Q4 2023 Earnings Summary
- Dun & Bradstreet is experiencing increased growth driven by its Master Data Management (MDM) and third-party risk and supply chain management solutions, which are areas where they have invested and have unique capabilities. The company has mapped 35 billion supply chain relationships, including 40% of the entire supply chain of one of the big three automotive companies, showcasing a strong competitive advantage, especially as the market adopts generative AI technologies.
- The company is capitalizing on new opportunities in the capital markets space, with new solutions showing immediate impact and a building pipeline. This represents significant potential for new customer acquisition and revenue growth, as capital markets firms are a large pool of potential new clients for Dun & Bradstreet.
- Improving free cash flow conversion driven by decreasing capital expenditures and convergence of depreciation and amortization, as cloud migrations and back-office work wind down. This enhancement in free cash flow will support further investments and debt reduction. The company is committed to investing in organic growth, maintaining the dividend, and reducing leverage ratio.
- Lower-than-expected margin expansion due to increased investments: The company expects an adjusted EBITDA margin expansion of approximately 30 basis points in 2024, below the typical 50 to 100 basis points. This is due to increased investments in generative AI and other initiatives, suggesting that margins may remain under pressure as the company continues to invest heavily in new technology that may not yield immediate returns.
- Significant increase in effective tax rate impacting EPS: The effective tax rate is anticipated to rise from approximately 18% to 23% due to new tax regulations (Pillar II) in Ireland. This increase is expected to negatively impact EPS by around $0.06.
- Underperforming business segments may hinder overall growth: Certain parts of the business, such as the credibility business, have been declining and not generating comparable returns. Despite efforts to stabilize these segments, they may continue to act as headwinds to overall growth.
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Margin Expansion and Investment
Q: Why is margin expansion limited in 2024?
A: Management plans to expand margins by 30 basis points in 2024, investing an additional $5 million to $10 million in areas like generative AI to capitalize on current opportunities. They believe this investment is small relative to their $950 million EBITDA and essential for long-term growth. -
Organic Growth Drivers
Q: Can you break down the components of organic growth?
A: Approximately 2% of growth comes from pricing increases, slightly higher than the traditional range. Incremental growth is driven by new logos, upselling existing solutions, and cross-selling. Significant growth areas include Master Data Management (MDM) and third-party risk and supply chain management, fueled by the generative AI movement. -
Cash Flow Priorities
Q: How will improving cash flow be prioritized?
A: The first priority is investing in the business to drive organic growth. Management is committed to the dividend and reducing debt. While open to M&A, the bar is set very high, preferring partnerships over acquisitions unless there's extreme conviction. -
Portfolio Optimization
Q: Are you reviewing the portfolio for underperforming assets?
A: Yes, management is constantly reviewing the portfolio, divesting low-margin and non-core businesses. They shut down seven product lines last year and are selling a voice of the customer solution with $2.5 million in revenue and expenses. This allows them to focus resources on higher-return areas. -
International Growth Outlook
Q: What is the outlook for international markets, especially Europe?
A: Management is confident in their international business, expecting mid-single-digit growth in Europe for 2024. The acquisition of Bisnode, initially a declining asset, is now projected to grow at this rate. Localization of D&B products and penetrating larger enterprise clients are key drivers. -
Data Costs and Margins
Q: How do data costs impact margins?
A: Data and processing costs, including cloud charges, are a normal part of supporting revenue streams. In 2023, elevated health care benefits added $6 million, and incentive compensation increased $10 million, impacting margins. Such costs are expected to normalize in 2024, with ongoing investments in generative AI and capital markets. -
Vitality Index Impact
Q: How does the vitality index affect future growth?
A: The vitality index, measuring revenue from newer products, is at 27%. While expected to normalize to around 20%, this high level strengthens client renewals, enables cross-selling and upselling, and supports pricing power. It contributes positively to 2024 guidance by enhancing client satisfaction and retention rates.