Richard Veldran - Leader of Treasury and Investor Relations
Steve Alesio - Chairman and Chief Executive Officer
Sara Mathew - President and Chief Operating Officer
Tasos Konidaris - Chief Financial Officer
Kyle Evans - Stephens
Edward Atorino - Benchmark Partners
Dun & Bradstreet Corp. (DNB) Q1 2008 Earnings Call May 8, 2008 10:00 AM ET
Good morning and welcome to D&B's 2008 First Quarter Teleconference. This conference is being recorded at the request of D&B. If you have any objections, you may disconnect at this time. All participants will be in listen-only mode, until the question-and-answer session of the call. (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 - Leader of Treasury and Investor Relations
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 first quarter results. Sara Mathew, our President and Chief Operating Officer will then provide some additional insight into the US and international results and our expectations going forward. And Tasos Konidaris, our Chief Financial Officer, will then review some additional financial highlights. Following some closing remarks from Steve, we'll then take your questions.
To help our analyst and investors understand where this business is headed, our remarks for this morning will include forward-looking statements, our Form 10-K and 10-Q filings, as well as the earnings release we issued yesterday, highlighted 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 obligations to update any forward-looking statements.
During our call today, we will be discussing a number of non-GAAP financial measures, as that's how we manage the business. For example, when we discuss revenue growth we will be referring to the non-GAAP measure revenue growth, before the effect of foreign exchange, unless otherwise noted.
When we discuss corporate and other expenses, operating income, operating margins, 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 a supplemental reconciliation schedule that we post on the Investor Relations section of the website. Later today you'll also find a transcript of this call on our investor relation site.
With that, I'll now turn the call over to Steve Alesio. Steve?
Steve Alesio - Chairman and Chief Executive Officer
Thanks, Rich, and hello to our shareholders, team members and analysts on this call today. We are glad to be with you this morning.
As you saw from our earnings release, we delivered strong first quarter results specifically revenue was up 8%, operating income grew by 11%, earnings per share improved by 18% and we delivered free cash flow $107 million, which was up 5%.
These results were inline with our expectations and extend our track record of meeting our commitments, in other words doing what we say. In fact it's our 30th consecutive quarter of double-digit earnings growth.
Looking at our top line results in the quarter, our US business delivered solid results overall and our international business had a strong quarter. We are pleased with this performance and our ongoing revenue momentum in the current economic environment.
Looking at our earnings growth in the quarter, we are particularly pleased with our results, which were strong across the board. We had strong growth in operating income in both our US and international businesses. We continue to benefit from our financially flexible business model, which has allowed us to invest while retuning cash to shareholders. And we are benefiting from the diversity of our portfolio, which is well balanced across products, customers and geographies.
Even a good start to 2008, we remained confident in our ability to achieve our full year financial guidance, which we have now reaffirmed. From a geographic perspective, we expect the top line of our US business to improve as the year progresses. We expect our international business to continue to perform as well as it did in the first quarter. And we feel good about our underlying earnings and cash flow strength over the rest of year as well.
With that, what I will do now is ask Sara to comment on our US and international businesses, both the results in the quarter and our expectations going forward rest of this year. After that, I will ask Tasos to comment on our profitability and cash flow again results in the quarter, as well as expectations for the rest of the year. I will then come back with some closing comments looking beyond 2008 as we are confident about our prospects for the future and our ability to continue to generate strong shareholder returns for longer term.
So, with that Sara?
Sara Mathew - President and Chief Operating Officer
Thank you, Steve and good morning everyone. Let me begin with the discussion of our US business were total revenue grew 6% and operating income grew 9% over the prior year.
Now as context, I will discuss the US business along our three to strategic stakes, Risk Management, Commercial Data Integration and the Internet. Now in the first quarter US Risk Management, our largest segment grew 6% over prior year inline with our expectation. Of note our RMS business includes 2 points of growth from supply management, which we are now reporting as part of RMS. This is consistent with our decision to focus on supplier risk as part of our Risk Management stake.
In the first quarter, the primary driver of RMS growth was once again our subscription program. The subscription revenue is now 45% of our RMS business up from 37% a year ago. Within our subscription program DNBi now accounts for two-thirds of the total revenue and we are very pleased with these results. This is because we create a win-win solution for D&B and our customers when we convert them to DNBi. Our customers tell us their satisfaction that DNBi is significantly higher than non-DNBi products and their feedback is consistent across all our customer segments, small, medium and large.
