Dun & Bradstreet Q3 2007 Earnings Call Transcript

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The Dun & Bradstreet Corporation (NYSE:DNB)

Q3 2007 Earnings Call

November 6, 200710:00 am ET


Richard Veldran - Treasury and Investor Relations

Steve Alesio - Chairman and CEO

Tasos Konidaris – CFO

Sara Mathew - President and COO


Neal Deaton– Stephens

Edward Atorino - Benchmark Partners

Michael Meltz - Bear Stearns

Frederick Searby – JP Morgan

Susan McGarry - Granahan Investment Management


Welcome to D&B's 2007 third quarter teleconference. (OperatorInstructions) I would now like to turn the call over to Mr. Richard Veldran, Leaderof Treasury and Investor Relations. Mr. Veldran, you may begin.

Richard Veldran

Good morning, everyone and thank you for joining us today.Here's what we'll cover on today's call: Steve Alesio, our Chairman and ChiefExecutive Officer, will begin with some opening remarks on D&B's strategicprogress and our commitment to driving total shareholder return; TasosKonidaris, our Chief Financial Officer, will then review our third quarterfinancial results; and Sara Mathew, our President and Chief Operating Officer,will then provide some additional insight on our operating performance and ourexpectations going forward. Following some closing remarks from Steve, we'llthen take your questions.

To help our analysts and investors understand where thisbusiness is headed, our remarks this morning will include forward-lookingstatements. Our 10-K and 10-Q filing, as well as the earnings release we issuedyesterday, highlight a number of important risk factors that could cause ouractual results to differ from these forward-looking statements. These documentsare available on the investor relations section of our website and we encourageyou to review this material. We undertake no obligation to update anyforward-looking statement.

During our call today we will primarily be discussingnon-GAAP financial measures, as that is how we manage the business. Forexample, when we discuss revenue growth, we'll be referring to the non-GAAPmeasure core revenue growth before the effect of foreign exchange, unlessotherwise noted. When we discuss corporate and other expenses, operatingincome, operating margin and EPS, these will all be on a non-GAAP basis beforenon-core gains and charges. Reconciliation between these and other non-GAAPfinancial measures and the most directly comparable GAAP measure can be foundin the schedules to our earnings release. They can also be found in thesupplemental reconciliation schedule that we post on the investor relationssection of our website. Later today you'll also find a transcript of this callon our investor relations site.

With that I'll now turn the call over to Steve Alesio.

Steve Alesio

Thanks, Rich and hello to our shareholders, team members andanalysts on the call today, we are glad to be with you this morning. As you sawfrom our earnings release, we delivered another good performance in the thirdquarter of 2007. Revenue grew 7%, operating income growth was strong at 10%,EPS was up 15% marking our 28th consecutive quarter of double-digit earningsgrowth; and on a year-to-date basis, free cash flow was $257 million, up 7%. Weare very pleased with these results and we remain on track to deliver anothergood year in 2007.

Looking ahead, we are now focused on building the foundationfor continued strong performance in 2008 and beyond and we remain confident inour prospects for this future.

There really are four key results for our confidence:

(1) Ourcurrent business is performing very well;

(2) Weare making progress in executing against our strategy for the future;

(3) Wehave a track record of consistent performance over time;

(4) Wecontinue to generate a significant amount of free cash flow and remain highlydisciplined in how we deploy this cash.

Let me just address each of these topics of confidence.First, in terms of our current business our U.S.operation continues to deliver strong results and we are pleased with thepositive momentum we are building for the future. Specifically, our U.S.risk business is benefiting from continued growth of our subscription plans aswell as DNBI; and our Sales & Marketing Solutions business is benefitingfrom the continued scaling of our data integration offerings.

We are also pleased with the strong results we've seen fromour Internet business, as our Hooversoperation continues to deliver strong growth over an expanding base. At thesame time, our international business is meeting our expectations and itremains on track with the targets we've set for 2007. Specifically, we areseeing good progress from our established European markets and our emergingAsian markets continue to drive strong double-digit growth.

So in sum we are pleased with the results we've seen fromour existing businesses and we are confident in the sustainability of ourgrowth in the future. Our confidence in the future is also driven by theprogress we are making in executing against our long term plan. As we told you,we are pursuing three strategic stakes to drive profitable revenue growth atD&B over the course of time.

First we intend to grow our global risk management businessby enhancing our data, our analytics and our platforms.

Second, we intend to further penetrate the high-growth spaceof commercial data integration.

And third, we intend to grow in the high-growth space ofInternet solutions for businesses and professionals.

Yesterday afternoon we announced two initiatives thatdirectly support our risk management and data integration stakes. First, interms of our global risk management business, we announced an agreement thatwill allow us to expand our risk management business in Japan.Specifically, we are establishing a new joint venture in Japanwith our existing partner, Tokyo Shoko Research, or TSR for short. This venturewill be called Dun & Bradstreet TSR Limited.

As context, D&B Japan is a small but double-digit growthbusiness for us and of course the country of Japanis the second-largest market in terms of GDP outside the U.S. Currently,D&B Japan sells value-added risk products to a small number of largecustomers and TSR sells traditional risk products to a much larger customerbase. This new venture will bring together all the large business customers ofboth parties and D&B will own these customer relationships in, Japanleveraging our strong team on the ground including a very capable salesforce.We believe this JV structure is a very effective way of expanding our businessin Japan,allowing us to maximize total shareholder return us as we expand our presencein this important part of the world.

