Dun & Bradstreet Corp. (DNB) CEO Robert Carrigan on Q2 2016 Results - Earnings Call Transcript

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Dun & Bradstreet Corp. (NYSE:DNB)

Q2 2016 Earnings Conference Call

August 2, 2016 8:00 AM ET

Executives

Kathleen Guinnessey – Treasurer and Investor Relations Officer

Robert Carrigan – Chief Executive Officer & Director

Richard Veldran – Chief Financial Officer & Senior Vice President

Joshua Peirez – President and Chief Operating Officer

Analysts

Peter Appert – Piper Jaffray & Co.

Jeff Meuler – Robert W. Baird & Co., Inc.

Andrew Steinerman – JPMorgan Securities

William Warmington – Wells Fargo Securities

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

Manav Patnaik – Barclays Capital, Inc.

Andre Benjamin – Goldman Sachs & Co.

Operator

Good morning, and welcome to Dun & Bradstreet's 2016 Second 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. [Operator Instructions]

I would now like to turn the call over Ms. Kathy Guinnessey, Treasurer and Investor Relations Officer. Ms. Guinnessey, please go ahead.

Kathleen Guinnessey

Thank you. Good morning, everyone, and thanks 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 the call. Following my brief remarks, Bob will provide an overview of our second quarter results and the transactions in Latin America and Benelux that we announced last night. Then, Rich will come on and take you through the highlights of the quarter in more detail. After that, we'll open the call for your questions.

To help our analysts and investors understand how we view the business, our remarks this morning will include forward-looking statements. Our Form 10-K and 10-Q filings, as well as the earnings release we issued yesterday, highlight a number of important risk factors that could cause our actual results to differ from those forward-looking statements. These documents are available on the Investor Relations section of our website, and we encourage you to review the material. We undertake no obligation to update any forward-looking statements.

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 the revenue that has not yet been earned and represents products or services that are owed to our customers.

As the products or 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 the impact of the write-down of deferred revenue due to purchase accounting, 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. Additionally, when we discuss organic revenue growth, we are referring to the adjusted revenue before the impact of acquired and domestic businesses. 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 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 schedules to our earnings release. They can also be found in the supplemental reconciliation schedule that we post on the Investor Relations section of our website.

We do not provide guidance on a GAAP basis because we are 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'll also find a transcript of our prepared remarks on our Investor Relations site.

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

Robert Carrigan

Good morning, everyone. And thank you, Kathy. Let's get right into the results. As we reported last night, we had a strong second quarter with organic revenue growth of 2% and total company revenue up 5%. Operating income was up 8%, and EPS was up 10%. I am very pleased with our strong execution in the second quarter and specifically in our ability to close some new business opportunities which has been an area of focus for us. We have great relationships with long-term customers and high retention rates across our business, but we need to bring in more new business. We've reorganized our sales teams and changed our compensation structure to drive new business, and I'm pleased to say it's paying off.

Our 2016 plan anticipated an uptick in sales in Advanced Marketing Solutions, including a number of larger deals where the timing can often be hard to predict. I'm proud that our team was able to close a couple of these deals earlier than we expected in the second quarter. This success puts our results for the quarter ahead of expectations. It's also exciting that these deals represent new business within existing customers. We see this as a big opportunity as our existing customers see the value of our new use cases, including in the area of Audience Solutions where we are leveraging our data to help our customers do programmatic targeting of advertising and website recognition.

Another sign of improved performance in the quarter is in our deferred revenue balance which was up 3% for the company and 4% in the Americas before acquisitions and the impact of foreign exchange. As we've discussed before, deferred revenue growth is a sign that we're growing in the areas where we are investing, meeting our customers' needs for as-a-service, on-demand data solutions where we embed our data in our customers' workflows with products like D&B Direct. This is all part of a key pillar of our strategy, modernizing delivery of our data.

But modernizing delivery isn't just about improving the ways we get our data to our customers through our own products, it's also about working through alliances to embed our data in a software that existing and prospective customers already use. Alliances continue to drive growth as revenue from alliances in the Americas grew 20% in the second quarter.

In addition, outside of the U.S., we are really leaning into our Worldwide Network partner model. As I've said before, the core of our strategy as a content company is to have the richest, most complete global data available anywhere in the world, and our Worldwide Partner network provides a significant competitive advantage.

We go to market around the world in three ways: first, direct ownership; second, our Worldwide Partner network; and third, majority-owned joint ventures. We continually review how we go to market across the globe, and if it makes sense for us, we will make changes in specific geographies to improve global data coverage and our financial profile.

For example, in the past few years, we've converted our businesses in Australia and Japan from owned and JV markets to Worldwide Network partners because we felt that partners could better serve those markets while we operate the global, cross-border components of those markets.

In keeping with our global go-to market strategy, last night we announced that we are entering into new partner relationships in the Latin America and Benelux regions. After selling our domestic businesses in each region, Latin America will be operated by CB Alliance which is currently our partner in Israel, and Benelux will be operated by Altares, our existing partner in France.

