Operator: Our next question comes from the line of Andrew Steinerman with JPMorgan.
Andrew Steinerman: Just a little bit more on data processing costs. You called — I think you call it data processing, but is it third-party data purchasing or also third-party processing purchasing? And do you feel like we’re going to have to continue to talk about this subject from a margin perspective? Or do you feel like you’ll be able to realize enough value with the customer is that — it’s not going to be an ongoing subject?
Bryan Hipsher: Yes. So Andrew, again, I think we’re always going to have obviously our data and data processing, right? So this is, for instance, cloud charges, right? This is the processing charges that we have to support our overall revenue streams. And so it’s not necessarily that these things are incrementally or over and above where they should be, right? You’re going to have that level of cost embedded within the overall margin structure. And so like I said, really when we think about the typical data cost, that processing costs allows our internal and our data supply chain in our cloud infrastructure. But again, that’s normal, right, in terms of us driving the contribution margin that we would expect. Really, as I said, again, in ’23, for instance, the abnormal piece was more around some of these kind of resetting of incentive-based compensation across the Company and some of the elevated health care benefits.
As we’re heading into ’24, again, we’ll expect normal data and data processing fees, right, that run through. But it’s more along the lines of us continuing to drive organic revenue growth. And then it’s just being mindful of the environment and where we want to make the investments and push forward in some of the gen AI investments, some of the investments we’re making around capital markets, which is where we’re expanding margins, but just not pushing them towards the higher end of our expansion ranges.
Operator: Our next question is from Manav Patnaik with Barclays.
Manav Patnaik: I just wanted to touch on — I think you said it was 27% was the vitality index. Just hoping a little bit more color on just some more quantification around how you calculate that, maybe the base? And how is that going to contribute to ’24 guidance?
Anthony Jabbour: Sure. The way we calculate the vitality index is revenues from newer products that we have. And really, what we’re trying to measure with that is do we have a lot of our clients on older products, older solutions. So if you think about at renewal time, you have your best foot forward with the clients or are they on an older solution. So for us, with our vitality index being so high, and it won’t always be this high because like I said, it cycles. It’s — and it will probably be in the 20% range, I imagine, which again is, I think, exceptionally high. But what it will do is it will allow us to be in a position of strength on renewals with our clients, number one. Number two, it will — the way they’re architected facilitates us to sell add-on capability because it’s built into that infrastructure on our more modern platforms versus what’s possible today with some of the legacy ones.
So from that perspective, Manav, that’s why it’s important to us. We’re driving higher client satisfaction. We’re seeing a lot of great operational results from that and from our renewal rates. It also puts us in a great position from a cross-sell, upsell perspective as we continue to [indiscernible] small bundles, analytics, et cetera, that we can plug in easily and clients can buy easily and they can implement easily.
Bryan Hipsher: Yes, Manav, I think to Anthony’s point, one, we want to make sure you know one of the vintages from early on is falling off, right, as we head into 2024. So don’t be surprised when that [indiscernible] number starts to migrate down this year. But I think when you think about how does that impact guidance, right, it’s helping us from a pricing perspective, right? It’s helping us obviously from a cross-sell and upsell perspective. Our retention rates, right, continue to be industry highs from that perspective. So it was really important for us to not only invest and upgrade materially solutions that we have. But as we bring on capital markets, right, as we do things like Anthony mentioned ask procurement and Hoovers, these are all things that ultimately fall into supporting the vitality index as we go forward.
Manav Patnaik: Got it. And Bryan, maybe just a quick follow-up. Relative to EPS, anything to keep in mind in terms of conversion for free cash flow and stuff?
Bryan Hipsher: Yes. So Manav, this year, in particular, on EPS, I think the President of Ireland signed into effect Pillar II on December 18, so late last year. So that had a pretty big obviously impact on a year-over-year basis from that perspective. The tax rate is going from roughly 18% to 23%. You’re talking probably in the range of $0.06 from that side. When we think about the conversion component, free cash flow going into adjusted income, a couple of things that are driving that improvement. One, D&A and CapEx are starting to converge. CapEx has come down off of its peak back in on that ’21, ’22 time frame, and so as those two start to converge, that was always a big component of the gap. And then while we have some of these cloud migrations going on, some of the back-office work, as those wind down as some of those duplicative costs come off, that also helps the two to convert from that perspective.
Operator: Ladies and gentlemen, in the interest of time, we take the last question from Heather Balsky with Bank of America.
Heather Balsky: I appreciate it. I wanted to go back to the question earlier with regards to investment spend and margin and how you can think about it philosophically going forward. I appreciate that right now, gen AI is a meaningful opportunity. But given that we kind of operate in a world where there’s a lot of innovation going on and technology seems to be advancing very fast, kind of how do you think about balancing your margin target, your midterm margin target with the opportunities that you see today and the potential for additional opportunities in the future?
Anthony Jabbour: Thank you, Heather. No, it’s a good question. Look, we’re very focused operationally. I mean, we — well, I’d say, again, looking back at ’23 [indiscernible] for the unusual health care and the incentive benefit comps, right? So in terms of the core engine, how it’s producing revenues and how the margins are expanding, we see that we have confidence in it. And when we look to 2024 and having margin expansion of 30%, we guided 50 to 100. And like we said, there’s about a $5 million to $10 million difference there of investment where I think the number would be much greater typically with the opportunity that’s in front of us in front of many in this market with the advent of generative AI. But it’s a testament to where we have pulled back spend and where — and how efficiently I’d say we are spending it and where we are investing.
So this isn’t something that I’d look at on any given year and look at 2024, 2025 as any given year. I really look at them as inflection points in this industry, I’ll say, in the data and analytics industry, there’s potential here. And those that really understand that, I think, are really doubling down their investments to take advantage of that space and be foolish for us not to do that. And like I said, it’s a relatively small investment that we’re making that precludes us from being in the typical margin range that we would be. But like I said, we feel really good that the juice is worth the squeeze.
Operator: Ladies and gentlemen, that was the last question. I now hand the conference over to Anthony Jabbour for his closing comments.
Anthony Jabbour: Thank you, Ryan. As always, I’d like to thank my Dun & Bradstreet colleagues for their exceptional efforts to sustainably grow our business for the years to come and to our great clients for their partnership and guidance. I’d like to thank you for your interest in Dun & Bradstreet. Hope you have a wonderful rest of your day.
Operator: Thank you. The conference of Dun & Bradstreet has now concluded. Thank you for your participation. You may now disconnect your lines.
