Dun & Bradstreet Executive Insights: North American RMS, Project Revenue

On Tuesday, Dun & Bradstreet Corporation (NYSE:DNB) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite shared.

North American RMS

Shlomo Rosenbaum – Stifel Nicolaus: I just want to start by focusing a little bit again on North American RMS. Could you talk me through why the subscription revenue is down? My understanding is that suppose to be particularly sticky revenue?

Sara Mathew – Chairman and CEO: Yeah, let me break that up into two pieces, Shlomo. There is the DNBi component and what we would describe as a non-DNBi subscription component. The DNBi component was mostly in line with expectations (less) returned back to the mid single-digit range. The non-DNBi customers is where we saw a contraction and it’s partly driven by them opting for usage-based contracts which allow them to save money in the near term. If the usage goes up, they actually pay more in the long-term and clearly we see that this is largely driven by what we would say a budgetary pressure and a certain caution. We haven’t seen something like this, this early in the year and that’s what reflected in our guidance. Now, you should know that DNBi subscription is the bulk of the subscription revenue overall.

Shlomo Rosenbaum – Stifel Nicolaus: What I’m trying to understand though is that the move with customers looking at and lowering their pricing buff on by usage base is there a general focus on my data costs are high and are you seeing a pressure in the industry on pricing.

Byron Vielehr – President, North America: Shlomo, this is Byron and as Sara said on the DNBi side which is 60% of the risk business lift as we turn to mid single digits and retentions holding up well. We’ve currently seen a pressure in the project side of the business and we’ve not seen a big acceleration of losses but people have compressed down their spending. There is a cautiousness, with which people are spending dollars and we resized some of those projects based on that cautiousness and so we are seeing that in the market.

Sara Mathew – Chairman and CEO: Shlomo, I think to get what you’re trying to say is it pricing pressure or is it budget pressure. What we’re seeing is people are assuming they are going to use fewer units. So it’s less about pricing and the best way in a subscription plan is to opt for a usage based contract away from subscription and that’s why we saw a shift in the first quarter.

Shlomo Rosenbaum – Stifel Nicolaus: Can you just define for me the difference between what’s going on in the project related and what’s happening right now in the subscription. In other words, I understand if people are cutting back in the projects, but the focus on subscription, the decline in subscription really sounds like a change in the way that people are thinking in a normal course of business?

Byron Vielehr – President, North America: There has been some shift. As I’ve said, DNBi is holding up relatively well. We have seen some people go to metered product so on – we introduced a metered version of DNBi last summer as well as dnb.com and so once again this is back to people managing spend. If there’re transaction, what we seen in the past is if the transactional volume goes up, they start consuming more, we will start to see that because they’ll go through their contractual commitment. Unlike on DNBi where essentially on that subscription they can keep consuming more. If they go to metered product, once they use up the number of reports or units they have, they’ll have to pay us for that. But it is the way for customers to say I am going to consume less reports and so I want to go to a metered product and spend less. They take the risk if they need more.

Shlomo Rosenbaum – Stifel Nicolaus: In the4Q, you talked about the innovation in 4Q on DNBi was just to drive revenue growth in business in 2012. How are you thinking about that now and the efforts you guys put in last year are you seeing the fruits of that or I am trying to understand is the lower guidance in RMS strictly from the non-DNBi or is it also DNBi?

Byron Vielehr – President, North America: It’s primarily from non-DNBi. So as I said, the DNBi core metrics are back to where we’ve seen them historically, low 90 retention mid single-digit lift. We do have two products that we’d introduced. One was DNBi Pro and we’re up to about 2,000 customers on that product over the first quarter. We also introduced the Portfolio Risk Manager, which is off to a bit of a slower start than we had thought. But we think it is going to ramp up through the year. We’ve doubled the pipeline on Pro, doubled from the beginning of the year to the end of the first quarter.

Sara Mathew – Chairman and CEO: I think, by the way, it will also be helpful to talk about what are we going to do about this, because we do know that with DNBi we have a really good product that our customers love. We get what we will call very good pricing lift than high retention. If you look at the absolute number of customers on DNBi, we do believe there is an opportunity to go, get other customers like them into the franchise. We know the DNBi holds up better because then other subscription accounts are really reports and DNBi is more of a real time interactive solution that customers are willing to pay for. So the goal is really to get to DNBi into the hands of more customers.

Byron Vielehr – President, North America: We need to acquire more customers on the DNBi platform. As I said for the customer basis on it, there seem retention (list) metrics at historic levels, but we have to acquire more customers for that platform. We’re focusing on mid-market and up for new customer acquisition. We know it’s a good value prop, it has very good lift in retention rates, and so that’s one of our major focuses.

Shlomo Rosenbaum – Stifel Nicolaus: In the 0% to 3% revenue growth is off what revenue base for 2012? Are we taking RoadWay out for that calculation or is it including the RoadWay?

