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Edited Transcript of DNB earnings conference call or presentation 2-May-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Dun & Bradstreet Corp Earnings Call

Short Hills May 4, 2017 (Thomson StreetEvents) -- Edited Transcript of Dun & Bradstreet Corp earnings conference call or presentation Tuesday, May 2, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joshua L. Peirez

The Dun & Bradstreet Corporation - President and COO

* Kathleen Guinnessey

* Richard H. Veldran

The Dun & Bradstreet Corporation - CFO

* Robert P. Carrigan

The Dun & Bradstreet Corporation - Chairman and CEO

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Conference Call Participants

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* Jeffrey P. Meuler

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Manav Shiv Patnaik

Barclays PLC, Research Division - Director and Lead Research Analyst

* Peter Perry Appert

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Shlomo H. Rosenbaum

Stifel, Nicolaus & Company, Incorporated, Research Division - VP

* Stephen Sheldon

* William A. Warmington

Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst

* Y. Cho

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Dun & Bradstreet's 2017 First Quarter Teleconference. This conference is being recorded at the request of Dun & Bradstreet. If you have any objections, you may disconnect at this time. (Operator Instructions) I would now like to turn the call over to Ms. Kathy Guinnessey, Treasurer and Investor Relations Officer. Ms. Guinnessey, you may begin.

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Kathleen Guinnessey, [2]

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Thank you. Good morning, everyone, and thank you for joining us today. With me on the call this morning are Bob Carrigan, our Chairman and Chief Executive Officer; Rich Veldran, our Chief Financial Officer; and Josh Peirez, our President and Chief Operating Officer. Here's what you can expect on our call today. Following my brief remarks, Bob will provide a brief overview of our first quarter results and an update on our strategy. Rich will then take you through the highlights of the quarter. After that, we'll open the call to your questions.

To help our analysts and investors understand how we view the business, our remarks this morning will include forward-looking statements. Our Form 10-K and 10-Q filings as well as the earnings release we issued yesterday highlight a number of important risk factors that could cause our actual results to differ from those forward-looking statements. These documents are available on the Investor Relations section of our website, and we undertake no obligation to update any forward-looking statement.

From time to time, we may refer to sales, which we define as the annual value of committed customer contracts. In addition, we speak from time to time about deferred revenue. When we refer to the change in deferred revenue, we mean before foreign exchange, dispositions, acquisitions and the impact of the write-down of deferred revenue due to purchase accounting, unless otherwise noted.

During our call today, we will be discussing a number of non-GAAP financial measures, which we call as-adjusted results, as that's how we manage the business. Unless otherwise noted, all metrics on the call will be presented on an as-adjusted and non-GAAP basis, as further described in our earnings release. You can find a reconciliation between non-GAAP financial measures and the most directly comparable GAAP measures in the schedules to our earnings release, and they can also be found on the supplemental reconciliation schedules that we post on the Investor Relations section of our website.

Where appropriate, we have reclassified certain prior year amounts to conform to the current year presentation. Laster today, you'll also find a transcript of our prepared remarks as well as the financial model, with historical results in the new format will sales and marketing revenue allocated between sales acceleration and advanced marketing, on the Investor Relations site.

So with that, I'll now turn the call over to Bob Carrigan. Bob?

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Robert P. Carrigan, The Dun & Bradstreet Corporation - Chairman and CEO [3]

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Good morning, everyone, and thank you, Kathy. Let's get right into the results for the quarter.

2017 is off to a good start for us with first quarter results a little ahead of our expectation. As we said on our last call, we expected organic revenue to be down slightly in the first quarter due to a timing shift from a large government contract. Even with that shift, I'm pleased that we actually grew organic revenue in the first quarter by 1 point, driven in part by strong growth in Non-Americas partnership in both Europe and Asia Pacific. Total first quarter revenue for the company was up 2 points, as revenue was better than expected. Operating income also came in above expectations for the quarter.

Rich will provide additional details on our first quarter results in a few minutes, but I can say that we feel good about how we started the year and we are on track to achieve our guidance metrics for 2017. But more importantly, we feel great about our strategy and where it's taking us. I'll spend the bulk of my time this morning going into some detail on a couple of specific areas that we addressed on our last quarter call, our so-called legacy products. I've been waiting a long time, since I got to Dun & Bradstreet, to be able to report that we've gotten DNBi and Hoover's positioned for growth.

As we have said in the past, declines in our legacy products have slowed our top line progress as a company, but we've taken proactive steps to improve their performance. Last year, we launched our new cloud-based credit decisioning tool, D&B Credit, to replace our legacy DNBi product. We are reporting D&B Credit and DNBi together under the D&B Credit suite, so I'll refer to the broader category as D&B Credit.

We said on our last call that our goal was to get the D&B Credit category to flat in 2017 after 5 years of declines in DNBi. Over that time, DNBi enjoyed very high retention in the low 90% range and low single-digit price lifts. Revenue in the product declined because we did not bring in enough new customers. When we launched D&B Credit, our expectation was that we could improve retention and pricing or the capture rate. We also said we wanted to reach new customers, and I'm pleased that we have been able to do both. The launch of D&B Credit helped us to improve the capture rate in the category by several points over last year. Importantly, we also saw strong growth of new customers in the product, which as I said earlier, has traditionally been a weak spot for us. It's encouraging that our emerging businesses group drove new customer acquisition in the product, as their expertise of bringing in new customers was one of the reasons we acquired Credibility Corp. back in 2015.

We have ambition to turn D&B Credit into a growth driver for Dun & Bradstreet. Our investments, thus far, are paying off, and I'm pleased that D&B Credit was flat in the Americas in the first quarter of 2017. Given that we sell nearly 50% of these products between December and March, we feel pretty confident that we are turning the trajectory of this product. Getting the D&B Credit suite to move in the right direction has been a challenge after 5 years of declines, but we've made the right investments and are focused on turning the category, and it's working.