This venture will require no upfront cash investments on ourpart as both D&B had TSR are contributing customer contracts to the JV andexchanging value through various licensing and royalty arrangements. D&Bwill be the majority shareholder of the new venture which we expect to close bythe end of 2007.

The second initiative we've announced is D&B's $48million acquisition of Purisma which is a provider of commercial dataintegration software solutions. This acquisition provides software capabilitiesthat will enable us to further penetrate the fast-growing CDI marketplace. Theacquisition of this capability has several immediate benefits.

First, it provides a strong technical fit to DUNSRight sincePurisma's technology was purpose built to leverage the D&B commercialdatabase.

Second, it enhances D&B's product solutions by adding anew software that can operate within a customer's firewall, something that wedon't do well today.

Finally, it allows us to provide a simple, easy to implementCDI solution to meet the needs of a broader range of customers.

On a combined basis, these two transactions are expected togenerate $25 million to $30 million of incremental revenue growth for D&Bin 2008 while positioning us to accelerate our underlying growth rate in 2009and beyond.

Referring back to the drivers of confidence in our future,our third reason for confidence is our track record of consistent performanceover time. Since the formation of this new D&B in late 2000, we have done asuperior job of meeting expectations and in our words, doing what we say. As wenow move into our 2008-2010 planning period, we have every intention of extendingthat momentum.

The high-level metrics we are pursuing in this time periodare: revenue growth of 8% to 10% over this time period, operating income growthof 10% to 12% and EPS growth in the mid-teens of 13% to 16%. The basis for ourhigher level of performance in this time period as well as the belief that wecan the consistent in our performance are really founded on D&B's corecompetitive advantages of our brand, our winning culture, our financialflexibility and DUNSRight.

These core advantages have served us well over the pastseven years and they will continue to support our efforts to meet ourcommitments and deliver consistent performance as we approach this new planninghorizon.

Finally, the fourth driver of our confidence for the futureis strong cash flow generation and our disciplined deployment of that cash. Aswe've demonstrated, we generate a lot of cash with D&B, more than $250million year-to-date, and we are confident in our ability to continuegenerating strong cash flow in the future.

Equally important to cash generation is spending this cashwisely. We are proud of the financial discipline we undertake in deploying ourcash and we are proud of our track record of making TSR accretive acquisitions.Virtually every tuck-in acquisition we have made has performed at or above ourexpectations and we expect the same to be true for Purisma and our jointventure in Japan.

Finally, we are proud of being able to return significantexcess cash back to shareholders.

So to summarize my opening comments, first we are verypleased with the third quarter performance of our existing business and weremain on track to deliver a solid 2007.

Second, we feel good about our progress in executing againstour strategic stakes. Specifically, we are excited about the two newinitiatives we've announced, and our team continues to work on otherinitiatives that will make a difference to our future as well.

Finally, we remain confident in our prospects for the futureand believe that the choices that we are making will allow us to continue todrive total shareholder return over the long term.

With that I will now turn things over to Tasos for a morespecific review of our third quarter financial results.

Tasos Konidaris

Thank you, Steve and good morning, everyone. In the next fewminutes I'll share with you a more detailed view of our third quarter financialresults. As you heard from Steve, we are very pleased with our third quarterperformance and we are confident that 2007 will be another good year.

From a total company perspective, and before the effect offoreign exchange, we delivered 7% revenue growth which includes a point ofgrowth from acquisitions. Operating income grew 10% which reflects a 50 basispoint increase in operating margins. Earnings per share grew 15%, driven by ourshare repurchase activity, partially offset by higher taxes and interestexpense.

In addition, we continue to generate significant free cashflow. On a year-to-date basis, free cash flow totaled $257 million, up 7% overthe same period last year and in line with our expectations.

Let me now turn to our U.S.business which accounted for 75% of our revenue this quarter. U.S.revenue grew 8% with all solutions sets contributing to this growth and we werepleased with this performance.

Risk Management Solutions grew 5%, in line with ourexpectations. We are pleased with the continuing growth of our subscriptionplans including DNBI. This growth has contributed to a strong 10% increase inour total company deferred revenue over the prior year quarter.

As we've said in the past, the introduction of new servicebundles and additional DNBI modules are shifting our risk management businessto a more ratable revenue recognition over time. In other words, revenue associatedwith these contracts is recognized more evenly over the term of the contractrather than upfront at the contract signing. This had roughly 1 point of impacton our overall U.S.revenue growth over the past year and we expect it to be at about 1.5 points in2008 as our pace of innovation around DNBI continues.

Our sales and marketing solutions grew 9% in the quarter.These results were driven primarily by our commercial data integrationsolutions and more specifically our Advanced Optimizer Solution powered byAcxiom. Our ebusiness solutions grew 23% in the quarter. This growth was drivenby subscription growth at Hooversas well as the positive impact of our First Research acquisition. Finally, ourSupply Management Solutions grew 2% in the quarter off a very small base.

Turning now to our U.S.operating income, we improved 10% in the quarter, in line with ourexpectations. This performance was driven by revenue growth, partially offsetby investments to enhance our strategic capabilities.

In summary, we are pleased with the continued financialstrength of our existing U.S.business which continues to be the key driver of our total company revenue andmargin performance.

Let me now turn to our international segment which accountedfor 25% of our business this quarter. International revenue grew 5% before theeffect of foreign exchange, also in line with our expectations. Excluding ourItalian real estate data business, international revenue grew 6%. As we've saidbefore, our Italian real estate business remains subject to continued top linevolatility due to regulatory changes in that country. However, we continue tomanage this business for profit as we have said and done in the past.