In connection with these deals, we are entering long-term contracts where they will monetize the domestic business, and Dun & Bradstreet will monetize the valuable cross-border business as we do throughout our Worldwide Partner network.

We like this model as the cross-border business is very predictable and generally comes with a much higher margin. We believe a partner-owned model in these markets will provide a better way to serve the regions, and these relationships will help us capture the best local data for our global business.

Under the terms of the deals, we are selling our domestic businesses in the two regions for $39 million. And we are entering into long-term contracts, under which we will be paid for licensing data, the right to sell certain existing products and use of the Dun & Bradstreet brand. We are also providing technology and consulting services.

This partner structure locks in a future revenue source with a more profitable and predictable operating income stream for Dun & Bradstreet. The net present value of the combined deals is more than $200 million, including the upfront consideration and the committed revenue streams from the long-term contracts. Both deals are accretive this year and next, and they provide a return in excess of our cost of capital.

The new arrangements will also give us future upside in the markets as we develop new products, and that upside is not included in the valuation. When these transactions are completed, our ownership model will be simplified in our major markets: direct ownership in the U.S., Canada, UK and Ireland; a partner model in Continental Europe and Latin America; and majority-owned joint ventures in China and India.

So, in summary, I'm really pleased with our performance in the second quarter with the organic revenue up 2% and a growing deferred revenue balance. I'm also proud that we are converting the Benelux and Latin America markets to the partner model, working with great long-term partners with proven track records to help us achieve our long-term goal of profitable organic revenue growth, which is the path to creating value for customers and shareholders.

Overall, these deals improved profit by about a half a point. This accretion, combined with our strong performance in the second quarter gives us the confidence to increase our operating income and EPS ranges by a full point for the year.

So, our guidance for the year is as follows: organic revenue growth continues to be in the range of 1.5% to 3.5%; the total revenue growth is still expected to grow between 4% and 6%; operating income increases a point to between 1% and 5%; and EPS also increases a point to between minus 2% and plus 3%; free cash flow continues to be in the range of $255 million to $285 million.

Now, before I hand it over to Rich, I just want to say that I am really proud of what the Dun & Bradstreet team accomplished in the second quarter, especially considering we achieved higher-than-expected organic revenue growth while working to execute key transactions that are great for our business. We are now fully focused on execution to finish the year strong and set us up for continued growth.

Now, with that, I'll turn the call over to Rich Veldran who will discuss our second quarter results in further detail. Rich?

Richard Veldran

Thank you, Bob, and good morning, everyone. In my remarks this morning, I'll take you through our results for the second quarter, then I'll go through the impact that the partner deals will have on our financials for the remainder of the year.

Our second quarter revenue increased 5% to $399 million with organic revenue up 2%. These results were about 2 points above our expectations. Our Americas segment had revenue of $330 million, which represented 83% of revenue in the quarter. Total revenue for the Americas increased 7% and organic revenue was up 2%.

Within the Americas, Risk Management was up 3% in the second quarter due to the inorganic contribution from Credibility Corp. Organic RMS revenue was down in the low-single digits. Other Enterprise Risk grew 21% in the quarter due to the inorganic credit-on-self revenue from Credibility Corp. Organic revenue in Other Enterprise Risk was flat in the second quarter which was expected.

As we've said in the past, revenue in this category can be lumpy from quarter-to-quarter due to the size of some of the contracts. We continue to have strong underlying performance driven by supply and our DaaS solution, D&B Direct for Risk, and we expect to have strong growth in Other Enterprise Risk for the full year.

Trade credit was down 3% in the quarter and organic revenue was down mid-single digits due to the decline in DNBi. We expect some noise in DNBi this year due to the launch of our new cloud-based D&B Credit Solutions, which are also included in these results. The revenue decline is partially due to the timing of the launch of D&B Credit Solutions in emerging businesses. If you recall from last quarter, we sunset a DNBi offering in the first quarter and did not launch the comparable D&B Credit Solution in emerging businesses until the second quarter. I'm happy to report that sales of the new solution grew nicely in the second quarter, and we're building good momentum.

In addition, we're now ramping up the sales effort in our middle market channels for D&B Credit. We expect the combined DNBi and D&B Credit results to be a little better in the second half of the year but still down low-single digits for the full year, as it takes a while to move the revenue results on subscription products like these.

Sales and marketing revenue in the Americas was up 12% in the quarter with most of that growth organic. Advanced Marketing Solutions was up 16%, both on an organic and a total basis. The large new business contracts that Bob mentioned were in Advanced Marketing Solutions.

Prospecting Solutions grew 1% during the quarter due to the inorganic contribution from Credibility Corp. Organic revenue in Prospecting declined mid-single digits due to declines in Hoovers and MDR. The Hoovers decline was consistent with its recent run rate. MDR, our educational marketing business, declined due to lower usage in the quarter relative to last year.