In addition our perceived data quality is better. And finally since DNBi is a real time interactive product it can be customized to meet the unique needs of individual users. The bottom line is that customers really like the functionality that DNBi provides and as a result they have historically rewarded us with double-digit increases in their revenue commitment. It is therefore our intent to continue to drive DNBi penetration over the rest of 2008.
Converting our traditional product to DNBi has been underway for well over a year. We have only begun migrating our value added products to DNBi. This is done through the addition of modules to perform risk mitigation activity such as portfolio analysis and automated credit decisioning and we are still early in the migration. These new DNBi modules provide cross-sell opportunities for our sale force and allow us to bring DNBi solutions to small and mid-size customers in a simple easy to implement fashion and we see plenty of runway ahead.
We expect to accelerate this conversion in 2008 and as we've said in the past our VAPs business will be subject to ratable revenue recognition when we convert to DNBi. This is partly reflected in the 11% growth in deferred revenue in the first quarter and is also incorporated in a mid single-digit revenue growth expectation for RMS in 2008.
Let me now turn to S&MS, which accounts for 29% of our US revenue and which grew 3% in the quarter. To be quite candid, S&MS was the one area of our US business where we know we could have done better and you can expect us to deliver improved results over the balance of the year.
Our traditional business which accounts for roughly 40% of our S&MS revenue generated a modest 1% decline inline with expectations. This is the most economically sensitive part of the business and not a strategic focus area for us. As a reminder our focus is to migrate our customers from traditional S&MS products to value added solutions overtime.
In S&MS, our strategic area of focus is value added products or VAPs since that includes commercial data integration our second strategic stake. VAPs now account for 60% of revenue and grew just 6% in the quarter below our expectations.
I am sure that the question that’s on your mind is whether or not these results are a reflection of the current US economy. Let me address that question directly. While we did experience some lengthening of the sales cycle in the quarter we at D&B do not except that as an excuse, we know better. Our VAPs business is resilient in tough economic time. Especially when we remain customer focus that is tuning our value proposition to address specific customer pin points and sharpening our execution, specifically pipeline management and deal closure.
When we are sharp on execution, we deliver exceptional results. Let me elaborate with a real life example. During the first quarter, one of our financial services customer, under stress had a multi-million dollar marketing deal up for renewal. We knew our optimizer product would significantly enhance their marketing campaign by delivering a valuable prospect list. We brought Acxiom to the table to enable a data base solution and we laid out the value D&B would provide to the customer by partnering with Acxiom.
More specifically we would match and identify prospects and leverage Acxiom's grid technology and ability to provide trigger based campaigns for the customer. However, the customer was facing cost pressure and they would have preferred to delay the decision. But we got agreement to run a test in one market. So we demonstrate the value we provide. The test delivered a significant lift in metric for the customer and he willingly signed a multimillion dollar deal in March with the 35% uplift in their commitment. This is what we mean, when we say that the customer focus coupled with strong execution is the answer to the current economic situation.
So looking ahead you can expect an improvement in the S&MS growth rate over the balance of 2008 driven by two key factors: first, shopper execution on the optimizer and second increased traction from Purisma, which did not have a material impact in Q1.
Let me now turn to our third strategic stake, the US Internet business. We were pleased with our 26% growth rate in the first quarter. Results were driven by continued subscription growth at Hoover's and benefits from the acquisition of First Research and AllBusiness.com. Within Hoover's we will accelerate the pace of innovation adding contact names to drive higher subscription growth while continuing to scale our platform to drive more unique visitors to the site.
Of note for First Research is now fully integrated in to the Hoover's platform allowing us to provide even better insight for premium subscribers. And we are seeing good progress in cross selling First Research through our existing channels at D&B. We also expect to benefit from the acquisition of AllBusiness.com a primer internet advertising property, which we can now monetize over the web.
Our business is significantly enhanced a search engine optimization and marketing capabilities, while increasing monthly unique visitors to its site by nearly 50% since we acquired the company in December. Unique visitors or UVs are the critical metric in determining online advertising rates and a strong trajectory AllBusiness has established, creates a new source of revenue for D&B.
More specifically, with its critical mass of small business decision makers AllBusiness has emerged as a key property for advertises targeting that segment. As an example, we recently rolled out the AllBusiness exchange partnership with Intel allowing visitors to combine the how to content of AllBusiness with solutions provided by Intel.
