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Edited Transcript of CNNE.N earnings conference call or presentation 12-Nov-19 4:00pm GMT

Q3 2019 Cannae Holdings Inc Earnings Call

Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Cannae Holdings Inc earnings conference call or presentation Tuesday, November 12, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent Bannister Bickett

Cannae Holdings, Inc. - President

* Richard L. Cox

Cannae Holdings, Inc. - Executive VP & CFO

* William Patrick Foley

Cannae Holdings, Inc. - Chairman

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Conference Call Participants

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* David Luke Eller

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Jason Scott Deleeuw

Piper Jaffray Companies, Research Division - VP & Senior Research Analyst

* John Robert Campbell

Stephens Inc., Research Division - MD

* Shannon Devine

SOLEBURY TROUT LLC - VP

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Presentation

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Operator [1]

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Greetings, and welcome to the Cannae Holdings, Inc. Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Shannon Devine, Investor Relations for Cannae Holdings. Thank you. You may begin.

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Shannon Devine, SOLEBURY TROUT LLC - VP [2]

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Thank you, operator, and good morning, everyone. We appreciate your participation in our third quarter 2019 earnings conference call. Joining today are Cannae's Chairman, Bill Foley; President, Brent Bickett; and Chief Financial Officer, Rick Cox.

As a reminder, a replay of this call will be available through 11:59 p.m. Eastern Time on November 19, 2019.

Before I begin, I would like to remind you that this conference call may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our expectations, hopes, intentions or strategies regarding the future are forward-looking statements.

Forward-looking statements are based on management's beliefs as well as assumptions made by and information currently available to management. Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The risks and uncertainties, which forward-looking statements are subject to, include, but are not limited to, the risks and other factors detailed in our press release, which was released this morning, and in the statement regarding forward-looking information, risk factors and other sections of Cannae's Form 10-K and other filings with the SEC.

Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release.

Now let me turn the call over to Bill.

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William Patrick Foley, Cannae Holdings, Inc. - Chairman [3]

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Thank you, Shannon. I am very pleased with the execution our team delivered through the third quarter as we position our portfolio for continued value creation, benefiting all of Cannae's shareholders. A significant highlight of the quarter was the success of our Dun & Bradstreet management team has achieved just 8 months into our turnaround. Led by Anthony Jabbour and Steve Daffron's leadership, the D&B team has successfully executed cost actions on $192 million of annualized savings through September 30, 2019, as part of D&B's $200 million cost reduction plan. These cost actions have driven share improvement to D&B's profitability, which are now more in line with its peers. I am confident that we will surpass our cost savings goals, and we'll update you on our outlook for future cost saves on our fourth quarter call.

In addition to the reorganization of D&B's sales structure and compensation plan that is also having a positive impact on our new sales revenues, both of which experienced an acceleration in the third quarter. For the third quarter ending September 30, 2019, D&B generated adjusted revenue of $450 million, an increase of 8.5% versus the prior year quarter. Lattice, our acquisition, contributed about 1.1% of the increase, and moving some larger contracts forward from the fourth quarter, also contributed. Nonetheless, we achieved more than 4% organic revenue growth. Equally impressive, adjusted EBITDA for the third quarter of 2019 totaled $194 million, a 52.8% increase over the prior year quarter. And adjusted EBITDA margin expanded to 43.1%, a 1,280 basis point improvement compared to prior year quarter. Rick will review the D&B third quarter results in more detail in a moment.

Looking forward, D&B's extensive proprietary data continues to provide opportunities to further drive revenue growth through cross-selling existing products and services and bringing to market new product offerings as we work to exploit opportunities across D&B's extensive customer base.

Before I turn the call over to Brent, I would also like to announce that we have added 2 experienced executives to Trasimene Capital Management's leadership team. First, Rick Massey has joined Trasimene as a senior managing director. I have known Rick for almost 17 years, and he's an experienced M&A practitioner and an accomplished investor. In addition, we have brought on [Brad Ridgeway] as our restaurant management operator, who will oversee all of our restaurant group and assist them in optimizing their cost structure, improving their operations and supporting us in future monetization events. I couldn't be more pleased to have Brad and Rick join our team.

With that, I'll now turn the call over to Brent.

