorb it within our ongoing operation costs. So we should be fine.

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

Okay. And then with the Financial Flexibility initiative this year. How much of that amount of savings is going to be reinvested in the business?

Richard H. Veldran

The -- well, there'll be actually a significant chunk. If you -- at the end of the day, our operating income guidance is our operating income guidance. It includes reinvesting a significant portion of that. I won't give an exact number, but that is the premise always of our reengineering program is that it allows us to expand margins, but at the same time, reinvest significantly into the business.

Sara Mathew

There is a significant amount of marketing investment we have planned, as well as investment to drive DaaS growth in 2012, which is our Data-as-a-Service product. I'm going to ask Byron to touch on it because it will impact operating income in the first half of 2012. So Byron, do you want to talk?

Byron C. Vielehr

Sure. So we're accelerating both marketing for this, direct response marketing that we've started to accelerate in the fourth quarter, really focused at the small end of our business. As part of that, we're also increasing our presence at all the major conferences. So we are -- so we're increasing our exposure and presence in the marketplace. The last piece is particularly around CRM. We're increasing marketing in the risk space to make sure that we have a lot of presence around the Portfolio Risk Manager product, which is a new capability for us.

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

Great. And then just 2 more quick ones for me. First one is on RMS pricing. After the center gets up in Dublin and new products coming out, are you expecting to move the pricing back to kind of historical levels of growth annually?

Byron C. Vielehr

Yes. For 2012, our plan in -- is to have mid single-digit lift on the DNBi platform. We think that's very achievable, particularly with the introduction of PRM. And we've got a full roadmap filled out, so you're going to start to see regular releases on the DNBi platform.

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

And then last one for me. Just what was the year-end pension liability on the balance sheet.

Sara Mathew

Kathy, do you want to?

Kathy Guinnessey

Dan, the liability, I don't have in front of me. I can tell you the underfunded portion is going to be approximately between $250 million and $300 million for the -- on a GAAP basis, and that's off of -- sorry, the liability is about $1.3 billion.

Operator

[Operator Instructions] Our next question comes from Bill Warmington of Raymond James.

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

First one for you is on data.com and asking about how the economics on that are going to work. And my -- I wanted to ask you about the cannibalization risk. Meaning that if you're spending $20,000 with D&B now, you convert to data.com, spending $20,000 with Salesforce, what's the impact on you guys? And is that something to be worried about or not?

Sara Mathew

Byron?

Byron C. Vielehr

Sure, I can talk about it. As we've talked about in the past, data.com is priced on a fee basis, and so they've talked about their pricing at $125 a fee. We have a royalty payment on that, and we have a minimum floor on that. And for competitive reasons, I'm not going to disclose that. The entire CRM marketplace is largely fee based. Relative to cannibalization, we've spent a lot of time when we were restructuring the deal to make sure that we didn't have a big impact on cannibalization. And one of the things that we affirm is, most of our data in the S&MS space, particularly as you look at Optimizer, is going into big data warehouses, so it's not going all the way down into the CRM application. It's one of the reasons that we really like D&B360. It's a use case that isn't prevalent with some of our other datasets. And so for customers that are looking at whether it's data.com or other CRM applications, it's a very specific use case. One of the things that we have found is, oftentimes, they need to file -- they want to optimize their file along with it, so that they have D&B data. It's not only across their CRM application but in their data warehouse or for other usage. But there's not a -- we don't have a use case where people can easily trade down from what we have to data.com. We would specifically build the relationship to prevent that from happening. We've also limited the data set that's available on data.com. And so it's -- relative to all the data we have, it's a relatively small data set that sits in data.com.

Sara Mathew

Predominantly, what we would describe as list and label data, for which we're getting a much higher dollar range than we would if we just sold it on a per deal basis a -- to a third-party. So we feel very good about that.

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

Got you. And then one housekeeping item. The -- what's the deferred revenue growth year-over-year on an apples-to-apples basis adjusted for the new accounting?

Richard H. Veldran

Yes, let me give you the pieces. So in North America, as we said, the reported was minus 2%. It would actually be plus 1% if we hadn't adopted the ASU 2009-13, which effectively moved some revenue that would've been recognized in 2012 into the fourth quarter of 2011. So deferred balance was reduced for that. So North America would have been plus 1%. In international, the big change there was the fact that we took the Japan business and we're partnering it and we sold off of our market research business. So there's about $15 million of assets held for sale that was formerly in the deferred balance. Adjusting for that, international was actually up about 5.5%.

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

Okay. And then how would you tie the plus 1% growth in deferred to the pricing lift that you're seeing?

Sara Mathew

The plus 1% growth in deferred to the pricing lift?

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

Yes. That you're seeing on the renewals.

Sara Mathew

The way you want to think about deferred and, what I would say, DNBi as a whole is as our mix shift towards sales and marketing, which is more upfront, it's just less deferred. So you are having a mixed impact, which is what's really resulting in deferred being low. And as long as RMS is flat, you will continue to see this occur with deferred, until we anniversary the mix shift.

Operator

Our final question comes from Manav Patnaik from Barclays Capital.

Manav Patnaik - Barclays Capital, Research Division

So couple of questions on the tech investment, just back to that. On the Investor Day, when you had guided to the $110 million to $130 million, you talked about annualized savings from this coming in the $35 million to $50 million range in the second half of '12. I just wanted to get sort of your updated thoughts on how much of that you've already seen. And with the added spend to $160 million, what the new expectation should be?

