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

Good afternoon everyone. My name is Kyle Peterson, I'm analyst at Needham. We're going to be doing a fireside chat with D&B. We have CFO, Bryan Hipsher, here with us. Bryan, thanks for joining us and welcome to the conference.

Yes. Thanks so much. It's been -- as we were talking about kind of fully booked back-to-back. So we appreciate having the opportunity and look forward to the conversation.

Yes. Great, so maybe we could kick it off. D&B as a company, has been around for quite some time, but there's also been a lot of changes kind of undergone on over the last 3 to 5 years. So maybe if you could get everyone kind of back up to speed on some of those changes and initiatives that have taken place that would be helpful.

Yes, absolutely. A long enough that we've had 4 U.S. presidents, including Abraham Lincoln so it definitely has had a long storied history from that perspective. 5 years ago now back in February 2019, we went through a take private. Really, I think, great asset, great global brand, really differentiated data from its proprietary nature and contributory nature. But just kind of got stuck in a spot where it was really kind of flat from an organic growth -- wasn't really being invested in and needed a pretty significant transformation. And look, they had talked about transformations, but really, what we saw was that they changed the CEO and left everything else in place. And that does not a transformation make. So we came in and really reorganized the business, I would say, kind of spent the first 2 years doing the really heavy lifting data supply chain work, infrastructure work from 11 terrestrial data centers down to 3. Now we're talking about and moving towards full cloud-native, took out 17 of the top 19 executives day one about 60% of the kind of Tier 2 leaders. And then almost half the team was churn from that perspective, then we started kind of rebuilding with better talent from that perspective. GTM organization was really overhauled at that point, change incentive compensation practices, started incenting multiyear deals. Started deincenting just kind of maintaining from that perspective and really incented growing. And so as we got through that period about 1.5 years in, the markets really opened up, and we ended up taking the business back public. At the time, we were 9x levered if you remember back then with a big preferred equity instrument in a couple of pretty heavy secured and unsecured bonds. We were able to take out the entire preferred. We were able to call back those bonds and then that set us up to do in acquisition with Bisnode, but also really to start delevering the business, now we're at roughly 3.7x. And so on that journey, though, we knew that there were some structural headwinds in terms of a contract they had lost back in 2018 that was going to cost $25 million a year. That's finally off and behind us, and we've lapped behind that. And so we knew that it was going to go from kind of 0% to 3% into that 3% to 5%. And last February, we laid out a path to 5% to 7% growth off of the kind of 4-ish percent -- 4% to 5% growth where we are today. And I think that's really been fueled by kind of the second leg of the transformation where the first was getting people to sit up straight organizationally, having focused being growth oriented and getting the foundation where it wasn't a detriment to innovation, the last 2, 3 years have really been about innovation. And so we brought in obviously, guys like Gary Kotovets from Bloomberg. Mike Manos came in, he was the CDO at -- CTO at First Data, Fiserv. And then Ginny Gomez came in, the Chief Product Officer, and now head of North America, from TransUnion and really started to push forward in terms of new solutions, new verticals, brought it internationally in terms of what Neeraj is doing on that side. And you've really seen the business go from flat organic growth for almost a decade to now that mid-single digits. Margins were in the low 30s, now in the high 30s. We're at low 40s at one point, free cash flow conversion improving. And again, it's one of those things that it takes a little bit of time for each of these components to really flow through, but you've seen it. I think over the last year and especially over the last few quarters, that the work is paying off in terms of the results.

That makes sense. And maybe we could dive a little more into -- you guys did a lot of work. It seems like with the sales force in terms of realignment, changing incentives and priorities and goals for a lot of your sales team. But maybe if you could dive more into some of the changes that were made at the sales force level and how that has helped get the top line moving in the right direction?

