Dun & Bradstreet Holdings, Inc. (NYSE:DNB) Q1 2024 Earnings Call Transcript May 2, 2024

Dun & Bradstreet Holdings, Inc. reports earnings inline with expectations. Reported EPS is $0.2 EPS, expectations were $0.2. DNB isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the Dun & Bradstreet First Quarter 2024 Earnings Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question-and-answer session [Operator Instructions] This call is being recorded on Thursday 2nd of May, 2024. I would now like to turn the conference over to Mr. Sean Anthony, VP Corporate FP&A. Please go ahead sir.

Sean Anthony: Thank you. Good morning, everyone and thank you for joining us for Dun & Bradstreet's financial results conference call for the first quarter of 2024. On the call today we have Dun & Bradstreet's CEO, Anthony Jabbour; and CFO, Bryan Hipsher. Anthony will begin with an overview of our first quarter results, provide a few strategic updates on what's driving our growth outlook and then pass it to Bryan for an in-depth financial review. We will then finish up with Q&A and a few closing remarks. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call including the Q&A portion of the call may include forward-looking statements related to the expected future results for our company and are therefore forward-looking statements.

Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Today's remarks will also include references to non-GAAP financial measures. Additional information including the reconciliation between non-GAAP financial information to the GAAP financial information is provided in the press release and supplemental slide presentation. The conference call will be available for replay via webcast through Dun & Bradstreet's Investor Relations website at investor.dnb.com. With that I'll now turn the call over to Anthony.

Anthony Jabbour: Thank you, Sean. Good morning, everyone and thank you for joining us for our first quarter earnings call. 2024 is off to a strong start. We delivered an accelerated organic revenue growth rate of 4.3%, 50 basis points of margin expansion and improved free cash flow conversion of 119%, up 22 percentage points versus the prior year quarter. The business continues to improve as we have shifted to mid single-digit growth and are moving into our midterm target of 5% to 7% organic revenue growth. With the vast majority of our revenues at/or above the high end of our midterm range, we have more conviction now that we can drive towards the higher end of that range over the coming years as we bring more innovation to strengthen our existing solutions portfolio.

It's exciting to see the investments we have made materialize into consistently improving revenue growth, profitability and free cash flow generation. And the team and I look forward to bringing even more of that to bear in the near future. And with the leverage coming down to 3.7 times and headed towards 3.5 times by the end of the year, our Board also authorized a share repurchase program of up to 10 million shares through 2027. While our capital allocation focus remains on organically growing the business and deleveraging the balance sheet, we also want to give ourselves the flexibility to be opportunistic in light of the significant disconnect we see with our valuation against our financial performance relative to our peers. Our retention rates are rock solid at 96% and combined with the improvements we have made in cross-sell upsell, new logo acquisition, new solution innovation and pricing, we are bringing a holistic approach to our improved growth algorithm.

It all begins with the investments we've made in our data supply chain and our ongoing cloud upgrades that have allowed us to significantly improve our data and analytic offerings. Our vitality index is now at 32% overall and is a reflection of our clients utilizing our most modern solutions and taking on net new innovations that we are now producing every quarter. With new solutions to sell, our sales force is bringing incremental value propositions to our customers through cross-sell and upsell efforts and we expect another one to two points of growth to materialize in 2025 and into 2026 from those efforts. Increased growth from pricing is also a reflection of the improvements we've made. And while this year is expected to deliver around 2.5% growth from price, we expect to see closer to 3% to 3.5% growth in 2025 and beyond.

The first quarter was another strong quarter of execution from both an operational and financial perspective. Now, while the overall solution portfolio is performing well, I want to take some time to highlight a few areas that are really exciting and we believe will drive the next phase of our growth story. Beginning with our Finance and Risk solutions. I want to share a deeper view into what we are doing in our third-party supply chain risk management solutions. Those solutions are growing nearly $200 million in annual revenues, and we saw the first quarter grow nearly 30% on a global basis. Clients and prospects throughout the world, continue to need better data, analytics and insights into the risk profile of their most critical vendors and third parties, while the definition of risk continues to expand each and every day.