We also envisioned turning sales acceleration into a growth business for Dun & Bradstreet, and we're off to a good start. As we said on our last call, we expect to move from our traditional prospecting businesses into the higher growth, sales acceleration space, driven by the launch of our new D&B Hoover's product enabled by our acquisition of Avention in January. With D&B Hoover's, we are now able to sell a new sales acceleration product equipped with best-in-class business data from Dun & Bradstreet, including our professional contact data on the platform that was originally built by Avention. We see the new D&B Hoover's turning the sales acceleration category for us in 2 ways. It gives us a platform to further penetrate the customer base of our alliance partner, Salesforce, and it provides a higher growth replacement for Hoover's and the products we acquired with Avention.

Now let me say a little bit about each. On our last call, we told you that our relationship with Salesforce was evolving. We now have more clarity on what the relationship will look like going forward. Salesforce plans to renew our existing joint customers on the Data.com platform in the next few years, a historic renewal rate for Data.com has been consistent and given that most of these customers are on multiyear contracts, the impact of this transition on revenue will be gradual. By the end of the first quarter, over $45 million of our revenue from the alliance was already committed for 2017 due to the subscription nature of the product.

The Dun & Bradstreet team is already selling the D&B Hoover's product to Salesforce CRM users that were not customers of Data.com. We expect to ramp up sales in the new D&B Hoover's product to Salesforce customers over the course of the year, so total revenue related to Salesforce should be about flat in 2017, which is factored into our full year guidance. We are working closely with Salesforce to determine how to handle the eventual migration of customers that buy Data.com today over to D&B Hoover's in a few years in a way that best serves customers.

Now we feel good about our ability to further penetrate the Salesforce customer base given the market reaction we've already seen to the new D&B Hoover's product. As I just said, in addition to selling to Salesforce customers, we expect D&B Hoover's to replace the legacy Hoover's product over time and stabilize that business. Hoover's had been declining for the past few years, and that decline accelerated towards the end of last year. I'm pleased to say that we're already seeing signs of D&B Hoover's stemming that decline. In fact, sales of legacy Hoover's and D&B Hoover's combined were actually up a little in the first quarter. After only a few weeks in the market, we sold over $1 million of D&B Hoover's to new customers. D&B Hoover's is a subscription product, so it will take some time for their sales performance to show up in revenue, but we are pleased that customers are reacting to the new product so quickly.

Sales acceleration represented a little more than half of our sales and marketing revenue in the first quarter. To better reflect our strategy in sales and marketing, we have a made some changes to the way we report the category, dividing it into sales acceleration and advanced marketing. The sales acceleration category includes revenue from our legacy Hoover's product, our new D&B Hoover's product, the inorganic revenue from Avention's existing products, and our revenue from Data.com, all of which we refer to as the D&B Hoover's suite of products. It also includes MDR, our educational marketing business; and a variety of other sales acceleration products, including those we sell in different markets around the world. The D&B Hoover's suite is the biggest component of sales acceleration and represented 62% of the subcategory in the first quarter.

The other half of our sales and marketing revenue came from Advanced Marketing Solutions, which comprises master data solutions like Optimizer, D&B Direct and other products designed to help our customers organize and gain insight from their data. It also includes other third-party alliances and Audience Solutions. Master data made up about 80% of advanced marketing and is a very big part of our growth expectations in this category. Master data is where we help companies deal with the huge volume and velocity of data they are collecting. Companies are challenged because they collect data from multiple systems, creating disparate data sources with differing definitions. They need to structure that data into a standardized format for it to be of any use to them in providing insight on their customers. That's where Dun & Bradstreet comes in. We help them obtain a single comprehensive accurate view of their customers and suppliers from different sources by matching it to a Dun's number and then organizing it to corporate hierarchies. To be good at this, you need the most global data coverage and the best data quality, both overwhelming strengths of Dun & Bradstreet.

We're just scratching the surface of what we can do for customers, and we're having great conversations with some of the biggest players across all of our strategic verticals. Master data is a great place for us to be as it puts Dun & Bradstreet at the center of our customers' enterprise data strategies and provides an opportunity for us to expand into other areas of our customers' business. The remaining 20% of advanced marketing primarily came from other third-party alliances and also Audience Solutions, where our deterministic data enables B2B marketers to better target their digital media campaigns with intelligent, relevant messages the right audiences, and also add a level of personalization when the visitors go to their websites.

Now before I hand it over to Rich, I'll provide a quick update on our integration of Avention, which is off to a great start. We've combined the Avention team with our existing team, and they are already working well together. They've developed a new D&B Hoover's product together and got it to market just 2 months after the acquisition, as I discussed earlier. We've also successfully upgraded our Avention OneSource customers to D&B Hoover's. We're very excited to have the former Avention team now part of Dun & Bradstreet. Like our recent acquisitions of NetProspex and Credibility Corp., they bring valuable input to our corporate culture. Today, Dun & Bradstreet is acting in a much more innovative and entrepreneurial way, and these teams are a big part of that new spirit.

Now in closing, let me just say that I'm pleased that we're starting 2017 on the right foot, especially since the first quarter is traditionally a slower growth quarter for Dun & Bradstreet. Our performance puts us in good position to hit all of our 2017 guidance targets for the year. Rich?

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Richard H. Veldran, The Dun & Bradstreet Corporation - CFO [4]

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Thanks, Bob, and good morning, everyone. As Bob said, we're pleased with how we're starting the year. First quarter results were slightly better than expected, and importantly, we're making good progress on our recent launches of D&B Credit and D&B Hoover's. In my comment this morning, I'll give you more detail on our first quarter results.

Total revenue for the company was $383.8 million, and grew 2% for the quarter, with organic growth of 1%. Organic revenue adjust for the impact of divesting our Benelux and Latin America markets during the fourth quarter of 2016 as well as the acquisition of Avention early this year. You can see a reconciliation of organic revenue to total revenue, including both the acquired and divested revenue amounts on Schedule 2 of our press release.