Yes, absolutely. I mean it sounds not like rocket science, right? But like incentives are really structural from that perspective. And so one of the things that we saw was like they were incenting in essence, the bag carrying sales folks that if they kept 95% of their business, they could end up achieving 100% of their commission, right? And then if they sold something incrementally new that would give them a 20% to 30% kicker. So if I'm a business and I'm going, okay, I went from 100% to 95%, and then they sold something new for 95% that took me back to my 100% but the commission expense was 130%. I'm flat, but the salespeople are all running around high fiving because their compensation went up 15% year-over-year. So that's the kind of stuff we had to take out, right? I mean they don't get paid now until they're growing on a year-over-year basis, flat obviously doesn't cut it. In terms of incenting multiyear contracts, I mean, we were incenting only annual contract value versus now we incent obviously total contract value, which is why we went from less than 20% of our revenues are on multiyear agreements. Now, I think it's like 53%, 55% with built-in price escalators. And so those are a couple of examples just on the compensation side of how we have evolved it. We continue to tweak that and drive some product-specific and other things from their perspective. But the other side is also just we got rid of a lot of fat on these like sales support groups and other kind of, I call them, hangers-oners, right, where there's always a hunter that actually goes out and closes the deal. Well, in essence, we were paying, let's say, a 7% commission where we could have been paying a 5% commissioning and given 4% to the hunter, instead we were paying 7%, giving 2% to hunter and the peanut butter in the rest of all the sales support people. And again, you really want to like upset someone who closes a deal, give any of their money to someone they think doesn't deserve it, right. And so that's the kind of stuff I would say we cleaned up. We then evolve, I would say, just a structure of the sales force to have kind of the mega accounts, the strategics, the top 200, and they're set up with a clear overall manager, but then they go into subject matter expertise on the sales and marketing side versus Finance and Risk side. There's national accounts that are still large, but not as big as the strategics. They're a little bit more separated from a geographical perspective and an industry vertical. And again, they have a little bit broader remit in terms of what they can sell on both sides, but they're still bringing in the expert because where we are now with the product set and the sophistication on the sales and marketing it's a very different sale than it is on the Finance and Risk side of the equation. And so while going from Finance Solutions to supply chain risk management, those are pretty closely correlated. They generally sit under the CFO's umbrella. If you go on to the marketing side or the sales side, now you're kind of crossing from defense to offense. And that's where the expertise has to come in from that perspective. At the very low end, still lot of inbound and call center oriented, but we've also started to consolidate our websites and really bring more of a digital experience from that side of the equation. Most recently, we've made some new hires -- we talked about Isabel, [ Vidal ] coming in to join the team and be the North American CRO. Just got obviously, a great background from that perspective. And she, I think, will continue to evolve to be even more deeply focused from a vertical perspective. And what we see is while the horizontals are very I would say, standard across the board, there is certain verticals, whether it's cap markets or insurance or FI that need some expertise and need a little bit of that twist from that expertise, right, to really drive the true value proposition, the true expansion opportunity that we have within the accounts.

Okay. And maybe thinking about some of the building blocks of organic growth in that 5% to 7% model you guys laid out. How should we think about the components with -- whether it's new logos, pricing, additional products, like what are kind of the different levers that you guys see kind of building up to that broader 5% to 7% number?

Yes. I mean it starts with closing a back door, right. And so our gross retention in -- 96%, 97% is really strong, and it has been improved from even where we were before. That churn ends up happening more on the SMB side. And so where those turn out because they're either small businesses and they're going out of business or they had a onetime use case. That's where the new logos kind of come in, in North America and replace that. Obviously, we're looking to add that on a net basis. And as we make progress on the credibility asset and what we're doing from that perspective, that will support that. Price, again, went from less than 1% of growth when we came into the business, now it's about 2.5% this year. And we expect that to go to kind of 3%, 3.5% as we progress going forward. That's -- all the things we talked about in terms of transformation and investment in the data assets going from 275 million D-U-N-S of 550 million D-U-N-S and the depth and alternative data assets that we brought in, all of that puts you in this like moral high ground to take price. And that's where we've been successful from that perspective. When I look at kind of cross-sell, upsell, that's been kind of 2-ish points of growth per year. And again, that's taken it from Finance Solutions to supply chain risk management, that's taken from MDM to go on the marketing and sales side of the equation. If you get in that MDM side, it's really great to federate out to both sides of the financial risk and sales and marketing because we become that client's master client or master vendor record. And so they use the D-U-N-S and the D-U-N-S hierarchy to create a parent-child relationship and then they can really understand the 360 nature. I mean when I was at FIS back in the day, we used Dun & Bradstreet, right? Because while we were pretty close into the FI space, we called Bank of America 73 different things within our billing and QTC applications because you had Bank of America, you had Merrill Lynch, you had Countrywide, you had BAM, you add Bank of America, BofA. And so really by using this kind of D-U-N-S structure and then creating the parent-child hierarchy, it's the organization that then allows you to curate right to append and to enrich from that perspective, and that's really powerful and the ability then to bridge off to cross-sell/upsell. It's why our largest clients are using 7 to 8 products per versus at the lower end, it's something more like 1 or 2.

Great. That makes sense. And I know on the last earnings call, you guys called out that in the vast majority of your business seems to be growing at kind of 6% plus. I guess what is that stub piece of the under -- of the business that's growing slower? And are there things you guys can do to get that. So the whole business is growing kind of 6% plus.