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Brent Bannister Bickett, Cannae Holdings, Inc. - President [4]

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Thanks, Bill. Today, Cannae consists of 4 primary businesses: Ceridian, Dun & Bradstreet, our Restaurant Group and T-System. Bill reviewed the success our team has achieved with D&B, so I'll review the balance of our portfolio.

To begin, Ceridian HCM Holdings continues to be an outstanding performer in the payroll and human capital markets business segment. For the quarter ended September 30, 2019, Ceridian's total revenue increased by 14%, cloud revenue increased by 26.2% and Dayforce revenues increased by 30.5%, all on a constant currency basis. There are now 4,169 customers live on the Dayforce platform, up from 3,465 at the end of the third quarter of 2018, which reflects a strong market demand for Dayforce, and we expect to see continued revenue growth heading into the fourth quarter and into 2020. We believe David Ossip and Ceridian's management team has Ceridian well positioned for continued long-term growth and success.

During the quarter, we made the decision to, again, prudently rebalance our portfolio by selling 2 million Ceridian shares at a price of $56.30 per share. This resulted in $112 million of proceeds, and we recorded a gain of $82.2 million. The cash received was partially used to repay borrowings under the FNF revolving credit facility. Today, Cannae owns 28.7 million shares of Ceridian common stock, representing an approximate 20% ownership position. Based upon Ceridian's closing price of $54 per share on November 11, 2019, Cannae's stake in Ceridian has a market value of $1.55 billion.

Turning to the Restaurant Group, the team continues to implement previously discussed initiatives targeted at expense reduction and improved store operations that lead to better store performance. Year-to-date through the third quarter, the team has achieved more than $10 million in pro forma cost reductions, including the closure of 11 stores during the third quarter, for a total of 55 since the third quarter of 2018. In addition to the store closures, the management team continues to launch further brand and operational initiatives in an effort to drive guest count at O'Charley's, Village Inn and Bakers Square. At Legendary Baking, manufacturing efficiency and profitability are the priority. While there's more work to do, the improved results at Legendary Baking is encouraging. We will continue to aggressively review strategies that will improve operational results and maximize optionality for future monetizations.

Turning to T-System. Bob Wilhelm has continued to drive his initiatives, designed to improve the company's operation and reaccelerate sales growth. We currently have an active pipeline of potential merger and acquisition candidates, which will provide cross-sell opportunities, while expanding our product offerings.

During the quarter, we also announced that Cannae has entered into a management services agreement with Trasimene Capital Management as of November 1, 2019 and has transitioned to an externally managed structure. As part of this agreement, Cannae will pay a quarterly management fee to Trasimene equal to 0.375% of Cannae's cost of investment, which totaled $971.5 million as of November 1. We are excited about the benefits that the new externally managed structure unlocks for Cannae as the structure improves our competitive position relative to our peers, while providing meaningful protections for our shareholders.

I'll now turn the call over to Rick to review the financial results of our portfolio companies in more detail.

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Richard L. Cox, Cannae Holdings, Inc. - Executive VP & CFO [5]

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Thanks, Brent. To start off, Ceridian generated third quarter revenue of $202.3 million, inclusive of both Cloud and Bureau solutions, which represents a 13.6% increase from the third quarter of 2018. Third quarter adjusted EBITDA increased 27.5% to $46.4 million as compared to the year ago quarter. More detail on Ceridian's third quarter financial results, which were released last week on November 7, can be found on the Investor Relations section of their website.

As Bill discussed, we are very pleased with the success that our team is achieving at Dun & Bradstreet and remain optimistic with the outlook for the business. Of note, we will no longer be reporting Dun & Bradstreet on a 1 quarter lag, and will now report results on a current quarter basis.

For the third quarter of 2019, Dun & Bradstreet generated total GAAP revenue of $408.2 million and a net loss of $54.9 million in the quarter. Adjusted revenue for the 2019 third quarter grew 8.5% to $450.4 million as compared to $415.1 million in the year ago quarter. Adjusted EBITDA grew 52.8% to $194 million as compared to $127 million in the 2018 third quarter. Adjusted EBITDA excludes the effect of purchase accounting and transaction-related expenses that are approximately $71 million, of which approximately $33.3 million are onetime charges related to transaction-related expenses.

Turning to American Blue Ribbon Holdings, which includes O'Charley's, Village Inn and Bakers Square as well as Legendary Baking, generated total revenue of $168.1 million in the third quarter of 2019, compared to $193.8 million in the third quarter of 2018. The decline in revenue is largely a result of closing 55 stores over the last 4 quarters, of which 11 closings occurred in the third quarter. American Blue Ribbon Holdings delivered third quarter 2019 EBITDA of negative $8.8 million, which compares to EBITDA of negative $14.6 million in the third quarter of 2018. The increase in the third quarter 2019 EBITDA compared to a year ago quarter, primarily relates to an increase in same-store operating cash flows and reduced G&A.

Looking at the Ninety Nine results in detail. The brand delivered revenues of $79.6 million, which is relatively flat compared to a year ago quarter. Ninety Nine generated third quarter 2019 EBITDA of $6.1 million or an 8% EBITDA margin as compared to a year ago quarter of $8.8 million of EBITDA and an 11.6% margin. Ninety Nine's decline in EBITDA margin is primarily related to higher labor rates.

Turning to T-System. The company generated total revenue of $13.4 million and EBITDA of $9.2 million for the third quarter of 2019, compared to total revenue of $14 million and EBITDA of $3 million for the third quarter of 2018. The $6.2 million increase in Q3 2019 EBITDA is driven by a onetime gain related to a legal settlement of $7.8 million. As we highlighted last quarter, while having no impact on cash receipts, implementation of ASC 606 has produced greater volatility in the revenue recognition for T-System documentation segment. For example, application of ASC 606 reduced the documentation business segment third quarter revenue and EBITDA by approximately $1.7 million, respectively. At September 30, 2019, Cannae book value was 1.2 billion -- were $16.81 per share as compared to $1.1 billion or $15.58 per share on December 31, 2018. We ended the third quarter of 2019 with $104.3 million in holding company cash. We remain pleased with the progress we continue to make across our portfolio of brands as we continue to position Cannae to deliver long-term value for our shareholders.

I'll now turn the call back to our operator to begin our question-and-answer sessions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line Jason Deleeuw with Piper Jaffray.

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Jason Scott Deleeuw, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [2]

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Congratulations on the great work so far with Dun & Bradstreet. I just wanted to know how you're feeling about the 3% to 5% revenue growth target at Dun & Bradstreet. So you're at 4% organic now. I mean, you're just starting to get the benefit from the sales productivity drivers and cross-selling. It sounds like you've got new products that could be rolling out. How are you feeling about the 3% to 5%? Could it be better than that? Or what should we be expecting?

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William Patrick Foley, Cannae Holdings, Inc. - Chairman [3]

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Well, we're going to -- Jason, thanks, and we're going to maintain our guidance or our view on the 3% to 5% as we move through the fourth quarter. As you may recall, Dun & Bradstreet, in the past, had signed numerous contracts in the fourth quarter and really kind of that was the biggest quarter of their year. And so it impacted the first quarter in terms of not having quite the signings. And then the second, third and fourth quarters would build over time. We've attempted to move some of those larger contracts and term them out, in other words, make them 3- and 5-year and 7-year term contracts and move them forward. And that was part of the revenue growth in the third quarter. We still feel like we're going -- even though the fourth quarter last year was a successful quarter for the company, we feel like we can get to that 3% to 5% growth rate again. And then the first quarter should be much easier. So in a few more quarters, I'll be able to give you more color on our revenue growth, especially as we move through the recapitalization of the company over the next 12 months to reduce our interest expense and reduce our overall debt structure. And that will enable us then to start moving forward and looking more aggressively at acquisitions, and there are many, many tie-in, bolt-on acquisitions, more than I've ever seen in any other business in the Dun & Bradstreet space.

So we really couldn't be happy about Dun & Bradstreet. We're probably going to -- at the end of the next quarter, we're going to increase our synergy target, but we'll leave it at $200 million for the time being. And I believe you're going to be very pleased with the results as they're generated from Dun & Bradstreet.

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Jason Scott Deleeuw, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [4]

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Great. And then in terms of the timing for that recapitalization of the company, is there any help that you can give us on that? Is that 2020 some time event?