Now let me give you more detail on our segment performance. The Americas had first quarter revenue of $316.3 million, which represented 82% of our revenue in the quarter. Total revenue was up 2% and organic was down about 1 point due to the timing shift of a large government contract that we talked about on our last call. Within the Americas, risk management, representing 58% of America's revenue, was up 1% in the quarter. Strong growth in other enterprise risk offset declines in Trade Credit. Other enterprise risk grew 13% in the quarter. The strong growth was spread across the product mix with particular strength in credit-on-self solutions. Other Enterprise Risk also benefited from some shift of customer spend from Other Trade Credit to D&B Direct.

Trade Credit was down 4% in the quarter. As Bob mentioned, the D&B Credit suite, which includes DNBi and represented 3/4 of Trade Credit revenue was flat, which we were pleased about. DNBi is a $400 million product line globally. Despite very strong retention, we weren't bringing on new customers and DNBi revenue had declined since 2012. We launched D&B Credit in the first half of 2016 to stem this decline and to get the combined DNBi, D&B Credit category back to growth. It's a big task to impact such a large subscription-based revenue stream as quickly as we have, and we're on track to be flat for the year.

Other Trade Credit is about 1/4 of Trade Credit revenue and was down 14% in the quarter. The shift in the large government contract was in this category. There are also several smaller deals that shifted out of Other Trade Credit to other areas of D&B and without the impact of those shifts, Other Trade Credit would have been down in the low single digits. We continue to expect Other Trade Credit to be noisy. Some of the oldest solutions are in this category like multipacks of individual credit reports. Over time, we expect to migrate these customers over to our D&B Credit solution for small business. Also in this category are legacy filed delivery products, which we expect to move over to D&B Direct over time.

Now let me shift over to sales and marketing where revenue in the Americas was up 3% in the quarter. Sales and marketing was 42% of total revenue in the Americas in the first quarter. Sales acceleration, which is 53% of sales and marketing revenue was up 13% due to the acquisition of Avention. Organic revenue was down in the mid-single digits. The decline in organic revenue was due to weak sales of the old Hoover's product in 2016. Hoover's is a subscription-based product, and while we're pleased with the improvement in the underlying sales rate for the D&B Hoover's suite and the first quarter, it will take a little while for new sales to flow through to revenue and turn the reported results around.

Advanced marketing, which was 47% of sales and marketing revenue was down 6% in the quarter. Overall, revenue in advanced marketing has been strong, but it can be lumpy quarter-to-quarter due to the large size of contracts and the fact that most of this revenue is not subscription-based, so timing can move. These timing shifts were somewhat offset in the past by the steadily growing subscription revenue from Data.com, which is now part of sales acceleration. Overall, there no were real surprises in this category in the quarter and we expect advanced marketing revenue to grow in the mid-single digits for the full year.

Shifting to Non-Americas. Revenue was $67.5 million in the first quarter, which represented 18% of revenue for the company. Total revenue was up 4% and organic revenue grew almost 10%. The organic revenue growth was due to strong performance on our Worldwide Network partnerships, both in Europe and Asia Pacific. This growth was partially offset by declines in the U.K. market. On our last call, we said that we had weak performance in the U.K. last year, which would be playing out in our revenue results this year due to the subscription nature of most of these products. Deferred revenue was up a little over 1% for the company before M&A activity and the impact of foreign exchange. Americas deferred revenue was up 1% and Non-Americas was up 5%.

Now let me turn to profitability. Operating income in the quarter was down 9%, which was better than expected due to the better performance on the top line. The decline in the first quarter operating income was consistent with our typical pattern of lower earnings in the first half of the year and growth in the second half. We expect a similar rate of decline in operating income in the second quarter before improving in the second half of the year, particularly the fourth quarter. EPS declined 19% in the first quarter to $0.95 per share due to the lower operating income in the quarter and higher interest expense as well as the slightly higher shares outstanding.

Turning to the balance sheet. We ended the quarter with $1.7 billion of debt, including about $1 billion of fixed rate senior notes and $700 million of floating rate debt. Our cash balance was $375 million for net debt of $1.3 billion. Before I close, I'll echo Bob in saying that we're on track to meet all of our guidance metrics for the year, including organic revenue growth of 1% to 3%, total revenue growth of 3% to 5%, operating income about flat or between minus 2% and plus 2%, EPS down between 4% and 9%, and free cash flow of $250 million to $245 million.

With that, we'll now open the call for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Jeff Meuler from R.W. Baird.

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Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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So I just want to understand a bit better on the Data.com. Is Salesforce going to be providing you with some form of warm leads for new business sold? And just to clarify, they're done selling new business at this point, but they're going to support the renewals for a few years, is that correct?

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Robert P. Carrigan, The Dun & Bradstreet Corporation - Chairman and CEO [3]

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Yes. So let me -- it's Bob, let me answer your question. So the Salesforce, they didn't renew their agreement with us and they could have done that in February. We expected that, knew that was coming. They're going to continue to renew customers for the next few years. And they have the right to sell new business this year through the end of the contract, which is in August. And so they have the right to do that, although we're seeing that rate decline, and it's really in wind down mode, and as we ramp up D&B Hoover's on that platform. So we're in a transition period with them in that regard. But we -- as we said, we have very good visibility into the revenues and we've already got more than $45 million of committed revenue this year and a good amount for 2018, and with the new sales that we're seeing, we see getting to about flat with last year. So it's a gradual transition. To answer your question about marketing, Salesforce is a great partner, and we talk to them about a lot of different marketing arrangements. Again, we're in a transition period. There's really -- there's no arrangement currently in place. We'll share more when we have more details, but we're staying close with these guys. There's a big opportunity on this platform, and we want to make sure that we take care of our existing customers and that we continue to drive these solutions on their platform. We're the best ones suited to do that. We're the experts in data. Salesforce is -- they're experts in software. And so we feel very good about what we are offering now on that platform, and we see a really big opportunity ahead. And we'll continue to work with Salesforce to make sure that we're offering those customers the very best solutions available.

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Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Okay. And now that you've been through a very big selling and renewal season, roughly, what percentage of the legacy DNBi revenue has been -- revenue or customer set has been shifted over to the -- or upgraded to the D&B Credit product?

