D&B Reports Dismal 1Q, Outlook Flat
Dun & Bradstreet Corp. (DNB) reported first quarter 2012 earnings, before non-core gains and one-time charges, of $1.35 per share, well short of the Zacks Consensus Estimate of $1.39 per share.
Quarter Details
Total revenue increased 1.2% (after the effect of foreign exchange) year over year to $390.1 million but missed the Zacks Consensus Estimate of $400.0 million. In the reported quarter, core revenues were positively impacted by higher Sales & Marketing Solutions revenue (up 8.1% year over year to $107.0 million) and Internet Solutions revenue, (up 4.5% to $30.1 million).
The strong growth in Sales & Marketing Solutions and Internet Solutions was fully offset by poor performance at Risk Management Solutions, which declined 1.8% on a year-over-year basis to $253.0 million in the quarter.
Region-wise, the quarter was mixed for D&B. North American revenue dipped 1.0% year over year to $285.5 million. International revenue grew a healthy 7.9% year over year to $104.6 million, primarily driven by strong growth in the Asia-Pacific region (up 16.3%) and Europe and Other International markets (up 2.0%).
Operating expense increased 3.0% year over year to $319.3 million. D&B’s operating profit increased 2.5% year over year to $106.0 million. Operating margin expanded 40 basis points in the reported quarter, due to higher-than-expected revenue growth. Net Income increased 1.1% year over year to $65.2 million, while net margin remained flat on a year-over-year basis in the reported quarter.
D&B ended the quarter with $117.7 million in cash and cash equivalents, slightly up from $84.4 million in the previous quarter. Total debt was $842.8 million versus $965 million at the end of the preceding quarter.
Free cash flow, excluding the impact of legacy tax matters, was $152.0 million compared with $118.8 million in the year ago first quarter.
Strategic Technology Investment (MaxCV)
In February 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, increasing the speed of product innovation and significantly reducing technology costs.
In the first quarter of 2012, D&B incurred $8.4 million in total pre-tax expenses for MaxCV. Moreover, it incurred $7.5 million in capital expenditures and additions to computer software and other intangibles related to MaxCV. D&B expects to spend $60.0 million on MaxCV for fiscal 2012.
Chinese Unit Closure
In March 2012, D&B announced the suspension of operations at its Chinese subsidiary, Shanghai Roadway D&B Marketing Services Co. Ltd, following an investigation into its alleged violation of U.S. and Chinese laws. The subsidiary had been blamed for breaching Chinese consumer data privacy laws, the Foreign Corrupt Practices Act (FCPA) as well as the anti-bribery law. The matter has been referred to the U.S. Department of Justice (:DOJ) and the Securities and Exchange Commission (:SEC) for further investigation. Subsequently, D&B announced the closure of this Chinese unit.
Guidance for 2012
D&B expects core revenues to increase 0.0% to 3.0% (prior outlook 3.0% to 5.0%), before the effect of foreign exchange. Operating income is expected to increase 4.0% to 7.0%, before non-core gains and charges.
The company expects earnings to grow in the 8.0% to 11.0% range, before non-core gains and charges. D&B expects free cash flow between $275.0 million and $305.0 million, excluding the impact of legacy tax matters but includes investments in MaxCV.
Recommendation
We are disappointed with the flat 2012 outlook, which reflects a sluggish macro environment in North America and weakness in Europe. Moreover, we believe that increasing competition from companies including Equifax Inc. (EFX) and Moody’s Corp (MCO) will also hurt profitability going forward.
However, we have a positive stance on D&B over the long term owing to its high-margin business model, strong international growth potential, emerging market growth opportunities, strategic investments, incremental cost savings and new product pipeline.
We, therefore maintain our Neutral recommendation over the long-term (6-12 months). Currently, D&B has a Zacks #4 Rank, which implies a short-term Sell rating.
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