Dun & Bradstreet Holdings, Inc. (NYSE:DNB) Q1 2023 Earnings Call Transcript

Dun & Bradstreet Holdings, Inc. (NYSE:DNB) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the Dun & Bradstreet First Quarter 2023 Earnings Conference Call [Operator Instructions]. This call is being recorded on Thursday, May 4, 2023. I would now like to turn the conference over to Sean Anthony, VP, 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 first 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 the 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. This conference call will be available for replay via 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 2023 earnings call. On today’s call, I’ll start with a brief overview of our first 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 results and to discuss our expectations for the remainder of 2023. We’ll then open up the call for Q&A, and I’ll finish up with a few closing comments. With that, let’s get started. Our first quarter results demonstrates a continued progress we are making and the strength and resiliency of our business model throughout the world. We exceeded our communicated expectations by delivering 3.2% revenue growth on an organic constant currency basis as customers and prospects continued to rely on D&B’s mission-critical solutions to help them navigate this challenging business environment.

Beginning with North America. We grew just over 2% despite this being the final quarter that included the impact from 3 full months of the GSA contract expiration. Excluding the impact of the GSA, North America revenues grew 4% with solid performance in both our Finance & Risk and Sales & Marketing solutions. On the Finance & Risk side, our risk solutions drove high-teens growth as companies continued to look at ways of driving a more real-time AI-driven approach to assessing and monitoring the third-party and supply chain exposure. As we continue to expand the magnitude of our existing data and add new and alternative datasets to further expand our offering into areas such as fraud, cybersecurity, climate and ESG, we’re positioning ourselves to land and expand through a variety of use cases within clients’ risk, compliance and underwriting departments.

For example, we recently expanded our ESG Rankings data coverage across public and private companies from 42 million to 74 million and 185 countries, reflecting the latest Sustainability Accounting Board Standards. This expansion further strengthens Dun & Bradstreet’s position in the ESG space as organizations seek to make sustainable decisions with confidence. We are also bringing in new real-time financial datasets into our data cloud. An example of this is payments transaction data that allows us to blend near-term transactional behavior with longer-term trends, creating a unique perspective on the financial profile of an entity in ways that have never been done before. These new analytics are enhancing our proprietary data cloud. And through the use of our latest artificial intelligence-driven algorithms, we are further extending our leadership position in the decisioning of commercial credit and embedding ourselves even more deeply into the most mission-critical finance decisioning workflows.

Finance Solutions continued to have strong retention rates and is benefiting from the impact of price increases as we look to optimize our contracting and pricing structures. Overall, our Finance & Risk solutions in North America grew 2.5%, excluding the GSA impact, which is right in line with our expectations for the start of the year. Within North America Sales & Marketing, we are seeing continued progress in our financial results from the ongoing transformation and investments in the solution set. We delivered over 5% organic growth in the quarter, driven by our Master Data Management and Digital Marketing solutions. Improvements to solutions like Hoovers have driven retention rates from the 70s to nearly 90%, turning them from headwinds to tailwinds and are allowing the benefits of our transformation efforts to be realized in our financial results.

As we continue to resolve a shrinking group of legacy underperforming assets in our portfolio, it allows us to show the true strength we have been building in our Sales & Marketing suite. We also continue to innovate new solutions, which further support our now 20% vitality index in North America. In the first quarter, we launched a mid-market version of D&B Connect that includes a self-guided user interface, which brings most of the benefits of Master Data Management to medium- and smaller-sized companies with limited tech complexity; D&B Compliance Intelligence Engine, which created smart workflow integration to seamlessly onboard and monitor third parties from cradle to grave; and we are launching our SMB Navigate portal, which builds upon the foundational improvements to our SMB ecosystem, such as the website consolidation and shopping cart enhancements we have made over the past few quarters.