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Joshua L. Peirez, The Dun & Bradstreet Corporation - President and COO [5]

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Jeff, it's Josh. We're not providing specific metrics on the conversion, but we're actually at a material point where we do see a significant amount of those customers already upgraded. And we're seeing new business sales, which have exceeded what we were seeing on DNBi in the past, which we're very pleased about. So we're seeing both the capture rate increase as we move customers over, which is a combination of retention and price increases. We're actually getting a little bit of both. But in the end, we're focused on just increasing that capture rate. So we're okay if we end up getting higher retention by competing on price or by getting higher price where we can for additional features and higher versions of the product. And we're seeing that play out very well, and we're seeing the new acquisition in the emerging business segment, as Bob and Rich said, which was part of our strategy and plan in launching the product a year ago. So we're very pleased with where it is. We're right on plan in terms of moving the customers and upgrading them. We expect to do that more aggressively throughout this year and then also to launch in other markets around the globe, which we've already started doing.

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Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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Okay. And then just finally, I was, I guess, surprised by the magnitude of the improvement in Net Promoter Score. I guess, I said that not knowing exactly what the starting point was. But can you just comment on that? And when you're talking about the 22-point improvement, is that across the product set or just any help on what exactly was being measured?

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Robert P. Carrigan, The Dun & Bradstreet Corporation - Chairman and CEO [7]

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Yes, this is Bob. Okay, we started to use NPS as a measurement a few years -- I guess, the year before last, and we saw a really significant jump up last year across our customers. The first wave we did was with our customers in North America and also in U.K. and Ireland. And we've now -- we're expanding that to our worldwide network and parts of Asia. And we used a third-party firm that did the evaluation, and they said this was the one of the largest jumps they've seen. I think it really gets down to the way we're leaning in to serving our customers. We've got -- we've made a lot of improvements in our go-to-market approach, our multichannel approach and the way we account services. But it also gets to the core value proposition of what we're delivering to our customers. As that improves, the customers are really seeing increased value and the underlying idea behind Net Promoter Score is that they want to -- you want them to recommend you to other folks and the more they like what we're offering them, the more we're seeing that lead to folks wanting to recommend us to others. So we're excited by the improvements, we have ambitious goals to drive that even higher this year. And these -- all these things bode well for sales going forward.

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Operator [8]

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Your next question comes from Shlomo Rosenbaum from Stifel.

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [9]

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Is there some way to discuss quantitatively or what the new customers are flowing into what is now the new DNBi suite? I mean, historically, D&B has done a very good job of going, like into the last decade when they migrated customers from one platform to another platform, and they got a lift on pricing. And is there some way that you can just quantify to investors what the new customers are to really illustrate that you're getting new customers onto the platform in a meaningful way?

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Joshua L. Peirez, The Dun & Bradstreet Corporation - President and COO [10]

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Thanks, Shlomo. It's Josh. We can think about how we can maybe show things in charts. But at this point, I think what we're sharing is, first of all, we're seeing significant new customer acquisition relative to what we were seeing with just DNBi before. So D&B Credit is driving new customer acquisition at rates that are far exceeding what we had seen. It is -- a lot of that is being driven down in the emerging business segment, which is great because we have opportunity there to further penetrate that segment, and we think that there continues to be great whitespace for us to sell new product there. The prices that we are seeing on those new units are higher than what we had been seeing on DNBi, but we also have the opportunity to move more aggressively along the demand curve as we have multiple versions of the product that we are able to offer, including some that are really intro products, and so we can share that. In terms of the experience where you could see a lift that you're getting from upgrades and migrations, which is what you would have seen in the past that moves to DNBi, we are getting significant improvements in the capture rate as we shared versus what we had been getting in the past. And I think Bob shared the low 90s retention and low single-digit price increases that we had been getting. We actually improved on both of those metrics in this past quarter. However, we're focused on the capture rate in the aggregate because we would trade price for retention or retention for price, depending on the competitive environment. But we feel good that we're actually getting both at this point as customers are moving to higher versions of the product and wanting more seats of the product as they move from DNBi to D&B Credit. And we'll think about how we can provide something more detailed on that.

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [11]

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Okay, good. And then can you talk a little bit more about just what's involved in setting up a sales team in the new D&B Hoover's and to really go after the Salesforce.com customers. It's not an area where you had been selling beforehand. Where are you now? What needs to be done? How does that work like mechanically on the street? What is involved for you guys in terms of investments?

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Robert P. Carrigan, The Dun & Bradstreet Corporation - Chairman and CEO [12]

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Yes. Well, first of all, with the acquisition of Avention, we acquired a team that was very skilled in selling on the Salesforce platform, they were the next biggest competitor selling on that platform. D&B Hoover's has been designed so that it integrates into a lot of third-party applications, including Salesforce. So if you think about the application, they're getting the best of Dun & Bradstreet data, they're getting this application that was developed by Avention. So we didn't have to build it from the ground up. So they -- and Avention, as I said, I think, on the last call, they kind of led with software where we lead with data, so the combination of those things has been -- is a pretty powerful combination. And I could tell you that more than half of the sales that we've generated since we launched the product include Salesforce integration. So we have a couple different flavors of the product. And more than half of the sales that we've already sold include the ability to integrate on the Salesforce platform. So that's the way we're approaching it. We have -- obviously, Salesforce, that platform is a tremendous environment. Salesforce has done a great job in building kind of the preeminent platform, but we're going to integrate into a lot of different environments. And when you combine the expertise of Dun & Bradstreet, the former Avention team, we've got the people and the product to be able to take advantage of the market opportunity.

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [13]

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Okay. And just can you discuss a little bit more, Bob, about the divergence in trend in Americas' deferred revenue? It had been growing kind of 3%, 4% in the second half of the last year, grew only 1% this quarter. But then you have the Non-Americas, which was kind of the flip. You saw down 2% to 4% second half, but now you're up, I think it was 4% or 5%. So can you just discuss what's going on behind those numbers?

