Dun & Bradstreet Holdings, Inc. (NYSE:DNB) Q3 2023 Earnings Call Transcript

Dun & Bradstreet Holdings, Inc. (NYSE:DNB) Q3 2023 Earnings Call Transcript November 1, 2023

Dun & Bradstreet Holdings, Inc. beats earnings expectations. Reported EPS is $0.27, expectations were $0.26.

Operator: Hello, and welcome to the Dun & Bradstreet Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would like now to turn the conference over to Sean Anthony, Vice President, Corporate FP&A. Please go ahead.

Sean Anthony: Thank you. Good morning, everyone, and thank you for joining us for Dun & Bradstreet’s financial results conference call for the third quarter of 2023. On the call today, we have Dun & Bradstreet’s CEO, Anthony Jabbour; and CFO, Bryan Hipsher. 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.

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Today’s remarks will also include references to non-GAAP financial measures. Additional information, including a 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 third quarter 2023 earnings call. On today’s call, I’ll start with a brief overview of our third quarter results, followed by an update on our operational activities and progress towards our strategic initiatives. After that, I’ll pass the call over to Bryan for an in-depth review of our financial results and to discuss our expectations for the remainder of 2023. We’ll then open up the call for questions, and then I’ll finish up with a few closing comments. With that, let’s get started. We delivered a strong third quarter of financial results and operational execution, with organic constant currency revenue growth of 4.8%, adjusted EBITDA growth of 5.6% and 40% EBITDA margins.

We continue to show both acceleration and durability in the quarter. North America and International continue to capitalize on the need for businesses to better leverage data and analytics in driving both financial and operational improvements, which is only being further magnified by the advancements of generative AI solutions. We’re at the forefront of the application of GenAI to business, and we are excited about how clients and prospects are coming to us for guidance and support in implementing this groundbreaking technology. With our data as the backbone for some of the largest and most sophisticated companies throughout the world, we’re uniquely positioned to help them achieve their goals of increasing revenues, driving down costs and mitigating risk.

As a reminder, we are collaborating with our clients in our D&B.AI Labs, and we’ll be launching new products under our AIBE brand. We are also focused internally on ways that this technology can improve our own operational efficiency and access client zero in the development of future commercial offerings. I don’t believe there’s been a time in our recent history in which our proprietary data, analytics and platform solutions have had more potential, and I’m very excited about the progress we are making and the pace at which we are operating. With that in mind, let’s dig in to what we delivered in the third quarter across both our North American and International segments, and then I’ll follow up with the latest on our strategic initiatives.

Beginning with North America, revenues grew 4.5% in the quarter. Our Finance and Risk solutions grew 5%, driven by strong double-digit growth in risk, consistent growth in finance solutions, and this being the first quarter with no year-over-year impact from the GSA. Sales and Marketing also grew 4%, driven by mid-single-digit growth in our Master Data management solutions. Finance solutions and third-party risk and compliance offerings continue to deliver resilient growth by offering mission-critical solutions that help clients weave their way to an increasingly complex and volatile business environment. Finance Solutions continued its steady growth through delivering incremental value throughout the contract period as well as providing a great client base to upsell and cross-sell additional capabilities.

We continue to see strong retention rates and are working with our clients to integrate and deliver our solutions even deeper into the most mission-critical applications and processes within our customers’ ERP, AR and other finance-related workloads. Our risk solutions had another excellent quarter, as businesses continue to search for ways to automate and optimize the onboarding, monitoring and management of the third-party supplier networks, whether it’s the SEC bringing increased cybersecurity disclosure requirements, the state of California adding incremental ESG and supply chain reporting regulations or Europe’s increased adoption of sustainability requirements, businesses are being forced to understand and report on a more detailed level of who they are partnering and doing business with.

With one of the world’s most comprehensive global risk solutions, we are continuing to capitalize on the increasing demand for know your customer, know your supplier and in general, know your third-party solutions. And we will continue to invest in accelerating these assets over the coming years. Turning to our Sales and Marketing solutions. We saw another solid quarter of 4% growth, driven by our Master Data Management and Sales and Marketing data solution sales. Our Sales and Marketing business is anchored by our MDM solution and therefore, doesn’t experience the same dynamics that other Sales and Marketing providers have out in the market. In both good times and bad, highly curated, organized and rapidly accessible data is critical. With our ability to deliver economies of scale through the upsell and cross-sell of our complementary solution sets, we are well positioned to defensively grow our enhanced set of sales and marketing solutions through leveraging our unique positioning with our MDM offerings.