Shifting to non-Americas, revenue was $70 million in the second quarter which represented 17% of revenue for the company. Non-Americas revenue declined 1% in the quarter driven by the UK and Benelux, partially offset by strong results from China and our Worldwide Network partnerships. The UK has a strong pipeline of new Compliance product, but the sales cycle has been a little longer than anticipated.

Regarding Brexit, we're not currently seeing a material impact on our business after the vote. Our business model is somewhat protected from currency swings as most of our costs are denominated in the same currency as revenue. So, while we're seeing some impact from the strengthening dollar, the impact can be absorbed in our earnings guidance changes.

Deferred revenue was up 3% for the company before the effect of foreign exchange and acquisitions. In the Americas, deferred revenue increased 4%, and that does not include committed sales with our alliance partners that would have added another point to the balance.

Turning to profitability. Operating income was up 8% in the second quarter, which was much better than expected due to our organic growth, as well as some underlying expense control. EPS increased 10% in the quarter to $1.37 per share primarily due to higher operating income and we generated $148 million of free cash flow in the first half of the year.

Turning to the balance sheet. We ended the quarter with $1.7 billion of debt including about $1 billion of fixed rate senior notes and $700 million of floating rate debt. Our cash balance was $379 million for net debt of approximately $1.4 billion.

As with previous years, we expect the second half of the year to be stronger than the first half with particular strength in the fourth quarter. Specifically in the third quarter, we expect organic revenue to grow at about the same rate as it did in the second quarter. Operating income is expected to be about flat in the third quarter as there is a significant step-up in our investment spending, as well as timing of some other expenses in Q3.

EPS is expected to be down mid-single digits due to the change in the tax rate. Last year, our third quarter tax rate was very low due to the release of audit reserves related to prior periods, and we do not expect a repeat of that benefit this year.

Now, let me shift over and talk about the two partner deals that we announced last night. As Bob said, we're converting our Benelux and Latin American businesses to partner models and are selling the stand-alone domestic business. In connection with these deals, we're entering long-term contracts where we'll receive ongoing revenue for data sales as well as technology, brand and consulting fees.

The value of these deals is over $200 million with most of that value created in the early years of the contracts. As Bob said, our guidance for both organic and total revenue growth is unchanged. After converting the Benelux and Latin America markets to partner model, our revenue in these markets will be about half the size.

We generated $69 million of total revenue in 2015. That revenue will now be replaced with about $36 million of new annual revenue for the ongoing data and other fees. We've put a schedule in the press release to lay out the quarterly revenue impact to help you with your models. While the absolute revenue is smaller, the new revenue stream comes in at such a high margin that overall profit increases from the current business.

In terms of 2016 guidance, since the transactions are closing relatively late in the year, total revenue will be about $6 million lower, which we can absorb in our total guidance range of 4% to 6%. Organic revenue growth is unchanged. Going forward, we'll continue to show both total and organic revenue which strips out the impact of acquisitions and divestitures, so that you can view the underlying business on an apples-to-apples basis.

So, in summary, we're pleased with how we're executing against the strategy, thus far, in 2016. Our pipeline for new business is robust and deferred revenue was increasing leading to a second half that is expected to be stronger than the first half. And the partner deals will increase our overall profitability, enhance our global data coverage, and reduce our operating risk in what have been uncertain markets for us.

With that, we'll now open the call to your questions. Operator? [Operator Instructions]

Question-and-Answer Session

Operator

Our first question comes from the line of Peter Appert with Piper Jaffray. Your line is open.

Peter Appert

Thank you. Good morning.

Richard Veldran

Hey, Peter.

Peter Appert

So, I guess the takeaway is that the strength in the second quarter, a reasonable amount of that, from a revenue perspective at least, is timing related in terms of these two specific contracts you mentioned and a little bit a shift from the third quarter, is that a fair interpretation?

Robert Carrigan

Hey, Peter. It's Bob. Look, we're excited about some of the larger deals that we closed in the quarter. Some of them we closed sooner than we expected. But look, we're really excited about the overall pipeline and very focused on the plans for the year. And what this does is it puts a little less risk in the second half of the year and gives us some good confidence going into the second half of the year. So, we're making good progress against our plan especially in the areas of new business which has been a focus for us. And we started growing deferred revenue balance, so we're selling a lot of the right solutions which bodes well for the long term. So, we're feeling pretty good about where we are at this point in the year.

Peter Appert

Got it. And on that point, Bob, in terms of deferred revenues, any chance you could give us a little more granularity in terms of specific things you would call out that's driving the acceleration there?

Robert Carrigan

Well, as the business moves, our strategy is all about taking advantage of this as-a-service world. And as you look at some of our solutions like D&B Direct, we're able – these businesses, these products, we don't earn the revenue upfront. They're earned on a usage basis over time. And so – and a lot of the modern solutions we've been focused on are centered around this idea of delivering through the cloud and through as-a-service. And so, that's why we say that if you see a growing deferred revenue balance, it indicates that we're selling against some of the newer solutions and not some of the more traditional upfront revenue generated products.