Yes. So one of the -- half of it, about $125 million, which is roughly 5% in that range, is this legacy credibility business. So is a business that we inherited, obviously, when we came into. We've made a lot of changes to it right on the gates. D&B prior had bought it and sold it and then bought it again. Well, one of the times that they sold it. They were really running in a way that -- it was creating some really poor sales practices, which opened up an FTC investigation, which concluded in a consent order about 1.5 years ago which is impacted, obviously, you can imagine the growth of that business [indiscernible] created a decline because we had to stop doing some things, stop selling some things. We wiped down the entire management team like right away, right. Because the environment was just not one that we were interested in participating in. Now where we're at now after the impact of the consent and the communication, we're starting to create new products and roll those out which is why you're seeing it go from a negative number to -- by the end of this year, we expect it to be slightly positive. So fixing these things, and we talked about kind of boulders, rocks, pebbles and sand. And really, this was one of the last remaining kind of rocks out there that we needed to kind of fix and then get moving into the right direction. Because, again, that allows you to create a lot more flexibility. We fix businesses, we've improved them, and that helps the overall growth rate. And that all sits by the way, North America Finance and Risk. And so when you're kind of looking at it, you're going, hey, Finance Solutions, really strong, really embedded, great pricing power. TPRC is growing double digits, third-party and supply chain risk management. Why is North America F&R getting dragged down a little bit and [ inside ] credibility business. So that has some structural things. We've got to go in the right direction. Now it's just a matter of time of allowing some of that to pick up and start to accelerate in the coming quarters and years. On the other 5%, on the sales and marketing side, we built down and acquired some things on Audience Solutions, Eyeota and NetWise that are really great assets. And what they're doing is allowing us to take our data from being really off-line to online in using audience building capabilities to create programmatic advertising, right? So that has -- was really growing double digits. Last year, kind of got to like single digits, right? And really, it was a tale of 2 halves. As sales and marketing budgets started to kind of put the brakes on late last year and early into this year, that's where you've seen it start to decline a little bit. We expect it to flex back up. We're making more progress in terms of wallet share and market share. But again, if you look at the overall business and 95% plus is subscription, daily ratable or on delivery with the commitment throughout the year. There's just this little stub on the end that's got a little bit more volatility. And again, we think that there's clear potential and upside to really scale that up as we move forward. But it's 1 of those 2 that if for some reason, it does get too cyclical, right. And we're in a pretty unique period right now. So we kind of want to see how it plays out. We're always looking at the alternatives of -- is it a strategic asset? Would it make more sense in another portfolio? And then it's just making sure we get the right price and the right value from that perspective. But what I would say now it is something that I think we think there's a lot of potential in. And especially when you start to do what we call like a [indiscernible] D-U-N-S identity graph, and you're starting to lay over the individual with the business side of the equation and what ultimately that could drive. Business personas from programmatic advertising is relatively new, right. So while everyone knows Google or Facebook and they have these identity graphs and they can say, Bryan Hipsher is a former basketball player. And so therefore, and he likes Nike shoes and I'm going to put the ad up right from a publisher's perspective? What's really interesting to the Oracles, the SAPs, the Workdays, the Microsoft says, if I'm on the Wall Street Journal, and they know I went through an ERP conversion already. So that's not their primary push. They see the CFO of a multibillion-dollar corporation is out there. And it's Dun & Bradstreet and therefore, they're going to push like their latest treasury workstation, the latest receivables workstation and they see that as a bigger opportunity right from a B2B perspective than a smaller dollar add on the B2C side.

That's helpful. And maybe if we could switch over to multiyear contracts. You alluded to earlier, you kind of -- the business used to have almost nothing on multiyear deals and now it's over half, I guess. How has that transition been? And what's the impact and lift you guys have seen both to revenue and whether it's sales force productivity or is there any other tangential benefits...