Just go to www.allbusiness.com "that’s one word AllBusiness.com" and select business exchange. Intel is now using this site to generate leads for its product, targeting small business users looking to buy products and services over the web. To sum up on the internet we are pleased with our Q1 results and expect continued double-digit growth from the stack in 2008. So for the US as a whole, you can expect improvement in growth rates as the year progresses. We will benefits from stronger execution in our existing business and continue to accelerate revenue growth from our newly acquired business that is Purisma and AllBusiness.com as we integrate them into our core D&B operation.
Let me now turn to our international business, where we delivered a very strong 13% revenues growth before the effects of foreign exchange. Now there were two key drivers of this performance: First our business in Asia, including the recent joint venture in Japan, delivered nearly half of our international growth. Second driver was improved performance in our established market specifically the UK and also Benelux. With new leadership we've put in place in 2007, has increased stability in those markets and our investment to improve data quality, as well as stronger execution of clear beginning. Looking ahead, we expect continued strength in international.
Our business in Asia which is run by a talented leader will continue to perform well. And we expect the same growth from our developed market as our investments to drives better data quality and continued expansion of the DNBi platform into these markets, will ensure that that’s stability is maintained.
Finally, we continue to invest for growth beyond 2008 in these markets. A note worthy example is the establishment of a joint venture in Russia to enhance our data quality and distributing in this important market. The JV is with Interfax the leading provider of business information in Russia. The business will launch this month following some customary closing requirements and operate under the trade name Interfax D&B.
The JV will not have a material impact to our 2008 financial. It will, however, more than quintuple our database in Russia from 800,000 records to 4.2 million records, greatly enhancing our coverage in this important market. The JV also supports our broader goal of providing data in emerging markets such as China and Russia, a critical need for our global customers. To sum up on international, we are pleased with our performance and we expect to deliver a strong year in 2008.
And that concludes my remarks on our business operations. Let me turn the call over to Tasos to provide the financial highlights. Tasos?
Tasos Konidaris - Chief Financial Officer
Thank you Sara and good morning everyone. While Sara highlighted our top-line performance and outlook, I would like to focus my remarks first on our profitability and second our disciplined approach to financial management at D&B.
In regard to profitability, we generated strong operating income growth of 11% and a total company operating margin of 26.7%, up 30 basis points. Our Q1 results reflect margin extension in both the US and international, demonstrating our ongoing ability to drive margin growth while improving our top-line.
In the US, operating income was up 9% and our margin improved by 80 basis points to 36.9%. This increase was due to revenue growth and re-engineering savings, partially offset by investments to drive future top-line growth such as DNBi, Purisma, and our internet business.
In our international segment, operating income was up 25% and our margin improved by 30 basis points to 14.1%. This increase was due to revenue growth, as well as favorable foreign exchange, which accounted for roughly half of our operating income growth. Both increases were partially offset by investments in DUNSRight in Asia to fuel future top-line growth.
In regard to earnings per share, we delivered $1.14, up 18% over the prior year period. This increase reflects our strong operating income results, the accretive impact of our ongoing share repurchase program, partially offset by higher interest expense, which will continue in the quarters ahead. It is important to note that we delivered strong earnings results, while making significant and ongoing investments in all areas of our business.
Let me now turn to our financial disciplines. At D&B, we continue to generate a lot of cost and we maintain a high degree of [rigor] in deploying this cash. During the first quarter, we generated free cash flow of $107 million. This was a 5% improvement versus a strong performance in the prior year, which had benefited from the timing of a tax refund.
We leveraged our free cash flow to make ongoing investments in the business to support our long-term growth strategy while returning a significant amount of cash to shareholders through share repurchase and cash dividend. With respect to share repurchase, in Q1 we bought back 1.4 million shares for a total of $120 million. $85 million of this was due to opportunistic buying under our discretionary share repurchase program and the balance was used to mitigate dilution from our equity awards. In addition, we also paid out $17 million in dividends in the first quarter and our Board of Directors has now declared a $0.30 cost dividend for the second quarter.
In regard to capital expenditures, in Q1 we incurred $17.4 million or 4.2% of revenue. This is consistent with our goal of maintaining a CapEx to revenue ratio of 5% or less, reflecting our highly capital efficient business model. Looking ahead, we are confident in our ability to deliver continued profitable revenue growth and free cash flow.
There are three key reasons for this confidence: First, we are confident because we exited the first quarter with deferred revenue of $586 million and 11% increase. We continue to see deferred growth out pace revenue growth, which bodes well for the future. Second, we will benefit from continued revenue growth as well as favorable foreign exchange. And finally, our financially flexible business model is now a proven strength, year-after-year this model enables us to create shareholder value by funding investments for growth and it is especially valuable in the current economic environment.
