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

All right. Good morning, everybody. Thank you for being here. For those of you who don't know me, my name is Manav Patnaik. I'm Barclays' information services analyst. And we're pleased to have with us here Dun & Bradstreet. And we have Bryan Hipsher, who's the CFO of the company. So Bryan, thank you for being here.

Yes, Manav. Thanks for hosting us. Really appreciate it.

Of course. So Bryan, as you know, I have a long history with Dun & Bradstreet. But funny enough, this is the first time you guys have come to this big financial event. So I see a lot of familiar faces in the audience. But just to set the stage, just give you the opportunity to describe D&B as a company today. Because you are a new management team, a new company, but we all have memories from the old. So maybe just set the stage. And if you do talk to us today, how would you introduce Dun & Bradstreet?

Yes, sure. And it was one of the things I think we talked about really early on, and you did a lot of work in and expressed your opinions in terms of the potential of the business. And I think from that time, Manav, the first component is the asset, the data cloud, the reach, the reputation is all, I would say, strengthened from already a very strong pace from a business perspective. We've gone through a massive transformation effort. So about 4 years ago, in early 2019, as you said, new management team came in, turned over literally. The entire executive team, except for 2, was replaced. Senior management really overhauled from that side. And then it ended up, I think, about 850 on a net basis were replaced, for all intents and purposes. And again, I say that is -- those were exited. And a lot of bureaucracy, a lot of, I would say, kind of overlapping functions from that side that we drove out. But really, the change has been in terms of taking the asset and really strengthening the underlying infrastructure, data supply chain, technology side of the equation was very foundational for us. And then once we have that in place, once we have the right people in place, it's all about really accelerating, right, in innovation. And so when you think about D&B, historically, it was a flat business, right, when we came into it, for almost a decade. Its margins, as you so aptly pointed out, were about 1,000 basis points under what it should have been. And it really wasn't investing in growth and innovation than taking advantage of what was really a privileged position in the market. And so since then, we've accelerated organic growth each and every year. This year, at the midpoint of our guide is roughly 4%. Margins are now high 30s, 39%, 40%. Strong free cash flow. We had to delever the balance sheet from the LBO take-private transaction, and that's on a really nice trajectory. So -- and what I would say as another key point in there is like the Vitality Index. And it's interesting because it's a little bit of an indictment of where the business was before. Because right now, our Vitality Index, which measures new products as a percentage of overall revenues, is upwards of like 25% to 30%. Now that's not sustainable, right, because we are coming from such a low border. But it's an important piece just to show the new solutions, the new products really taking hold and resonating with our customer base. And that's why we've accelerated the growth to where it is today and really where we can take it over the next few years.

Got it. And before touching on some of those points you brought out, maybe just another kind of set-the-stage question. But how do you break out your business mix? That's the best way to kind of talk about the business.

Sure. And that's fair because that's another piece, I think, that's continued to evolve, domestically versus internationally, but also our Finance and Risk business versus our Sales & Marketing. And so if I touch briefly, domestically versus international, it's about 70-30. So North America is the predominant amount, but we've doubled the size of the international businesses, and it's really grown nicely over the last few years. On the product side, we have our Finance and Risk, which are kind of our defensive assets; and then Sales & Marketing, which is really the offensive side of the equation. If we look at that, it's about a 60-40 split. But inside of that Sales & Marketing business, it's a little bit unique from that perspective because about 55% of it is master data management. And so when you think about master client record, right, all of the CRMs, all of the MarTech stacks, a lot of that is actually the cleanse, match, append, dedupe, enrichment of that data is done through our MDM. And so when you go into the largest companies on the planet, they're using our parent-child hierarchy, our matching, our linkage, right, to really establish their business framework, right, within an organization from a data perspective. And then it's hanging other data assets off of it to solve unique use cases from that perspective. And so, again, it's funny because I think when you start with D&B, you generally start with, hey, we know the Finance and Risk side, the Credit side of the equation. Even that, while it's very strong, very embedded, growing now in that kind of company average range, the Third Party Risk and supply chain risk management has been growing strong double digits now for 8, 9 quarters in a row. And so we continue to really open the aperture to solve different use cases within these businesses throughout the globe. And I think that's a big change, too, Manav, from where it was before, which was they kind of just kept maintaining, right, the status quo versus really how do you build upon and expand from that perspective. And supply chain was a natural kind of step aside from where the Finance was. And Walmart was a great example because we did their trade credit underwriting and provided the data analytics from that perspective. But then when they were looking at their supply chain, and not just its financial resiliency, but the reg and compliance side of the equation, it was a natural step for us to expand from that perspective. And you can see that even going further with what we're doing in cyber, what we're doing with ESG, et cetera. So it's really a kind of cool concept because it's almost like a land and expand from a use case perspective within an organization.