We continue to move forward with supporting small business and their efforts to thrive during these tough times. Whether it be our partnership with Lendio, allowing SMBs access to capital in a quick and efficient manner; improve the visibility into the commercial credit profile through connectivity and to Plaid; or our latest partnership with Accelerate Tax that helps small business garner tax credits and incentives, we are committed to working hard to assist small businesses become big businesses. On the North American sales front, we saw examples of our momentum in both Finance & Risk and Sales & Marketing. On the Finance & Risk side, we had a strong quarter of expanded renewals and new solutions up-sells. One of our largest and most tenured customers, an American-based multinational technology company, signed another multiyear renewal.

This company is a great example of a sophisticated global firm that utilize our D-U-N-S and hierarchy and Master Data Management capabilities as a keystone for their finance and risk and sales and marketing solutions throughout their organization. While other providers attempted to compete based solely on price, our differentiated solutions, data and analytics clearly won out. We saw a similar outcome with one of the largest automotive manufacturers in the world. Like many auto manufacturers, they faced the need to invest significant capital into the electronic vehicle market while simultaneously balancing the financial challenges arising from a global economic downturn. With a mandate to reduce third-party spend, their procurement organization explored ways to reduce their spend with us just as they would with the rest of their vendor relationships.

However, due to the criticality and value we deliver, they ultimately concluded that descoping services would have a direct negative impact on their operations and ultimately decided to maintain and expand the relationship. Through our Master Data Management capabilities powered by the D-U-N-S Number, we allow companies like them and tens of thousands of others to [Indiscernible] during all economic cycles. Now turning to our International segment. We saw another quarter of solid 5.5% organic growth in the quarter. Our vitality index increased to 28% in the quarter and with all markets growing at or above our internal expectations. We saw the United Kingdom and Ireland produce just under 10% growth in the quarter as demand for our modern Finance & Risk solutions remained elevated.

We also saw continued steady improvement in Europe as the business grew 4% in the quarter with balanced growth across the region. Asia came in with low single-digit performance, which was expected as the market is dealing with some hangover from the lockdown impact in 2022 that affected 2022 sales and 2023 revenues. As the year progresses and sales pick up, we expect to see the revenues flow through and acceleration in those regions to complement the strength in our UKI and Europe markets. Overall, the performance is on track. And we continue to see the benefits of the disciplined investments in our international markets. On the sales front, the International segment continues to focus on landing and expanding more and more enterprise clients in the regions.

Deutsche Bank, one of the largest financial institutions in Germany, added a compliance solution to their portfolio that is allowing them to better understand their third-party and supply chain risk. This is just one example of what we saw throughout the quarter in terms of strong demand for these solutions. The Cabinet Office of England engaged us for our compliance Data Blocks APIs. Public sector entities, like the Cabinet Office, also have the need to understand who they’re doing business with and how the linkage to certain individuals, entities or countries could impact the way they view potential risk with doing business with said companies. We also saw another strategic win with a top four bank in China. This new data-driven win was a direct takeaway from a legacy provider and continues to show how our data, solutions and go-to-market improvements are driving expansion with the largest and most complex organizations in the region.

Along with the ongoing results and sales execution, we continue to focus on progressing against the strategic initiatives we laid out during our Investor Day earlier this year. On the technology side, we have made significant progress to start off the year. For instance, on the infrastructure side, we migrated one of our largest and most complex Sales & Marketing applications to our Google Cloud infrastructure. This migration has been underway for months and culminated in a near-seamless transition that has resulted in significant improvements to the application’s performance, throughput and stability. We also made significant progress in terms of our ongoing modernization efforts by reducing our reliance on mainframe hardware by 50%. We have significantly reduced our use of mainframe applications and have a clear path to bringing that down to zero over the next two years.

These are just a few examples of the many ongoing initiatives we have underway, which reflect our continued discipline, commitment and execution to making the changes necessary to support the long-term and sustainable change at D&B. We also made significant enhancements to our data supply chain through architectural enhancement as well as cloud migration efforts that led to a 50% reduction in processing latency. And while we are continuing to strengthen our foundation, we are also using cutting-edge advancements to extend and expand our analytics capabilities. In terms of linkage and matching, we have the most advanced business-to-business capabilities in the world. And to further extend that lead, we’re now leveraging GPT to drive enhancements in our global matching processes, which create efficiencies and, in some cases, incremental advancements in our match rates.