Expectations and regulations around sustainability, social, compliance, financial, cyber and governance continue to rise and more and more businesses are coming to us as the one-stop shop to solve their needs. We believe the depth and breadth of our private company data throughout the world, puts us at a significant advantage to others. So we'll continue to pursue rapid expansion and proliferation of our Risk Analytics and associated solution sets to our existing clients and prospects. With a total addressable market of nearly $10 billion and our relatively low penetration to our existing Finance Solutions customer base of less than 10%, the cross-sell opportunity is significant let alone the ability to secure new logos in regions of the world that are lower penetrated such as Sweden, Germany and others in Central Europe, Latin America and Asia.

Now while understanding, who we are doing business with is top of mind, another topic that is just as relevant to our clients, is managing and mastering first- and third-party data in the coming age of generative artificial intelligence. Our Master Data Management or MDM solutions in both North America and International, grew double digits with total growth of just over 10%. In North America, we continue to see expansion through the addition of complementary data sets, price increases and utilization of the solution across more and more functional areas, within a large corporation. Our best-in-class Entity resolution and Matching process identifies unique business entities, which enable the creation of commonly shared business insights and a master client supplier record.

And while cross-sell and upsell is the key driver of growth in North America, for the International side, the introduction of Data Blocks and D&B Connect have created strong demand from new logos. One of the exciting parts of our earlier acquisition of Bisnode was the direct access to key clients in the region. For instance, while the Scandinavian economy is not built on financial institutions, it contains a significant manufacturing and industrial production presence. These types of companies are a perfect fit, for our global MDM data and analytics capabilities, not to mention third-party and supply chain risk management, which I mentioned earlier. Now, what really works for us is when we get into the core of a company's data strategy, embed the D-U-N-S Number and our parent-child hierarchy into their master client and our master supplier record.

This lays the groundwork for symbiotic relationship for companies that first master manage their data in an organized and curated manner, allowing for the offensive and defensive use cases, we provide clients to be scalable and sustainable for years to come. The total addressable market for Master Data Management is over $15 billion and we have less than 10% of our clients using MDM, across Finance and Risk and sales and marketing, which means that the runway for growth through the next five to 10 years is a great opportunity. These are two really exciting areas of what we are doing today. But before I move on to a few key wins in the quarter, I want to provide a quick update on where we are in our gen AI progress, as we believe it could be a significant tailwind in the future.

It's exciting to see the rapid growth and increased awareness of gen AI over the past year, which has led to many organizations coming to us for guidance and support. Our trusted data has been among the broadest and deepest commercial data sets in the world. Our data and more specifically, our MDM solutions are becoming a foundational element to ensure that gen AI answers are accurate and relevant. It is also critically important to highlight that our focus on and commitment to responsible and trustworthy AI, is foundational to all we do and is embedded in our processes, underpinned by our AI ethics policy. Recognizing customers concerned about hallucination, we are committed to transparency and showing our work in our gen AI products. To this end, we've created explainability and traceability features in our AI agents, which allows our customers to audit in real-ime what the tool is doing and to review the raw data that was used for generating a response.

What's becoming apparent is that while many LLMs are popping up, there are clearly a limited amount of truly differentiated and reliable data sources. In our D&B.AI Labs, we have tested the top large language models. And what is clear is that even the best model built on poor data delivers poor results with significant amounts of hallucinations and drift. However, an average LLM with data like ours produces superior results with accuracy that can be relied upon. So with our unique third-party risk data and one of the premier models out today, Ask Procurement is the newest gen AI solution that we are co-eveloping with IBM that leverages the Dun & Bradstreet Data Cloud, real-time business intelligence and analytics as well as IBM technology. Ask Procurement simplifies, accelerates and reduces the cost of certain essential procurement decisions.

It empowers professionals to access new data and insights on current and prospective suppliers offering a detailed perspective on company relationships to drive savings and efficiencies and improve risk management. The product will deliver answers derived from customer-specific information, and Dun & Bradstreet supplier risk data via Data Blocks. We are also launching D&B Hoovers conversational list builder. Gen AI capability to generate targeted prospect audience and contact list in partnership with Google Vertex AI. For this solution, we leverage natural language processing to allow our customers to query our data in a more natural way. Hoovers' conversational list builder will be the first of many D&B talk with your data assistants, in which we look to democratize and proliferate the utilization of our data and analytics throughout our portfolio of solutions.