International operating income was $17.7 million, an improvementof 9%. Our international margin of 18.1% was in line with our expectations aslower data costs and favorable re-engineering benefits were offset by ongoinginvestments to drive growth in the Asia Pacific and our worldwide network.

In summary, from a total company perspective we feel verygood about our third quarter results and our continuing financial momentum.Corporate and other expenses in the third quarter were $20.4 million, in linewith the $19.6 million of expense in the same period last year. As a result,operating income for the company as a whole was $100.1 million, a strong 10%increase over the prior year quarter.

Finally, we reported earnings per share of $1.00, up 15%over the same period last year.

With respect to our free cash flow, we reported year-to-datefree cash flow of $257 million, a 7% increase, in line with our expectations.As we look ahead we are confident in our ability to continue generating strongcash flow.

Our priorities for deploying this cash are to invest in thebusiness to drive organic growth, TSR accretive acquisitions and to continuereturning a significant portion of our free cash flow to our shareholders.

As a result, we invested $48 million to acquire Purisma inlate October and we have also signed an agreement to create a new joint venturein Japan withour existing partner. The acquisition of Purisma was funded through ourexisting credit facility while the pending joint venture in Japanis structured as a non-cash deal. The 2007 financial impact of thesetransactions will be very small and is included in our guidance.

For 2008, we expect these transactions to contributeapproximately a 1.5 points of incremental revenue growth and about $0.10 of EPSdilution. On a cash basis, the 2008 dilution will be approximately $0.05 pershare. For 2009 and beyond, we expect these transactions to add about 1 pointof revenue growth and be accretive to earnings.

In addition to investing in the business we are committed toreturning cash to shareholders through a combination of share repurchases andcash dividends. In the third quarter, we stepped up our share repurchaseactivity and bought back approximately 1.1 million shares for a total of $109million. Approximately $84 million of this was related to our discretionaryshare repurchase program while the balance was used to mitigate dilution fromour equity awards. We now expect to complete around $250 million ofdiscretionary share repurchases in 2007, while making ongoing investments inour strategy. Looking ahead, we continue to target $200 million in annual sharerepurchases over the 2008-2010 timeframe.

Finally, in regard to our cash dividend, we have paid out atotal of $44 million to shareholders during the first nine months of 2007. Wehave now announced an additional $0.25 per share cash dividend that will bepaid out on December 14th to holders of record on November 30th. This willbring our full year dividend payout to approximately $60 million.

That concludes my review of our third quarter financial results.I'll now turn the call over to Sara who will provide additional insight on ouroperational performance.

Sara Mathew

Thank you, Tasos and good morning, everyone. Thank you forjoining us today. I'd like to build on Steve and Tasos' comments with myperspective on 2007 and the reasons for our confidence in the future ofD&B. Specifically, I'll highlight the key drivers of our current U.S. andinternational performance and how the two initiatives we announced yesterdaywill help us accelerate revenue growth. I'll also discuss how these initiativeswill allow us to continue to create value for our shareholders.

Let me start with the U.S.business. As you've heard, the U.S.continues to deliver strong results and has good momentum going into 2008. Therewere three key drivers of this performance. First, our U.S.risk management business continues to perform well. Second, the base momentumon our commercial data integration business will accelerate with the additionof Purisma, allowing us to satisfy a broader set of customer needs. Third, ourInternet business continues on the trajectory of strong double-digit growth.Let me touch on each of these in more detail.

First, within our risk management business we continue tosee higher penetration of DNBI with our customers and we expect that growth tocontinue. As a reminder, migrating to DNBi creates a win-win proposition forboth our customers and D&B. Customers receive virtually unlimited real-timeaccess to our global database and an enhanced risk management experience. As aresult, they reward us for this enhanced experience with higher revenue.Typically we receive a double-digit percentage increase in customer commitmentwhen we migrate them to DNBi.

Since DNBi is a simple web-based platform that's easy touse, we become more embedded in our customer processes and operations. Finally,the DNBi platform is scalable; it allows us to cost effectively innovate andadd value to our customers through ongoing enhancements and modules that targetnew customer needs. To date, we have successfully launched four value-addedDNBi modules, each providing unique functionality and value for our customers.These modules have been well-received and we intend to continue this pace ofinnovation to further embed DNBi in our customer operations over time.

Moving to the second driver of our U.S.momentum, let me discuss our progress against the commercial data integrationstake, or CDI. I'll begin with our Optimizer CDI Solution powered by Acxiom. Wecontinue to see strong acceptance for Optimizer which, along with our othervalue-added solutions, contributed to a 20% increase in S&MS VAP growthduring the third quarter.

Our latest matching technology, which we call NexGen, is nowrunning on the Acxiom grid. This upgrade has further enhanced the processingspeed, capacity and match rates and customer acceptance of this solution isstrong. As a result we've seen steady improvement in our sales pipelinethroughout 2007 and we expect this to continue into 2008.

Looking ahead, we are excited about further enhancing ourCDI offering with the addition of the advanced software capabilities of Purismawhich Steve referenced earlier. As background, the CDI market includes threekey segments. First, there is the traditional physical data warehouse which islocated within the company to link various internal databases and create amaster data repository.

Second, there are off-premise solutions which are deployedoutside the customer firewall to meet specific needs.

Finally, there are embedded software solutions that create avirtual data hub to access just the relevant data in real-time withoutphysically storing it.

