Q1 2024 Earnings Summary
- Management is confident in achieving higher revenue growth targets, with 90% of revenues already growing at around 6% or better, and expects to reach the higher end of their 5% to 7% organic revenue growth target in the coming years, driven by momentum in core businesses and new capabilities.
- High-growth areas such as Third Party Risk & Compliance and Master Data Management are experiencing strong demand, with Third Party Risk & Compliance revenues growing nearly 40% internationally and a total addressable market of nearly $10 billion with low current penetration, providing significant runway for future growth.
- Strategic partnerships with leading technology companies like IBM, leveraging their watsonx capabilities to develop and deliver advanced generative AI solutions such as Ask Procurement, are positioning the company for future growth and innovation.
- The company's 'credibility' business segment is currently a 60 basis point headwind to organic growth and is expected to continue being a headwind in Q2. There is uncertainty about when this underperforming segment will improve, potentially dragging down overall growth. , ,
- The ongoing cloud platform migration is increasing expenses and hurting margins in the near term, with benefits not expected until late 2024 or into 2025. This introduces margin pressure and uncertainty about when the migration will be accretive to margins.
- Investments in generative AI are at an early stage, with limited revenue contribution expected in 2024, and only modest impact anticipated in 2025 and 2026. This suggests that the benefits from these investments may take longer to materialize while costs are incurred now.
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Revenue Growth Confidence
Q: Why increased confidence in achieving higher end of revenue guidance?
A: Management expressed increased confidence in reaching the top end of their mid-term revenue guidance of 5% to 7% growth over time. This confidence stems from many revenues already being at the top end, and efforts to improve underperforming businesses like the credibility business. They are optimistic due to strong performance in key areas such as supply chain risk management and the shift to AI, and they are entering new markets like capital markets. They believe that even at the lower end of the range, their strong contribution margins will drive EBITDA and earnings expansion, noting their model is not cyclical and is set up to compound over the years. -
Credibility Business Impact
Q: How will the improvement in the credibility business affect revenue growth?
A: The credibility business was a 60 basis point headwind in the current quarter. Management expects it to remain a headwind in Q2 but anticipates it will pivot to low single-digit growth midway through the year. Improving the credibility business's trajectory will help North America's Finance and Risk segment reflect stronger underlying growth. -
Margin Pressures and Cloud Migration
Q: How does cloud migration affect margins and when will it be accretive?
A: The company has invested significantly in migrating off legacy data centers onto the cloud, which temporarily impacts margins. The move to the cloud enhances innovation, scalability, and efficiency. Expenses related to the cloud migration are expected to stabilize in the second half of 2024 and into 2025, after which it should be accretive to margins. In North America, expenses include significant investments in generative AI. -
Stock Undervaluation and Buyback Strategy
Q: How will you approach the share buyback given stock undervaluation?
A: Management plans to be opportunistic with the share buyback program. They believe the stock is very undervalued, estimating it should be $30 compared to peers, and even $50 compared to the Information Services group. Their capital allocation strategy focuses on investing in organic growth and deleveraging the balance sheet, aiming for a leverage ratio of 3.5x by year-end. -
Generative AI Initiatives
Q: What are the plans and expected benefits for generative AI initiatives?
A: The company is in early stages with generative AI and does not anticipate significant revenue in 2024. They expect a contribution of 1 to 2 percentage points in 2025 and 2026 as it builds up. Investments in AI are within the current guidance, and management feels in control of the spending. They are pleased with the momentum and results from their AI initiatives. -
Client Health and Sales Outlook
Q: How is the overall health of clients affecting sales cycles?
A: Client health is consistent with prior guidance, and sales are stable. Business optimism reports indicate confidence among clients, although supply chain issues remain a factor. Sales cycles are generally consistent, with no significant elongation, except for some softness in Sales and Marketing assets like digital marketing and digital audience. -
International vs. North America Growth
Q: What drives strong growth in International Finance and Risk versus North America?
A: International growth is driven by third-party and supply chain risk management solutions growing nearly 40%. Sales and Marketing bounced back after weaker prior-year comparables. In North America, timing delays and the impact of the credibility business, which is unique to North America, affect growth. Improvement in the credibility business is expected to enhance North America's growth trajectory. -
Underperforming Revenue Segments
Q: How are you addressing the segments not growing strategically?
A: Management is retooling offerings like the credibility business by enhancing the customer value proposition and sales force. They are encouraging small businesses to provide more data to improve credit scores, blending consumer and business scores for a 20% increase. Cross-selling other capabilities like Hoovers Essentials is also part of the strategy. They have confidence in turning around these underperforming segments. -
Data Acquisition Cost Savings
Q: Are lower data acquisition costs sustainable throughout the year?
A: Management is continuously optimizing data acquisition processes to be more efficient and effective. The lower costs are not a timing issue and are expected to continue throughout the year. They use tools, including traditional AI, to enhance data collection and curation. -
Strategic Options for Stock Undervaluation
Q: Will you consider strategic alternatives if the stock remains undervalued?
A: While focused on delivering results quarterly, management is shareholder-focused and open to any options that benefit shareholders. They believe continued strong performance will attract investors and address undervaluation. -
IBM Partnership and Procurement Solution
Q: How does the IBM partnership work regarding procurement solutions?
A: The company is collaborating with IBM to go to market with "Ask Procurement," their first generative AI solution. Combining IBM's strengths in enterprise solutions with their data and analytics capabilities aims to benefit shared clients.