With that, I will now turn things back over to Steve, for his closing remarks.
Steve Alesio - Chairman and Chief Executive Officer
Thanks, Tasos. What you have heard from Tasos and from Sara this morning, is that we are pleased with our first quarter results and we feel good about the direction we are headed for the rest of this year.
This confidence is reflected in our 2008 financial guidance, which we have reaffirmed. Specifically for the year, we expect to deliver core revenue growth of 8 to 10% before the effect of foreign exchange. Operating income growth of 11 to 13% or 501 to $510 million, before non-core gains and charges. Diluted earnings per share growth of 14 to 16% or $5.19 to $5.29, before non core gains and charges. Free cash flow of 337 million to 352 million excluding the impact of legacy tax matters. And a tax rate of approximately 37 to 37.5% again before non-core gains and charges. This outlook for 2008 is consistent with the aspirations we set out for our 2008 to 2010 planning period.
As we move forward and look beyond 2008, we are confident on our ability to continue to drive total shareholder return over the longer term. We are confident about our intentions for top line growth in this planning period of '08 to '10 for several key reasons. First we continue to see opportunity coming from each of our three strategic stakes, Risk Management, Commercial Data Integration, and Internet stake. Secondly reason is with our international business, performing better and our US business continuing to perform well, we expect more balanced geographic growth in the future. Third reason is we have opportunity for greater market penetration in all of our customer segments small, middle, large, as well as a government sector. And finally, we have many customer satisfaction initiatives underway across the company, which will likely to benefit our in 2009 and 2010.
As to earnings growth in the future, we have several things working for us. First, we are providing highly profitable solutions today so our revenue throws off high margins. Second, our global brand and our world class commercial database allow us to have premium pricing in a global market place. And finally, as Tosas said our flexible business model allows us to continually unlock dollars that we can reinvest in the business to drive growth.
In addition to our future expectations for revenue and earnings we have important and valuable assets in our culture and in our leadership team. We have a group of leaders that are passionate about winning in the marketplace. We have leaders that know how to rise above challenges that occur along the way, including the sales execution challenges as Sara referred to. These leaders and the culture that we have created or the source of a company that has delivered extraordinary consistent and improving results for seven years running and I am confident, we'll do so again in the time period of '08 to '010.
Before I open up the phone lines for any questions, we do want to let you know that we are planning a 2008 Investor Day Event, which will likely host in the third quarter in New York City. The purpose to this event will be to provide investors or potential investors for the more thorough review of our strategic progress, as well as our long-term growth prospects. I will provide more detail on these events in the weeks ahead.
And so with that, I will now open up the phone lines so that Sara, Tasos, Rich, and myself can take any questions.
(Operator Instructions). Our first question comes from Kyle Evans of Stephens.
Hey, good morning guys.
Good morning Kyle.
First question, with the international subscription opportunity, your deferred revenue growth has been stellar and ahead of your revenue growth in the US, but just not clear to me exactly what the long-term opportunity is for subscription over there?
Hi, Kyle. On the international we have just begun, we have launched DNBi in Canada, and as you know, Canada is a very small part of our total company and a small part of international. Our plans are to take that plan from to other developed markets, both the UK, Benelux et cetera. So there is tremendous runway ahead. We are just in the process of actually putting plans in place to roll the D&B out, call it in the next -- over the course of the second half for sure.
Second half of this year?
This year. That’s correct. That’s when it will start. So you will start to see the ramp there, just the way we saw the ramp in the US, call it about a year or two ago.
Okay. And you mentioned the cross-sell opportunity around new modules for DNBi, to my knowledge there is no marketing component to it today, and thus it’s all in the RMS segment. Are there any plans to [melt] those, tow together for your client base?
Well, I think there were two questions there. So I will start by saying DNBi modules are a very small part of DNBi today, and you are right, there is enormous opportunity. The modules that are out in the market certainly are focused on that. We do believe there is no reason why we could not have a sales and marketing component added to it and the power in it is, is one platform and it’s easy to add-on modules, including marketing modules, which make it easy for small or mid size customer to implement on the desktop without a lot of complexity. All they need is really training. So you can expect us to do that as well.
