D&B Misses Estimates, Outlook Dull

Zacks

Dun & Bradstreet Corp. (DNB) reported fourth-quarter 2012 earnings of $2.38 per share, which missed the Zacks Consensus Estimate by 3 cents. However, earnings per share (“EPS”) increased 7.7% year over year and 35.2% sequentially, driven by lower operating costs and better-than-expected margin expansion.

Revenues

Core revenues declined a modest 0.8% year over year but jumped 12.1% sequentially to $463.1 million in the fourth quarter. Including $31.8 million from divested operations in the year-ago quarter, total revenue declined 7.0% year over year and missed the Zacks Consensus Estimate of $475.0 million.

The weak year-over-year result was primarily due to sluggish performance from Risk Management Solutions (down 2.6%) and Internet Solutions (down 5.6%), which fully offset growth (up 3.4%) in the Sales & Marketing Solutions segment.

Sequentially, revenues were positively impacted by 37.9% growth in Sales & Marketing Solutions segment and 2.5% growth in Risk Management Solutions, which fully offset a 4.0% decline in the Internet Solutions business segment.

D&B recorded a 1.7% year-over-year decline in revenues from North America, while its International revenues increased 2.1% from the year-ago quarter. Strong International results were driven by 1.4% revenue growth in Asia-Pacific and 2.6% growth in Europe and other international markets.

Revenues from North America jumped 14.4% sequentially, while International increased 5.1% over the year-ago quarter. Europe and other international markets surged 10.0% that fully offset a 1.3% decline in the Asia-Pacific region.

Margins

D&B’s operating margin expanded 80 basis points (“bps”) on a year-over-year basis and 620 bps sequentially to 37.2% in the last quarter. The better-than-expected result was primarily driven by lower-than-expected rise in operating costs and expenses.

Operating costs as a percentage of revenues improved to 65.7% from 75.7% in the year-ago quarter and 73.5% in the previous quarter. All expense items as a percentage of revenues improved significantly, primarily reflecting stringent cost control and improving efficiency.

Net margin contracted 50 bps from the year-ago quarter to 22.4% due to higher interest expense (up 23% year over year) and other expense (up by $5.6 million). Net margin increased 320 bps on a sequential basis due to lower interest expense.

Balance Sheet

D&B ended the quarter with $149.1 million in cash and cash equivalents, up from $137.0 million in the previous quarter. Total debt was $1.29 billion versus $1.02 billion at the end of the preceding quarter.

Strategic Technology Investment (MaxCV)

In Feb 2010, D&B initiated a two-year strategic technology investment program known as MaxCV to strengthen its leading position in commercial data and improve its current technology platform to meet the ever-growing needs of customers. The program is expected to accelerate revenue growth and reduce expenses by improving data quality and timeliness, increase the speed of product innovation and significantly reduce technology costs.

In the fourth quarter of 2012, D&B incurred $4.7 million in total pre-tax expenses for MaxCV. Moreover, it incurred $5.8 million in capital expenditures and additions to computer software and other intangibles related to MaxCV.

Guidance

D&B expects core revenues to remain flat to up 3.0%, before the effect of foreign exchange. Operating income is expected to decrease in the range of 6.0% to 3.0%, before non-core gains and charges, which include $25.0 to $30.0 million of charges for MaxCV in 2013.

EPS is expected to grow in the 8.0% to 11.0% range, before non-core gains and charges. D&B expects free cash flow between $270.0 million and $300.0 million. D&B expects its ongoing financial flexibility initiative will create an additional $70.0 to $80.0 million in 2013. D&B expects to incur pre-tax restructuring charges of $17.0 to $22.0 million related to the program in 2013.

Recommendation

We believe that D&B’s high-margin business model, strong international growth potential, emerging market growth opportunities, strategic investments, incremental cost savings and new product pipeline will drive growth over the long term.

However, we believe that the 2013 outlook reflects a sluggish macroeconomic environment in its operating markets. The sequential decline in Asia-Pacific revenues is a major concern. Moreover, we believe that increasing competition from companies including Equifax Inc. (EFX), Yahoo! (YHOO) and Moody’s Corp (MCO) will also hurt profitability going forward.

Currently, D&B has a Zacks Rank #3 (Hold).

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