We also have three proof of concepts in place related to new business discovery, new contact discovery and employment counts for private businesses throughout the globe. It’s early stages now. But through taking a measured approach, we can leverage the power of our unrivaled proprietary business-to-business dataset, combined with GPT and other artificial intelligence advancements, to drive more and more value to our customers and prospects. I’ll look to update you on all these advancements and the others on future calls. But in the meantime, know we are hard at work at driving innovation and acceleration each and every day at Dun & Bradstreet. Overall, we’re off to a great start to the year, and I’m very pleased with the progress we’ve made to date.

Our ongoing transformational efforts have helped to offset a more difficult macroeconomic backdrop. We have capitalized on the strong demand for our solutions, drove strong sales traction, maintained excellent profitability and delivered another quarter of solid financial results. With that, I’d now like to turn the call over to Bryan to discuss our financial results for the first 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 first quarter 2023 results and provide an update on our guidance for the remainder of the year. Turning to Slide 1. On a GAAP basis, first quarter revenues were $540 million, an increase of $4 million or 1% compared to the prior year and 3% before the effect of foreign exchange. Net loss for the first quarter was $34 million or a diluted loss per share of $0.08 compared to a net loss of $31 million for the prior year quarter. Turning to Slide 2. I’ll now discuss our adjusted results for the first quarter. First quarter revenues for the total company were $540 million, an increase of 1%, or 3% before the effect of foreign exchange. Revenues on an organic constant currency basis were up 3.2%, driven primarily by increased demand in both our North America and International segments.

First quarter adjusted EBITDA for the total company was $190 million or flat to the prior year quarter. And adjusted EBITDA margin was 35%. Higher earnings from the increase in organic revenues was offset by the impact of foreign exchange, which resulted in a $4 million headwind to EBITDA for the quarter. First quarter adjusted net income was $81 million or adjusted diluted earnings per share of $0.19, down primarily from the prior year due to increased interest expense. 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 $375 million, an increase of 2%, or 2.2% on an organic constant currency basis. In Finance & Risk, revenues were $201 million or flat as double-digit growth in our third-party and supply chain risk management solutions were offset by the impact of the GSA contract expiration in April of 2022 and lower revenues in our legacy credibility solutions.

In Sales & Marketing, revenues were $174 million, an increase of 5%. This was driven primarily by growth in our Master Data Management and Digital Marketing solutions. North America first quarter adjusted EBITDA was $151 million and adjusted EBITDA margin was 40%, a decrease of 150 bps from the prior year due primarily to the margin impact caused by the lower revenues from the expiration of the GSA contract. Turning to Slide 4. In our International segment, first quarter revenues were $166 million, a decrease of $3 million or 2% and an increase of 5% before the effect of foreign exchange. Organic revenues on a constant currency basis increased 5.5%. Finance & Risk revenues for the first quarter of 2023 were $111 million, an increase of $2 million or approximately 2% and an increase of 7% before the effect of foreign exchange.

There was positive contribution from all markets. European growth was driven by Finance Analytics and API solutions. The Worldwide Network alliances was due to higher cross-border data fees. And growth from our United Kingdom markets came from third-party and supply chain risk management, along with compliance solutions as well as Finance Analytics. Sales & Marketing revenues for the first quarter of 2023 were $55 million, a decrease of $5 million or 8% and a decrease of 1% before the effect of foreign exchange. Excluding the impact of the divestiture of our German business-to-consumer business in the second quarter of 2022, organic revenues increased 2%, primarily due to higher revenues from our U.K. market, driven by higher data sales. International first quarter adjusted EBITDA was $56 million, an increase of $1 million or 1%, primarily due to revenue growth from the underlying business partially offset by higher foreign exchange losses resulting from a strengthening U.S. dollar.