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Robert P. Carrigan, The Dun & Bradstreet Corporation - Chairman and CEO [14]

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Look, we -- I'll let Rich get into some of the numbers with you. But we -- the headline is we are where we expected to be. We had ambition to grow deferred, and we said that, that's what we want to do, and we certainly did that. And the way our business functions, we typically grow deferred as the year progresses. And so we were happy to see the growth in deferred revenue, and that is exactly where we expected to be. Rich, do you want to add anything?

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Richard H. Veldran, The Dun & Bradstreet Corporation - CFO [15]

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Yes, I mean, that's pretty much it. I mean, again both in terms of revenue and deferred, we typically start off the year on a relatively slow growth rate. And then that does pick up throughout the year. You'll see the same phenomenon last year, we took a little bit of a step-down from the fourth quarter growth rate, still grew, right. And this year, same thing. If you go to the fourth quarter, it was a little bit stronger deferred, steps down a little bit, still growth, right, 1% growth in the Americas in Q1. And then we do expect that to pick up as our overall sales rate picks up as the year progresses.

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Operator [16]

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Your next question comes from Peter Appert from Piper Jaffray.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [17]

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Can we just stick with that issue for a second? Rich, I understand seasonality in sales, but I don't really understand the concept of seasonality in growth rates. Can you speak to that?

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Richard H. Veldran, The Dun & Bradstreet Corporation - CFO [18]

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Well, it's similar because think of what's going to drive your deferred. It's going to be your sales growth rate, right, adding to your deferred balance. And as we've talked about many times, it's not just our revenue that's a lower growth rate in the first quarter, it's actually our overall sales rate. We have a very big fourth quarter every year. First quarter, based on our seasonality in terms of growth rate, starts out slow and then builds as the year goes on, and we do see that. And also, if you look at the biggest piece of sales in the first quarter, tend to be our subscription business, as we told you they were flattish, right, which were good, but still lower than you're going to see it as the year progresses. And so that seasonality plays out as it does in most years.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [19]

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Okay. Do you a have sense, Rich, of what overall market growth is for credit information, credit data? And whether or not you're sustaining your market share?

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Robert P. Carrigan, The Dun & Bradstreet Corporation - Chairman and CEO [20]

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Yes, I would say, it's -- look, the traditional trade credit business is low single digit. We are the market leader, so at some level, you have the responsibility as the market leader to drive higher growth rates. And by what we've done in launching this next-generation cloud-based D&B Credit, which our customers are really appreciating, we hope to obviously expand market, and we want to get this to growth. I mean, if you look at the trajectory, think about last year, I think we're at minus 4 in DNBi revenue for the first half of the year, minus 2 in Q3, minus 1 in Q4, and here we are at flat in Q1. Obviously, our ambition is to get growth going again. And as the market leader, we feel we're well positioned to do that, and hopefully, we'll bring the market along with us.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [21]

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So Bob, in the context of an expectation that deferred revenue growth numbers will accelerate a little bit here as the year progresses, I think you've talked in the past about a target of getting to mid-single-digit revenue growth. Is that conceivable in '18, you think?

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Robert P. Carrigan, The Dun & Bradstreet Corporation - Chairman and CEO [22]

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Well, look, I'm not going to give specific guidance, but what I'll tell you is we certainly see our strategy getting us there. And I think you can see some of the things we're putting in place to -- that will help us get there. One of the key things we have to do is address these so-called legacy areas of our business, which have been dragging us down, and centered around 2 main things, DNBi and Hoover's. And I think we're kind of at an inflection point here. We are at flat with D&B Credit and on a great trajectory there. And with D&B Hoover's, while the revenue will take a while to catch up, the fact that we were slightly up in sales in Q1, I think that speaks to the potential that we outlined in the overall sales acceleration space. These are the 2 areas we have to address. So we get those things moving in the right direction. And then we continue to be successful with Advanced Marketing, which we see it certainly mid-single-digit this year, and Other Enterprise Risk. Those are the 4 buckets of our business, and that's how we see getting this thing to that sustainable mid-single digits. So I don't want to commit to a time line for you there. I've done that before. I want to make sure that -- but I do want to give you the assurance that we certainly see, within the context of the strategy, getting there. And we feel like we're making good progress along those lines.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [23]

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That is helpful. And then one last thing, with the evolution of the Salesforce relationship, I'm wondering if you can talk about any measurable impact on margin that, that might have that we should be thinking about, right, having to take in the sales costs, et cetera, so I assume the Salesforce partnership deal had particularly high margin. So does that have some negative implications for what the margins could look like in the second half?

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Richard H. Veldran, The Dun & Bradstreet Corporation - CFO [24]

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Yes, look, over time, the model still holds. If you look at our business, in general, you throw off tremendously high incremental margin every dollar of growth. Now it so happens, we may have a little more cost because we're now running that business, but you're also getting 3x the amount of revenue as you convert that base, right. So before, I had 30% of the revenue of a customer, now I'll have the full 100% of the customer. Still a great margin. And as I grow the business, I'm still going to throw off, call it, $0.70 on the buck, which will allow me, as they get close to the mid-single-digit growth, to continue to invest back in the business and to expand margins. That will give you the data business, and the model will hold.

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Operator [25]

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Your next question comes from Andrew Steinerman from JPMorgan.

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Y. Cho, JP Morgan Chase & Co, Research Division - Analyst [26]

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This is Michael Cho in for Andrew. Just want to follow up on that last point on Salesforce. I guess, just from an ongoing basis, I mean, are there any other incremental costs that will -- that DNBi will have to incur to sell into Salesforce's client base? I mean, I guess, what I'm getting at is, is there ever a scenario where DNBi would have to pay a royalty to Salesforce? Did Avention pay a royalty to Salesforce?

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Joshua L. Peirez, The Dun & Bradstreet Corporation - President and COO [27]

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Thanks, Michael. So we are currently not paying a royalty on the business that we're doing there, and Avention did not. I don't want to speculate about what could happen in the future. We continue to have a strong relationship with Salesforce. We expect to continue to work with them. And to the extent that we're able to get something for it, we would certainly consider that. But our view is that this is a great business for us in sales acceleration. We're very pleased with the early indicators in Q1, especially only having gotten the product in market in March for 1 month. And the experience we saw that Bob shared in terms of new business acquisition, but also what we're seeing in terms of customers that we're able to move over and upgrade. So we see that as exciting, and we see the opportunity to further penetrate the Salesforce base, which was very underpenetrated in the Data.com world. So there's a lot of whitespace for us to go after new customers there.