Peter Appert

Specifically, would you point to the new cloud credit offering as a driver of that or is that less important at this point?

Richard Veldran

Peter, it's Rich. Not quite yet. It's a little early for that. So, that wasn't a big impact. Yet, it will be over time as it grows and it stabilizes the overall D&B lineup.

Peter Appert

Got it. One last thing, Rich. On the – so, the margin performance is – was really noteworthy in terms of the improvement you saw, anything you'd call out, and I'm wondering maybe why you're not slightly more optimistic on the full-year profitability metrics given the second quarter performance.

Richard Veldran

Yeah. I mean a couple of things. We were relatively prudent in terms of spending as we went it into the [indiscernible] knowing that we expect a somewhat lighter revenue half. We're really ramping up investment in the second half of the year, which is one of the reasons that you'll see we were expecting operating income to be flattish in the third quarter. So, given that, I step back and look [indiscernible] and say, you know what, I'm still on the path I expected to be on for this year and I'm still within the guidance range that we laid out to you guys.

Peter Appert

Okay. Great. Thanks, Rich. Thanks Bob.

Robert Carrigan

Sure.

Operator

Your next question comes from the line of Jeff Meuler with Baird. Your line is open.

Jeff Meuler

Yeah. Thank you. Just can you help us understand with the Worldwide Partner network model what – how you sell new solutions especially since you're getting more innovative into those markets? Are they sold by your partners and you receive some sort of negotiated fee on that? I guess, what's the motion for selling the new innovation into those markets?

Joshua Peirez

Hey, Jeff. It's Josh. So, there's a couple of ways that you would see incremental revenues there. First, it could well be that we're selling newer solutions in markets we own and operate, but we're pooling data from those local markets, for example, on the risk side where that would actually allow us to sell more of that product into the local market.

The second way and the one that is the primary for us strategically is these local partners will sell our new products into their markets locally, and they will pay us royalty-type arrangements for those products. Some of those, for the existing products that we have today, are baked into the streams that we've just articulated to you. It's part of the value our partners saw, was that they had the ability to sell some of those new products. But many of the products that we have been coming out with are not yet baked in those numbers; and as the partners sell them, those are new royalty streams. So, you could think of them somewhat similar to the way you would think about the alliance partnerships where they're going to go ahead and sell from a go-to-market motion in those local markets.

Jeff Meuler

Got it. Thanks, Josh. And then, on the ad tech, the programmatic marketing, I think there was a callout when you were talking about strengths on the quarter. My understanding was that was more of a usage-based product. So, just anything that you can say about traction in terms of the ad tech data solutions and usage as they're piped into the various DMPs that you are partnering with?

Robert Carrigan

Yeah. So, let me just take it up a notch, and then, I'll get to the Audience Solutions thing. So, we've had some good success in Advanced Marketing Solutions [indiscernible] and a lot of that was driven around our overall data management capabilities, around ongoing data hygiene and companies leveraging our data in their master data management strategies.

With regard to Audience Solutions, it's also helped us with growth in the quarter. That's where we're making our data available again for the programmatic and ad tech world, and we're really pleased with the progress we're making there. We've done a number of deals with the major data management platforms. So, we have our data available through standard segments, on Oracle BlueKai and Adobe and other major platforms. We've also done direct deals with some of our largest customers. And in that case, they can leverage our data to create kind of custom targeting segments. So, we go to market both through direct and also through kind of somewhat of an alliance method working through these data management platforms.

The cool thing about it is, this is Dun & Bradstreet deterministic data. If you follow the ad tech world, it's all about behavioral and inference data. So, this is really foundational data that comes from our database that's been done and cookied and is available in the programmatic world. So, we're doing lots of new deals in this area, and it represents a great new use case in the Advanced Marketing Solutions world.

Jeff Meuler

Okay. And then just finally for me, can you remind us what your relationship is with the Small Business Financial Exchange? I think you're a certified vendor, but does that give you access to all of their data, or are there any notable restrictions? And how long has the agreement signed through? Thank you.

Robert Carrigan

Yeah. So, we're really proud and pleased to be a certified vendor with the Small Business Financial Exchange. A lot of our key customers are members and they have outstanding data. And what we found is when we apply Dun & Bradstreet's analytic capabilities, we're able to provide nice predictive lift for the members of the Small Business Financial Exchange, again, many of them who are our key customers.

Do you want to add anything to that, Josh?

Joshua Peirez

Yeah. Jeff, the only thing I'd add is we had previously tried to compete with the SBFE through building our own database and product offering. And while we were able to create some good business out of that, the truth is this is the best data set in the small business financial arena. It's what our clients in the financial services phase 1 will be able to use and contribute to. We're thrilled to be a certified vendor. We expect it to be a long-term relationship with them and a scenario where we're working very closely with our financial services clients to make sure that we're able to give them lift off of what they've been historically seeing from the previously exclusive relationship. And we're seeing tremendous lift which creates great value. So, this is a big opportunity for us we're very excited about.