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William Patrick Foley, Cannae Holdings, Inc. - Chairman [5]

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Our goal is to do some pretty significant events in 2020. But it's all -- as you know, it's all a process. So the process has been started, and we're talking to -- informally to several different investment banks, about the proper way to attack our capital structure. And we've had several meetings, and now we'll be moving forward with taking action, but it -- and really, the best case is probably an April, May, June type of activity that we'll be able to undertake.

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Jason Scott Deleeuw, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [6]

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Sounds good. And then just the last one, with the share repurchase authorization, the 5 million shares that are out there, and you're still obviously doing good work here with Dun & Bradstreet, but the question is always what's next. And so I'm just trying to get your philosophy on the share repurchases, how you're thinking about that? And then uses of cash and other opportunities for Cannae investments?

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William Patrick Foley, Cannae Holdings, Inc. - Chairman [7]

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Well, on the latter part of the question, we are really being active relative to looking at various other investment opportunities. And generally, we're targeting investments that are in the $125 million to $500 million range, and we're running screens and obviously, the logical source of some of that cash would be our Ceridian stock. So we're being very active, especially with the addition of Rick to our management team. He's got a lot of experience in M&A.

In terms of the buyback, we've really targeted a price below $30 is kind of our buyback targets. And I just noticed today, we've moved above $30. So -- but we have purchased shares back in the third quarter, and we're committed to keep on buying shares back, but we also want to balance that with the really amazing acquisition opportunities that we're uncovering. So it's just going to be a balancing act as it has been with all of our other companies, the same story.

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Operator [8]

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Our next question comes from the line of John Campbell with Stephens Inc.

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John Robert Campbell, Stephens Inc., Research Division - MD [9]

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I'd just like to echo the congrats and really nice work on D&B. You guys seem to be way ahead of schedule. So a few more questions there and kind of where we go from here. So first, I know we probably shouldn't just run rate or kind of annualize the 3Q results. I know there's probably some seasonality there. So if you guys can refresh us kind of on the seasonality of D&B? And then maybe talk to the EBITDA lift in the quarter from the pull forward contractual rev?

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William Patrick Foley, Cannae Holdings, Inc. - Chairman [10]

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Well, the EBITDA lift was really a result of the increased revenues and also the continued incorporation of the cost saves. So by the time we got to the third quarter, a lot of -- the cost saves are really being annualized in. And so this EBITDA lift is not a onetime event. This is -- we're on a really good track to grow EBITDA significantly for the foreseeable future. On the revenue side, the business is lumpy in that traditionally, the fourth quarter has been a very, very strong quarter. And then because they do -- and they were doing annual contracts and paying commissions at year-end, the first quarter and second quarter, sometimes, were not quite -- were not as strong, and you saw that our first 2 quarters, although we didn't own the business until February 9.

So we're trying to smooth those revenues out by implementing longer-term contracts, paying commissions in a different fashion than they were paid in the past. And really kind of remove some of the lumpiness. We're not there yet. And that's why we feel like the 3% to 5% is a good target for the fourth quarter, because, again, it was a strong quarter. And then after that, we feel like we're going to have a really good first quarter because we're rolling over a weak quarter a year ago. And then it should settle down to this 3% to 5% type of range.

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John Robert Campbell, Stephens Inc., Research Division - MD [11]

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Okay. That's helpful. And then the 4% organic growth, that's obviously exclusive of the 1.5% I think you guys called out for Lattice. And then that also excludes the pull forward revenue from 4Q. That's right?

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William Patrick Foley, Cannae Holdings, Inc. - Chairman [12]

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That's correct. Yes, that's correct. So we -- the 8.5% total growth, but about 1.1% or 1.2% for Lattice and a few extra percent for kind of moving contracts forward. A big -- but they were the big contracts. The ones we wanted to get term on as opposed to mean annual contracts.

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John Robert Campbell, Stephens Inc., Research Division - MD [13]

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Okay. And then finally for me, just kind of higher-level question. I mean obviously, with just 8 months of work, you've got a new leadership team in place. You've got a new strategy. You've got already materially higher margins. You've got rev growth clearly pointing in the right direction. I think the answer to this is probably pretty clear at this stage, we thought I'd ask more directly. Does -- with the degree of success so far, where you guys stand today versus where you thought you might have been 8 months ago, do you feel like you've pulled forward the time line for monetization?