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Y. Cho, JP Morgan Chase & Co, Research Division - Analyst [28]

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That's helpful. Just one quick housekeeping. I think you might have mentioned in the past, but how big is that large government contract? And which quarter did it shift to?

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Richard H. Veldran, The Dun & Bradstreet Corporation - CFO [29]

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Yes, so it was about 1 point in this quarter, so obviously, a less than $4 million, between $2 million and $4 million. It shifted to the third quarter.

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Operator [30]

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Your next question comes from Bill Warmington from Wells Fargo.

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William A. Warmington, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [31]

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So I also had a question on Salesforce. What I've been hearing is basically, within Salesforce, most of the people who have been working on Data.com have now been reassigned to other areas, and the focus really is on Sales Cloud. Everything is sales service, marketing-related sales cloud. So my question is I'm just trying to understand how you guys now fit into Sales Cloud.

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Robert P. Carrigan, The Dun & Bradstreet Corporation - Chairman and CEO [32]

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Look, this is Bob. What Salesforce has done, if you look at their model, they have an ecosystem model, and they have many, many third parties, if you've ever attended Dreamforce, you'd see them all, that sell on their platform, and that's their model. Data.com kind of went against the green of their typical model. This is where Salesforce sold directly and paid a royalty to us, in this case. It was -- it's been a terrific relationship, but for Salesforce, they are an amazingly successful company. They've built Sales Cloud, but now they've got commerce and service and marketing, made a lot of acquisitions. They're very focused on what they do best. And so we are -- we have a terrific relationship with these guys. And all of these questions and everything, we understand there's a change in the relationship. But if you actually look at the model that Salesforce has, this is -- going forward, this is more consistent. All the conversations I've had with them is how do we expand this, because you're right, they have been deemphasizing the data business. They're not in that business, right. That's not a core business for them going forward. But if they were with us today, what they would say is, what they say to me all the time, is you guys are the world heavyweight champion is you are data experts. And so we need you guys to work with us across all of our clouds to be able to take advantage of this opportunity and to give our customers the essential services they need at a time when data is becoming more and more important to their end customers. And so that's really how this is evolving. And this is why we've been building up, we did the acquisition of Avention, why we are putting such a focus on this opportunity, because it is a substantial opportunity, and we know that we'll have a continuing great partnership with Salesforce. And hopefully, we'll expand with them in lots of other areas of their business.

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William A. Warmington, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [33]

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On the -- a question for you on the capture rate. So my understanding was that it had been running at roughly 96%, 97%. It sounds like you're at about 100%, and I don't want to put words in your mouth, but I need to – just wanted to confirm that.

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Joshua L. Peirez, The Dun & Bradstreet Corporation - President and COO [34]

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Bill, it's Josh. Just for clarity, for everyone else on the call, we're talking about the DNBi, D&B capture rate. (inaudible) I assume, right?

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William A. Warmington, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [35]

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Correct.

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Joshua L. Peirez, The Dun & Bradstreet Corporation - President and COO [36]

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And what we have said is that the capture rate was mid-90s, it was low 90s on retention and low single on price. And so what we've said now is we have improved both of those a little bit. We haven't given a specific capture rate number, and I'm not going to be able to do so today either.

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William A. Warmington, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [37]

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Okay. And then I noticed that net debt had ticked up sequentially, and I just wanted to ask how things were going with the credit rating agencies and, go ahead. Richard, you really wanted to jump in there with something, so.

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Richard H. Veldran, The Dun & Bradstreet Corporation - CFO [38]

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So yes. So here's the scoop. As you know we made the acquisition in the first quarter, so debt popped up a tad from that. We did, as we expected, see a downgrade to BBB+ from S&P.

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Kathleen Guinnessey, [39]

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BB+.

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Richard H. Veldran, The Dun & Bradstreet Corporation - CFO [40]

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I'm sorry, BB+ from S&P, and that's built into our expectations for the year.

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William A. Warmington, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [41]

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Got it. Okay. And then the free cash flow in the quarter was down, I think, on a year-over-year basis, about 6% and that was up against a pretty soft comp, down about 20% the previous first quarter '16. How should we think about that? Is that seasonal elements or what's going on there?

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Richard H. Veldran, The Dun & Bradstreet Corporation - CFO [42]

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Yes. The biggest element in the quarter that was a little bit different, we talked about this on our last call, was that we had an earn out payment for Credibility in the first quarter this year, that actually happened in the second quarter last year, that was about a $14 million payment. So that was the biggest driver of a little bit of weakness versus what you might have expected. But we're well on track to deliver our guidance for the year.

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William A. Warmington, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [43]

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Okay. And then final one, just a housekeeping item. You guys had given an annual sales bookings number previously. I think it had been about 1.5% in 2014, 3% in '15. What was it for '16?

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Richard H. Veldran, The Dun & Bradstreet Corporation - CFO [44]

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For '16? We were...

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Kathleen Guinnessey, [45]

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Sales number.

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William A. Warmington, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Analyst [46]

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Yes, typically, you give -- once a year, you give the annual booking number.

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Richard H. Veldran, The Dun & Bradstreet Corporation - CFO [47]

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Yes. We were a couple percent last year. I thought you were asking for of the quarter because we did say that quarter-to-quarter, we're not going to give the number. But we were a couple percent this year. (inaudible).

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Operator [48]

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Your next question comes from Manav Patnaik from Barclays.

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Manav Shiv Patnaik, Barclays PLC, Research Division - Director and Lead Research Analyst [49]

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First question was, Josh, I think you mentioned in your remarks about using price to compete effectively, to maintain the capture rates. And I think that's, I think, one of the first times you guys have talked about competition maybe that explicitly. So I was hoping you could elaborate, are you seeing any new competition? What's the dynamic when you're selling the DNBi Credit nowadays?

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Joshua L. Peirez, The Dun & Bradstreet Corporation - President and COO [50]

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Thanks, Manav. So first of all, we're seeing tremendous whitespace opportunity to sell new, where in many cases, we're not seeing competition. We're actually able to penetrate new segments with our D&B Credit product, which is very exciting for us. It's an area that we had lagged significantly. And I think as Bob had laid out the map, even if you're at mid-90s on a capture rate, if you're not selling new, you're going to decline. And so a big part of getting a flat was getting the new acquisition engine moving, and we're able to do that at what we consider to be attractive price points. In terms of our existing business and the existing capture rate that we discussed, what I said was that our intention with the new product was to be able to improve the capture rate. At any given point in time, those improvements can be driven by both retention and pricing or by one or the other. So our view going in was having a product that provided us with different version, different data sets that we could access, flexibility to offer different things along the demand curve, gave us the opportunity to play retention and pricing together to have a higher capture rate, overall. It's not our intention to move backwards, however, on pricing or retention. Our goal is to increase both, but we're fixated on the capture rate as a whole. And our experience thus far has actually been that we're able to get more pricing than we were getting with DNBi and that we're able to improve the retention rate, so we're getting improvements on both. I was simply flagging that, as we move forward, if there is a competitive bid that we're in for a large customer, we have the opportunity to offer price if we wanted to and maintain higher retention, which would allow us to improve the overall capture rate. In terms of the overall competitive environment, our view is that we are the best provider in the Trade Credit space, have been for a long time. Our data has been and continues to be second to none. Our product was not sufficiently better than others in the market until we launched D&B Credit, and now we feel we've got the best data, the best analytics offering and the best product in market, which allows us to actually get a premium price as we have in the past. And we're doing it at a higher clip than we were doing before the product launch.

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Manav Shiv Patnaik, Barclays PLC, Research Division - Director and Lead Research Analyst [51]

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And did the pricing, I guess, increases you're seeing with the new product, I guess, right off the bat, I would think maybe after a year of the company -- of your clients using it, maybe you start getting that. So is, I guess, that product demo just that much better than your legacy one then? Is that the assumption?

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Joshua L. Peirez, The Dun & Bradstreet Corporation - President and COO [52]

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Yes. So it's a combination of things in our mind, Manav. First of all, it's -- the product is that much better. And if you look at it, it's obvious, and you see it. Second of all, the data options, in particular, our global unlimited data package that we offer in the product is something that is extremely appealing to customers with any level of cross-border business with suppliers or vendors or customers. It's just something that they had wanted for a long time, and that we were not be able to offer in the DNBi environment on price points that were attractive, and so that has been a big driver. As well as the customers realizing that we've continued to innovate on this product since the launch a year ago, and we've been continuing to offer new versions, we've been continuing to enhance the features and functionality that are on the existing product, in response to their feedback and comments. And we believe that we're going to continue to do so, which we are. So we, first of all, have been seeing those lifts at the time of upgrade. We also are seeing them as customers are just now starting to renew on D&B Credit. But our view is that we're going to continue to innovate and make this product better, and continue to drive those capture rates higher.

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Manav Shiv Patnaik, Barclays PLC, Research Division - Director and Lead Research Analyst [53]

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Okay. And then in terms of leverage and M&A. Clearly, some of the recent deals you've done have been a key factor in you guys turning some of your legacy areas around. And unfortunately, too many restatements, Rich. But what's the appetite there? Like what should we think about M&A and your leverage going forward?

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Richard H. Veldran, The Dun & Bradstreet Corporation - CFO [54]

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Look, we're focused on maintaining a strong balance sheet, and we're proud of how we've used M&A to accelerate the strategy. You look at the acquisitions of NetProspex and Credibility as well as Avention, and we've touched on how we're using all of those around not just the legacy areas of our business, but also the other areas as well. So it's really exciting. And we've been really pleased with the folks that have come onboard, and we've maintained so many of the key people. And we've been able to accelerate our [moves into] these markets. Getting Hoover's up and running so quickly is really as a result of that acquisition of Avention. So going forward, we're going to be very thoughtful and continue to look at tuck-ins that can accelerate the strategy, but we will be very prudent and the bar is high.

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Robert P. Carrigan, The Dun & Bradstreet Corporation - Chairman and CEO [55]

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Right. And the only thing I would add is as we think about our uses of cash, in the current moment, our priority is really on delevering, that's the first thing. If there was something that really made strategic sense, some kind of a tuck-in, we'd consider it, but we're really focused on delevering. We just think it's prudent to have a strong balance sheet. We know we generate lots of cash, and we can pretty quickly get our balance sheet back to where we'd like it to be.

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Manav Shiv Patnaik, Barclays PLC, Research Division - Director and Lead Research Analyst [56]

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Fair enough. And if I can just squeeze in my Salesforce.com question here. And that's just more around you've been doing direct selling to all the other CRM providers already, which I don't think has been a meaningful contributor to revenue. So I guess, maybe, why you think you'll be better off or more successful in the Salesforce.com, I guess, CRM?

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Joshua L. Peirez, The Dun & Bradstreet Corporation - President and COO [57]

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Okay, Manav. It's Josh. So I think, in this case, we're taking a very different approach, which is to have a huge focus on selling in the sales acceleration space with a new product, with marketing support around it, with focus from the executive level, with tracking of pipelines and deals and marketing efforts. We're doing it into the Salesforce ecosystem and as well the other CRM ecosystems, frankly. Whereas in the past, our focus was on our standalone Hoover's offering. D&B Hoover's does integrate to most, if not all, of these platforms, and it's an area that we think we can have great success. And in particular, the Salesforce ecosystem is one, as Bob said, that has a lot of third-party sellers who have had success and where there's a model for that success, including Avention, which we've now acquired. So our view is that we can be successful in all of these ecosystems. We were highlighting Salesforce specifically because of the relationship with Salesforce and Data.com and the changes there. And so just to give transparency into our plans for that, we're highlighting that ecosystem. But it doesn't mean that we're not expecting to go after the others and expecting to do better than you would have seen historically.

