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The Dun & Bradstreet Corporation (NYSE:DNB)

Q3 2007 Earnings Call

November 6, 2007 10:00 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. (Operator Instructions) I would now like to turn the call over to Mr. Richard Veldran, Leader of 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 Chief Executive Officer, will begin with some opening remarks on D&B's strategic progress and our commitment to driving total shareholder return; Tasos Konidaris, our Chief Financial Officer, will then review our third quarter financial results; and Sara Mathew, our President and Chief Operating Officer, will then provide some additional insight on our operating performance and our expectations going forward. Following some closing remarks from Steve, we'll then take your questions.

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

During our call today we will primarily be discussing non-GAAP financial measures, as that is how we manage the business. For example, when we discuss revenue growth, we'll be referring to the non-GAAP measure core revenue growth before the effect of foreign exchange, unless otherwise noted. When we discuss corporate and other expenses, operating income, operating margin and EPS, these will all be on a non-GAAP basis before non-core gains and charges. Reconciliation between these and other non-GAAP financial measures and the most directly comparable GAAP measure can be found in the schedules to our earnings release. They can also be found in the supplemental reconciliation schedule that we post on the investor relations section of our website. Later today you'll also find a transcript of this call on 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 and analysts on the call today, we are glad to be with you this morning. As you saw from our earnings release, we delivered another good performance in the third quarter of 2007. Revenue grew 7%, operating income growth was strong at 10%, EPS was up 15% marking our 28th consecutive quarter of double-digit earnings growth; and on a year-to-date basis, free cash flow was $257 million, up 7%. We are very pleased with these results and we remain on track to deliver another good year in 2007.

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

There really are four key results for our confidence:

(1) Our current business is performing very well;

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

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

(4) We continue to generate a significant amount of free cash flow and remain highly disciplined 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 the positive momentum we are building for the future. Specifically, our U.S. risk business is benefiting from continued growth of our subscription plans as well as DNBI; and our Sales & Marketing Solutions business is benefiting from the continued scaling of our data integration offerings.

We are also pleased with the strong results we've seen from our Internet business, as our Hoovers operation continues to deliver strong growth over an expanding base. At the same time, our international business is meeting our expectations and it remains on track with the targets we've set for 2007. Specifically, we are seeing good progress from our established European markets and our emerging Asian markets continue to drive strong double-digit growth.

So in sum we are pleased with the results we've seen from our existing businesses and we are confident in the sustainability of our growth in the future. Our confidence in the future is also driven by the progress 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 at D&B over the course of time.

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

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

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

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

As context, D&B Japan is a small but double-digit growth business for us and of course the country of Japan is 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 large customers and TSR sells traditional risk products to a much larger customer base. This new venture will bring together all the large business customers of both parties and D&B will own these customer relationships in, Japan leveraging our strong team on the ground including a very capable salesforce. We believe this JV structure is a very effective way of expanding our business in Japan, allowing us to maximize total shareholder return us as we expand our presence in this important part of the world.

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

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

First, it provides a strong technical fit to DUNSRight since Purisma's technology was purpose built to leverage the D&B commercial database.

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

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

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

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

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

These core advantages have served us well over the past seven years and they will continue to support our efforts to meet our commitments and deliver consistent performance as we approach this new planning horizon.

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

Equally important to cash generation is spending this cash wisely. We are proud of the financial discipline we undertake in deploying our cash 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 our expectations and we expect the same to be true for Purisma and our joint venture in Japan.

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

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

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

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

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

Tasos Konidaris

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

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

In addition, we continue to generate significant free cash flow. On a year-to-date basis, free cash flow totaled $257 million, up 7% over the 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 were pleased with this performance.

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

As we've said in the past, the introduction of new service bundles and additional DNBI modules are shifting our risk management business to a more ratable revenue recognition over time. In other words, revenue associated with these contracts is recognized more evenly over the term of the contract rather than upfront at the contract signing. This had roughly 1 point of impact on our overall U.S. revenue growth over the past year and we expect it to be at about 1.5 points in 2008 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 integration solutions and more specifically our Advanced Optimizer Solution powered by Acxiom. Our ebusiness solutions grew 23% in the quarter. This growth was driven by subscription growth at Hoovers as well as the positive impact of our First Research acquisition. Finally, our Supply 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 our expectations. This performance was driven by revenue growth, partially offset by investments to enhance our strategic capabilities.