Jeff Meuler

Great. Thanks, guys.

Operator

Your next question comes from the line of Andrew Steinerman with JPMorgan. Your line is open.

Andrew Steinerman

I wanted to go back to these two contracts. I just wanted to understand. Was the 2 point organic bid in the quarter solely due to those two contracts? And do those two contracts not benefit third quarter?

Richard Veldran

Look, Andrew, the way we plan our year, there's lots of new business we expect to get. They were both new business deals, so they weren't – it wasn't a shift of timing or anything like that from one quarter to the other. They were new business deals we are working on for a period of time. We happened to get them in this quarter. So, yes, it [indiscernible] our expectations in the quarter, but it doesn't necessarily mean that it – otherwise, that the quarter wasn't strong because there's lots of moving parts as you go through any given year.

Andrew Steinerman

And did those contracts also benefit third quarter?

Richard Veldran

Yeah. It's a mix, right? One of them was a little more upfront. The other one was a little more spread over time. So, there's some benefit. But overall, it's all within our guidance for the year.

Andrew Steinerman

Okay. Thanks for [indiscernible].

Richard Veldran

What I'd really take you back to is if you look at our overall deferred revenue, it was up 3%. You have to look it in the aggregate of the company. So, it was a great quarter in terms of organic growth in the quarter. It was also a great quarter in terms of our overall deferred. So, as we sit here today, we feel pretty darn good.

Andrew Steinerman

Okay. Thank you.

Operator

Your next question comes from the line of Bill Warmington with Wells Fargo. Your line is open.

William Warmington

Good morning, everyone.

Robert Carrigan

Hey, Bill.

William Warmington

So, I wanted to just ask the question again. I know Peter asked it and Andrew asked it. And so, I just wanted to ask point-blank what was the contribution in Q2 from the two contracts closing early in terms of basis point contribution to the organic growth?

Richard Veldran

Yeah. Well, I mean, you can look at our quarter – contract by contract, what I'll say is...

William Warmington

Understood.

Richard Veldran

...those two enabled us to over-deliver what we expected by 2 points, 2 points obviously is $8 million in the quarter. That did help us to deliver overall. But there's other lots of moving parts in any given quarter.

William Warmington

Yeah. I was just trying to – I was figuring, the guidance had been sort of basically flat and you came in, it looked like about 1.6 and then rounding up to 2. So, I just wanted to understand that.

But I wanted to ask a second question on the Latin America and Benelux transaction. So, when we go to do the adjusted organic constant currency calculation for that going forward, is that – is the historical revenue removed from that calculation and we just look at the royalty-like income going forward, or how does that – you gave us some of the numbers, so...

Richard Veldran

Right. Yeah. So, we gave you Schedule 7, which will show you historically what that business contributed, $69 million roughly. It'll be replaced over time, on a full-year basis, by $36 million, right? So, what we're going to give you – and really, this year it's a de minimis impact for a couple of months, right?

William Warmington

Right.

Richard Veldran

If you think about next year and thinking about the way you're going to model, our total revenue will actually decrease by about $33 million, the difference between $69 million which we got as a stand-alone business when we owned it, and $36 million which is royalty based. So, you'll see our total revenue is that much lower.

William Warmington

Okay.

Richard Veldran

It will also give you though an organic measure that says, if this business had been in a partnership structural alone, so you normalize for the fact that it's just changing, right, that delta would be essentially you take that $33 million out of your base as well, just the growth rate. So, it's only...

William Warmington

Got it. Got it.

Richard Veldran

...if you can understand the growth rate. It doesn't impact the financial performance. You're not changing your history. But so you'll understand the underlying growth rate, you would adjust your prior year by that $33 million.

William Warmington

Got it. So, it won't...

Richard Veldran

We can walk you through...

William Warmington

...it won't create a drag in 2017 as a result of [indiscernible].

Richard Veldran

On organic, it won't. But on total, yes, it will. Of course.

William Warmington

Right. Okay.

Richard Veldran

...because total would be lower.

William Warmington

And then, you mentioned that there was a way – in addition to the royalty-like revenue that you get, there was a way to generate some upside to sales of – it wasn't clear to me how you would generate the upside. I was hoping to get some understanding of that.

Joshua Peirez

Hey, Bill, it's Josh. I think this is – going back to Jeff's question, we have certain products that are baked into the existing royalty which is locked in the contract. That's why we have such great confidence over the revenue stream and over the operating income that will generate from these two partnerships because we've actually locked in what we noted the incoming revenue for a period of time.