Adjusted EBITDA margin was 34%, an increase of 100 bps compared to the prior year. Turning to Slide 5. I’ll now walk through our capital structure. As of March 31, 2023, we had cash and cash equivalents of $204 million and total principal amount of debt of $3,643 million. The $3,643 million in principal is made up of $460 million of unsecured notes at 5%, which mature in 2029; term loans of $2,673 million, a LIBOR plus 325 that matures in 2026; $455 million at SOFR plus 325 that matures in 2029; and borrowings of $55 million under our revolver. The LIBOR-based term loan has a $1 billion floating to fixed swap effective through March of 2024 at 0.467% and a $1.5 billion floating to fixed swap which expires February 2026 at 3.695%. The SOFR-based term loan has a $250 million swap for floating to fix through February 2025 at 1.629%.

We also have 3 cross-currency swaps at $125 million each that settle in July of 2024, 2025 and 2026. We are currently either fixed or hedged at 88%. We had $795 million available on our $850 million revolving credit facility as of March 31, 2023. Overall, our weighted average interest rate was 5.63% as of March 31, 2023. Our leverage ratio was 4.0x on a net basis and the credit facility senior secured net leverage ratio was 3.5x. Turning now to Slide 6. I’ll now walk through our outlook for 2023. We continue to expect total revenues after the effect of foreign currency to be in the range of $2,260 million to $2,300 million or an increase of approximately 1.6% to 3.4%. This includes an assumption of a headwind in the first three quarters of the year, partially offset by a tailwind in the fourth due to the effect of foreign currency related to the expected variances between the U.S. dollar, euro, British pound and Swedish krona.

Revenues on an organic constant currency basis are expected to be in the range of 3% to 4.5% for the full year. As previously discussed, it is important to note that the total inorganic growth ranges take into account the conclusion of the existing GSA contract at the end of April 2022. The net impact to organic growth for the full year is a headwind of 30 basis points with 110 basis points headwind realized in the first quarter. Adjusted EBITDA is expected to be in the range of $870 million to $920 million. The adjusted EBITDA range also takes into account the conclusion of the GSA contract and 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.

Adjusted EPS is expected to be in the range of $0.92 to $1. Additional modeling details underlying our outlook are as follows. We continue to expect interest expense to be approximately $240 million; depreciation and amortization expense of approximately $100 million, excluding incremental depreciation and amortization expense resulting from purchase accounting; adjusted effective tax rate of approximately 24%; weighted average diluted shares outstanding of approximately $433 million; and for CapEx, we expect approximately $130 million to $150 million of internally developed software and about $30 million of property, plant and equipment and purchased software. Overall, as we monitor the macro backdrop, it remains consistent with what we anticipated in our original guidance.

And we expect — and we continue to expect the remaining quarters to perform as previously communicated. In conclusion, we are well positioned to capture the significant growth opportunities in front of us. And we expect to continue to accelerate revenue growth in 2023 despite a challenging overall environment and the conclusion of the GSA headwind at the end of April. With improving profitability and cash flows, we will also focus on deleveraging the balance sheet 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?

Q&A Session

Operator: [Operator Instructions] Your first question comes from Seth Weber, Wells Fargo.

Operator: Your next question comes from Kyle Peterson, Needham.

Operator: Your next question comes from Andrew Jeffrey, Truist.

Operator: Your next question comes from Heather Balsky, Bank of America.

Operator: Your next question comes from Stephanie Moore, Jefferies.

Operator: Your next question comes from Andrew Steinerman, JPMorgan. I apologize your next question is actually from Faiza Alwy, Deutsche Bank.

Operator: Your next question comes from Andrew Steinerman, JPMorgan.

Operator: Your next question comes from Ashish Sabadra, RBC Capital Markets.

Operator: Your next question comes from George Tong, Goldman Sachs.

Operator: Your next question comes from Kevin McVeigh, Credit Suisse.

Operator: There are no further questions at this time. I would now like to turn the call over to Anthony Jabbour for closing remarks.

Anthony Jabbour: Thank you. As always, I’d like to thank my Dun & Bradstreet colleagues for their exceptional efforts and helping us be stronger and stronger every day. And I’d like to thank our great clients for the partnership and guidance. Thank you for your interest in Dun & Bradstreet, and have a wonderful rest of your day.

Operator: Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines.