Dun & Bradstreet Holdings, Inc. (DNB) Earnings Call Transcript & Summary

Great. Listen, we are -- we're going to get started here. Next up, we have Dun & Bradstreet. We're thrilled to be hosting Dun & Bradstreet. CFO, Bryan Hipsher. I'm going to try to keep this as interactive as possible. What I'd like to do is just give a little background on Bryan, start-up with some Q&A, but try to keep this as interactive as possible. To the extent anyone has any questions, please feel free to ask or if they want to email me, cane-mail me at kevin.mcveigh@credit-suisse.com. But again, to start off, I am Kevin McVeigh, the business and information services, senior analyst here at Crédit Suisse, and we are thrilled to host Bryan Hipsher, who's the CFO of Dun & Bradstreet. Bryan and I have worked together a long time. He got primary functions across D&B today, but his prior history at both Black Knight and LPS, it really has been a wonderful addition, we think, to Dun & Bradstreet.

I wanted to start with and again, please feel free to either e-mail me or come in with questions. But Bryan, I think 1 of the things I think that would really help the audience is to give a little bit of context as to kind of -- from the time of the August 18 LBO, recall by way background, there was a $6 billion LBO Dun & Bradstreet until this past -- the successful IPO this past June, maybe talk about how you've been able to optimize the business over that time period for both organic growth and margin expansion, which we think are obviously 2 -- going to be 2 of the key tenets to the story. And so far, you folks have really demonstrated an ability to cultivate that. But maybe just help us enhance that from an audience perspective?

Yes, absolutely, Kevin. And it's been a pleasure, certainly working with you through the years. And we took that brief pause, right, while we were private for that time period, but jumped back into it this year. So appreciate you guys having us at the conference. It's been great so far. So we've done a lot of transfer regimen from that time period. And we call it a lot of times, the Bill Foley playbook, right? Bill is our Chairman, certainly had the experience from FIS, LPS, what we did at Black Knight. And as the team really came together we focused on, I would say, kind of 5 core themes of the overall transformation. And so the first was realigning the leadership team and the organization. Look, Dun & Bradstreet historically, great brand name, great presence, really strong kind of solution set, but really kind of got stuck, I think, is the best way that Anthony had described it in the past. We saw that it was really matrix from that perspective, and there wasn't a whole lot of accountability from the customer all the way to the GEO. So really early on, on day 1, we came in and we were realigned into really business unit functions from that perspective. When that happened, the first thing you saw was a lot of the kind of back office bureaucracy, duplicative functions, a lot of that kind of fell out from that perspective. The other thing it allowed us to do is really focus on product development, more from a specific use case perspective. And again, that helped us kind of drive out some of the legacy products and focus on more of the modern offering. So the first step function change. Within the first 12 months, we took out somewhere around $206 million of cost. And that's a net number, Kevin. I think that's always a really important -- that's a change in the fixed operating expense of the company on a go-forward basis. Again, things like think when we came in, there were 7 sales support functions scattered throughout the organization. You rationalize those, bring them together, you probably need 5 people instead of 20 people, right? Then on the vendor side, the technology side, we did a lot to reorganize scale. Cloud, I think, is something that we've migrated to and made some significant progress already. We're up to a little over 70% of cloud based architecture. I think over time, we'll push that to 80%, 90%. I'm sure we'll talk about the technology transformation a little bit deeper. But that change in leadership, a change in organization certainly was an initial fundamental change to D&B in the culture. And 1 of the big things, I think that we heard some questions early on was around ,well, how have been been there then transformations in the past? And the answer was changing the CEO is not a transformation, right? When we came in, frankly, we changed out 18 of the 19 top executives in the firm, were either new or in a new position. And so what we saw was really by changing that fundamental layer we could really start to unlock a lot of the potential that was in the organization. So the next step was really evolving the go-to-market strategy. So we optimized pay structures. We align based off of the new kind of business unit. Function perspective where we created subject matter experts within finance, within risk within sales and marketing that can really talk right to the personas that we were selling into, right? If you can't come to me as the CFO in Dun & Bradstreet, and explain why the finance solution offering that you're providing that we were providing make sense. Then, of course, it was going to work for our outside consumers. And so from that perspective, we were able to take really what we had on the shelf today and sell it in a much more effective way. And so from that perspective, what we saw was late into '19, we knew it's going to be risky, right? And we did it in a private environment because when you take out roughly 18 to top 19, when you take out roughly 1,000 FTE, right? And you're making these big sweeping changes in the go to market, there is a potential for disruption. What we ultimately saw was that the cost came out but the clients really saw the receptive nature of our new go to market and our engagement, and we started to see the sprouts of core revenue growth in the back half of last year. That's continued on through the early part of 2020 and as you saw in the last earnings call, the core engine is now kind of at that low single-digit growth rate. So that -- turning the tide there I think was a lot of the core work we were doing in those first kind of 12 to 18 months.