Richard H. Veldran – SVP and CFO: The answer is yes. If you go to schedule 7 of the release, you’ll see that laid pretty clearly.

Shlomo Rosenbaum – Stifel Nicolaus: Then if you’re keeping the EBIT in EPS growth guidance, it basically sounds like the only way if you keep the revenue the same. Excuse me, you roll in the revenue in – you’re just – you’re going to have more costs cuts. Just from a business perspective, I think the reason why your guys don’t do them faster on a regular basis is that I assume it’s the impact that you would have on the business and from a long-term perspective. Accelerating those cost cuts, I mean how are you balancing that with both the culture of what’s going on inside the firm and the disruption that (indiscernible) is by accelerating that.

Sara Mathew – Chairman and CEO: Let me just provide some perspective and then Rich will go through the mechanics of exactly how we deliver it. So Shlomo, we are actually accelerating investment into the business beginning in the second quarter. So, Byron touched the new data sets we’re bringing into the markets. We’re also willing to more heavily invest in data and analytics because we believe this is critically important to ensure we get our sales team pointed at the right customers, so that we can get them to acquire DNBi. Now, we go into deal with some as you would describe conservatism, and I want to ask Rich to talk about, how do we essentially think of our expense base. So we think of it slightly differently than the way you describe it. So I have Rich to discuss that.

Richard H. Veldran – SVP and CFO: Yeah. So a couple of things, we try to view our business as a truly flexible business where every dollar has to justify itself and we do flex it with revenue. Our belief is that if our revenue fall short of our expectation, it is our obligation to flex our cost base appropriately. So, let’s talk a little bit about the mechanics of how this one works because I think it’s a good instructive example. Because (we’ll be) down to a degree, we have some level of variable costs. So right off the bat some of that does going to fall out. We always go into the year though with the level and to be a conservative company with the level of conservatism in our cost base. So, we’ve got some contingency which we hold in the events that things don’t work out appropriately and we always have a continuous pipeline of new work that we’re doing, because we have a continuous reengineering model and we typically space those out over time, but we can’t accelerate them, in fact if you look at last year, I think I mentioned on the last call, we did a Hoover’s integration. We ended up doing that in the September period of last year. We had originally anticipated doing that this year. So, often times we will accelerate programs when it make sense to do so. If you take a look at the overall impact and what we’re covering right now, it’s about a third of it is from the year ago cost, about a third of it is from the conservatism that we’ve built into the forecast and the last third is by bringing some of the reengineering programs forward.

Shlomo Rosenbaum – Stifel Nicolaus: I’m going to leave you with one last question, just do you have any quantitative commentary about either the Salesforce.com or D&B360, any user accounts or pipelines or anything like that?

Sara Mathew – Chairman and CEO: Sure, Byron will take that.

Byron Vielehr – President, North America: Let me start with Salesforce.com, the relationship is going quite well. They are ahead of our plan. We think they will be ahead of our full year plan as well. From a revenue perspective, it’s a relatively small number because we get paid a royalty on it and then that royalty is ratable as well. But it’s ramping the way we had anticipated. Also as we look at it, almost 80% of the customers that they have added to data.com are new to D&B and so we’re starting to see lead flow come over to us that allows us to cross sell them on the rest of our value props. If you look at the DaaS products within our distribution channel D&B360, D&B Direct they added about a point of growth to S&MS in the first quarter and the pipeline for those has doubled from the beginning of the first quarter to the end of the first quarter. So we continue to get traction on that, they are going to continue to drive growth in S&MS.

Project Revenue

Korosh Saba – Stephens, Inc.: It’s actually Korosh Saba for Carter. Just a couple of questions. So first going back to the project revenue. Could you guys speak about how much of that revenue was just kind of a magnitude of the revenue in U.S. RMS and then whether there is any seasonality that goes with that?

Richard H. Veldran – SVP and CFO: Actually if you look in our financial statements what you’ll see is about 20% of the RMS revenue is sort of the vast business, that’s primarily the project stuff that we’re talking about and RMS is $130 million in the first quarter so 20% of that give you a sense of the project business.

Sara Mathew – Chairman and CEO: And if you look at the trend, you’ll find that we ended 2011 quite strong and we really saw a sharp drop off in the first quarter. We really didn’t quite see that coming. This is discretionary spend. It’s when the customer wants something very specific done. What we’re seeing is they are pushing it out and deferring it. We believe that that cautiousness will continue.

Byron Vielehr – President, North America: The last piece of it is, we saw a lot of that at the end of the first quarter. So people were holding on to their discretionary spend until the end of the first quarter which surprised us.

Korosh Saba – Stephens, Inc.: Then on the buyback, I know we didn’t see any in the first quarter, but could you guys give us a sense of how you’re looking at executing that throughout another three quarters more even or how you guys are looking at it?

Byron Vielehr – President, North America: Yes, so a couple of things. First I’ll start with saying that we are firmly committed to $150 million and $175 million. We do not give guidance around the specific buying patterns, so I won’t share any of that today.