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

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

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

In summary, from a total company perspective we feel very good about our third quarter results and our continuing financial momentum. Corporate and other expenses in the third quarter were $20.4 million, in line with 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-date free 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 strong cash flow.

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

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

For 2008, we expect these transactions to contribute approximately a 1.5 points of incremental revenue growth and about $0.10 of EPS dilution. On a cash basis, the 2008 dilution will be approximately $0.05 per share. For 2009 and beyond, we expect these transactions to add about 1 point of revenue growth and be accretive to earnings.

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

Finally, in regard to our cash dividend, we have paid out a total of $44 million to shareholders during the first nine months of 2007. We have now announced an additional $0.25 per share cash dividend that will be paid out on December 14th to holders of record on November 30th. This will bring 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 our operational performance.

Sara Mathew

Thank you, Tasos and good morning, everyone. Thank you for joining us today. I'd like to build on Steve and Tasos' comments with my perspective on 2007 and the reasons for our confidence in the future of D&B. Specifically, I'll highlight the key drivers of our current U.S. and international performance and how the two initiatives we announced yesterday will help us accelerate revenue growth. I'll also discuss how these initiatives will 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. There were three key drivers of this performance. First, our U.S. risk management business continues to perform well. Second, the base momentum on our commercial data integration business will accelerate with the addition of Purisma, allowing us to satisfy a broader set of customer needs. Third, our Internet 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 to see higher penetration of DNBI with our customers and we expect that growth to continue. As a reminder, migrating to DNBi creates a win-win proposition for both our customers and D&B. Customers receive virtually unlimited real-time access to our global database and an enhanced risk management experience. As a result, they reward us for this enhanced experience with higher revenue. Typically we receive a double-digit percentage increase in customer commitment when we migrate them to DNBi.

Since DNBi is a simple web-based platform that's easy to use, we become more embedded in our customer processes and operations. Finally, the DNBi platform is scalable; it allows us to cost effectively innovate and add value to our customers through ongoing enhancements and modules that target new customer needs. To date, we have successfully launched four value-added DNBi modules, each providing unique functionality and value for our customers. These modules have been well-received and we intend to continue this pace of innovation 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 integration stake, or CDI. I'll begin with our Optimizer CDI Solution powered by Acxiom. We continue to see strong acceptance for Optimizer which, along with our other value-added solutions, contributed to a 20% increase in S&MS VAP growth during the third quarter.

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

Looking ahead, we are excited about further enhancing our CDI offering with the addition of the advanced software capabilities of Purisma which Steve referenced earlier. As background, the CDI market includes three key segments. First, there is the traditional physical data warehouse which is located within the company to link various internal databases and create a master data repository.

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

Finally, there are embedded software solutions that create a virtual data hub to access just the relevant data in real-time without physically storing it.

Today D&B participates in off-premise solutions and has a limited presence in embedded software solutions. We will address this strategic gap with the Purisma acquisition. The Purisma data hub provides a simple software solution that can be rapidly deployed resulting in immediate insight for our customers. Additionally, it has a shorter selling cycle and can easily be integrated within a customer environment making it an attractive alternative to 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 the hands of our D&B salesforce we will have immediate access to a much larger customers set, many of whom need a simple CDI solution to solve their integration problems today. By combining Purisma software with D&B's salesforce we believe we will add approximately $10 million of incremental revenue in 2008, while also closing a critical gap in our integration capabilities behind the customer firewall. This is an important step forward towards increasing our penetration of the CDI market and it will be a key driver of revenue 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 very well with Hoovers, growing it from around $30 million in 2003 to approximately $100 million today. We continue to generate mid-teens revenue growth from our base Hoovers business while improving its value proposition with product and capability upgrades.

Let me share a few examples with you. To improve new customer acquisition and provide an attractive entry point we've added a lower cost, one seat license option to our existing offering. We've also added email capability so that our customers can reach contacts within the company with a single click. Customers who use as a CRM tool can now access Hoover's directly through that platform.

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

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

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

There are three key factors driving this confidence. First, our U.S. business is highly scalable as we have a renewable revenue stream and a very strong salesforce. Second, we continue to benefit from our ongoing re-engineering efforts which help us reallocate funds on a continuous basis. Third, our three strategic stakes are focused on the high-growth segments of the market such as risk platforms, the commercial data integration space and the Internet. Each of these stakes leverage our core assets -- that is DUNSRight and our sales capability -- 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 with margin expansion. We have great momentum, a very talented team and new capabilities we will be bringing to the market to ensure ongoing delivery of shareholder value.

Let me turn to our international business. We are pleased with our performance in the third quarter and we expect to close the year on a solid note. Looking ahead, we have two specific areas of focus for our international operations in 2008. In our established markets, primarily Europe, we continue to target the delivery of consistent performance; and in high potential markets, such as Asia and our worldwide network, we will continue to invest to accelerate growth.

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

We also expect to benefit from the new leadership we've put in place in the UK which will result in a heightened focus on pipeline management and flawless execution in that market.

In the other established European markets -- that is Italy and Benelux -- we continue to perform well and remain focused on achieving consistency of performance over time. Once this consistency is achieved, we will accelerate our pace of innovation, leveraging our proven DNBi platform and eventually our commercial data integration services that have broader applicability with customers across the globe.

Let me now turn to our high potential markets in international, specifically Asia which is a key area of interest for us and our global customer. The new joint venture we are establishing in Japan is designed to expand our presence in Asia and we expect it to add $15 million to $20 million of incremental revenue in 2008. As Steve mentioned, we have a strong leadership team in Japan with a proven track record of success. The creation of this joint venture will open up new selling opportunities for our team and we expect our Asia Pacific business to be a key driver of international revenue growth in 2008 and beyond.

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

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

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

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

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

Steve Alesio

Thanks, Sara and thank you, Tasos. So as you've heard, we are pleased with our third quarter results which keep us on track to deliver another good year in 2007. This is demonstrated by our 2007 guidance which we now have reaffirmed specifically. We expect to deliver for the full year core revenue growth of 6% to 8% before the effect of foreign exchange, all of which will be organic; operating income growth of 8% to 10% before non-core gains and charges; 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; and a tax rate before non-core gains and charges of approximately 37% to 38%.

We also feel good about our progress in executing against our strategic growth plan. We announced two initiatives today that will directly support our strategic stakes for the future and our commitment to driving total shareholder return.

To provide a higher degree of clarity for 2008, when we incorporate our preliminary plan for the year ahead with the two new initiatives we spoke of today we have a preliminary view of our 2008 outlook. Specifically, based on our current estimates, our preliminary outlook for 2008 calls 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 outlook for 2008 as we continue to grow revenue while expanding margins, even while we absorb some dilution.

Equally important to us, this outlook is directionally consistent with the expectations we have for our 2008 to 2010 time period. We are in the process of finalizing our 2008 plan and we expect to provide updated full year 2008 guidance as well as our outlook for free cash flow and our tax rate in either December or January.

To sum up, we remain confident in the prospects for our future and our ability to drive total shareholder return. As we move into our 2008-2010 planning period we remain very focused on executing against the three drivers of total shareholder return. For us, they are driving profitable revenue growth over time; second is being consistent in our performance, and the third is maintaining our discipline around the deployment of cash.

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

Question-and-Answer Session


Your first question comes from Neal Deaton– Stephens.

Neal Deaton– Stephens

How is the dilution of the new growth initiatives distributed 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 that relates to our acquisition in Purisma. Does that answer your question?

Neal Deaton– Stephens

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

Sara Mathew

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

Steve Alesio

I think in Tasos' comments he had said that we had looked at both 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 of Purisma's behind the firewall capabilities? How much business were you missing out on in the CDI market because you didn't have an adequate behind the firewall solution beforehand?

Sara Mathew

I'll just step back and give you some perspective of the CDI market in its entirety. There are three segments. The largest is central databases. This is a physical data repository that companies spend, in some cases, hundreds of millions of dollars actually building. This is the keeper of all truth for a company, to ensure that all other databases stay in sync within that. 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 in that space.

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

It is growing at high double-digits, and it is a very small emerging space. There have been several acquisitions that have been made already in this space, and we chose a smaller provider because their virtual data hub is perfectly positioned against DUNSRight. In fact, Purisma came to existence, designed and built around providing more insight with D&B's database.

So it's a perfect fit. It is in the commercial space. It works perfectly relative to what our sales folks already know to sell, because we've got a small software solution in the space. This will just allow us to go much 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 much broader reach of customers. So we are very excited about this.

Steve Alesio

I think you should take away it is a fast-growing marketplace. 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 Optimizer product with Acxiom so we are going to really leverage that as we go into '08 and '09.

Sara Mathew

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


Your next question comes from Edward Atorino - Benchmark Partners.

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 per share is about $5 million after taxes, you gross it up it's $10 million before taxes, there's got to be a little interest in there. Is there a lot of depreciation or losses?

Steve Alesio

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

Sara Mathew

Just remember, we are buying a very early stage company, so the revenue right now is very small. What we are acquiring is a capability and that is a capability that we know that we can put into the hands of our salesforce and with that comes investment; because it's almost organic if you want to think of it, as most of [Purisma] is essentially organic driven through our 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 - Benchmark Partners

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

Sara Mathew


Steve Alesio

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

Edward Atorino - Benchmark Partners

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


Your next question comes from Michael Meltz - Bear Stearns.

Michael Meltz - Bear Stearns

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

Tasos Konidaris

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

Michael Meltz - Bear Stearns

You said that's 40% minority?

Steve Alesio

You got it.

Michael Meltz - Bear Stearns

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

Steve Alesio

Michael, just so we are clear, the business side of this I would 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 - Bear Stearns

I guess I'm interested in the numbers.

Steve Alesio

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

Tasos Konidaris

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

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

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

Michael Meltz - Bear Stearns

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

Sara Mathew

Let me try and take that and I'll try and point you to a specific example that will help you understand what's going on. I'll take you to Q3 and I'll take you through our RMS traditional versus RMS value-added product. VAP for the third quarter was actually flat, you probably saw that. If I tell you what sales 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 just ratable over time. Previously when I sold you the old eRAM and RAM product the bulk of the revenue was recognized upfront. As you know, we've been experiencing this, to Tasos' point earlier, for some time now and we expect that to continue.

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

Steve Alesio

I just wanted to come back on that, Michael. So as you're looking at this, there's nothing else we are trying to clarify other than that ratability 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 are thinking about so we don't have any other net revenue expectations different than what you've heard from us over time.

Michael Meltz - Bear Stearns

And over time you've said U.S. RMS should be growing 6% to 8%?

Sara Mathew

It should.

Michael Meltz - Bear Stearns

Then one clarification. Steve, in your script you talked about your intermediate-term goals of revenue EBIT and EPS from '08 onward. You talked about EPS of 13% to 16% which is not where I thought you had previously been 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 the course of the last year we've had several factors that have changed our thinking relative specifically to EPS. Those factors would have to do with how much share repurchase actually is a total capital base today, the level of interest expense and just factoring in some of the dilution from M&A. So you should take it as a year later, a thoughtful response to how we are thinking 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 metrics we feel very good about and we are sure will continue to add value to our shareholders.

Michael Meltz - Bear Stearns

On Hoover's, are you still actively looking for Hoovers like acquisitions? Are you, can you say, pretty far in the process of anything there?

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 through 2005 through 2007 and we didn't come up with much. We certainly didn't predict everything 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 about timing of those acquisitions. Obviously we've given you a set of guidance metrics which was thoughtful in terms of everything we know at this point in time related to acquisitions.


Your next question comes from Frederick Searby – JP Morgan.

Frederick Searby – JP Morgan

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

The second one, can you give us any metrics on what percentage of your clients are now on subscription? If you can break that down geographically.

Finally, just a strategic question going back truthfully when a number of you weren't at the company, but way back the thought was we get 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 some nice earnings growth. It seems like you guys are now changing tact or stance and going after and thinking about increasing your exposure to Asia again and trying to move back in tactically. I just wondered if you could comment on whether there's a strategic shift you see. Thanks.

Steve Alesio

Let me tackle the first two and then I'll have Sara tackle the question about international. First of all, just for again, clarity's stake, 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 that because that's quite consistent with what we've said over the course of time and is no change. I thought actually in Sara's prepared remarks she did a wonderful job of describing our confidence in the basic core business. So there's nothing that's changed.

I think at times people might be taking that 6% to 8% and the 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 clarify that more than anything else. We still feel good about the core revenue growth of the existing business.

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

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

Frederick Searby – JP Morgan

You didn't answer the second question, but maybe I'll just fire in another one. It looked like free cash flow was down year on year. I wondered if you could just give us some thoughts 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 we talked a little bit about some timing impacts that actually benefited the first half. So for the mid year, we were actually at 25% growth knowing that for the full year we would be at 4% to 9% growth, and we're actually seeing that, as expected, play out in the second half. Some tax payments, some working capital and the timing of our restructuring, all of those things together really make that different. But net-net you can expect us to come in on the guidance range for the year.

Steve Alesio

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

Sara Mathew

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

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

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 Japan with the intent to be an organic player, reinvesting to start over from scratch. I say that because there is no cash investment; it is essentially taking an existing partnership which we believe is working very well and extending it because we want to have access to more large customers. Let's not forget that Japan is 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 can provide a value-added solution which that market desperately needs, because they don't have it right now, it's a very traditional market, and we think that we can create a win-win proposition all around.

So there's no shift in the strategy, it's just a focus in Japan and we've always been in China. China was never a market that we partnered to essentially feed that market to somebody else. But in order to grow China further, we entered into a partnership with the intent of growing faster because in Asia you have to be local in order to really successfully create what we want to do here at D&B which is a partnership that allows us to continue to grow profitability in that region. Does that help, Fred?

Frederick Searby – JP Morgan

Yes, great. Thank you very much.


Your next question comes from Edward Atorino - Benchmark Capital.

Edward Atorino - Benchmark Capital

I just wanted to remind myself: in the fourth quarter last year there was what, a $7 million or $7.5 million one-time item which is not going to be this year, right?

Tasos Konidaris

Yes, as you recall that was the partial reversal for the Italian 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 to our shareholders. That is the driver behind. When you look at the international operating income in its totality for the 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 as a result, yes, Q4 will be down because of that.


Your next question comes from Susan McGarry - Granahan Investment Management.

Susan McGarry - Granahan Investment Management

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

Steve Alesio

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

In the space of sales and marketing where it's more likely to be seen, we focus more intently on the commercial data integration or the high-end space where you would see less impact. You would see more of it on the lower end space, lists and labels, traditional. So we watch that, but that's not a high-growth expectation for us. That's how our company is really built and, if you will, and designed in a certain sense.

But let me have Sara address it more specifically whether from 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 see we would say in the low end lists and labels. If you look at our traditional S&MS product line, we report that as a segment externally, we did see a modest slowdown. It didn't seem to trace to what we would say economic contraction, per sae. It seemed to more trace to the fact that we are trying to migrate that business to our value-added solutions which actually play better in 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 to revisit this once again but I want to be quite clear about this. There had been discussions and also you did mention on this call again the target for top line of 8% to 10%. So how does that relate to this 6% to 8% organic, 7% to 9% total that you are expecting for next year? Related to that, you are confirming that you are changing your expectation for 2008 to 2010 from the mid to 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 are over that time period. Very similar to what we set out when we did '05 to '07, you may not have been with us in that time period. So we look at it over that time period that we are intending to achieve those sets of expectations, in this case 8% to 10% revenue, 10% to 12% op income, EPS mid-teens, 13% to 16%. So that is over the course of the time period. That will shift as each year goes on and we'll manage it each year. But our expectations as we sit here today is those are still valid expectations over that time period.

Yes, we did shift our thinking over the last year on EPS from mid to upper to mid-teens. I just wanted to clarify that. The last thing I would say is we will issue final 2008 guidance in another month or two also just to kind of reinforce what we had given as preliminary and we did it really to provide some context for our planning being somewhat 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 would include 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 large customer continued this quarter. Could you just give us a little more detail on that?

Sara Mathew

Sure. That saga has gone on for I think several quarters so let me just bring you up to speed. This was a large customer that had an acute compliance need and they came to us for a solution and developed with us a very inefficient solution. We actually told them this is somewhat inefficient, 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 that we knew would not repeat.

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


At this time there are no further questions.

Steve Alesio

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

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