On top of that, there are products that are not covered in that royalty stream including some of our newer Compliance products for example. And as we build out new products that the partners will want, and we know they want to, sell within their market. And when they do that, we will have a separate royalty arrangement with them where they will pay us a royalty for either the product, the technology or the data and some combination. They will sell it, we will receive that royalty back again at a much higher margin than we were getting in these markets when we were selling it direct. So, that incremental piece above the roughly $200 million-plus NPV that we articulated would come from being able to sell these other products that are not yet covered in the locked-in royalty rates we've negotiated.

William Warmington

Got it. And then a final question, this is hoping to get an update in how the sales of the Compliance product, Know Your Customer type products were doing, that seemed like a big growth opportunity for you.

Joshua Peirez

Yeah. So, we continue to see good pipeline and good growth overall in our Compliance product sales. We're actually starting to see some momentum there as well in the mid-market in the United States, which is great to see. There is a distinction between our Know Your Customer and Compliance products and some of the other ones like FATCA which are more related to tax or other regulatory areas, but we have a really strong pipeline. We see it as a big driver of growth going forward. These deals can be quite sizeable, so they can be lumpy depending on which quarter they do land in, but it's something that we do consider to be a big part of our growth driving going forward.

William Warmington

Okay. Well, thank you very much.

Operator

Your next question comes from the line of Shlomo Rosenbaum with Stifel, Nicolaus. Your line is open.

Shlomo Rosenbaum

Hi. Good morning. Thank you for taking my questions.

Joshua Peirez

Good morning, Shlomo.

Robert Carrigan

Hey, Shlomo.

Shlomo Rosenbaum

I just wanted to ask just more kind of underground, the two big contracts, one of them was the programmatic advertising and I assume that that goes on more regularly. Is the other one the optimizer and that's why you had kind of a big upfront fee during the quarter?

Joshua Peirez

Hey, Shlomo. It's Josh. Let me first just start by saying that we actually had a very strong new business sales quarter and have had a very strong new business sales first half. And so, that's why you're seeing things like the deferred balance go up sequentially. That's also why you're seeing us so confident in our guidance and performance going into the back half of the year.

Specifically, on these contracts, we didn't actually say it was one thing or the other. We said that they generally fell in the Advanced Marketing category. In fact, in one case, it covered actually a wide range of different products, some upfront, some actually deferred. In the other case, it was majority deferred, and it can be a combination of data and licensing rights to achieve that.

For us, we're looking at it as really being focused in the spaces that we've expected to drive our growth where we're driving both revenue and the deferred revenue balance which gives us the confidence towards the back half of the year. And so, that hopefully answers your question. It wasn't specifically one product in any either case.

Shlomo Rosenbaum

So, can you just give us an idea about the range if you're starting to be able to bundle them? What goes into the bundle that generates this kind of growth? Because we're trying to figure out if this is kind of an inflection or – everyone's questions are getting to the same point, is there something over here that was a full forward or one time, or is there something where something is actually starting to click? So, that's where we're trying to get at.

Joshua Peirez

Yeah. So, first of all, it's new business. So, we don't see it as a full forward. We do think things are starting to click just to be very direct and answer that question. Things that you could see in the bundle are combination of the data itself which allows our customers to use our data for master data management both within our own environments and other software platforms that they use. The programmatic space which helps us to drive their efficiency and effectiveness in using their advertising and marketing budgets in the spaces around wanting expanded rights to use our data beyond what they may have traditionally used it, because they are seeing the value in our new use case going forward. And for us, when you have these sort of bigger wins, we have a really strong pipeline of new business deals that are sizable. It's just hard to always know exactly which quarter you're going to land them in. And so, we have articulated that in this particular quarter, we had told you on the last call we thought we'd be flat, we ended up 2, that was helped by a couple of these larger deals that we're able to land here.

But when I look across the business, at the new business deals where – we have in the pipeline and that we're closing consistently now, those really cut across this variety of use cases around MDM, the programmatic advertising space and around the basic firmographic information that companies used to actually make sure that they are making good decisions every day.

Shlomo Rosenbaum

So, this wasn't one of the Compliance deals that seem that there were – last quarter, we discussed some of the – there were issues internally in some of the customers in terms of having to go upstream within their own organizations to work it out. This is something totally different from that.

Joshua Peirez

These were not those Compliance deals. And on those Compliance deals, we are actually continuing to see good progress there. We are continuing to actually see momentum in that space as well.

Shlomo Rosenbaum

Okay. If you'll indulge me in just a couple more. The Americas deferred revenue growth of 4%, was that all organic or was there something from the Credibility Corporation acquisition?

Richard Veldran

Yeah. The only piece left from Credibility Corp was, last year you may have recall as a part of the purchase accounting, you write-down some of the deferred revenue balance which would have lowered last year's base, we actually add that back in, so that you don't get a bigger pop this year. So, we do an adjustment for that accounting treatment. Otherwise, you would have seen a bigger growth, something above 4%. The right normalized number is the 4%.