Throughout the quarter, we continue to roll out new solutions, deliver significant enhancements to existing platforms and expand upon our strategic partnerships. On the new solutions side, in the SMB space, we launched the D&B concierge service, which allows for the contribution of other proprietary data sets that provide prospects and existing clients the opportunity to create a more holistic picture of their financial profile and therefore, provide themselves an even better opportunity to access much-needed capital to establish or grow their business. This product was launched ahead of schedule and is already outselling our legacy concierge product. It is another great example of our ability to be nimble and execute with urgency. We also brought together a bevy of existing solutions in our new credit insights product that will allow small businesses to have a unified buying experience of products and services that supports them on each step of their growth journey.

We also continue to drive new and modified solutions in our most rapidly growing areas. For example, in third-party risk and compliance, we released Compliance Intelligence. I know your third-party monitoring and compliance decision-making solution driven by Dun & Bradstreet’s AI-powered data. In Master Data Management, we continue to expand our new D&B Connect Essentials launch and product that takes the power of MDM, but it simplifies it from mid-market utilization, allowing smaller companies to leverage a simplified user interface with prewired algorithms that companies can use right out of the box. As we continue to invest in innovating Sales and Marketing and in Finance and Risk, we see a strong uptake of our new solutions, which further supports our now 26% vitality index in North America.

In addition to the GenAI initiatives I mentioned upfront, we also announced at our recent Global Client Conference an expanded partnership with IBM. Together, we will be building and launching new products based on the integration of D&B data and IBM watsonx. This new go-to-market will be a part of IBM’s consulting engagements to embed these new capabilities directly into the solutions our joint clients use today as part of their daily workflows. As announced at our conference, the first use cases include foundational entity resolution for any commercial use case and a new ask procurement capability for supply chain risk mitigation. We’re excited about bringing together the power of watsonx and AIBE to solve business issues that will ultimately unlock significant value for our clients.

Moving on to North American sales. We continue to show resilient growth, which is supportive of our continued acceleration into 2024 and beyond. Overall, our portfolio of solutions is, once again, proving to not only be mission-critical in times of uncertainty, but a strategic path forward so that clients and prospects have the ability to drive a more efficient and effective operation through data and analytics-driven processes, improvements and/or automation. We set out on a strategy four years ago to build not only a growing business, but a sustainably growing business. I’m pleased with the durability that we have built in that time. And with 55% of our North American revenues under multiyear contracts and 53% overall, we continue to progress towards our goal of 60% in the midterm.

And not only are we increasing our total amount of revenues under multiyear contracts, we’re also seeing the tenure increase. For instance, in the third quarter, we saw the number of four-year-plus deals increased 16% versus the prior year period. This lengthening of contracts is directly proportional to our clients’ growing trust and confidence in Dun & Bradstreet as a partner. With over 96% retention rates and a vitality index of 26%, we continue to strengthen our base position with existing customers. In addition, with the introduction of innovative new solutions, we are better able to expand with existing clients and convert new prospects as we broaden our addressable market. On the land and expand front, Coface, a worldwide leader in credit insurance, business information and accounts receivable management, extended their nearly 25-year relationship with us through a multiyear deal that migrates them to our modern Data Blocks solution and creates an opportunity for them to further increase their volumes, while creating economies of scale throughout their credit insurance underwriting operations.

From an SMB perspective, we continue to expand our marketplace with the addition of Enova International’s OnDeck. Enova continues to look for new and innovative ways to drive increased small business loan origination through a combination of our D&B mobile applications and SMB advertising capabilities, we’re able to drive a significant increase in leads to OnDeck to a captive audience of millions of businesses that come through the D&B ecosystem each and every year. And finally, we also had a significant expansion with the Department of Defense. Our client continues to invest in supply chain risk mitigation and foreign investment assessment, enabling further discovery of potential vulnerabilities, identification of industrial-based risk and ultimately, supporting the administration’s objective to fortify and strengthen our nation’s security.

Whether it’s in Sales and Marketing, Finance and Risk, public sector or private, I’m very pleased with the progress we are making across our North American segment and the team is laser-focused on closing out the year and maintaining our positive momentum as we head into 2024. Now turning to our International segment. We saw another quarter of strong organic growth at 5.8%, as all regions drove positive growth, including high single digits across U.K., Asia and worldwide network markets. While Europe grew greater than 3% and is up 4% year-to-date, a marked improvement from levels when we acquired the business less than three years ago. We continue to focus on the localization of existing solutions and driving new innovations in our own WWN markets.