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Robert P. Carrigan, The Dun & Bradstreet Corporation - Chairman and CEO [58]

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I'll also add that the product itself includes, again, integration into a lot of the third-party marketing tech applications where we didn't have that with Hoover's before. And so we've built this thing around, again, the Avention OneSource solution, which is much better integrated into the marketing tech ecosystem. So previously, we were excluded from selling on the Salesforce platform, so we kind of had a standalone Hoover's product. Now we've got a product that's integrated not just with Salesforce, but other important marketing tech platforms and applications. And I got to tell you again that more than half of the sales since we launched the product, and again it's very early days, we launched it in March, but we generated more new business than we even thought. And more than half of those included Salesforce integration, so customers opted for that. So we have a product that we're able to sell and integrate easily, and that integration is becoming increasingly important in the marketing tech world. Marketers are buying way too many applications and they need to connect them, and data is kind of the connective tissue among a lot of all these different applications, and so we want to make sure that our product enables our data to seamlessly interact across the marketing tech ecosystem. And again, early customer feedback is that, that's what they want and more than half of the folks have bought that integration.

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Operator [59]

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(Operator Instructions) Your next question comes from Stephen Sheldon from William Blair.

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Stephen Sheldon, [60]

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It looks like you're expecting margins to be down a decent amount again in the second quarter. So what are the factors that will drive a better margin trajectory in the second half of the year?

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Richard H. Veldran, The Dun & Bradstreet Corporation - CFO [61]

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Look, it's all about the growth. So if you think about the seasonality of our revenue, it ramps up throughout the year, right. The second half is much stronger. If you think about our investments across the year, they're relatively even spread, a little bit lighter in the first quarter, but then they pick up in the second and they're fairly evenly spread throughout the year. So that is really the driver of the change in margin over time. And the fourth quarter is always our strongest, you have a very big pop in revenue, as we expect this year. Other than the investments, most of your costs are fairly even spread over the year as well. And if you just go back to the last couple of years, you'll see that same dynamic.

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Stephen Sheldon, [62]

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Okay. And then, I guess, within sales acceleration, excluding D&B Hoover's revenue, the other portions of the sales acceleration business where they look like they were down in the high single digits. I'm guessing some of that is the MDR business, but can you maybe provide some of the puts and takes on what's driving that?

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Richard H. Veldran, The Dun & Bradstreet Corporation - CFO [63]

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Yes. So overall, as we've talked about before, sales acceleration has a couple things in it, right. Hoover's was down significantly in terms of revenue because although the sales rate was pretty good, right, the sales last year were light. That feeds into this year because of it's a subscription business. So that's really the biggest driver of it. It's really last year sales rate that feeds into this year. Yes. MDR was actually relatively solid in the quarter. It had been a bit of a drag, but it actually had pretty decent first quarter, so we feel good that we're -- we may be turning the tide there as well. We also put some new management in place in the MDR business, and we're seeing some inroads into stabilization.

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Stephen Sheldon, [64]

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Okay, that's helpful. And then, I guess, just lastly, I don't think you talked much about blank (inaudible) solutions. I know there are a lot of moving pieces with the various regulations. But can you maybe provide an overall view of the trends in the pipeline and how that could translate into, I guess, opportunities over the remainder of the year?

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Joshua L. Peirez, The Dun & Bradstreet Corporation - President and COO [65]

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Sure, Stephen. It's Josh, We continue to see the compliance and supply suite as important use cases for us and key driver of our growth going forward. We have a number of great solutions and we're seeing the category grow nicely for us overall. As you said, there are particular solutions that, at any point in time, given the regulatory requirements, could speed up or slow down in terms of close rates with customers, and so it certainly can be a little difficult to predict when you might get some of the bigger deals in this space, for example, with FATCA. But our view is that our data plays extremely well in the compliance and supply space, that customers need that accurate global information, they need it connected to the Dun's number where they're able to actually use it for master data purposes and understand who they're doing business with, how they're doing business with them, how much business they're doing with them and in what markets. And we don't really see other data sets that play as well as ours do. So we continue to see it as a space that should be a good growth driver for us, the pipeline is strong, and we are pleased with the traction we've been gaining in the space and continue to see great potential.

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Operator [66]

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Your next question comes from Shlomo Rosenbaum from Stifel.

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [67]

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I just want to ask a little bit about the enterprise risk management. It clearly had very good growth and it seems to be organic growth. Where are we with retention on the management over there? Last year, you talked about changing some of the contract, I think that the last hurdle goes through 2017. How comfortable do you feel with either retention of those guys that came from the Credibility business or the bench that you've built in the interim?

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Robert P. Carrigan, The Dun & Bradstreet Corporation - Chairman and CEO [68]

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Shlomo, this is Bob. You're speaking -- I think you're referring more specifically to the team that came in with Credibility. And we've integrated a lot of those folks into the business, given some of the key leaders oversight on the original business and then expanded their roles. So we're really pleased with how we've integrated them. From the very beginning, we were pretty ambitious in how we went about this, right? We did that, we put the entirety of our small business operations under these folks. So the idea was not to kind of run them completely separately, but really integrate them in. And we're seeing the benefit of that, and the Credibility business is really helping us in a lot of areas of our business. And so we're not going to retain them all, but we are happy with some of the key folks that we've been able to keep onboard, and we'll continue to work with them to grow their careers at Dun & Bradstreet so that they have interesting and dynamic jobs, and it's my job to make sure that we create that kind of environment where they want to stay and do their best work. And I'm pleased to say that, that's what's happening right now.

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Operator [69]

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At this time, I have no further questions in queue. I turn the call back over to the presenters for closing remarks.

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Kathleen Guinnessey, [70]

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Okay, great. This is Kathy. Thank you very much, and we're going to sign off now. We'll talk to you next quarter.

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Operator [71]

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Thank you, everyone. This concludes today's conference call. You may now disconnect.