Shlomo Rosenbaum

Okay. Got it. And then is the lower free cash flow in the first half of the year versus last year, is this due to the charges you took at the end of last year to kind of get ahead of the cost and that's just kind of flown through the cash flow now? Or is there some kind of – is there any changes we should think about in terms of the business structure?

Richard Veldran

Yeah. There's really three things, and it's roughly split between the three. About a third of it is the high restructuring that you alluded to at the end of last year, but we also had some in the first part of this year. So, some of it is that, and that was in our guidance of course. The other third is just higher interest expense, obviously related to the financings that we did last year. And some of little bit higher CapEx, so that's in there as well. And then, the last piece is literally some timing between the first half and the second half. We did have some of the big new business deals that came in relatively late towards the end of the second quarter. We haven't collected those yet. So, we'll see a much bigger free cash flow in the third quarter this year because we've got a lot of collections that just happened to be scheduled then.

Shlomo Rosenbaum

Okay. Great. Thanks very much.

Operator

Your next question comes from the line of Manav Patnaik with Barclays. Your line is open.

Manav Patnaik

Yeah. Hi. Good morning, gentlemen.

Richard Veldran

Hi, Manav.

Manav Patnaik

Rich, maybe just a follow-up on the free cash flow question first. So, the restructuring and the higher CapEx, like, just thinking over the next few years, I mean given the investment and stuff you're making, I presume CapEx should keep trending up, but then maybe just some color on restructuring which I guess has been going on for some time I guess at D&B.

Richard Veldran

Yeah. How I would view it, Manav, is we still expect CapEx to be less than 5% of revenue as it typically is. So, it's trended up a little bit this year. But I don't expect anything dramatic over time. I would expect over time restructuring to be somewhat lower. We did a fairly significant bunch of changes this year as we relooked elements of our go-to-market. But a lot of that heavy lifting is done. So, my expectation is that begins to become a little bit lower over time. So, if I think about longer term free cash flow, you should expect it to grow and to grow relatively nicely compared to income.

Manav Patnaik

Okay. And then just on the Worldwide Network, one quick one for you, Rich, which is, should we just annualize the 1% EBIT contribution from the – I guess from the deals you made this quarter or for the full year? Or is there some seasonality associated with it? And then, just for Bob, I guess over the last six years of covering D&B, I've seen like the argument go back and forth between owning and Worldwide Network and so forth. So, maybe if you could use UK and Ireland as an example and help us understand why you need to own those as opposed to maybe get those on the network as well.

Richard Veldran

Yeah. So, on your first question, yeah, it's a couple of million bucks as we talked about. We said, it's about half a point. That's really in the fourth quarter. It's not going to be in the third. The deals won't really close until late third quarter at the earliest. [Indiscernible].

Robert Carrigan

Yeah. Manav, it's Bob. So, with regard to kind of the portfolio and being direct owned in UK and Ireland, for instance, first of all, really if you look at it now, we've got kind of a simpler way to describe our global footprint with direct ownership in the UK, Ireland, the U.S. and Canada. And we've got this partner approach in pretty much all of Continental Europe and Latin America and then majority on JVs in China and India. With regard specifically to UK and Ireland, the UK is our largest market outside the U.S. It's a big hub for financial institutions, and we have a very solid, competitive position there and nice scale in that market. In some, we can win there, right?

And when we look at kind of our portfolio, we do have the opportunity in markets like we've outlined in Latin America and Benelux where we've got great partners that could serve those local markets and invest in those markets that we feel in even better ways than we can. The key thing is we're just selling the domestic business. So, we have all the access to the global data and the cross-border data. So, those local partners will make data investments. They will continue to build and they'll be experts in those markets. They know those local markets, they'll upload that data and will benefit from that with our largest customers. And that's really how we monetize greatly this business, right?

So, the cross-border and global data, that's ours. And whether or not we have a local domestic partner running that market, that's really just a portfolio decision. We love what we've done in these two regions. We're working with great partners that we have long-standing relationships with. We know they're doing excellent job serving those local customers while we take advantage of the global data opportunity. That's kind of the way we think about it.

And again, we also look at it from a financial perspective as Rich had laid this out while the total revenue goes down a bit, given the very high margin, these deals make sense from a financial perspective in terms of our profitability, and it enables us to kind of focus on the markets where we know we can win and where we have the scale. And that's – you know we're doing a lot with our strategy, and so having the focus that we need around this direct-owned markets and then having access to such a fantastic global data set, that's a very powerful combination for us.

Manav Patnaik

Okay. Fair enough. And then just one last one, Rich or Josh. I think, Rich, maybe in your comments, you had mentioned that the rollout of DNBi, the cloud one, had impacted some of your revenue growth. So, is that something that we should expect as you roll it out and it cannibalizes or impacts growth, and just maybe you can help me clarify that comment?

Joshua Peirez

Yeah. Manav, it's Josh. First, just pleased that we have exceeded our revenue expectations in the second quarter even with the DNBi number being slightly lower than our expectations. But with respect to DNBi, there is noise in the numbers. One of the things that Rich had articulated was we had actually shut down one version of DNBi that was focused on the small business segment in EB. And we shut that down in the first quarter, and that had an impact which we talked about on the last call.