One thing, I think that really needs to be emphasized, too is you folks have really implemented and effectively expanded the margins initially about 700 basis points. And as I understood it, maybe just frame this a little more, kind of that initial phase was more HR related. There's a ton optionality on the infrastructure side as you continue to optimize the cost aspect of the business. And again, I think 1 of the things that always impressed me was your ability to retain despite historically maybe not having as effectively curated the data as much as you would have wanted. And again, I think that really underscores the uniqueness of the data. So maybe talk to that a little bit.

Yes, absolutely. I mean that was 1 of the pieces, too, that gave us the confidence in making the underlying changes right. I mean our data is, as you said, curated, right, matched, independent. The data actually comes into our private cloud from that perspective in a contributory fashion. So kind of the core underlying data starts with that contribute to our network. Many of our customers, riding many other kind of data suppliers from that perspective. Then we also bring in other kind of third-party data where we need to supplement from that perspective. But that data set, in essence, goes from front-to-back within an organization. So on the finance side, when you think about trade credit expansion, when you think about making business-to-business loans, right, that underwriting process, that's all leveraging right the Dun & Bradstreet asset. When you think about on the sales and marketing side, you master client record, you've been a client record. Again, all very sticky points, right, of that sales and marketing creates the backbone right of a parent-child relationship within an organization from a client's perspective. And so you're absolutely right. It's very mission-critical. It's very sticky from that perspective, which is partly the reason that even from years of, I would say, kind of mismanagement under investment, right, the business stayed relatively flat. And that was 1 of the things that attracted us for the asset was the amazing brand. And frankly, the performance with kind of the guidance, right, that the overall organization was being provided. And we knew that if we made some changes, if we made the investment in new product innovation that we could really get the engine going again from that perspective. So you're absolutely right. We call it walk in chewing gum, right? So we take out the cost, but also simultaneously, we took a business that was investing $40 million to $50 million a year in CapEx right? We increased that to $80 million last year. This year, we'll do about $120 million, and a majority of that is in new product innovation. And so that's really what we saw was that where there were sprouts of growth in the past, they came from when they brought new product, new use case solution to bear. And that's really what we see is that we have this great foundation. And our retention rates in this COVID environment went up again in the third quarter on a year-over-year basis. And that's what that's also starting to institute some price increases. Nothing massive, right, or unfair from that perspective, but starting to draw more of a price escalator kind of cost of living adjustment. That reflects the base level of functionality, the base level of data improvement that we're putting into our products. And so it's that kind of combination, I think, that gives us great confidence in the direction that we're going.

Super. Maybe I'll pause there, see if there's any questions from the audience. Or again, if anyone wants to email me, kevin.mcveigh@credit-suisse.com. Or if anyone wants, feel free to just queue up. Okay. I'm going to keep going because, again, I think 1 of the other key parts to this story is you folks should kind of frame what we think is very, very achievable targets, kind of near term, 0% to 3% type organic growth. And then as you kind of continue the transformation that flexes up to 3% to 6%. So maybe remind us of the component to that 0% to 3% and the 3% to 6%. And 1 of the things that I think we really get excited about is, particularly as you think about the 0% to 3% and then the 3% to 6% from a pricing perspective, I feel like there's the initial opportunity to reprice and then kind of that incremental opportunities you earn the right as the data has become much more user friendly. So maybe just talk about those components of the growth and again, I think it really underscores it's going to be a good proxy for where you folks are going in and have been operationally?