Most recently, we launched the compliance intelligence module in Risk Analytics, expanded our ESG registered seal in additional WWN markets, and enhance the Hoovers platform with Audience Builder and launched in Central Europe. We continue to see excellent uptake in our new solutions and our vitality index reflected this progress with its rise to 34%. We plan to continue to steadily execute the balance of migrations and the introduction of localized solutions to drive further sustainable growth across our global regions. We are very pleased with the consistent operational execution by our international team. On the sales front, we had another strong quarter. Enterprise accounts remain a key focus of our strategy, and sales growth in this channel is up double digits through the first three quarters.

Retention remained healthy in the third quarter at 93%, and we added a few more key names to our growing roster of top-tier multinational clients. Beginning with the significant new business win, we are excited to welcome Munich Re to our D&B client portfolio. We sold a combined solution across both Finance and Risk and Sales and Marketing, in which the value of our end-to-end solution, connected by the D-U-N-S ecosystem, ended up becoming a very compelling offering. We’re also able to support Siemens Energy with an MDM solution that allows them to cleanse and curate data from several other acquired companies that built up some inconsistency over time. Another land and expand win in Asia was Hong Kong Export Credit Insurance Corporation. We deepened our relationship with the addition of credit decision data blocks that allow them to more efficiently manage the financial underwriting of clients they are handling throughout the region.

Again, these are about a handful of examples of strong wins in the quarter. There were many others that continue to provide additional proof points of the strengthening of our global solutions, data and go-to-market team. Whether it’s improving our data quality and coverage, migrating and upgrading our infrastructure and back-office systems through cloud migration and system enhancements, adding new clients or coming to market with leading partners, like IBM and Google, we continue on our path of executing against our strategic vision and delivering strong and improving financial results along the way. As we’ve said before and proven out over time, D&B is a defensible growth asset with significant upside from our merchant opportunities, such as the GenAI revolution, and we will continue to focus our capital and energy on driving accelerated growth, delighting our clients and delivering significant shareholder value.

With that, I’d now like to turn the call over to Bryan to discuss our financial results for the third quarter in more detail and the outlook for the remainder of 2023.

Bryan Hipsher: Thank you, Anthony, and good morning, everyone. Today, I will discuss our third quarter 2023 results and provide an update on our guidance for the remainder of the year. Turning to Slide 1. On a GAAP basis, third quarter revenues were $589, an increase of $32 million, or 6% compared to the prior year and 5% before the effect of foreign exchange. Net income for the third quarter was $4 million or a diluted earnings per share of $0.01 compared to net earnings of $8 million for the prior year quarter. Turning to Slide 2. I I’ll now discuss our adjusted results for the third quarter. Third quarter revenues for the total company were $589 million, an increase of 6% or 4.8% on a constant currency basis, driven by increased growth in the underlying business and the positive impact of foreign exchange.

Third quarter adjusted EBITDA for the total company was $235 million, an increase of 6% compared to prior year quarter and an adjusted EBITDA margin of 40%. The increase in adjusted EBITDA was driven by organic revenue growth contribution, higher performance-based incentive compensation, along with the negative impact of foreign exchange. Third quarter adjusted net income was $116 million or adjusted diluted earnings per share of $0.27. The increase in adjusted net income was primarily attributable to higher adjusted EBITDA and higher tax benefit, partially offset by higher depreciation and amortization, higher interest expense and higher foreign exchange loss in the current year quarter. 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 third quarter were $421 million, an increase of 4% or 4.5% on a constant currency basis. Finance and Risk revenues were $235 million, an increase of 5%. This was primarily due to double-digit growth in our third-party and supply chain risk management and single-digit growth in finance solutions, which were partially offset by lower revenues from our legacy credibility solutions. Sales and Marketing revenues were $186 million, an increase of 4%. This increase was primarily driven by 5% growth from our Master Data Management solutions and higher Sales and Marketing data sales. North America third quarter adjusted EBITDA was $196 million, an increase of 4%, with an adjusted EBITDA margin of 46%, a decrease of 30 basis points from the prior year.

The increase in adjusted EBITDA was primarily due to revenue growth, partially offset by higher costs from data acquisition and processing costs related to our revenue growth and the negative impact of foreign exchange associated with our centralized European technology team. Turning to Slide 4. In our International segment, third quarter revenues were $167 million, an increase of 9% or 5.8% on a constant currency basis. Finance and Risk revenues for the third quarter of 2023 were $114 million, an increase of 11% and an increase of 7% before the effect of foreign exchange. There was positive contribution from all markets. Europe and Asia Pacific growth was driven by Finance Analytics and API solutions. WWN alliances was due to higher cross-border data fees.