Today D&B participates in off-premise solutions and hasa limited presence in embedded software solutions. We will address this strategicgap with the Purisma acquisition. The Purisma data hub provides a simplesoftware solution that can be rapidly deployed resulting in immediate insightfor our customers. Additionally, it has a shorter selling cycle and can easilybe integrated within a customer environment making it an attractive alternativeto the more expensive physical data warehousing option.

Now while Purisma will generate very modest revenue in 2007,we see significant potential ahead. When we put the Purisma software in thehands of our D&B salesforce we will have immediate access to a much largercustomers set, many of whom need a simple CDI solution to solve theirintegration problems today. By combining Purisma software with D&B'ssalesforce we believe we will add approximately $10 million of incrementalrevenue in 2008, while also closing a critical gap in our integrationcapabilities behind the customer firewall. This is an important step forward towardsincreasing our penetration of the CDI market and it will be a key driver ofrevenue in 2008 and beyond.

The third key driver in the U.S.is the continued growth of our Internet business. As you know, we've done verywell with Hoovers, growing it fromaround $30 million in 2003 to approximately $100 million today. We continue togenerate mid-teens revenue growth from our base Hooversbusiness while improving its value proposition with product and capabilityupgrades.

Let me share a few examples with you. To improve newcustomer acquisition and provide an attractive entry point we've added a lowercost, one seat license option to our existing offering. We've also added emailcapability so that our customers can reach contacts within the company with asingle click. Customers who use Salesforce.com as a CRM tool can now access Hoover'sdirectly through that platform.

In addition, we will continue to benefit from the First Researchacquisition we announced earlier this year. That acquisition has enhanced the Hoover'svalue proposition and created an easy cross-sell opportunity for Hoover'scustomers. First Research has accelerated Hoover'sgrowth this year while significantly expanding the level of industry insight weprovide. We are ahead of acquisition economics on First Research and we arevery pleased with its performance in 2007.

We are also actively searching for the right acquisition togive added life to our Internet stake. We are very clear about the candidatesthat would meet our criteria; candidates like First Research and Hoover'swhich provide platforms or capabilities to access a completely new set ofcustomers, the business professional. So we remain optimistic about ourprospects in this area and our ability to meet our long-term expectations overthe 2008 to 2010 timeframe.

Moving to operating income, we are very pleased with thestrong operating income and the resultant margin expansion we reported in thethird quarter and we expect to close 2007 on a strong note.

There are three key factors driving this confidence. First,our U.S. businessis highly scalable as we have a renewable revenue stream and a very strongsalesforce. Second, we continue to benefit from our ongoing re-engineeringefforts which help us reallocate funds on a continuous basis. Third, our threestrategic stakes are focused on the high-growth segments of the market such asrisk platforms, the commercial data integration space and the Internet. Each ofthese stakes leverage our core assets -- that is DUNSRight and our salescapability -- enabling profitable revenue growth across our core operation.These three factors give us confidence that are core operations in the U.S.will continue to build margin in the years ahead.

So as we close out 2007 and move into 2008, we believe the U.S.is well-positioned to continue its trajectory of higher top line growth withmargin expansion. We have great momentum, a very talented team and newcapabilities we will be bringing to the market to ensure ongoing delivery ofshareholder value.

Let me turn to our international business. We are pleasedwith our performance in the third quarter and we expect to close the year on asolid note. Looking ahead, we have two specific areas of focus for ourinternational operations in 2008. Inour established markets, primarily Europe, we continueto target the delivery of consistent performance; and in high potentialmarkets, such as Asia and our worldwide network, we willcontinue to invest to accelerate growth.

We are making progress in both areas. As we've told you, ourUK business hasbeen affected throughout 2007 by reduced usage from a large global customerwhose business has been in flux. While we were again impacted by this issue inthe third quarter, the bulk of this challenge is now behind us so we face morenormalized comparisons in 2008.

We also expect to benefit from the new leadership we've putin place in the UKwhich will result in a heightened focus on pipeline management and flawlessexecution in that market.

In the other established European markets -- that is Italyand Benelux -- we continue to perform well and remainfocused on achieving consistency of performance over time. Once thisconsistency is achieved, we will accelerate our pace of innovation, leveragingour proven DNBi platform and eventually our commercial data integrationservices that have broader applicability with customers across the globe.

Let me now turn to our high potential markets ininternational, specifically Asia which is a key area ofinterest for us and our global customer. The new joint venture we areestablishing in Japanis designed to expand our presence in Asia and we expectit to add $15 million to $20 million of incremental revenue in 2008. As Stevementioned, we have a strong leadership team in Japanwith a proven track record of success. The creation of this joint venture willopen up new selling opportunities for our team and we expect our Asia Pacificbusiness to be a key driver of international revenue growth in 2008 and beyond.

So to conclude the discussion on international, we expectlow to mid single-digit international revenue in 2007 and looking ahead, weexpect our joint venture agreements in Chinaand Japan toposition us for higher top line growth in 2008 and beyond.

I'll close with my personal observations about D&B andthe opportunities that lie ahead. We are a company that has a clearly definedstrategy; a strategy with clear choices which we call stakes. These stakes arein large and growing markets and are connected to our scalable capabilities, DUNSRightand our highly effective salesforce.

Additionally, we are judicious about how we execute ourstrategy. As an example, we chose a smaller acquisition in CDI because webelieve it affords greater value creation potential for our shareholders versusa larger, more dilutive acquisition of an established player.