Kyle, Steve. I would just add to your question. I think to add to Sara answer, I think we see the DNBi platform is having a lot of scalability, not just for risk products, and Kyle behind that we see the Hoover's platform as a company also having a lot of scalability. So those two are very clear and we'll continue very aggressive migration to those platforms. And over the course of time we'll examine other things we have. Such as we have the asset of all business, and we'll see what's possible there over the course of time. Let's know to what is at the moment.
Great. And last question, you mentioned 1% decline in the more traditional S&MS business, and that was inline with your expectations. Did you see any out performance or deterioration there by vertical industry that stood out in the period?
Not really, because if you look at our traditional products, some of it is the schools, we did find there. The rest goes across all of our channels and in general it’s not a strategic focus area for us. And I wouldn’t point to any particular vertical per se.
Okay, great. Thank you.
Our next question is from Edward Atorino of Benchmark Partners.
If I look at the RMS category and if I sort of do some math and take out SMS, and take out Internet, the remaining piece which I guess is the core RMS, it was only up about 3%. Was that partly due to transition of revenues from one platform to another or was there some other factor in that sort of somewhat slower growth there in that category?
Hi, this is Steve.
Let me just maybe frame the question and then see whether Tasos or Sara wanted to answer it. So first of all clarity sake, when we speak about our business, we speak in three stakes, risk management is one, it’s kind of separate. We speak about sales and marketing and commercial data and we speak about internet and that’s also separate from risk. What we did this quarter was start to put supply management into it and so we highlighted that I think what's in the press release as well as the schedule. And so you should look at that. So what we said was in the US. Tasos what was risk with and without supply management?
So US risk was 4%, without supply management, which was an acceleration from Q4 of 3% consistent with our expectations. And when we add supply management, I guess just 6%.
And in that Ed, what Sara had said was in risk management in the US we expect mid single-digits full year that's even without the supply management portion of it. That's what she said. So now to know that's clarified, what else can we answer for you?
Thank you. In this transition of programs to the DNBi, is something getting sort of -- is there a negative effect there of business going from say the old platform to the new platform, is there a transition effect going on to some extent and will that sort of wane as the year goes along?
Sure. So that is reflected -- I will start by saying a [non-mingle] digit expectation or amount. So the subscription portion DNBi and subscription programs continue to perform very, very well. If you look at our value added products, I mentioned some of this in my prepared remarks, were essentially migrating that to module. And when you do that, you take a product that had upfront revenue recognition and it becomes ratably recognized.
So when that happens, yes, it has an impact on the top line and it has an impact on deferred revenue. So that will continue until we actually complete the migration and as I said we are pretty early in our migration.
And that’s why we said mid single digits for US for 2008.
Understand. Also in the international segment, you sort of said that’s going to continue, it's a pretty high growth rate. Can you sort of differentiate maybe between the time, I presume the UK has turned around and the non-UK and that’s a pretty good performance in the first quarter that business, I imagine things are going pretty well over there?
Sure. And that’s really a testament to the leaders we have in all of those markets who I think are doing a superb job, driving what we would call both core organic growth as well as integrating our joint venture in Japan into our business. So we really got benefits from both, organic international was up 6%, which is really very good and then you had the benefits of the joint venture. DNBi has not launched in any substantive way in international at all. Our focus is then on what we would call core DUNSRight, data quality, and better execution. So if you look at the international trajectory, we expect that trajectory to sustain through 2008 because we feel we've got the right leadership and the right components in place to have a really good year in 2008. Does that answer your question?
Yeah, one last question. Russia, this is going to be another new market?
Well, we were in Russia. We had a distributor in that market, but they were small and they were not quite where we needed to be in terms of coverage. So we went into a joint venture with Interfax, they are essentially the leading business information provider in Russia and we believe that that combination will take the first step, which is get our data quality and coverage in the market where it needs to be. So our global customers now have access to that. Benefits really as you are going to imagine beyond 2008.
Do you need a partner in Russia because it's Russia?
We have found in many of our emerging economies, we really do much better when we have a joint venture partner with us and we go to market together because they bring a lot of local know-how and expertise and we know how to navigate that and actually manage those partnerships well.
Is it 50/50 and do you get cash out in rubles, rubles out?
Well, we are a majority owner of joint ventures.
I'll put it that way.
Can you get money out?
Tasos, do you…?
I am, so we will.
Okay. Thanks a lot.
(Operator Instructions). At this time, there are no further questions.
Okay, then I will thank everybody on the phone for taking the time to listen and to hear about our progress and we look forward to speaking again next quarter. Operator, you can go ahead and end the conference call.
Thank you. Thank you for participating in today's conference call and have a good day.