Dun & Bradstreet (DNB) Robert P. Carrigan on Q4 2015 Results - Earnings Call Transcript

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Dun & Bradstreet Corp. (NYSE:DNB)

Q4 2015 Earnings Call

February 12, 2016 8:00 am ET

Executives

Kathleen M. Guinnessey - Treasurer and Investor Relations Officer

Robert P. Carrigan - Chief Executive Officer & Director

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

Joshua L. Peirez - President and Chief Operating Officer

Analysts

Peter P. Appert - Piper Jaffray & Co (Broker)

Jeffrey Meuler - Robert W. Baird & Co., Inc. (Broker)

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

Andrew Charles Steinerman - JPMorgan Chase & Co.

Manav Patnaik - Barclays Capital, Inc.

William A. Warmington - Wells Fargo Securities LLC

Andre Benjamin - Goldman Sachs & Co.

Operator

Good morning and welcome to Dun & Bradstreet's 2015 Fourth Quarter Teleconference. This conference is being recorded at the request of Dun & Bradstreet. If you have any objections, you may disconnect at this time. All participants will be in a listen-only mode until the question-and-answer session of the call.

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

Kathleen M. Guinnessey - Treasurer and Investor Relations Officer

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

Here's what you can expect on our call. Following my remarks, Bob will provide an overview of our 2015 results and an update on our strategy, including our outlook for 2016. Then, Rich will come on to take you through the highlights of the fourth quarter. And after that, we'll open the call for your questions.

To help our analysts and investors to understand how we view the business, our remarks this morning will include forward-looking statements. Our Form 10-K and 10-Q filings as well as the earnings release we issued yesterday highlight a number of important risk factors that could cause our actual results to differ from these forward-looking statements.

These documents are available on the Investor Relations section of our website, and we encourage you to review the material. We undertake no obligation to update any forward-looking statements.

So from time-to-time we may refer to sales, which we define as the value of committed customer contracts. This term is often referred to as bookings or commitments by other companies. In addition, we speak from time-to-time about deferred revenue. As a reminder, deferred revenue is a liability that refers to revenue that has not yet been earned and represents products and services that are owed to our customers. As the products and services are delivered over time, it is recognized as revenue on the income statement. Deferred revenue is important to management, because it provides insight into the health of our future revenues. When we refer to the change in deferred revenue, we mean before foreign exchange and acquisitions unless otherwise noted.

During our call today, we will be discussing a number of non-GAAP financial measures, which we call as-adjusted results, as that's how we manage the business. For example, when we discuss revenue growth, we'll be referring to the non-GAAP measure revenue growth as adjusted, which is revenue adjusted to eliminate the effect on revenue due to purchase accounting fair-value adjustments to deferred revenue and also before the effect of foreign exchange. When we discuss operating income, operating margin and EPS, these will all be on a non-GAAP basis, which we call as-adjusted.

Additionally, our as-adjusted results exclude the results of discontinued operations. When we discuss free cash flow, this will be on a non-GAAP basis, excluding the impact of legacy tax matters, potential regulatory fines associated with the ongoing China investigation, and potential payments for legal and other matters. You can find the reconciliation between these and other non-GAAP financial measures and the most directly comparable GAAP measures in the schedule to our earnings release. They can also be found in the supplemental reconciliation schedule that we post on the Investor Relations section of our website.

We do not provide guidance on a GAAP basis because we're unable to predict with reasonable certainty the future movement of foreign exchange rates or the future impact of non-core gains and charges, acquisition and divestiture-related expenses, and purchase accounting fair-value adjustments to deferred revenue. These items are uncertain and will depend on several factors, including industry conditions, and could be material to Dun & Bradstreet's results computed in accordance with GAAP.

Later today, you will also find a transcript of our prepared remarks on our Investor Relations site.

With that, I'll now turn the call over to Bob Carrigan.

Robert P. Carrigan - Chief Executive Officer & Director

Well, good morning everyone, and thank you, Kathy. This morning, I'm going to address our fourth quarter and full year 2015 results, the progress we've made against our strategy and our 2016 guidance. I'll start with the fourth quarter.

Last night, we announced that total company revenue was up 10% for the quarter, and organic revenue grew 3%. Our revenue ramped in the fourth quarter similar to our pattern over the past several years.

Operating income was up 10% for the quarter. If you recall in 2015, operating income declined 10% in the first half of the year and ramped in the second half, which was what we communicated when we laid out our guidance in the beginning of last year, and we expect this pattern to continue in 2016. Rich will give you more detail on this in a few moments.

EPS was up 13% in the quarter, so we had a strong fourth quarter, and I am pleased that we hit all of our guidance metrics for the year.

The quarter also continued the trend of strong growth in deferred revenue. Our deferred revenue balance had the highest growth we've seen in about five years. While we had seen a flat to declining deferred revenue balance since 2010, we saw a meaningful 4% increase in deferred revenue this year before acquisitions and FX, which represents about a point of full year organic revenue growth, and that's also before adding committed sales from strategic alliances, which would have added an additional point to the company deferred revenue balance.

The increased deferred revenue is driven by an improvement in underlying sales of our subscription and usage based products, where revenue is recognized over time. This includes our newer cloud-based products like D&B Direct and Optimizer for Contacts. In fact, in 2015, organic revenue was up 1%, but organic sales were up 3%.

Now, when we talk about sales, we mean the value of committed contracts signed by customers. We're providing you with our annual sales growth figure, because it will help you understand our true, underlying performance against the strategy. Going forward, we will provide actual organic sales growth on an annual basis.