Finally, we have a culture that is passionate about winningand a team of more than 4,000 leaders who are focused on meeting theircommitments and driving shareholder value every day. With this strong set offundamentals, core capabilities and a talented team of winners we look forwardto another good year in 2008.

With that I'll turn things back over to Steve for hisclosing remarks.

Steve Alesio

Thanks, Sara and thank you, Tasos. So as you've heard, weare pleased with our third quarter results which keep us on track to deliveranother good year in 2007. This is demonstrated by our 2007 guidance which wenow have reaffirmed specifically. We expect to deliver for the full year corerevenue growth of 6% to 8% before the effect of foreign exchange, all of whichwill be organic; operating income growth of 8% to 10% before non-core gains andcharges; diluted EPS growth of 13% to 16% before non-core gains and charges;free cash flow of $310 million and $325 million before legacy tax matters; anda tax rate before non-core gains and charges of approximately 37% to 38%.

We also feel good about our progress in executing againstour strategic growth plan. We announced two initiatives today that willdirectly support our strategic stakes for the future and our commitment todriving total shareholder return.

To provide a higher degree of clarity for 2008, when weincorporate our preliminary plan for the year ahead with the two newinitiatives we spoke of today we have a preliminary view of our 2008 outlook.Specifically, based on our current estimates, our preliminary outlook for 2008calls for core revenue growth of 7% to 9% before the effect of foreign exchange,of which approximately 6% to 8% will be organic; operating income growth of 8%to 10% before non-core gains and charges; and diluted EPS growth of 11% to 14%before non-core gains and charges. We feel good about this preliminary outlookfor 2008 as we continue to grow revenue while expanding margins, even while weabsorb some dilution.

Equally important to us, this outlook is directionallyconsistent with the expectations we have for our 2008 to 2010 time period. Weare in the process of finalizing our 2008 plan and we expect to provide updatedfull year 2008 guidance as well as our outlook for free cash flow and our taxrate in either December or January.

To sum up, we remain confident in the prospects for ourfuture and our ability to drive total shareholder return. As we move into our2008-2010 planning period we remain very focused on executing against the threedrivers of total shareholder return. For us, they are driving profitablerevenue growth over time; second is being consistent in our performance, andthe third is maintaining our discipline around the deployment of cash.

Before we move on to the Q&A I want to just once againthank the D&B team members listening in on this call today from around theworld. At a recent senior leadership meeting that Sara and I hosted, we tookthe time out to recognize that as a team we have created a new legacy ofwinning for our company and that legacy is being created each and every day bythe contribution of each one of us. On behalf of D&B's shareholders and ourcustomers we thank you for your leadership.

With that, I will now open up the phone lines so that Sara,Tasos, Rich or myself can take any questions. Operator, please go ahead and dothat.



Your first question comes from Neal Deaton– Stephens.

Neal Deaton– Stephens

How is the dilution of the new growth initiativesdistributed between the Japanese joint venture and the Purisma acquisition?

Steve Alesio

Your question is how are they distributed?

Neal Deaton– Stephens


Tasos Konidaris

I would say off of a $0.10 dilution, the majority of thatrelates to our acquisition in Purisma. Does that answer your question?

Neal Deaton– Stephens

Yes, it does. Then just looking forward on the Japanesejoint venture, what could be the expenses with that associated going forward?Could those be ramping up pretty significantly, or should that be at a fairlysteady level?

Sara Mathew

We would expect Japanwith this initiative to be margin accretive going forward. So essentially, whatwe are really driving for is higher levels of revenue growth. Just so you know,Japan isgrowing double-digits and has that track record for several years now. Our goalwith this acquisition with the broader set of customers we are going to reachis to ensure we continue that trajectory; but more importantly, that we makesure that it is margin accretive. So margins will grow; expenses will not rampup ahead of revenue.

Steve Alesio

I think in Tasos' comments he had said that we had looked atboth of them and they both actually generate higher levels of revenue growth in'09 and turn accretive. I think that was his comment.

Neal Deaton– Stephens

Could you just talk a little bit about the significance ofPurisma's behind the firewall capabilities? How much business were you missingout on in the CDI market because you didn't have an adequate behind the firewallsolution beforehand?

Sara Mathew

I'll just step back and give you some perspective of the CDImarket in its entirety. There are three segments. The largest is centraldatabases. This is a physical data repository that companies spend, in somecases, hundreds of millions of dollars actually building. This is the keeper ofall truth for a company, to ensure that all other databases stay in sync withinthat. This was a trend for several years through most of the last six to ten years,and we are not competing in that space and we have no intention of competing inthat space.

That space is about $2 billion to $3 billion, but embeddedwithin that is a small high growth segment of what we would call softwaresolutions and Purisma plays in that space. So think of it as software that on avirtual basis, would access different databases and then create a virtual datahub, store that data without physically storing it, to essentially solve theintegration issue.

It is growing at high double-digits, and it is a very smallemerging space. There have been several acquisitions that have been madealready in this space, and we chose a smaller provider because their virtualdata hub is perfectly positioned against DUNSRight. In fact, Purisma came toexistence, designed and built around providing more insight with D&B'sdatabase.

So it's a perfect fit. It is in the commercial space. Itworks perfectly relative to what our sales folks already know to sell, becausewe've got a small software solution in the space. This will just allow us to gomuch broader because it is much simpler to install than what we currently have.When we put it into the hands of our salesforce, they will have access to a muchbroader reach of customers. So we are very excited about this.