Yes. I mean it's funny. I mean you look at an apples-to-apples basis from sales force productivity. We're up, I think it's like 7% to 10%. And that included, obviously, we brought business from that perspective. So it's been really, I would say, positive, right, from that side of the equation. I mean if you think about it, when I got there, it was -- our top 200 customers have been with us for an average like 19 plus years, right? And so you're going this is nonsense, like why are we not on multiyear contracts. It's like and you ask the sales force, and they're like, well, we get paid on the annual contract value, and you're like, okay. So we're like what if we paid you on total contract value upfront. And then you went like upsold and cross-sold and drove even more sales as you forward, and you're like, yes, it sounds good. And so -- but that was some of the change. So it took this haggling over the same products each and every year, which then you get caught in the sourcing cycle and put us in a more strategic level where we could focus on setting it in, putting the structural price increase in and then coming back with our new solutions to really upsell and cross-sell from that perspective. So that's really the combination of these things is what's driving pricing revenue growth, better cross-sell/upsell opportunity and even stickier retention from that perspective. So it's something fundamentally we did a great job of it in my past company at Black Knight. In Anthony's history too, in the banking industry. And so that model, I think, fits very well to what we're doing and it's allowing us to focus on our new innovations and new growth, which is reflected in the vitality index that's in like high 20s, low 30s. And again, a little bit of that is we've gone through a period of investment and a period of new product innovation where for the 10 years prior, it was pretty stable from that perspective.

That's helpful. And I wanted to move over and talk about margins. You guys have shown a lot of margin expansion, but still seem to be investing quite a bit in new products and other areas to be able to grow faster. So I guess could you walk us through how you guys have been able to expand margins so much in recent years kind of whether it's sort of a cost to -- were just excess and that money was better spent elsewhere? How has this kind of evolved in the cost structure over time?

Yes. So in the beginning, there was a lot of that, right. The bureaucracy, the kind of fat, and unnecessary costs that were in the business. And so that was some of the early work we did where we took on a net basis, like $240 million. It took us all the way up to like 42%. Now when we bought Bisnode, we bought at about 5x post synergies, right, but that was a negative 2% organic grower with 12% margin, 13% margin. So now it's growing mid-single digits. It's got 30% margins. But that was just something that kind of influenced the overall margin percentage from that perspective. What we see is that the contribution margins are 60% kind of -- and that's net normal investment, right? And so when we're talking about 50 to 100 bps of margin expansion in a normal year, right, that's where just the contribution margin [ falling ] through is from that perspective. So for us, we want to continue to do things like migrate off of like their legacy platforms. And so it was really one of those like if you think about product management, product management life cycle, A lot of things were in the maturity state or decline state, but they weren't sundowning them completely. They were kind of leaving them out there. We call them zombie products right, kind of The Walking Dead where they got revenue, they got a high amount of profitability, but they're better served to be migrated over onto a new modern platform and then shut down because that's where the OpEx savings come from, from that perspective. So we're going to keep driving those migrations. There was a lot in Europe last year. There's still some ongoing in the U.S. And again, every time we can get off an old application we can take that money and either take it to the bottom line or continue to reinvest in the business.

Great. That makes sense. And maybe let's quickly talk about AI kind of as a topic of the day and I think a lot of people trying to figure out what businesses are helped or potentially disrupted from AI. How do you guys see whether it's AI and how it fits in your business today and how you see that evolving?

Yes. It's one of those things that, from our perspective, it was very exciting. I mean, historically, we used AI, right, whether it's GPT-3 or any other kind of prior generative applications that we're helping us with process automation, helping us look at the collection and curation of certain data assets, right? That's been around for a long time. I think on the generative side, what's really exciting is that the power of these large language models is going to be predicated on data, right? And so from our perspective, our proprietary data that's contributory in nature, it's predominantly on private companies. It's curated and tied through the structure in literally every country except for North Korea where you say it's not that hard to make a Sales and Marketing or Finance and Risk decision in North Korea. And so from that perspective, it's one of those that it's really exciting. Now we have to be mindful of really protecting the data asset and making sure that we keep it within our environment. But leveraging the large language models to build as procurement. We're dealing with IBM. We're doing some things with Vertex and we're doing some things from Microsoft. But it's always contained in a very structured way. Providence of data, ownership of data, sourcing of data, right, and ultimately the accuracy and cleanliness of that data. they're all uber important when you're talking about a successful AI strategy. So MDM will absolutely benefit materially from GenAI, right? Our data in general in the usability of it, we'll continue to benefit from that perspective. Look, if we were somebody that was out there kind of on public companies and scoring public companies and [indiscernible] that is something completely different, right? I mean there's Qs, there's Ks, there's EDGAR, like sourcing our data you're getting that contributed from the largest telecoms, the largest banks, the largest retailers in the world. The small companies are contributing that to us to build out their file to be a vendor to some of the largest entities on the planet. And so from that side, you're not going to go out and scrape the web and all of a sudden find $500 million financial statements out there on companies in Germany in Asia and Latin America in the U.S., it doesn't exist, right? And so we feel great about our position. I think we're working with the right balance and partners. And it's something that I think could be an accelerant for us as we head into the future years to come.