The D&B Credit cloud solution which is called D&B CreditReporter for that segment wasn't launched in emerging businesses actually until May. So, there was just a couple of months' period where we had actually moved the customers who had been on that product over to some transactional products, and at the same time, we were not selling new D&B Credit into those customers for that period of time. So, what we've seen since May when that product was launched is actually a nice ramp in the D&B Credit sales, particularly in the emerging business segment.

And just to give you some sense, because we haven't really given dollars on it, we're seeing over 1,000 users on that product at this point. So, we're pleased with it. Also, we'd remind you, we launched D&B Credit in the UK and Ireland markets just this past month. So, we're actually quite excited to continue to be on our rollout plan there. But you do see noise into the second quarter number just from that time gap which is what Rich articulated between when we had shut down what was called DNBi Pro and when we launched the D&B CreditReporter business. So, the new business sales suffered for a couple of months there.

Manav Patnaik

All right. Thanks, guys.

Operator

[Operator Instructions] Your next question comes from the line of Andre Benjamin with Goldman Sachs. Your line is open.

Richard Veldran

Good morning, Andre.

Robert Carrigan

Hey, Andre.

Andre Benjamin

Good morning. I guess, a more high-level question. I guess, as more of the business seems to shift to sales and marketing and you have more experience working with alliances, could you maybe talk to – the quality and visibility of that revenue versus risk management, and how repeatable it's proving to be, even though it's not subscription, there is a recurring nature to it? And I guess how that visibility impacts how you think about the attractiveness of growth in that business versus the legacy risk management business from a strategy and planning perspective?

Robert Carrigan

All right. Well, I'll start, Andre. First of all, at a high level, love what's going on in the world of marketing technology and data right now, as you saw with LinkedIn and Microsoft, and this is a revolution going on in leveraging data and software to be able to engage and target customers in their ways. And data really is that connective tissue among all these applications, CRM, et cetera.

So, we're excited about that. And we certainly have strong alliance relationships. But look, a lot of our solutions are direct sold. We work with these customers increasingly through API delivery to be able to make our data available, so they can organize their data and create that single view of the customer and understand other connected parties that they should be targeting within their CRM. All the things that we do really well from data hygiene to helping them again segment and target the right prospects.

So, this is a great area for us, and we're seeing strong growth there. Love the underlying trends in the overall world of marketing tech and ad tech, and feel that that is something that we'll continue to approach from both in alliances and a direct sales position.

Joshua Peirez

And Andre, just to add. A lot of what we're seeing in the alliances space and in the sales and marketing space is really around the master data management space and the software-as-a-service space with our data embedded, our DaaS solution, in addition to the programmatic opportunities Bob discussed. And in those two areas, those contracts are committed generally long-term contracts with our alliance partners. They just happen to give us royalty reports on the revenues we're earning on a monthly or quarterly basis which is what we shared with you.

When we're able to share the fact that a point of deferred, for example, would've been added to the balance from those relationships, that's because we know the duration of those contracts and the fact that those revenues are all but guaranteed to come through to us. It's just that they're not sitting on our books until such time as the partner comes and gives us those quarterly reports. So, it's very sticky. And I also want to emphasize, and I think you know, it's also the compliance and supply products areas that we see driving the growth increasingly over time, not just in the sales and marketing space.

Andre Benjamin

Thanks. And the last one would be – and it may be less relevant since you set up a partnership there, but in terms of issues in Europe, particularly Benelux, that was a challenging region, performance wise, can you maybe let us know just how that region was performing? And I guess it sounds like – I don't want to put words in your mouth – but the fact that you're allowing a partner to come in there allows you to do a better job of servicing the local customers than you felt like you could do as an owned company, I just want to make sure that that's the right takeaway and I'm not misinterpreting your prior comments.

Robert Carrigan

Yeah. Look, Andre, we're – again, we love – the partner that's going to take over Benelux is Altares, which is in France, and they feel that they can leverage synergies among the broader region there. We have talked about the kind of acute competitive situation in the Benelux region and some of the execution issues we had. And again, when we looked at the fact that under this – [indiscernible] leaning into the Worldwide Network model, especially working with a great company like Altares, we could get all the great data that we need to service our global customers but be able to – we felt that Altares could do a better job of serving that local market and being on the ground and even more competitive on a local level. So, that was certainly part of the calculus. And this is the beautiful thing about the Worldwide Network model, right, that we've got great partners that we can rely on to help us in these markets while we maintain the valuable cross-border and global opportunity.

Andre Benjamin

Thank you.

Operator

There are no further questions at this time. I'll turn the call back over to the presenters.

Kathleen Guinnessey

Okay. Well, thank you very much, everyone, for your time and attention. And we look forward to talking to you next quarter.

Operator

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

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