Steve Alesio

I think you should take away it is a fast-growingmarketplace. It's a niche inside of it purposely built for D&B. Sara and the whole U.S.team had good experience in '07 with adding a capability call the Optimizerproduct with Acxiom so we are going to really leverage that as we go into '08and '09.

Sara Mathew

Just to close it out in terms of what we do we get? We saidwe expect to add $10 million of revenue as a result of this acquisition, that'sincremental revenue for '08 built into our guidance.


Your next question comes from Edward Atorino - BenchmarkPartners.

Edward Atorino -Benchmark Partners

On the dilution, the $48 million deal, I don't mean to be picky,but it sounds like a lot of dilution for a $48 million transaction; $0.10 pershare is about $5 million after taxes, you gross it up it's $10 million beforetaxes, there's got to be a little interest in there. Is there a lot ofdepreciation or losses?

Steve Alesio

Let me just have Sara answer it more from a businessperspective to give you our perspective. If there are still more financialquestions, we'll touch on those as well.

Sara Mathew

Just remember, we are buying a very early stage company, sothe revenue right now is very small. What we are acquiring is a capability andthat is a capability that we know that we can put into the hands of oursalesforce and with that comes investment; because it's almost organic if youwant to think of it, as most of [Purisma] is essentially organic driven throughour salesforce and our DUNSRight capability.

Edward Atorino -Benchmark Partners

So there is an operating loss, I would guess?

Sara Mathew

It would be an operating loss.

Edward Atorino - BenchmarkPartners

Right, and then you've got some depreciation andamortization in there.

Sara Mathew


Steve Alesio

Our experience on this Ed is, there are other tuck-ins, acompany called Live Capital we purchased.

Edward Atorino -Benchmark Partners

I'm not a computer genius, but I talk to somebody who knowsabout that business and it sounds like the right kind of deal, fits in withyour strategy to penetrate the market, et cetera. It's just that the numbersseemed… but I understand now. Thanks.


Your next question comes from Michael Meltz - Bear Stearns.

Michael Meltz - BearStearns

On the last point, can you just clarify for Ed and me aswell, the rest of the dilution, is there something else out of the JV, anotherfactor that takes you from the EBIT loss down to the EPS dilution?

Tasos Konidaris

Hi Michael. We have a couple different things going on. Firstis the dilution associated with the amortization of intangibles. We have theinterest expense. And because these deals are accounted slightly different, inregard to Japanwe have the minority expense, the 40% we have to pay our partner. So these arethe three items that take you from the $5 million loss in operating income allthe way down to the $0.10.

Michael Meltz - BearStearns

You said that's 40% minority?

Steve Alesio

You got it.

Michael Meltz - BearStearns

Tasos, you said something during your script about RMS. Canyou talk about the momentum you have there in the U.S.? You said something about 150 basispoints. Are you saying that you're going to see growth accelerate goingforward?

Steve Alesio

Michael, just so we are clear, the business side of this Iwould have Sara answer and there was a ratability point that Tasos referred to,I'll have him come back and clarify. Do you want the business first, though?

Michael Meltz - BearStearns

I guess I'm interested in the numbers.

Steve Alesio

We'll have Tasos clarify his point on ratability and Saracan handle the rest.

Tasos Konidaris

When we look at our revenue growth for our U.S. RMSbusiness, that's a mid single-digit. This is exactly what we called out acouple quarters ago and it has performed as expected. We've also shared withyou the fact our business is shifting as we are trying to get more embeddedwith our customers. As we introduce new products and new innovations such asDNBi, that's impacting the way we recognize revenue.

So as a result, if you look at it, in many ways our revenuegrowth has been impeded in the U.S.by about 1 point this year, it was about 1 point the year before, about 1 pointthis year. But as we look forward, we see that impact accelerating it to about 1.5points, the best we can see it at this point in time.

The way this plays out, and that's why we begin giving deferredrevenue over the previous two quarters. Our deferred revenue growth thisquarter was 10%, so that is a very strong signal that our deferred revenue isgrowing at a faster rate than our revenue growth which speaks to the underlyingstrength of the business as well as plusses out the impact of ratability.

Michael Meltz - BearStearns

I guess I understand what you're saying, I would think itshould balance out at some point. So are you saying that your U.S. RMS revenuegrowth in '08 will be below the level of '07 because of that extra impact fromquicker, more penetration of subscriptions?

Sara Mathew

Let metry and take that and I'll try and point you to a specific example that willhelp you understand what's going on. I'll take you to Q3 and I'll takeyou through our RMS traditional versus RMS value-added product. VAP for thethird quarter was actually flat, you probably saw that. If I tell you whatsales were for VAP for the third quarter, it was double-digit and very strong.

Because what is happening is when we put in a DNBi module,this is to do portfolio analysis, the revenue recognition on that model is justratable over time. Previously when I sold you the old eRAM and RAM product thebulk of the revenue was recognized upfront. As you know, we've beenexperiencing this, to Tasos' point earlier, for some time now and we expectthat to continue.

In terms of how you should think about it, we have thoughtabout this as we gave you our total guidance for 2008. The impact of thatratability that Tasos talked about is included in our guidance.

Steve Alesio

I just wanted to come back on that, Michael. So as you'relooking at this, there's nothing else we are trying to clarify other than thatratability is occurring, but as we provided guidance for '08, 7% to 9%, 6% to 8%of which is organic, it's embedded in that 6% to 8% organic that we arethinking about so we don't have any other net revenue expectations differentthan what you've heard from us over time.