Yes, absolutely. So if you look at where we are today and we kind of think about the building wants, right? So you talked about -- I love Anthony's closing the back door and opening the front door, right? So the retention aspect in of itself helps, right, from a growth perspective because you're not taking that step back, right, each year that you're growing over. The first building block from a price perspective, this is a business that has had the top customers with it for over 25 years, right? It has 96% plus gross retention rates, right? So really sticky, really deeply embedded. And in our top customers, it's 99% plus, right? It's -- price was only driving about 0.5 point to about 7.5 points of growth per year, right? So we certainly saw an opportunity from that perspective. We're attacking that really from 2 pieces, right? The first piece is multiyear contracts. So think about deals that are 3 to 5 years in nature, right? Only about 13% of the revenue when we came in was under multiyear deals. So again, these are customers with us 20 years that we're renewing 20x, right? D&B is kind of trying to take a bite at the apple every year, and it's just not an effective way of really dealing with a customer from that perspective. So we're locking them into multiyear deals, and then we're building in a small price escalator, so call it, 3% per year. Look, if you want to do a 1-year deal, we're raising kind of the core base prices up by like 5% or more in certain products, right? So understanding elasticity, inelasticity and not kind of peanut buttering the price increase across the board. But certainly, we're rewarding those that take a longer-term contract than a shorter-term view from that perspective. So that's kind of the first step, Kevin, is to start to see that 3% on the 30% flow through. And we think we can take the 30% of multiyear contracts and raise that up to, call it, 40%, 50%, it will never be 100%. We have some smaller clients, right, that it just doesn't match up from a multiyear agreement perspective. But certainly, we can continue to make large strides from where we are today. The only thing on the pricing side, just to finish off that piece is, we are looking at kind of the pricing across the board from a client cohort perspective. So think about industry size, use case, and then understanding where are customers that are significantly below kind of what the median price point is from that perspective and then lifting them up strategically upon renewal, whether that takes 1 or 2 years to get them to where they should be. Certainly bringing them up over and above what that kind of standard cost of living adjustment would be in any given period. Yes. Go ahead, Kevin.

Yes, I didn't mean to cut you off because I think this is such an important part to the story. But 1 of the other things I was hoping you could kind of just contextualize too is I don't think the market necessarily appreciates how diversified your client base is in terms of -- from the enterprise level, very sophisticated multibillion-dollar enterprises to a single kind of vendor may be looking for an extension of credit from the first time. So maybe talk to that a little bit within the context of price and even just from a competitive perspective because, again, I think it really just underscores how unique and important that private data is as you really permeate all aspects of really the client spectrum.

Yes. It's amazing, right? So you talked about my background a little bit, right? And I came out of a business that is an unbelievable business, right, but actually has a relatively restricted client base, right? So you're talking about the largest banking institutions in the U.S. and then also real estate cap markets from that perspective. But this business is amazing. When you look at the Fortune 500, I mean, it's 90% of the Fortune 500. You're talking about the biggest institutions in all kind of verticals from that perspective. And not just in the U.S. We have about 60% of the Global 500 owned markets in U.K. and in Asia Pacific, and then we operate through the worldwide network. As you know, and I'm sure we'll talk a little bit about that in the coming, but it is a massive global enterprise from that perspective. When you think about how diversified we go not just from auto and retail and finance and software, et cetera, from a diversification of industry perspective, the clients go from [indiscernible] excess of the world all the way down to, we used to use Joe's Hobi Ranch because I think that was Steve Daffron's favourite place to get a snack in Arkansas back in the day. But it is -- and what's really interesting about that is that the company has done a great job of monetizing, especially at the large range and at the mid size. At the smaller end of the spectrum, you can go all the way down to the micros, right, so the sole proprietorships. That is a place that those businesses and those smaller businesses, they come to us. So when you talk about private data, I mean, our private data is amazing because they have to come to us to register for a Dun's number. Because if you want to be a provider for Walmart or you want to be an app developer for Apple, you want to participate in a government contract, right? You need a Dun's number, right, and you need to provide a certain base level of information to Dun & Bradstreet. And so from that perspective, that's what Anthony says a lot of times, is companies spend millions and millions of dollars trying to attract businesses to come to them, right? These businesses are coming to us naturally. So for us, it's about monetizing, right? So yes, we take the data aspect from that perspective. But the 1 thing that I would say we're evolving from is we kind of had the Mercedes offering from that perspective. High feature, high functionality, very strong, very scalable for the high end. But then the product packaging, pricing and delivery for the lower end was very narrow, right? In the trade credit business, we can do some credit reporting, and that was very helpful from that perspective. When you think about like a digital presence and an end-to-end solution where they can sales and marketing or different financial risk or third-party risk and compliance. You need light versions of that, little less feature functionality, but at a lower price point to really continue to penetrate from that perspective. So we're pretty excited about the balance of continuing to add more and more to the data set into the solution set, both for the top end, but also for the bottom end. So it is something that we always have to be focused from a product management perspective in a strategic product road map because it is something that has such a wide aperture from that perspective.