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William Patrick Foley, Cannae Holdings, Inc. - Chairman [14]

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Absolutely, absolutely. I mean, 8 months ago, our target was really a couple of years. And we're way ahead of schedule. And we're already beginning to execute on that plan. And we are over-levered. So we want to do transactions that reduce our leverage and then give us flexibility in terms of acquisitions because the Lattice acquisition, we actually went to our capital partners and got contributions to acquire Lattice. And since then, I put the brakes on acquisitions, just pending getting our capital structure squared away. So believe me, the management team is all-in on working on the capital structure.

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Operator [15]

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Our next question comes from the line of David Eller with Wells Fargo.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [16]

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I just wanted to go back to the pull forwards. Were there any customers that chose to move earlier? Or was all of the activity related to kind of moving forward your term licenses as you talked about earlier?

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William Patrick Foley, Cannae Holdings, Inc. - Chairman [17]

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No, it really is just a collaborative effort with the customers, and we attack some of the larger customers to move them forward out of the fourth quarter, so we could focus in on some of the smaller customers in the fourth quarter, to make sure we renewed them. But -- and there was really no particular cost benefit to the customers for moving forward. We just wanted to convert them to term contracts. And they were -- they're all more than willing to do it. I believe if you talk to our customer base, it did say it's a new Dun & Bradstreet that they haven't seen this kind of responsiveness to the request, to their data request or just sales requests. And so we're feeling really good about what's going on with Dun & Bradstreet. It was a -- it's never an easy fix, but this one's come together very, very quickly.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [18]

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Okay. And then on the organic side, could you just talk about pricing trends in that business? I know historically, there were some pricing degradation that had creeped in over the last couple of years. But if you could just talk about either pricing or volume trends that you've seen so far this year since you've owned the business?

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William Patrick Foley, Cannae Holdings, Inc. - Chairman [19]

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Well, both -- they're both good. We have stopped -- we have stopped the deal cutting that went on consistently in Dun & Bradstreet, just to close the transaction, so a commission could be earned. So we're not -- prices are not being degraded at all at this point in time. And customers are being very responsive relative to new product offerings and cross-sell opportunities that we're presenting. So we're -- and we changed the whole sales organization, the whole sales structure is no longer sell what you sold last year. It's sell what you sold last year, but also here are 5 new products in the analytics area that will help you in terms of doing business. And that's really where the growth is coming is these cross-sell of other products. And we just started, as you can see, the third quarter was our first quarter of having revenue growth. So we're feeling good.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [20]

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And then earlier in the call, I think you talked about the number of M&A opportunities that you see for bolt-ons, just being a large pool there of potential opportunities, but then you also talked about kind of pulling back on doing M&A as you look to delever the balance sheet. But just could you provide a little bit more color, given strong debt markets right now, some of the puts and takes as you evaluate your M&A appetite and your M&A pipeline?

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William Patrick Foley, Cannae Holdings, Inc. - Chairman [21]

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Well, I've never seen more M&A opportunities than I see in the space. It's not like Black Knight with a limited group of opportunities in the mortgage space or the loan origination space. And it really isn't like Ceridian. So it's a different situation. Dun & Bradstreet is a 200-year old company that lost its way. And we have 8 to 12 potential acquisitions in each one of our business lines, and it's just a matter of picking and choosing, and getting the capital structure in line, so we have adequate cash to execute on the acquisition opportunities.

So we're looking at acquisitions all the time. I'm just holding the guys back until we do some work on the capital structure because we are over-levered and we want to move that overall leverage down below 5%. And if we can get it to 4.6% or 4.7%, we feel like we have more room to do acquisitions.

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Operator [22]

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Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I will now turn the floor back to management for any final comments.

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Brent Bannister Bickett, Cannae Holdings, Inc. - President [23]

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To conclude, we are very pleased with our third quarter results, highlighted by the significant progress that our D&B management team has achieved. In just 8 months, they have nearly completed their goal of delivering $200 million of expense saves, while also reaccelerating revenue growth and driving significant margin expansion. We have the right team and the right strategy in place to successfully turn around this iconic company with almost 200 years of history. We look forward to updating you on our fourth quarter call in February. Thank you for your time today.

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Operator [24]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.