Michael Meltz - BearStearns

And over time you've said U.S. RMS should be growing 6% to8%?

Sara Mathew

It should.

Michael Meltz - BearStearns

Then one clarification. Steve, in your script you talkedabout your intermediate-term goals of revenue EBIT and EPS from '08 onward. Youtalked about EPS of 13% to 16% which is not where I thought you had previouslybeen talking. I thought you had said mid to high teens. Can you clarify that,please?

Steve Alesio

Sure. We took the time to clarify today, so really over thecourse of the last year we've had several factors that have changed ourthinking relative specifically to EPS. Those factors would have to do with howmuch share repurchase actually is a total capital base today, the level ofinterest expense and just factoring in some of the dilution from M&A. Soyou should take it as a year later, a thoughtful response to how we arethinking over that planning horizon which in totality is 8% to 10% on revenue,10% to 12% on operating income, EPS mid-teens so 13% to 16%, all a set of metricswe feel very good about and we are sure will continue to add value to ourshareholders.

Michael Meltz - BearStearns

On Hoover's, areyou still actively looking for Hooverslike acquisitions? Are you, can you say, pretty far in the process of anythingthere?

Sara Mathew

Even if we were, Michael, we couldn't give you that answer.But we are looking all the time. In fact, we were looking all the time through2005 through 2007 and we didn't come up with much. We certainly didn't predicteverything happening in the third quarter the way it did.

But the reality is you should take away one thing from us,we will focus on TSR accretive acquisitions and we don't worry so much abouttiming of those acquisitions. Obviously we've given you a set of guidance metricswhich was thoughtful in terms of everything we know at this point in timerelated to acquisitions.


Your next question comes from Frederick Searby – JP Morgan.

Frederick Searby – JPMorgan

I don't know if this is what Michael was getting at or whatyou guys were saying, just to clarify. So it looks like in your '08 guidancethe organic growth is slightly below the 6% to 8% you're seeing this year, thepre-FX organic growth. What explains that? Do you see any economic sensitivitygiven that you guys have talked about medium-term target that actuallyenvisions an acceleration/ That would be my first question.

The second one, can you give us any metrics on what percentageof your clients are now on subscription? If you can break that downgeographically.

Finally, just a strategic question going back truthfullywhen a number of you weren't at the company, but way back the thought was weget out of a lot of these international markets it's harder to make money,there's a lot of free data and that was one of the ways you guys drove somenice earnings growth. It seems like you guys are now changing tact or stanceand going after and thinking about increasing your exposure to Asiaagain and trying to move back in tactically. I just wondered if you couldcomment on whether there's a strategic shift you see. Thanks.

Steve Alesio

Let me tackle the first two and then I'll have Sara tacklethe question about international. First of all, just for again, clarity'sstake, in this context of the preliminary guidance for 2008, what we said was 7%to 9%, 6% to 8% of which we see as organic. So I just wanted to clarify thatbecause that's quite consistent with what we've said over the course of timeand is no change. I thought actually inSara's prepared remarks she did a wonderful job of describing our confidence inthe basic core business. So there's nothing that's changed.

I think at times people might be taking that 6% to 8% andthe 1.5 and doing what I'd call reverse math. But that's not what we said.We've said 6% to 8% and generally 7% to 9%. So I just first wanted to clarifythat more than anything else. We still feel good about the core revenue growthof the existing business.

Secondly, on the metrics for subscription and/or DNBi, wegenerally wait until the end of the year to update those. So you should expectthat we will do that on our next quarterly call.

Before I move on, have I answered those two questions? I'llturn it over to Sara if I have.

Frederick Searby – JPMorgan

You didn't answer the second question, but maybe I'll justfire in another one. It looked like free cash flow was down year on year. I wondered if you could just give us somethoughts there?

Steve Alesio

I'll have Rich do that for you.

Richard Veldran

So year-to-date, the down quarter brings us to 7%year-to-date which is really smack in the middle of 4% to 9%. You may recall on the Q2 earnings call wetalked a little bit about some timing impacts that actually benefited the firsthalf. So for the mid year, we were actually at 25% growth knowing that for thefull year we would be at 4% to 9% growth, and we're actually seeing that, asexpected, play out in the second half. Sometax payments, some working capital and the timing of our restructuring, all ofthose things together really make that different. But net-net you can expect us to come in onthe guidance range for the year.

Steve Alesio

Fred, you had a question about whether our strategy ischanging in international and Sara will answer that question for you.

Sara Mathew

Fred, I'll start by saying that doesn't pre-date Steve andme; we were here. So this was part ofsomething we did and I'll just remind everybody about that strategy. The strategy was about achieving a number oneor number two position in each of those markets with the ability to drive valueover time and a commitment to look at that every year and have a disciplinearound ensuring that that premise still holds.

Based on that, there were a series of markets that we feltwe did not see any path to creating value and we still feel good about thedecision we made back then. In terms of partnering, I wouldn't say we exitedthose markets because let's not forget we have a partner in every market andthat's what enables us to support the 111 worldwide records we have in ourdatabase.

Now in terms of what we're doing in Japan,what we're doing is we're just extending our partnership. We are not going into Japanwith the intent to be an organic player, reinvesting to start over from scratch. I say that because there is no cashinvestment; it is essentially taking an existing partnership which we believeis working very well and extending it because we want to have access to morelarge customers. Let's not forget that Japanis the second-largest GDP market in the world outside of the U.S.and it has been a high-growth market for us. All we're doing is accessing more of the large customer base so we canprovide a value-added solution which that market desperately needs, becausethey don't have it right now, it's a very traditional market, and we think thatwe can create a win-win proposition all around.