In the end, we are very proud of the unique proprietary and link data that we own. And as we look to gen AI shifting from one-off pilots to broader adoption, we are excited about the heightened elevated importance our data will receive. If I can draw a parallel to Formula 1 Racing, billions have been spent creating a race car to win and teams want to feed their engines with highest quality, highest octane fuel to drive maximum performance. And similarly, for gen AI to be successful, data is going to be what fuels these models, and we look forward to supporting our clients and prospects in this next phase of their business evolution. And now I'll highlight a few client wins in the quarter. Starting with North America, I want to touch on a few examples of how we support our 96% gross retention rates and also how we are utilizing multiyear contracts to create built-in growth through price escalators.

Two of the top four banks in the United States renewed a piece of their relationship with us through such contracts. Both clients are leveraging our sales and marketing solutions to drive more efficient and effective customer acquisition, market analysis and to create offers for commercial lines of business and card. Our clients see us as the provider that best supports their ability to be the first to the opportunity of a newly formed small business, while also allowing them to make the most appropriate offer to fit the needs and risk profile of that prospect. Another example of retain and expand of a large existing client was with the Food and Drug Administration, or FDA. The FDA deals with a large amount and types of businesses throughout the world, and the utilization of our best-in-class Master Data Management, supply chain, risk management, import safety, business intelligence, analytics and data science offerings helps them to create consistency and accuracy as data is exchanged throughout their platforms.

And our final highlighted win in North America is one of the world's largest insurance/reinsurance firms, that entered into another multiyear deal with us. They use D&B firmographic data to support their Master Data initiative, Finance Analytics for global underwriting as well as Hoovers and our global reference solutions for marketing and prospecting. And now moving on to International. We saw a common theme of strong renewals and elevated Master Data Management and third party risk solution sales. To start, we secured a five-year contract with one of the world's leading manufacturers and providers of compressed air products and services, KAESER KOMPRESSOREN to fuel their Master Data capabilities. Similarly, we also secured the three-year contract with one of the leading global logistics service providers, Rhenus Group to also support their Master Data and CRM needs.

One of the largest European auto manufacturers also renewed and expanded a multiyear deal with significant upsell to provide supplier onboarding and monitoring in the proprietary platform with data delivered via data blocks. And lastly, we captured another enterprise win in Asia with a leading financial institution, providing the client our best-in-class credit decisioning tools. Overall, we're off to a strong start to 2024. We are on track to achieve our full year guidance for all key metrics and are making significant progress in some pretty exciting areas to support our growth for the years to come. With that, I'd now like to turn the call over to Bryan to discuss our financials in more detail and give a quick update on our outlook for the remainder of the year.

Bryan Hipsher: Thank you, Anthony, and good morning, everyone. Turning to slide 1. On a GAAP basis, first quarter revenues were $565 million, an increase of 4.5% compared to the prior year quarter and an increase of 4.1% before the effect of foreign exchange. Net loss for the first quarter was $23 million or a diluted loss per share of $0.05 compared to a net loss of $34 million for the prior year quarter. The $11 million decrease in net loss for the three months ended March 31, 2024, compared to the prior year quarter was primarily due to a higher tax benefit improved operating results and a non-cash gain related to the interest rate swap amendment, partially offset by debt extinguishment costs in connection with the term loan amendment.

Turning to slide 2. I'll now discuss our adjusted results for the first quarter. First quarter revenues for the total company were $565 million, an increase of 4.5% compared to the prior year quarter and an increase of 4.1% before the effect of foreign exchange. The increase in revenues was driven by balanced growth in our North America and International segment. International growth was partially offset by the impact of the divestiture of a non-core business to consumer marketing business in Finland in the fourth quarter of 2023 and therefore, revenues on an organic constant currency basis were up 4.3%. First quarter adjusted EBITDA for the total company was $201 million, an increase of $11 million or 6%. This was primarily due to increased organic revenues and lower data acquisition costs, partially offset by associated personnel and cloud infrastructure costs supporting our Gen AI and other growth initiatives.

First quarter adjusted EBITDA margin was 36%, an increase of 50 basis points compared to the prior year quarter. First quarter adjusted net income was $85 million or adjusted earnings per share of $0.20 compared to $81 million or $0.19 per share in the first quarter of 2023. The increase was primarily attributable to higher adjusted EBITDA and lower tax expense in the current year quarter, partially offset by higher depreciation and amortization expense as our investments in new solutions and significant upgrades have moved into production. Turning now to slide 3. I'll now discuss the results for our two segments, North America and International. In North America, revenues for the first quarter were $387 million, an increase of 3% from prior year quarter and 3.2% on a constant currency basis.