Got it. And maybe just a final set-the-stage is the -- can you just talk about the long-term algorithm, and maybe by those 2 divisions, in terms of what targets you anticipate getting to, given all these changes you've alluded to?

Yes. And so if you go back when we first started this thing, there were some headwinds that we had inherited prior to. And so we knew the transformation, why it was going to be a transformation, right? And so we kind of laid out, hey, it's going to be 0% to 3%, 3% to 6%, and then latest in our Investor Day is 5% to 7%. And so what we've done to get to that kind of, call it, 3%, 4% over last year and into this year is really start to drive price from that perspective, the cross-sell, upsell from that perspective. And then we also started to kind of close the back door on products that were declining. And so Hoover's was a great example. It's about $90 million to $100 million business in the Sales & Marketing side, a brand that's pretty well known but was severely underinvested in for 5, 6 years, right? And so by enhancing the UI/UX, so the user interface, user experience, by adding -- contact data is an important part when you get into the medium to low end. When we got here, we had 2 million, 3 million contacts that were a majority of them were stale. Now we're in the 30-plus million from that perspective, and they're really focused on the key decision makers within the organization. So all of a sudden, you're seeing a business that was minus 10%, minus 15%, get to slightly growing. And just that in and of itself is part of the reason why Sales & Marketing grew 5% in the last quarter. It's because the more of these kind of negatives you can fix -- and look, we had boulders, rocks, stones, pebbles, sand to work through. And so the boulders are out. There's still a few that we're repairing, right, from that perspective. But as we think about how do we continue on to that next step, fixing those last couple of businesses, right? And we've most recently talked about in the North American Finance Risk, credibility in the public sector side. In getting behind some of those headwinds, it exposes the rest of the business that's growing in that kind of 5% to 6% range already.

Got it. And that 5% to 7% long-term algo, can you just break it down by pricing, volume, et cetera? And also, just compare it to what it is today, so how each component is kind of stepping up or not?

Yes. So really, today, the first is, if you look at like our gross retention, right, it's in that 96% to 97% range. So already really, really strong. At the top of the house, it's like 99%-plus, so the strategic customers, the really large-scale customers. The small businesses, right, that's what usually has churned in the past. And so we've got some strategies there that we're launching later this year to address that market in a different way. But there's a mix of better retention there, but also just new logos from that perspective, especially in North America. So if I think about where we're at today, price, for instance, has given us about 2 points of growth, right? Where should it be over time? Between Europe and between what we're doing with some of the contract constructs in North America and just being able to continue to extract price from what we call the moral high ground, that's something that we expect to have another point or 2 from that perspective. So think about getting to 3% or 4% over that time period. If I think about where the rest of the growth has really come from today, it's better cross-sell and upsell, and then some, I would say, new logos. We just announced, for instance, 1 of the top 3, 4 software companies. And it's an interesting one because you asked about where were we and where are we. When I got here, that business and us were in a really bad place. And so when we signed and executed that deal in the beginning of Q2, it was something that meant a lot to me, not just because it was a multimillion dollar, multiyear deal, right? But it really showed the change in trajectory and the change in view from that type of business to Dun & Bradstreet, right? And so on that side, as I said, the cross-sell. Upsell, right, in the logos, obviously, have been contributing in that kind of 2 points right from that side. And so as we go forward, I think the consistency of the cross-sell, upsell will be there, but it's going to be about price, it's going to be about new logos. And then it's going to be about innovation starting to contribute maybe a point or 2 from that perspective. So we did a nice bridge in our Investor Day deck that kind of walks through, hey, here's where we're starting at the midpoint of our guide this year, and here are the pieces that could step through. Now the funny thing is, if you add all of them up, it's obviously 11%, not 5% to 7%. But the point is, is that, each year, it's not like you add up all of those components. You're going to have times where price is going to be, I would say, pretty consistent as a growth contributor. But then as you're rolling out a new product, as you're garnering some new logos from that side, it's not any one that we're banking on for 3%. You're going to have the opportunity of 1%, 2%, 3% in any given year.

Got it.

The split between Finance and Risk, it's interesting because the Finance side of the equation, again, very sticky, very embedded, very mission-critical, and it's got good pricing power, right, from that side. The faster grower, I would say, is the supply chain and Third Party Risk & Compliance. And so that's got a nice ability to continue to accelerate. And then the last 2 pieces, I would say, in that credibility in public sector side are kind of like, hey, get them to start to be flattish, right, and then see the inflection as they start to grow. And we expect that to start to turn the corner in later this year and into next year. On the Sales & Marketing side, the MDM business, very sticky, very embedded, right? Strong pricing power and can hang more and more data assets off of it over time. Then you have the Digital Marketing business that's more like that third-party and supply chain risk in terms of double-digit growth earlier on in its maturity cycle and has a lot of opportunity from that perspective. So I wouldn't say that we're banking on, hey, we need Sales & Marketing, for instance, to grow 10%, right, for us to achieve. They actually have a similar opportunity to grow in different pieces of them over and above the blended average, and then a really strong foundation on each side to continue to push it going forward.