So there's no shift in the strategy, it's just a focus in Japanand we've always been in China. Chinawas never a market that we partnered to essentially feed that market tosomebody else. But in order to growChina further, we entered into a partnership with the intent of growing fasterbecause in Asia you have to be local in order to really successfully createwhat we want to do here at D&B which is a partnership that allows us tocontinue to grow profitability in that region. Does that help, Fred?

Frederick Searby – JPMorgan

Yes, great. Thank youvery much.


Your next question comes from Edward Atorino - BenchmarkCapital.

Edward Atorino -Benchmark Capital

I just wanted to remind myself: in the fourth quarter lastyear there was what, a $7 million or $7.5 million one-time item which is notgoing to be this year, right?

Tasos Konidaris

Yes, as you recall that was the partial reversal for theItalian real estate business.

Edward Atorino -Benchmark Capital

So year-to-year you'll be down?

Tasos Konidaris

That was $7.5 million that we worked very hard to return toour shareholders. That is the driverbehind. When you look at the international operating income in its totality forthe full year, it's flat year over year.

Edward Atorino -Benchmark Capital

For the full year?

Tasos Konidaris

We don't anticipate that event to repeat this year. So asa result, yes, Q4 will be down because of that.


Your next question comes from Susan McGarry - GranahanInvestment Management.

Susan McGarry -Granahan Investment Management

First just going back to the economy. Are you hearing fromany of your customers, large or small, concerns about the big picture and areyou seeing sales cycles lengthen at all?

Steve Alesio

Let me just touch on that a little bit and I'll have Saratouch on it more from a sales perspective. So in general, we don't see any major positive or negative impact at themoment, but it's really by the nature of the business that we're in. So we're in the risk management businesswhich over the course of time, neither has a large benefit or a large detrimentto ups and downs in the economy so far; again, in the time period that Sara and I havebeen here, six or seven years.

In the space of sales and marketing where it's more likelyto be seen, we focus more intently on the commercial data integration or thehigh-end space where you would see less impact. You would see more of it on thelower end space, lists and labels, traditional. So we watch that, but that'snot a high-growth expectation for us. That's how our company is really builtand, if you will, and designed in a certain sense.

But let me have Sara address it more specifically whetherfrom a selling perspective in the recent months we've heard or felt anything?

Sara Mathew

In recent months we haven't really felt anything. We did seewe would say in the low end lists and labels. If you look at our traditionalS&MS product line, we report that as a segment externally, we did see amodest slowdown. It didn't seem to trace to what we would say economiccontraction, per sae. It seemed to more trace to the fact that we are trying tomigrate that business to our value-added solutions which actually play betterin an economic downturn. So I would say we didn't see anything specific, Susan.

Susan McGarry -Granahan Investment Management

Then just back on the 2008 expectations, and sorry torevisit this once again but I want to be quite clear about this. There had been discussions and also you didmention on this call again the target for top line of 8% to 10%. So how doesthat relate to this 6% to 8% organic, 7% to 9% total that you are expecting fornext year? Related to that, you areconfirming that you are changing your expectation for 2008 to 2010 from the midto upper teens EPS growth rate to the mid-teens growth rate?

Steve Alesio

Susan, I'll touch on that. First of all, the expectations we have in the '08 to '10 time period areover that time period. Very similar towhat we set out when we did '05 to '07, you may not have been with us in thattime period. So we look at it over that time period that we are intending toachieve those sets of expectations, in this case 8% to 10% revenue, 10% to 12%op income, EPS mid-teens, 13% to 16%. Sothat is over the course of the time period. That will shift as each year goes on and we'll manage it each year. Butour expectations as we sit here today is those are still valid expectationsover that time period.

Yes, we did shift our thinking over the last year on EPSfrom mid to upper to mid-teens. I justwanted to clarify that. The last thing I would say is we will issue final 2008 guidancein another month or two also just to kind of reinforce what we had given aspreliminary and we did it really to provide some context for our planning beingsomewhat behind us and these two new initiatives that we announced yesterday.

Susan McGarry -Granahan Investment Management

So the 8% to 10% includes FX and the 7% to 9% doesn't?

Steve Alesio

No, the 8% to 10% on the revenue side is total, it wouldinclude organic and any acquired revenue.

Sara Mathew

But they will all be FX, [inaudible] foreign exchange.

Susan McGarry -Granahan Investment Management

Sara, you mentioned briefly that the issues with one largecustomer continued this quarter. Couldyou just give us a little more detail on that?

Sara Mathew

Sure. That saga hasgone on for I think several quarters so let me just bring you up to speed. Thiswas a large customer that had an acute compliance need and they came to us fora solution and developed with us a very inefficient solution. We actually told them this is somewhatinefficient, but given the urgency and the speed with which they wanted to act,what happened is we just went ahead and it was a very, very large contract thatwe knew would not repeat.

We have since gone back to the customer, we have a far moreefficient solution. As a result, you'vegot year-over-year comps where you had this very large number that impacted theUK which is nowwe would say mostly behind us. So it'sgoing to be much different from 2008 and beyond because we've anniversariedthis issue and you should see more normalized usage in the UKgoing forward.


At this time there are no further questions.

Steve Alesio

Thank you very much. We'llsign off until our next call.

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