As I discussed on our last quarterly earnings call, deferred revenue growth is a good sign for our business, as it is proved that we are upgrading existing products and launching new ones that better meet our customers' needs for on-demand data solutions. Our new as-a-service and cloud-based data solutions are where the puck is headed, as more and more customers look to get our data embedded in their workflows.

So, I'm pleased with the progress we've made, and I'm confident that we're heading in the right direction with accelerating sales momentum. Sales had been flat for several years before we launched our strategy in 2014. But in 2014, organic sales grew approximately 1.5% and accelerated to about 3% in 2015, which was about two points higher than our growth in organic revenue.

The fact that sales are accelerating gives us confidence that we are investing in the right places. With our continued growth in newer products, we expect sales to continue to grow at a higher rate than revenue, contributing to a growing deferred revenue balance in 2016. And while a growing deferred revenue balance is a good thing, it does put pressure on near-term revenue.

Another sign that the strategy is working is in our large strategic customer base, where sales grew in the mid-single digits last year. This growth came despite a tough year in our government channel. Sales in government can be somewhat spiky due to the timing of large contracts. For example, government sales grew in the teens in 2014, but only low single digits in 2015. And based on our pipeline, we expect our government sales to return to strong growth in 2016.

We're also making significant headway in bringing on new alliance partnerships that are intended to drive future revenue growth. We entered into 16 new alliances with a number of blue-chip partners last year.

Revenue from alliances grew double digits in 2015. This year, we will be focused on monetizing the new partnerships we've established, and we expect strong revenue growth again in 2016 as many of our new alliances are brought to market.

Now let me talk about another area of our strategy, small and medium business. Now, as you know, we acquired Dun & Bradstreet Credibility Corp. in May of last year and merged our small to midsized business channel into them, creating the new division, Dun & Bradstreet Emerging Businesses, led by the team from Credibility.

If you recall, underlying sales in our former SMB channel had declined 3% to 5% consistently over the last five years, while we saw the team at Credibility double the size of their business since acquiring it from us in 2010. So it's great to have them back in the fold, and running the entirety of our SMB business.

Sales in that channel have already shown a significant improvement over prior years. In fact, since the Credibility team took over, sales in our former SMB channel have actually reversed their decline and begun to grow. The integration of Credibility Corp. has gone even better than expected, and we're confident that we can turn what has been a drag on growth into a driver of growth.

Now let's talk about the other acquisition we made last year, NetProspex. The integration of NetProspex is on plan and has generated immediate results. We were able to quickly deliver our new contact data from NetProspex to the Dun & Bradstreet sales force. In fact, our sales force generated about $10 million in new cross-sell sales of NetProspex related content in 2015.

Importantly, the Dun & Bradstreet NetProspex team is also moving the needle on innovation and is taking the lead in the development of new sales and marketing solutions across the entire company in new areas for us like programmatic advertising.

Dun & Bradstreet NetProspex, of course, is not the only area where we're innovating. We've told you in the past that DNBi had not had a significant update in several years. Last month we announced the launch of D&B Credit, which is our new state-of-the-art cloud-based Trade Credit solution. D&B Credit is a powerful next-generation risk intelligence platform that can help today's finance professionals maximize cash flow through smart credit management. And the fact that it is now available in the cloud gives us flexibility to make the product more sophisticated. We now have the agility to offer more varieties of the product than we could before and to do so on a global scale.

It's a great example of our commitment to modernize the way we deliver our solutions to our clients. And we are now in the process of upgrading DNBi customers and attracting new customers to the platform. We launched the new D&B Credit platform on time in the Americas and we are on track for a staged rollout in Europe starting this summer.

The last update I want to give you about our strategy is that we have really upgraded our entire marketing operation. We've modernized our brand, which we talked about last year, and that has put wind in our sails in the marketplace, because it has been so well-received by our customers.

The next step in our modernization been around creating a marketing engine to help us be more effective in generating leads and deploying account-based marketing practices to generate more pipeline for our sales team. We're doing this across all of the personas that we're targeting from the Chief Risk Officer to the Chief Marketing Officer to the CFO and the Credit Analyst. Marketing across all of these constituencies is key to our ability to realize our share of the much larger $24 billion market opportunity that we see for Dun & Bradstreet. We've redefined our brand more broadly across all these use cases, and we're targeting the right buyers with purpose, which will help drive growth into the future.

So we've made a lot of big changes at Dun & Bradstreet that are generating positive results. But as with any large-scale transformation, we encountered a few bumps in the road. So we've redoubled our efforts to remove impediments to growth in 2016. As you may recall, we elevated Josh Peirez to the role of President and Chief Operating Officer of Dun & Bradstreet in October, and we put all customer-facing operations under him to unlock the full potential of our multichannel sales organization, which is centered around three key areas: our global direct sales channel, alliances and our Emerging Businesses division. So since then we've changed the compensation structure in our sales force to incent new business development for every sales rep.

We've also restructured the organization to reduce friction and to make sure our sales people and alliance partners are selling the same way, leaving the option of how to buy up to the customers. In other words, allowing us to sell our solutions to customers in ways that are channel agnostic. And, quite frankly, we had some people who are not the best equipped to take us forward in this new multichannel world. So we needed to make some personnel changes. And in the end, we have upgraded our sales force, removed management layers, and aligned incentives to drive new growth. And we made these changes while still delivering a strong fourth quarter.

We've accomplished quite a lot in a short period to set Dun & Bradstreet on the path to sustainable growth. We've completed and successfully integrated two major acquisitions, reorganized and upgraded both our marketing and sales organization, launched innovative new products, and signed new alliance partners, all while accelerating sales growth. I'm really excited about where Dun & Bradstreet is headed, which brings us to our guidance ranges for 2016.

We expect revenue growth between 4% and 6%. As a reminder, we acquired NetProspex on January 5 last year, so it's now in our organic base. The Credibility acquisition in mid-May of last year, so we realized about almost 2.5 points of inorganic growth from that acquisitions in 2016. Operating income flat and up 4%. EPS between minus 3% and plus 2%. And I'd like to note that our EPS guidance includes a higher interest expense year-on-year, primarily due to last year's acquisition, and free cash flow of $255 million to $285 million.

So as we enter the third year of our strategy, there are things working better than I thought and things that needed more transformation than I originally anticipated. Last year, I said that we thought we would be in a position to achieve mid single-digit organic revenue growth in 2016, at which time we would see flat to expanding margins. While I can see us getting to that level of growth in terms of organic sales in 2016, we're not quite there yet in terms of organic revenue growth. Still I'm very encouraged by the progress we're making to set Dun & Bradstreet up for sustainable long-term growth.

And, with that, I now will turn the call over to Rich Veldran who will discuss our fourth quarter results in further detail. Rich?

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

Thanks, Paul. And good morning, everyone. In my comments this morning, I'm going to discuss our fourth quarter results and then I'll talk a bit about our full-year guidance and how we expect it to play out in our results over the course of the year.

As we expected and consistent with prior year, the fourth quarter was our fastest-growing quarter with total revenue growth of 10% and organic growth of 3%. This was on the top of 3% growth in the fourth quarter of 2014 and 4% in 2013. The reason for this pattern of strong fourth-quarter growth is that as year-end approaches, our largest customers are planning their strategies for the following year and they want to ensure that they have the freshest and most complete predictive data that is available. This is particularly true in sales and marketing with products like Optimizer and D&B Direct. You can see in our reported results that our Advanced Marketing Solutions became a much bigger part of our mix in the fourth quarter.

Now let me we give you more detail our segment performance. The Americas had revenue of $422 million, which represented 84% of revenue in the core. Revenue grew 11% and organic revenue was up 2%. Within the Americas, Risk Management, or RMS, was up 11% in the fourth quarter due entirely to the inorganic contribution of Credibility Corp.

Organic RMS revenue declined low single-digits as growth in Other Enterprise Risk was offset by declines in Trade Credit. Other Enterprise Risk grew 51% in the quarter. As a reminder, the inorganic Credit-on-Self revenue from Credibility Corp. is in this category. Organic revenue in Other Enterprise Risk was also strong with mid single-digit growth in the quarter. The organic performance was driven by data and analytics projects as well as our Data-as-a-Service solution D&B Direct for Risk.

Trade Credit was down 2% in the quarter. DNBi makes up about 72% of Trade Credit and declined 1% for the quarter and for the full year. DNBi retention was again in the low 90% with price increases in the low single-digit.

As Bob discussed, we just launched D&B Credit, which is our new cloud-based workflow tool for credit decisions. Like DNBi, the new product is subscription based, so it will take a little while to have an impact on a reported Trade Credit results. We're very encouraged by the reception from customers that are already using it.

The decline in other Trade Credit was primarily due to shifts to other more value-added risk solution.

Sales and marketing revenue was up 11% in the quarter with more than half of that growth organic. Advanced Marketing Solutions was also up 11% with organic growth in the high single-digit. Revenue from Optimizer, Alliances and D&B Direct for sales and marketing drove the strong organic growth. The inorganic growth came from NetProspex.

Prospecting Solutions grew 10% during the quarter due to the inorganic contribution from Credibility Corp. Prospecting was down in the low single-digits organically, primarily due to continued weakness in Hoover's.

Now, shifting to the non-Americas, revenue was $82.4 million in the fourth quarter, which represented 16% of revenue for the company. Non-Americas grew 7% in the quarter, driven by strong increases in our partner markets in both Asia-Pacific and Europe. In our owned market, we continue to see growth in China and India, partially offset by weakness in Europe, particularly Benelux. However, in Benelux, we did see improved underlying sales in the quarter due to growth in compliance products. That growth will be recognized throughout 2016.

Now, as Bob mentioned, deferred revenue was up 4% for the company before acquisitions and the impact of foreign exchange. This is the second consecutive quarter of strong growing deferred as our overall sales growth continues to outpace reported revenue. In total, organic revenue grew 1% for the year as we reported. However, organic sales or bookings grew 3%.

Overall, our sales were greater than our revenue in 2015, and this difference goes into deferred revenue. As we look forward to 2016, we expect this trend to continue with sales growing faster than revenue on an organic basis.

Turning to profitability, operating income in the quarter was up 10%, driven by the higher revenue. EPS increased 13% in the quarter for $2.87 per share. The increase was due to the higher operating income and a lower tax rate in the quarter, partially offset by higher interest expense into the acquisitions, and a higher average borrowing rate in 2015. For the full year, our tax rate was 31.7% compared with 32.5% in the prior year.

Turning to the balance sheet, we ended the year with $1.8 billion of debt, including about $1 billion of fixed rate senior notes and $800 million of floating rate debt. Our cash balance at year-end was $366 million for net debt of $1.5 billion. Net debt increased by $125 million year-over-year due to the net impact of M&A activity in 2015.

Now, before we open the call for questions. I want to give you a little more color on our 2016 guidance. As we enter the third year since the strategy launch, we're seeing sales growth accelerate, particularly in areas that were the initial focus of the strategy, such as alliances and large strategic accounts. And we're very pleased with the progress that we're making in Emerging Businesses through the Credibility acquisition, as this was an area that had been a drag for several years.

In 2016, we expect revenue to improve over 2015, and with it operating income. But as you can infer from our guidance ranges, we're not yet at that tipping point where we expect the margins to expand. We believe our strategy is working, and we'll continue to invest behind it in 2016. This year, we expect new investments of $35 million to $40 million.