Sara Mathew

Rich?

Richard H. Veldran

Sure. So we continue to expect the long-term savings to be in about that range. In 2011 itself, we had about $15 million that flowed in towards the end, and it's a little bit higher than that as we go into 2012. We're about $17 million full savings in next year.

Sara Mathew

What we are seeing, Manav, is we are seeing savings in other areas that we had not envisioned as part of MaxCV, and I'll just touch on one example. By consolidating our traditional Sales & Marketing products and the Hoover's platform, we were actually able to take out a significant amount of cost and, at the same time, consolidate all of Sales & Marketing innovation in Austin, which is where Hoover's is headquartered. So now you're going to see the benefits of Hoover's across a broader base of products. It's a very innovative and capable team, and that's a great place to source talent. So one of the things we are seeing is savings showing up that weren't originally envisioned, because we had a somewhat narrow view of savings coming out of just tech, primarily, and from our data as well. And now we're seeing it in other parts of the business, which I think is really positive, and that really helped us with the bottom line in 2012.

Byron C. Vielehr

Yes. It's actually one of the reasons that the reengineering program is larger in 2012, because the MaxCV initiative has unlocked the ability to actually do more consolidations than we normally wouldn't have been able to do.

Manav Patnaik - Barclays Capital, Research Division

Okay, got it. And then just back to the pricing front, just to understand so I read it correctly. So on the international side, I guess the progress that you're getting, the sort of mid single-digit pricing increases, but in North America, this time around, or I guess this quarter, it was only 2 percentage points or did it drop 2 percentage points?

Sara Mathew

Okay. Let me start with international. International is actually double digits, am I right, Manny? Because you're still in the early phase of converting to DNBi.

Emanuele A. Conti

Correct.

Sara Mathew

In terms of North America, we did have one quarter where we were lower than we would've expected. And that's primarily because -- I'll have Byron talk about the PRM.

Byron C. Vielehr

Sure, Manav. If you look at the fourth quarter for DNBi, we saw retention come up a little bit, and we saw some degradation in price lift. And as I said, we've not really -- we've not innovated on our platform in 2 years, and so we focused on retention with the notion that we can continue to up-sell PRM, as well as the ongoing innovation that we're putting into the platform in 2012. And then I guess the last piece is that the PRM -- if you look in the PRM release, we didn't get it until the very end of the fourth quarter. So we're very confident that the DNBi lift rates will come back up to the mid single digits.

Manav Patnaik - Barclays Capital, Research Division

Okay, fair enough. And then can we get sort of a summary of how DNBi Pro ended the year, with new customers and all that kind of stuff that you've given in the past?

Byron C. Vielehr

Sure, I can talk about it. We have about 1,400 customers on the platform. 90% of those are new to D&B. So once again, this is not a migration product. We built it to acquire new customers that we can then up-sell into the DNBi product line, and it continues to attract new customers into the franchise with very little migration.

Manav Patnaik - Barclays Capital, Research Division

And has the -- in the past, you've talked about you guys track the loss rate to your competitors, and it had been decelerating as opposed -- what's the progress there?

Byron C. Vielehr

Yes. From a competition perspective, we are seeing BusinessIQ in the marketplace and our losses are mostly in the small business area, and they're mostly due to price. And overall, if you look to the Risk business, our core competitive advantage is the DUNSRight process and Linkage, and we're just superior to our competitors from that perspective. The bigger piece, I would point out, is just we need to get back to innovating on DNBi. As you saw on the fourth quarter, we had strong retention rates, so we need to obviously drive up the lift rates on that platform. And we do think, long term, the Pro product will allow us to get more people using our products. It's an easy, low price point to step in, and we're really trying to get people that don't use credit products. That's our primary focus with that product. And I think we'll see the user count accelerate through the year.

Manav Patnaik - Barclays Capital, Research Division

Okay. And last question for you guys. Just on -- looking forward, I think on the Investor Day, for international, you guys have talked about potential for low double-digit, including acquisitions. Clearly, you guys have done something in China now. Is that sort of where your focus on M&A is going to be in the emerging market areas, or maybe you could give us some color on what's the updated thought process there?

Sara Mathew

Manny?

Emanuele A. Conti

Yes. Sure, Manav. This is Manny. Yes, so we continue to look at international as a growth engine for the company. And as we look out into the out-years, we certainly see the potential to grow low double digits. When we look at M&A, we can -- obviously, it's an area that we'll continue to look at, especially in emerging markets. As we look at 2012, I think we're going to expect mid to high single digits in Asia Pacific and probably low single digits in Europe. But longer-term, we do see, beyond '12, a potential for double-digit growth.

Sara Mathew

Mid to high in overall international.

Emanuele A. Conti

And mid to high in overall international. That's right.

Sara Mathew

Overall international, with Europe low, and clearly, Asia Pacific driving much of the growth.

Emanuele A. Conti

Absolutely.

Operator

I'll now turn the call back to Sara Mathew for closing remarks.

Sara Mathew

Thank you, Mary Ann. For all of you on the call, thank you for your time and attention. We will be talking to you again in about 90 days. Bye-bye.

Operator

This does conclude today's conference call. You may disconnect your phones at this time.

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