And I think 1 other part that's interesting is underscores kind of the value so you compete against. If you think about, on the low end, maybe an Equifax or TransUnion relative to other folks at the upper end of the spectrum, and it really just underscores how critical you folks are to really the extension of the credit cycle. And you really saw that in COVID, where maybe we talked to COVID a little bit, not only I think your execution that really underscored how critical the revenue based on the lack of really revenue pressure you saw number one and number two, it feels like you're able to navigate it much more effectively in terms of client risk, client, bad debt, things like that. So maybe talk to that a little bit.

Yes, absolutely. I mean on the bad debt side, the client risk side, the good thing is we have great analytics. I actually eat internally, right? And it's funny. I mean we talk about this a lot. I am a perfect candidate, right, guinea pig for our solutions. Because I'm running an organization that has 130,000 plus clients. And look, stack ranking, for instance, receivables based off a DSO or just based off of length outstanding. If it's Wells Fargo and they're 35 days late, I'm really not -- my hair is not on fire, okay? And so it's those kind of solutions, right, that we can bring to bear from that perspective. But again, I think from a mission-critical perspective, you mentioned some competitors. You're right at the lower end, you do see that competition, right? Where sole proprietorship, credit, consumer credit and business credit start to overlap a little bit. As soon as you go up the chain for the small, the medium and the larger, it is -- we're kind of competing against ourselves, right? On the sales and marketing side, that's the other piece of the equation, the extension on the Master Data component, right? That is a piece that is very, very mission-critical. When you think about understanding your master client record within an ERP or within a billing system or within a multitude of billing systems, the ability to cleanse, match a pend and understand that parent-child relationship, it is very, very critical from that perspective. The vendor side, I think, was a great example in COVID, right? When we started to see the reports early on, and we started to see it flow through in our data, we reached out to our customers and said, hey look, your suppliers in, for instance, this area of Wuhan, right, are struggling from that perspective. Here are 4 doppelgangers, right, in Europe and in Latam, that if you needed to, you could flip over, right, in our kind of like, like providers from what you're utilizing in the past. We use this on the sales and marketing side all the time, right? If a certain cohort of customers look alike, right, then here are 15 other ones who look just like them that you should be targeting from that perspective. And so the power of the data is really critical, especially as we are evolving into, frankly, more and more digital times, right? So finance and risk, it was always leveraged really heavily upfront. Sales and marketing on the master record side, I think it definitely was. Now even more of the pipelining and then the kind of narrowing of that pipeline is becoming much, much more in both, right? So when you think about your sales force instances, right, and your in doubt. There are millions and millions of records in there, right? And if you ask what are top opportunities with Wells Fargo, it takes like 5 individuals to scrub through and try to find all that, right? When we talk about our products for Master Data, what it's doing is it's peening against the database, right cleansing all those records within your sales force instance and then appending any of the data that's missing or false, right, from user input error. And so that kind of starts the foundation of where you're building a campaign from that perspective. So it is -- I think COVID is 1 of those things that was an accelerant to a trend that was already starting to occur.

Bryan, just I'm going to ask a question that was e-mailed to me, and it's around pricing. And the question is as follows: the average D&B customer is probably looking to control costs. If you look at that average customer, how much of their budget goes towards D&B solutions? Or where is D&B's the customer rank orders, total expenses, 10th, 25th, 50th quartile? Any thoughts around that would be helpful.

Yes. So it's varying on the budget, right? I mean, if you look at like Amazon or American Express, we're a very small portion of their overall budget, right? Even if you look at the smaller customers. So that's why in the end, when you look at its kind of value to cost ratio, we're in a very good position from that perspective. This isn't something that you're guessing about whether or not it's going to be effective. It certainly is a tried and true process from an underwriting standard or from a risk mitigation standard or even on the sales and marketing side, right? You need prospects, and that's what we provide from that perspective. When you think about pricing, again, how critical is it? I mean look at the fact that our retention rates are going up this year, right? So it's 1 thing that you're continuing to grow and retain more when things are good. But if budgets were any tighter in the third quarter -- second quarter or third quarter this year and more unsure of how you're moving forward. I mean I think that is something that it shows just a resilience that the core engine of this business continues to grow in times like this.