We've mentioned in the past that we expect margins to expand when we reach mid single-digit organic revenue growth, and this is still true. With the business model centered on data, our incremental margins are high, and that level of growth will afford us the opportunity to expand margins even while continuing to invest in the business. We're just not quite at that point yet in 2016.

Now, consistent with the seasonal pattern that we see year-after-year in our business, we again expect a relatively slower start to the year, followed by a strong second half, with a particularly strong fourth quarter when we see significant increases in Advanced Marketing Solutions and Other Enterprise Risk, as customers prepare their businesses for the year ahead.

Q1 is always a slow quarter for us and we'll be impacted this year by the timing of several large contracts that have shifted to later in the year. We currently expect organic revenue to be flat to down slightly in the first quarter. In terms of operating income, the first quarter is always our seasonally smallest. For example, in 2015, first quarter operating income was $77 million out of a total of $437 million for the year. Against this small base, the potential dip in organic revenue as well as our Q1 investment spending will have a disproportionate impact on our operating income growth rate.

So while we expect operating income to be flat to up 4% for the year, in the first quarter, we expect operating income to be down in the mid-teens percentage range. These quarterly trends in both revenue and operating income are consistent with the historic seasonality of our business and are taken into account in our full-year guidance.

With that, we'll now open up the call for your questions.

Question-and-Answer Session

Operator

The first question is from Peter Appert with Piper Jaffray. Your line is open.

Peter P. Appert - Piper Jaffray & Co (Broker)

Thanks. Good morning.

Robert P. Carrigan - Chief Executive Officer & Director

Good morning, Peter.

Peter P. Appert - Piper Jaffray & Co (Broker)

So, Rich, maybe – hi. Could we dig a little further into the guidance because, I guess, I'm just not following it. The target is mid single-digit revenue growth to get the margin leverage, you are forecasting 4% to 6%, which sounds like mid single-digits. So it seems like a disconnect in terms of the revenue acceleration and the lack of margin leverage?

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

Yeah. Let me talk a little bit about that, Peter. I'll give you some of the details on it. But, again, I want to start with: the strategy is working and we're continuing to invest. We haven't changed our investment plans even though the revenue is a little behind where we thought we'd be. As we've said many times, when we get to mid single-digit organic revenue, that's where we see the margin expansion begin.

So if you kind of disaggregate the year ahead, I'm going to take the midpoint of the range just to kind of put some numbers around it and hopefully this will make a little bit clear. But if you take the midpoint of the range of 4% to 6%, that's about a 5% growth. Call that about $80 million. Half of that, about $40 million is the inorganic contribution from Credibility. That comes in with around a 20% margin, so a little lower than the rest of our business. And we've also got some integration costs. So, net-net, as a result of that half of the revenue, I'm expecting about a point of op income accretion, right, so give or take.

If you look at the rest of it, the other $40 million or so of revenue, is really being offset by the $35 million to $40 million of investment that I mentioned before. Now, as you know, we always every year go through our business, we save a lot of money, we're very prudent with the way we spend things (25:45). All the savings that we're doing this year are really going towards dealing with inflationary pressures as well as some one-time items. If I go back into last year, for example, we've said many times, we were a little behind our expectations. So some of our variable comp a little bit lower last year, that gets restored to normal levels this year. I also had a number of other one-time things that I'm dealing with, increases in pension costs, that kind of stuff. All of that we're taking care of through cost savings. So does that at least give you a flavor for where we are?

Peter P. Appert - Piper Jaffray & Co (Broker)

Yeah. Understood. Thank you. And then in terms of the incremental $35 million to $40 million of investment spend, can you give me some color on how that's being directed in terms of product areas, et cetera?

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

Yeah. Let me talk a little about that and a lot of that – the seasonality is a little different this year as well. Normally, we've ramped up to a degree. This year, a lot of these investments were really begun at the tail end of last year and they are continuing. It's on things like the D&B Credit rollout, continued work on that. We've ramped up a lot of new alliances. Some of the work in the early part of this year was on activating those alliances and getting them moving. And then there is a number of other new product areas, such as compliance and programmatic advertising that we think are going to really make a big contribution down the road and you need to spend the money upfront to get those things moving. So those are a lot of the areas that you'll see the spending hit.

Peter P. Appert - Piper Jaffray & Co (Broker)

Got it. Okay. Thanks very much.

Operator

The next question is from Jeff Meuler with Baird. Your line is open.

Jeffrey Meuler - Robert W. Baird & Co., Inc. (Broker)

Thank you. I guess, how do you think about managing the investment spend, and I ask that from the standpoint that you took a pretty big step-up in 2014, I think a more modest step-up in 2015. It's continuing to ramp. I know sales are starting to ramp as well. But if revenue is more towards the lower end of the full year guidance range, I think organic that's about 1.5% or 2%, do you feel like you need to continue to increase initiative spend in 2017 to continue to try to jumpstart revenue growth? Or at what point do we stop seeing the increases in initiative spend, I guess?

Robert P. Carrigan - Chief Executive Officer & Director

Yeah. Hi. This is Bob. So as Rich said, it's been our plan to continue to invest in the strategy. And as we grow revenue, our incremental margin affords us the ability to continue to invest and as we grow. We're a little behind in terms of organic revenue, but we're seeing the sales acceleration in all the right areas. So we know that our investments are working. Certainly, we need to continue to spend in D&B Credit and areas like Data-as-a-Service, things that are really contributing to our sales momentum and will increasingly over time.

So, for us, the model is very much allows us to invest at the appropriate level on a go-forward basis and we're still in that original investment plan where we laid out a couple of key areas where we needed to drive the business. We see those areas are working and, again, being a little bit behind in revenue and the fact that we're spending on – it's not ramping through this year. We're a bit front-ended in this year compared to last year and how the investments (29:10) from last year. Those are all the contributing factors. But the headline is we are investing in the right areas, we're seeing accelerating sales against that. And as the revenue increases with increasing sales, it affords us plenty of room to be able to invest at the right level to continue to drive the strategy forward.

Jeffrey Meuler - Robert W. Baird & Co., Inc. (Broker)

Okay. So, is this more a function of you're spending at about the level that you expected to in 2016, but because you're a little bit further behind where you were hoping to be on revenue growth that it comes out of margins instead of being supported by the revenue growth? That's the right way to think about it, the spend level's kind of where you thought it would be?

Robert P. Carrigan - Chief Executive Officer & Director

Yeah. That's exactly right. I mean, look, we want to – we've got a good thing going here, and we want to – after many years of lack of investment here, we've been very focused on building and investing in the right areas, and we don't want to let up on that. And I know that puts a little bit of pressure on us in the near-term, but it's the right thing for the long term, and that's why we're in this. We're all about long-term sustainable growth, and the potential for Dun & Bradstreet in this market is tremendous.

We see again, that, $24 billion market opportunity. To do that, we needed to invest in a couple of key areas. Again, we like the progress we're making against these things. We've got this issue where sales is outpacing revenue. That's one of the reasons we wanted to be a bit more transparent on the sales this year, just so you can see that we are growing sales, and if we continue to do that, all good things will happen on the organic revenue side as well.

Jeffrey Meuler - Robert W. Baird & Co., Inc. (Broker)

Okay. And then, just finally from me. You had a comment about 2016 sales, and I think you said it's possible or something along those lines to hit mid single-digit. But, if you could just clarify your comment, and I'm assuming you're stopping short of providing formal sales guidance. And then, related to that just given the impact that bookings leading revenue should have on free cash flow. Are there offsetting factors that we don't see a better year-over-year free cash flow number in 2016?

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

Yeah. Let me take the second part of the question first, and then kind of bump up back on the first one. Couple of things this year that do hold us back a little, we did do more restructuring as you'll see in our reported results. At the end of last year, we actually pay for that in the year ahead, so, a little bit more of a downward push on free cash flow this year. I've also got higher interest expense this year, for example, so that'll hold me back a little bit. But you are correct, as I sell – and that's recognized down in front of (31:53) revenues, that actually helps my free cash flow, because we bill at the time we sell solutions. So, even though I may recognize that revenue across the year, I'm actually collecting the bulk of the money upfront. People don't pay as you go with this thing. They pay us for the solution. We'll give them a little bit of term, but we collect that money, and then we just recognize the revenue later.

Robert P. Carrigan - Chief Executive Officer & Director

Yeah. And to your question around sales in 2016, just to, again, repeat a little bit what I said in my remarks, organic sales have been flat here for many years, prior to us launching this strategy in our new go-to-market. In 2014, sales reached about 1.5% of growth and in 2015 we're at 3%. And so, you could see that we're trying to drive this up into the right, and what I said was that, we certainly can see us getting to that mid-single-digit organic sales in 2016. That's certainly what we're focused on. We're actually focused beyond that as you can imagine. But we are building in the right direction.

Jeffrey Meuler - Robert W. Baird & Co., Inc. (Broker)

Okay. Thank you, guys.

Operator

The next question is from Shlomo Rosenbaum with Stifel. Your line is open.

Robert P. Carrigan - Chief Executive Officer & Director

Hey, Shlomo.

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

Hi. Good morning. Thank you very much for taking my questions. Hey, can you hear me?

Robert P. Carrigan - Chief Executive Officer & Director

Yes, we can.

Kathleen M. Guinnessey - Treasurer and Investor Relations Officer

Yes, sir.

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

Okay. All right. Thanks. Rich, can you just do the math for us. What is the organic constant currency revenue growth implied in the revenue guidance, just what is it straight out?

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

Well, obviously it's 2.5%, right, from inorganic it's 1.5% to 3.5%.

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

1.5% to 3.5%? Okay, great. Thank you.

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

Yeah. We always guide constant currency.

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

Right. Okay. And then, can you just go over the interplay of deferred revenue to actual revenue in how much of the business's revenue is going into deferred revenue? In other words, you have an improvement in that and some of that is moving the business from kind of one time contracts into some of this stuff that's a little bit more subscription based and I just want to know how much is that indicative of the growth of the underlying business?

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

I understand the question entirely. So, let me break it out in rock terms. So, things that I would consider more upfront recognition, the Optimizer's of the world, roughly across our business, that's about a third of our business today, right?

The other two-thirds is ratable and usage. Usage has been picking up off late. So, today about three quarters of it or so is ratable, of that remaining two-thirds, with the rest in usage. But usage has been picking up off late, and that's where you get a little more variability that pushes us even later in the year because what we're finding is that a lot of the usage in those contracts, again, although we get paid upfront, the customer is tending to use that stuff a little bit later in the year, little bit less say in the first quarter, just less of an activity based quarter than you'll see as you get closer to year-end.

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

So how much of the company if you – of revenue, how much of the actual revenue that you recognized during the year initially started out the year as – or at some point in the year was deferred revenue?

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

Well, I'll give you an example. I mean, if I go into, to this year, my deferred balance is around $660 million. So I've got about $660 million or so sitting on my balance sheet today that's going to flow into revenue in the year ahead.

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

So should I think about that 35% to 40% of revenue goes into deferred?

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

Yeah. And then that's up from where it used to be, right.

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

Okay. Yes. Thank you. Then, how about giving us, if you're talking about sales, a lot of other companies give like an annual contract value or something like that. Does it make sense for you guys to start talking about that if you're moving more in that direction you're talking about sales?

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

Yeah. Look, we're sort of easing our way into it. So, our bookings, our sales, we did give you a figure now. We're planning to at least talk about it annually. We've debated putting it out as another metric as the – it's a little more volatile because we have so many big contracts that tend to move around quarter-to-quarter. So you don't get a perfect view when you look quarter-to-quarter. You do get a very good view when you look year-over-year because of the time and particularly when you think about the government contracts and that shift around during the year. You still end up selling them. You may sell them in different quarters. So, we've debated whether that's actually going to help or hurt if we start putting out a quarterly metric for that.

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

Right.

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

But, it is something we're going to talk more about as we go in. Certainly, we're going to talk about it on an annual basis.

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

Okay. Thank you. Then, Bob, can you talk a little bit about the clouds – DNBi cloud solution. I think it started to roll-out in January. Is it enough time for you to talk to get a good sense about the appeal to the market?

Robert P. Carrigan - Chief Executive Officer & Director

Well, it's rolling out. It's starting to roll-out in North America in January, but we've been working with customers that have been using the beta version and getting a lot of feedback from them. So, we've been at this for quite some time. The product was really informed almost entirely by our customers. So, maybe early feedback has been good. Just rolling it out to the teens. And so, as you can imagine, our sales folks are excited about having a new solution, a new product after many years of not having this and we are the leaders in this market. So, it's a terrific opportunity. And, Josh, do you want to add any other color?

Joshua L. Peirez - President and Chief Operating Officer

Yeah, Shlomo, I would just add that we've actually had our first sales both new business and upgrading of existing customer. And we also have in-markets and free trials, where we have a number of customers who have chosen to take advantage of that. That's a new approach for us to get customers on the product using it where they're then signed up to continue at the end of the trial. So, we're actually getting pretty good feedback in market. Our sales force is also very excited. And, it's something that, while we're early in market, we like what we're seeing. We also like the fact that we're releasing every three weeks. So we can add enhancements and changes in accordance with what we hear from customers pretty quickly, given the cloud-based nature of the product.

Robert P. Carrigan - Chief Executive Officer & Director

Yes.

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

Okay. Great. And last one from me. If you can just go into a little bit more detail of what the restructuring charges in the quarter were for they were pretty high and is that part of the kind of the sales force alignment that you guys talked about?

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

Yeah. We did do a fair amount of realignment within sales, and within a couple of other areas related to that. So, that was the primary set of changes. We wanted to make sure that when we did the walk around the go-to-market strategy, we did it quickly and we did it well. And you see that reflected in that fourth quarter.

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

Thank you.

Operator

The next question is from Andrew Steinerman with JPMorgan. Your line is open.

Andrew Charles Steinerman - JPMorgan Chase & Co.

Hi. I wanted to talk more about the launch. Hi, it's Andrew. I wanted to talk more about the launch of D&B Credit. Is this a product that mostly would be sold to existing customers or upgraded to existing customers during the renewal cycle that we just went through in December and January? And so, in terms of traction of these products, isn't it more kind of like a year away at this point?

Joshua L. Peirez - President and Chief Operating Officer

Hey, Andrew, it's Josh. So, first of all, we see (39:38) a very strong opportunity for new customer acquisition, particularly in the Emerging Businesses segment as we're able to launch many different versions of the product in micro-segment consistent with the strategy that Jeff discussed and how they approach the business. So, we actually do see NCA opportunity there.

In terms of upgrade, our intention is not only to upgrade customers at the time of renewal and in fact, many of the conversations we're having in market today are about getting those customers on to the higher value of the new products sooner and locking them up into longer-term arrangement earlier. So, we do anticipate that.

However, given the ratable nature of the product and the timing, you will see that show up towards the latter part of the year and into next year. But you'll see it show-up in the deferred balance sooner. So we don't expect it to be a year away, but we do expect it to be later in the year, where you would see the material movement. We're also in market testing many different pricing and packaging options to make sure that we maximize the value for our customers and ourselves. So, as we nail that, we'll accelerate our efforts.

Andrew Charles Steinerman - JPMorgan Chase & Co.

Josh, could you go a little more into that last point of how you see the value realization?

Joshua L. Peirez - President and Chief Operating Officer

Sure. So we're – in the previous versions of DNBi, we generally sold an all-you-can-eat package price for customers pretty much consistent across the board and then we added module sales on top of that for those customers who wanted that higher value. Here, we actually have a number of different offers in market that we're testing that actually are different from one size fits all pricing model. And we think it's allowing us to move up the demand curve and be able to really target what customers need from the product.

So, one example, is in the past while we had unlimited versions of DNBi, international data was actually limited, and you had a package of amount of international data you can buy. It was actually one of the biggest dissatisfiers we had on the product. Today, we have a version for D&B Credit of unlimited global data for those customers where that has value. We're testing out the price points for that in market to see exactly what that value has, and as we nail that sweet spot, we'll be able to accelerate. It's pretty standard way that you would go into pricing on a new product versus our historical method, which has been to fix a price and then just, how the sales people see what they can get for it.

Andrew Charles Steinerman - JPMorgan Chase & Co.

That sounds right. Thank you.

Robert P. Carrigan - Chief Executive Officer & Director

Sure.

Operator

The next question is from Manav Patnaik with Barclays. The line is open.

Manav Patnaik - Barclays Capital, Inc.

Yeah. Good morning, guys.

Robert P. Carrigan - Chief Executive Officer & Director

Hi, Manav.

Manav Patnaik - Barclays Capital, Inc.

Hey. How you doing? So, first question is, it sounds like, from your commentary, you guys are making a lot more progress than what the market is clearly giving you credit for and with the stock down 32% over the last year, why isn't buyback something you guys are doing, especially since you got a steady free cash flow, you got $300 million of cash, leverage should not be an issue, so why isn't that something as part of the strategy?

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

Hi, Manav. This is Rich. So our leverage should not be an issue in the eye of the beholder I suppose. For us, as you know, we've been very keyed on remaining investment grade after the acquisitions that we did last year, and after the significant repurchase program we've done in the past. We're at the lower end of investment grade. It's very important to us. So, our uses of cash in the near-term are really geared towards reducing leverage.

Manav Patnaik - Barclays Capital, Inc.

Okay. Fine. And then, Bob, just one question. I mean, I think you obviously inherited the tough task here, but just around the talent pool that you referred to earlier. Just maybe could you elaborate a little bit more just around the sales force and other areas? I mean, you had, I guess, two of your hires that you had highlighted when you first joined, leave the company for different reasons. But, just trying to understand like how comfortable you are there? Do we just see a lot more turnover going on there, or how should we think about that?

Robert P. Carrigan - Chief Executive Officer & Director

Well, we've been very purposeful in how we – and the changes that we've made. And so, with the acquisitions we made, particularly with Credibility and forming that focus around the SMB area with Emerging Businesses, all the new alliances that we launched, we kind of said, okay, the best way for us to go-to-market was around these three distinct channels. So, global direct sales, Emerging Businesses and alliances.

And, this year was a year where I felt confident that we could make some pretty big organizational changes. And we have – and look, I talked to a lot of you guys over the years, my few years here about the historic issues around our go-to-market and sales. And, I got to tell you, we took some pretty big actions in the latter part of the year. I think we turned over almost a quarter of our sales team. A lot of that was, again, part of the organizational change. But, also, we want to up our game, we want to get the right people in the right areas focused on serving customers. And this year, we felt like we were in a position to be able to do, to do just that. And I'm really pleased with the talent we've been able to attract, and by de-layering a bit and putting people closer to the customers, this has been a good thing for us. It helps us to be more agile and I believe that that's exactly what needed to happen.

And so, I think we've made those moves, the bold moves. I'm really pleased that it happened and I certainly give Josh a lot of credit who took over in Q4 but we did a lot of this in a big quarter for us. We're able to still come in with a strong quarter and build sales momentum. So, I think these changes were necessary, they're the right thing for our business over the long-term. And I'm really pleased with the talent and the organizational structure that we have right now.

Manav Patnaik - Barclays Capital, Inc.

Okay. And then just last question. Rich, I think you said 4% to 6% was constant currency. So what's the, I guess, how should we think about what the estimated FX impact would be at maybe current rate?

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

Yeah. Look, at current spot I'm expecting just about a point or so hit on the top-line, a little less than a point on the bottom-line and that's factored into – on the bottom-line certainly factored into my guidance.

Manav Patnaik - Barclays Capital, Inc.

Okay. So the 4% to 6% should be, I guess, 3% to 5% reported then?

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

If you thought about it as AFX (46:22), yes, that's what you'd see, right (46:24) on constant currency, yes.

Manav Patnaik - Barclays Capital, Inc.

All right. Thanks a lot, guys.

Robert P. Carrigan - Chief Executive Officer & Director

Sure.

Operator

The next question is from Bill Warmington with Wells Fargo. Your line is open.

William A. Warmington - Wells Fargo Securities LLC

Good morning, everyone.

Robert P. Carrigan - Chief Executive Officer & Director

Good morning.

William A. Warmington - Wells Fargo Securities LLC

So I wanted to start out just by asking about the renewal fees. I know you do – most of the renewals come in sort of the December, January timeframe. Talk a little bit about how those renewals have been going and maybe some comments around retention and price increases?

Joshua L. Peirez - President and Chief Operating Officer

Hey, Bill, it's Josh. I think we had a good season. You see it reflected in the performance in the quarter as well as in the deferred balance. Our ranges in terms of renewal rates and price increases stayed the same. For DNBi, for example, low 90%s and low-single digit price increases. So really pleased that we saw that be consistent while then having good performance in some of our newer products, which drove a lot of the growth. So, it was a good season.

William A. Warmington - Wells Fargo Securities LLC

Okay. In terms of the quarterly progression going from Q4 to Q1, were there any contracts or renewals that got moved from Q1 into Q4 that might account for the particularly weak Q1?

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

There was nothing significant. The bigger moves that we're seeing are moving later into this year. There may have been one contract of less than $1 million or so that was early. But the real driver was things that are moving a little bit later in the year.

And don't forget, Q4 is always big because you get a lot of the Optimizer work. You get a lot of the data services work. And that stuff pretty much renews in fourth quarter because that's when they're getting their work done. You don't get that much movement, say, in and out of Q4 because of those needs that customers have.

William A. Warmington - Wells Fargo Securities LLC

Okay. And how – what was the – I think you might have mentioned the revenue – in terms of modeling the revenue in Q1, in terms of the organic growth that quarter?

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

Yeah. For Q1, we're expecting it to be flat to slightly down. It's been pretty flat for the last three years. It's always a light quarter for us, a little light...

William A. Warmington - Wells Fargo Securities LLC

Yeah.

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

...activity driven, a little more ratable driven. As I've mentioned, we do have a couple of things that we do know will really go to (48:49) in the year.

William A. Warmington - Wells Fargo Securities LLC

Okay. And then...

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

So it's all in the guidance.

William A. Warmington - Wells Fargo Securities LLC

I was going to ask for – well, if you look at the organic growth, and again correct my figures because again I'm looking at it from the outside, I don't have your level of precision. 2014, 1.7% in constant currency organic. 2015 looks like 0.9%, the guidance for 2016 1.5% to 3.5%. And if you look at the fourth quarter, it looked like, fourth quarter of 2014 3.1%, in the quarter that we just did, 2.6%. So my point is that the – we're looking at an acceleration, no matter how you slice it, and I was going to ask if you could kind of walk through the components of what were going to help you deliver that acceleration?

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

Yeah. Yeah. So, look, during the course of the year, what we typically see – well, (49:52) just frame it, sales have been moving faster than revenue in general, right, because more stuff is coming to (49:57), right?

William A. Warmington - Wells Fargo Securities LLC

Yeah.

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

All right. So, as you think about this year, we'll start – and as we typically do, you're starting off the year relatively slow, you have a little more of the ratable business in the beginning of the year. As the year progresses, you'll begin to see the impact of some of the newer products this year of some of the deferred that came in from last year, because a lot of that's usage-based, right? So, won't necessarily be used in the first quarter, but it will be used throughout the year.

And then, you'll also see an impact from the alliance work that we're activating this year. The big quarter is always the fourth quarter. We expect that again this year. The largest customers tend to do Optimizer data services, lots of work to prepare their portfolios. We do more and more with these, we have very strong relationships with these customers. We do a lot of work with them, and they spend more with us, because we're giving them more value every fourth quarter as they're getting their year's ready.

So, once again, we expect a pretty big pop in the fourth quarter. We do have that $20 million incremental deferred that you saw last year that we know is going to flow in this year. That's already a point of revenue in the year, not as much if it hits the first quarter, I said the rest of the year, though.

William A. Warmington - Wells Fargo Securities LLC

Got it.

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

So that give you some color for the ramp and, again, it's not that dissimilar from the ramps we've seen in the past, except we have a little more strength going into the year because of the increase in deferred and we have a lot more in terms of what we expect from activation of alliances and newer products that we expect to come on as the year progresses.

William A. Warmington - Wells Fargo Securities LLC

Okay. So last question is just to ask, given the turmoil that you're seeing in the capital markets, the question that's coming up a lot is, are you seeing any change in customer behavior on either the marketing side or the credit side? That's the question.

Joshua L. Peirez - President and Chief Operating Officer

Hey Bill, it's Josh. We haven't seen major impacts. As we mentioned, Europe had been a little slower for part of last year and the current economic climate is factored into our plans and our guidance. But in terms of what we're seeing, hearing from our customers out there, we're expecting to be within our ranges. We did have a stronger Q4, as we saw even with the climate and we just – we see that as within the range of our guidance.

William A. Warmington - Wells Fargo Securities LLC

Thank you very much. I appreciate it.

Operator

The next question is from Andre Benjamin with Goldman Sachs. Your line is open.

Andre Benjamin - Goldman Sachs & Co.

Thanks. Good morning.

Robert P. Carrigan - Chief Executive Officer & Director

Hi, Andre.

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

Hi, Andre.

Andre Benjamin - Goldman Sachs & Co.

First question is beyond the partnership with Salesforce, you've done a lot of alliances. Is there any color that you could provide on which one of those is next material in terms of materiality, sorry, and how those return over the next couple of years and how big they can get relative to the Salesforce deal?

Robert P. Carrigan - Chief Executive Officer & Director

Yeah. Hi Andre, it's Bob. So, yeah, we've had a lot of success in the alliance area in the CRM space. And as we got into the second half of last year, we started to gain some traction in some other areas like the MDM space, compliance, starting to ramp in the programmatic advertising area with a number of relationships with some of the data management platforms and trading desks. So we're starting to gain some traction in those – I would say, in those buckets. In particular, our focus, as I said, in 2016 is going to be on monetizing these relationships.

It's a portfolio, you have – we had 16 new alliances on top of the alliances we already had, and so our goal is to do our best to get most of these growing in a good direction. With the portfolio, you're going to have some that are going to do better than others, but our focus is on really activating and driving these relationships in 2016.

Andre Benjamin - Goldman Sachs & Co.

And to follow-up, I believe, Manav's question about the sales force, I apologize if I missed it, but any update on the challenges that you were previously facing in Europe? I remember that was an area you're particularly concerned and then any thoughts on hiring a new Chief Sales Officer or are you going to just continue to cover those responsibilities as a committee?

Robert P. Carrigan - Chief Executive Officer & Director

Yeah. So we've talked a bit about some of the challenges we've had, particularly in the Benelux region where we had a particularly acute competitive situation. And we didn't have some of the solutions that we needed to compete effectively in that market.

The good news there is that we've actually launched some solutions there, specifically in the compliance area, and that's kind of a hotbed area for that. And we saw some really strong sales – some of our biggest compliance deals happened towards the end of last year and we'll start to realize the revenue benefit of that in 2016.

So I think we've addressed a lot of those issues. Obviously, we're all over it and these are all in the context of the larger changes that we've made around our multichannel approach, again, focused on global direct sales, Emerging Businesses, which has been a historical challenge for us, the SMB area, and then alliances, selling through best-in-class partners. I've put all of that under Josh Peirez, and that in addition to focusing on some key use cases that we've got particular traction in like compliance, our sales and marketing solutions, analytics, supply, Trade Credit, these are all areas of real focus for us. So I like the focus of our structure going forward. And we're often running, and we're starting to see accelerating sales in that new structure.

Andre Benjamin - Goldman Sachs & Co.

Thank you.

Operator

We have no further questions at this time.

Robert P. Carrigan - Chief Executive Officer & Director

Okay.

Kathleen M. Guinnessey - Treasurer and Investor Relations Officer

Great. Well. Thank you, everyone, for your attention. And, we'll talk to you next quarter.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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