And growth from our U.K. market came from third-party risk and compliance solutions as well as Finance Analytics. Sales and Marketing revenues for the third quarter of 2023 were $53 million, an increase of 6% and an increase of 2% before the effect of foreign exchange, primarily due to higher revenue from U.K. and Europe, driven by higher data sales, delivered via our latest API solutions. International third quarter adjusted EBITDA was $56 million, an increase of 8%, with an adjusted EBITDA margin of 33%, a decrease of 60 basis points from the prior year. The increase in adjusted EBITDA was primarily due to organic revenue growth from the underlying business. Turning to Slide 5. I’ll now walk through our capital structure. As of September 30, 2023, we had cash and cash equivalents of $230 million and total principal amount of debt of $3,686 million.

The $3,686 million in principal is made up of $460 million of unsecured notes at 5%, which mature in 2029. Term loans of $2,659 million at SOFR plus CSA plus 275 that matures in 2026, $453 million SOFR plus 300 that matures in 2029 and borrowings of $150 million under our revolver. The $2.7 billion term loan has $1 billion floating to fixed swap effective through March 2025 at 3.214%, which was extended from the previous maturity date of March 2024 and a $1.5 billion floating to fixed swap which expires February 2026 at 3.695%. The $453 million term loan has $250 million swap from floating to fix through February 2025 at 1.629%. We also have three cross-currency swaps at $125 million each that settled in July of 2024, ’25 and 2026. Currently, 87% of our debt is either fixed or hedged, and it will remain that way through 2024.

We had $735 million available on our $850 million revolving credit facility as of September 30, 2023. Overall, our weighted average interest rate was 5.87% as of September 30, 2023. Our leverage ratio was 3.9x on a net basis and the credit facility, senior secured net leverage ratio was 3.4x. Turning now to Slide 6. I’ll now walk through our outlook for 2023. We expect total revenues after the effect of foreign currency to be in the range of $2,280 million to $2,320 million, or an increase of approximately 2.5% to 4.3%. This includes an updated assumption related to the effect of foreign currency and the expected variances between the U.S. dollar, euro, British pound and Swedish krona. Revenues on an organic constant currency basis are now expected to be in the range of 3.75% to 4.25% for the full year.

Adjusted EBITDA is now expected to be in the range of $880 million to $910 million. The adjusted EBITDA range takes into account a $5 million negative impact from the strengthening of the euro versus the U.S. dollar, in comparison to the relative flatness of the British pound and Swedish krona. And adjusted EPS is now expected to be in the range of $0.95 to $1. Additional modeling details underlying our outlook are as follows: We now expect adjusted interest expense to be approximately $230 million; depreciation and amortization expense of approximately $115 million to $120 million, excluding incremental depreciation and amortization expense resulting from purchase accounting; an adjusted effective tax rate of approximately 19% to 20%; weighted average diluted shares outstanding of approximately $433 million; and for CapEx, we still expect approximately $130 million to $150 million of internally developed software and $30 million of property, plant and equipment in purchased software.

Overall, we delivered better-than-expected results and especially, organic revenue growth in Q3 and have tightened and/or raised our ranges for the year. Implied in that is that Q4 expected to be at or around the midpoint of our updated guidance for organic revenue growth with excellent EBITDA and better than communicated EPS delivery, which takes into account the two factors we’ve discussed since the beginning of the year, our ongoing transformation and what we always expected to be a pretty challenging macro environment overall. In the end, our defensible and resilient solutions are allowing us to do what very few are doing, which is delivering in Q3 and raising up the midpoint of our full year revenue guidance. As Anthony said earlier, we’re well positioned to capture the significant growth opportunities in front of us, and we are very pleased with the performance year-to-date.

With improving profitability and cash flows, we will continue to prioritize deleveraging the balance sheet further below the 3.9x we are today and focusing capital allocation strategies on driving increased shareholder returns. With that, we’re now happy to open up the call for questions. Operator, will you please open up the line for Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Andrew Jeffrey of Truist Securities.

Andrew Jeffrey: Nice to see the improved results. Anthony, the — lots of good stuff going in the top of the funnel, sounds like new wins and longer contracts and even some new government business. Can you talk a little bit about maybe what’s coming out of the bottom? Because it sounds to me like given the vitality index and accelerated new sales and so forth, we should be looking at pretty nice organic revenue growth acceleration next year sort of macro notwithstanding. So just trying to understand maybe some of the puts and takes.