Got it. Maybe just to round out the long-term algo then. Can you just talk about that 5% to 7%, what that flows through in terms of margins and EBITDA growth that's out there?

Yes. So the big first step-function change we went from kind of 30s to almost 40%, right, and we were a little bit above 40% before some of the acquisitions that we did, that was cost take-out. And then even at a lower growth, the contribution margins are still very high, right? So as we think about balancing that growth in the algorithm, 4%, 5%, 6%, 7%, right, any given year, that's going to give you 50 to 100 bps of margin expansion. And so the nice scale of this is, as we collect the data, curate the data, right, as we sell the data, then it's kind of do it once and sell it multiple times. So that's obviously higher than 60% contribution margin. But we want to invest back in the business, whether it's in incremental data assets, workflow solutions. What we're doing around Gen AI, obviously, is really germane to this point in time. So all of that kind of gets bundled into how we think about the balance of investment and profitability flow-through.

And in terms of the leverage targets and how that balances with what you want to do in terms of capital allocation, how should we think about how that steadily perhaps decreases over time?

Yes. So it certainly decreased pretty rapidly, right, when we did the IPO. I mean, we were with a preferred equity instrument, like 9x levered through an LBO, right? And so what was great about the timing of the IPO was we were able to deleverage the balance sheet pretty quickly and take advantage of, for instance, like the Bisnode acquisition that we may not have been if we weren't in that timing from going back public. As we go forward, we're just a smidge under 4x right now. When I say a smidge, like 3.95x. So -- but as we progress through the year, we've talked about being below 4. Really, the target that we laid down is like 3 to 3.5x. And so look, as EBITDA continues to expand, as we continue to pay down gross debt from that perspective, you would expect to see that within the next year or so from that perspective. I think once you're in that kind of 3-ish range, 3, 3.25, 3.5, right, it just opens up the aperture more in terms of, one, the external kind of screening mechanisms that are saying, hey, 4x is high. And the second is in a rising rate environment, right? There's just some cash flow that's going out that could be better utilized in other places from our perspective. And so at that point, look, if we're growing the way we would expect to grow with margins in the 40% and leverage is that 3 to 3.25, and we're trading where we are today. I mean, clearly, buybacks and that kind of opportunity becomes even more and more easy from a flexibility perspective. And then M&A, right, is always something that the business has a great aperture, right, from an M&A perspective because of its assets are very horizontal, right, from an industrial perspective. And we touch a lot of use cases within businesses. And so from that side, I would say, the bar is very high right now, Manav, in terms of making an acquisition in this environment. But certainly, we're out still scouring, reviewing, seeing strategic fit from that perspective. Because you don't want to pass something by just because there's a kind of short-term need for being at exactly 3.25x versus being at 3.5, but doing a great deal.

Got it. If we can shift a little bit to maybe this year/near-term talk, how do you, firstly, characterize your revenues by subscription, recurring transaction? The broader question is, obviously, how much visibility do you have in your business at any given point in time?

Yes. So if we break it down, it's about 75% of what we call daily ratable revenues, right? And so this is -- we signed a contract. Every single day, it's taking -- it's $1 million contract divided by 365 and recognizing it every day. We have another about 15% that's on delivery. And so that on delivery from that perspective, in essence, means it could be quarterly, right? It could be semiannual. It could be annually. And the guaranteed amount is over a 12-month period. And so again, extremely high visibility. But if they went 25%, 25%, 25%, 25%; in the next year, they do 25%, 30%, 20%, 25%, there can be a little bit of variability from a quarter's perspective, but on a 12-month annual basis, extremely high visibility. It's just here a little bit at the customers whim in terms of when they're using it through that time period. The last I would say, roughly, call it, 10% is completely -- about half of it is completely committed or a little over half is completely committed, but then they're literally just using it. Think about like a prepaid debit card that they're using any time throughout the year. And so that, again, is guaranteed in 12 months but has a little bit more variability, right, predicated on the timing of consumption. And then the last is like where we capture overage, right, or we capture literally somebody just comes in and buys a set of reports. And that's, again, a small fraction of the revenue. So when we look at recurring revenue, right, so the subscription, all of that on delivery, right, and then the piece on the variable side that is contractually committed, you're talking somewhere north of like 95%, 96-plus percent. So it's very sticky, very high visibility, but there's always going to be a little bit of timing quarter-to-quarter.