In Finance and Risk, revenues were $208 million an increase of $7 million or 3% due to strong growth in our third party supply chain risk management and Finance Solutions, partially offset by decreased revenues from our credibility solutions. For Sales and Marketing revenues were $178 million, an increase of $5 million or 3%. Sales and Marketing growth was primarily driven by higher revenues from our Master Data Management solutions, partially offset by decreased revenues from our other marketing solutions. North America first quarter adjusted EBITDA was $152 million, an increase of $2 million or 1%. And North America EBITDA margin was 39%, a decrease of 90 basis points from the prior year quarter. This was primarily due to revenue growth and lower data acquisition costs, partially offset by higher infrastructure costs as we upgrade off of legacy infrastructure onto modern cloud platform.

And while we distribute our solutions around North America and our International markets, our significant investments in product development and technology are contained within our North America segment as it is the primary innovation engine. Turning to Slide 4. In our International segment, first quarter revenues increased 7% to $178 million or an increase of 6%, before the effect of foreign exchange and an increase of 6.8% on an organic constant currency basis. Finance and Risk revenues were $120 million, an increase of 8% or an increase of 7% before the effect of foreign exchange. This was attributable to growth across all markets including higher revenues from the United Kingdom and Europe, primarily attributable to growth in Finance Analytics, API solution and our Third Party Risk & Compliance solutions, along with increased revenues from Greater China, driven by growth in Finance Analytics.

Sales and Marketing revenues were $58 million, an increase of 6% or an increase of 5% before the effect of foreign exchange. On an organic basis, revenues grew 6%, primarily due to higher revenues from the UK and Europe, driven by new to market and localized solutions, such as Hoovers and Direct+ as well as higher overall data sales. First quarter International adjusted EBITDA of $64 million, increased $9 million or 16% and adjusted EBITDA margin was 36%, an increase of 250 basis points compared to the prior year quarter. The increase in adjusted EBITDA was primarily due to revenue growth from the underlying business and foreign exchange gains as certain foreign currencies of our international market strengthened against the US dollar during the current year quarter, partially offset by higher net personnel costs.

Turning to Slide 5. Slide 5 contains the details of our capital structure as of the quarter end. At the end of March 31, 2024, we had cash and cash equivalents of $216 million and total principal amount of debt of $3,564 million, with a weighted average interest rate of 6%. Currently 90% of our debt is either fixed or hedged. And as of March 31, 2024, we had $850 million available on our $850 million revolver credit facility. Our leverage ratio was 3.7 times on a net basis and the credit facility senior secured net leverage ratio was 3.2 times. We expect to be at around 3.5 times on a net basis by the end of this year as we continue to migrate down towards the medium-term range of 3 times to 3.25 times in 2025. And now turning to Slide 6. Our outlook for 2024 remains unchanged.

Total revenues after the effect of foreign currency are expected to be in the range of $2,400 million to $2,440 million or an increase of approximately 3.7% to 5.4%. This includes an assumption of a modest headwind in the first three quarters of the year, partially offset by a modest tailwind in the fourth quarter due to the effect of foreign currency related to the expected variances between the US dollar, euro, British pound and Swedish krona. Revenues on an organic constant currency basis are expected to be in the range of 4.1% to 5.1% for the full year. Adjusted EBITDA is expected to be in the range of $930 million to $950 million. And adjusted EPS is expected to be in the range of $1 to $1.04. Additional modeling details underlying our outlook are as follows: we expect interest expense to be around $220 million; depreciation and amortization expense to be in the range of $125 million to $135 million excluding incremental depreciation and amortization expense resulting from purchase accounting; adjusted effective tax rate of around 22% to 23%; weighted average diluted shares outstanding of approximately $436 million, a slight increase from the original $433 million; and for CapEx, we expect approximately $150 million to $160 million of internally developed software and $45 million of property, plant and equipment and purchased software.

Based on the results we delivered in the first quarter, our expectations for the cadence for the remaining quarters is unchanged. And we continue to anticipate operating free cash flow conversion as a percentage of adjusted net income, excluding the impact of AR securitization to improve guidance pattern. Overall, we are on track for 2024. We look forward to discussing our continued progress in the upcoming quarters. With that, we're now happy to open the call for questions. Operator, will you please open up the line.

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Kyle Peterson with Needham. Please go ahead.

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