Anthony Jabbour: Yes. Sure, Andrew. Thank you for the question. We’re certainly excited about the momentum that we are building. And obviously, for next year, we’ll get into that in February when we guide for the year. And there are certainly other factors. There’s macro factors out there. But really what we’re focused on and what I’m trying to ensure my colleagues are focused on are the things that we control and we see it across all aspects of the business. We’re moving very quickly. We’re — I’d say, with our clients, the relationships have never been stronger, never been longer, the types of innovations that we’re coming out with. I’m constantly impressed with the speed at which we’re running at. And so I do feel really good about the things that we control.

And like I’ve always said, there’s a macro effect out there that’s affecting many companies. And the force of our transformation, the force of the great work by my colleagues is really helping offset that. So that’s what’s kind of coming out at the bottom, I’d say, Andrew, is just a macro force offsetting against a transformational force here.

Andrew Jeffrey: Okay. That’s really helpful. Look forward to hearing more about ’24 in February.

Operator: Our next question comes from John Mazzoni of Wells Fargo.

John Mazzoni: Maybe just a follow-up on that one. Just given the just client demand for longer contracts, I believe more of these kind of four-year plus contracts, could you just talk about really kind of the demand for maybe further send it out as well as just continued progress to that 60% target on multiyear? And really just could you speak to kind of the desire for kind of a single source of truth or just the kind of credibility of the D&B data and more uncertain times?

Anthony Jabbour: Thank you, John. Yes, certainly, we’re excited with, number one, that we chose the strategy four years ago. I mean it takes work, obviously, extending contracts and obviously building the trust and proving that you’re a partner for a long-term contract. And what I’d say from our clients’ perspective is they are very pleased. And the data is mattering more and more. So if you think of Master Data Management, right, which we’re incredibly strong in because our D-U-N-S number, the linkages, the data coverage that we have, the quality of the data, our Master Data Management skills, all of them, they’ve never been more important than now at the beginning of generative AI solutions that are being created. And so I think that, in addition to the trust, so we focused before President Biden talked about responsible AI or anyone else.

We were first in terms of driving a responsible AI approach. Our clients trust us. We had thousands at our client conference, and it covered a lot around generative AI. And they’re looking to us also in terms of how to deploy it. So I think when they look forward and they see all this exciting technology that can really help enable their businesses, they look at us as we’ve got really high-quality data capabilities around generative AI, and we’re thoughtful and we’re a trusted partner. So I think all those come together, and they’re helping us with these longer-term contracts and again, these really strong client relationships.

John Mazzoni: That’s great color. Maybe just a quick follow-up. Looking at kind of the 4Q jumping off point. It’s kind of assuming a handle on the actual OCC growth. How should we think about kind of 24% as we break it down into kind of pricing versus penetration and new logos. Just kind of high-level thoughts would be appreciated, if possible.

Bryan Hipsher: Yes, sure. And as Anthony said, we’re looking to obviously finish out the year strong and build momentum into 2024, which we’ll get on and go through in detail in February. One of the key components and why we sit on in the strategy of pushing towards multiyear contracts again. John, I think you remember, we were less than 20% of our revenues were under multiyear contracts when we started. Now it’s up over 53%. Embedded in that, too, is natural price escalators. And so when you look at this year being closer to roughly 2% of price contributing from that perspective, stepping up north of that as we head into 2024, that kind of base book of business — those base price increases are really one of the things that give us continued confidence and really allow us to set on that path of continued acceleration of organic growth that we’ve been on.

Operator: The next question comes from Andrew Steinerman of JPMorgan.

Alex Hess: This is Alex Hess, on for Andrew Steinerman. I want to turn to the balance sheet real quick and maybe what your adjusted interest expense implies. Can you remind us, is that an adjusted net interest expense guidance of $230 million or gross? And should we take the interest rate that’s implied for 4Q as sort of what you’ll be going forward now that you’ve refinanced the rate swap?

Bryan Hipsher: Yes, sure, Alex. So it is adjusted on a net basis. And so from that perspective, I think that is a pretty good run rate. We did the blend and extend on the $1 billion hedge in the quarter, which pushed that out from what was originally March ’24 date to March 2025. And so when you think about heading through next year, what kind of rates where they’re projected to be, that’s going to leave us in a pretty consistent position from that perspective.

Operator: The next question comes from Manav Patnaik of Barclays.

Ronan Kennedy: This is Ronan Kennedy, on for Manav. One of your Sales and Marketing competitors talked about a still challenged environment, where sales in the new cycle is going in to 1Q ’24 is likely to remain tough. Could you please expand on what you’re seeing in S&M in addition to the prepared remarks. But also overall, how much of your renewals occur in 4Q, 1Q? And how heavy are new sales in these quarters, too, as well, please?