Oct 26, 2012
Executives
Kathy Guinnessey Sara Mathew - Chairman and Chief Executive Officer Richard H. Veldran - Chief Financial Officer and Senior Vice President Byron C.
Vielehr - President of North America Operations Joshua L. Peirez - President of Global Product, Marketing and Innovation
Analysts
Andrew C. Steinerman - JP Morgan Chase & Co, Research Division Carter Malloy - Stephens Inc., Research Division Daniel R.
Leben - Robert W. Baird & Co.
Incorporated, Research Division William A. Warmington - Raymond James & Associates, Inc., Research Division Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division Peter P.
Appert - Piper Jaffray Companies, Research Division Manav Patnaik - Barclays Capital, Research Division
Operator
Good morning, and welcome to D&B's 2012 Third Quarter Teleconference. This conference is being recorded at the request of D&B.
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, Leader, Treasury and Investor Relations. Ms.
Guinnessey, you may begin.
Kathy Guinnessey
Thank you. Good morning, everyone, and thank you for joining us today.
With me on the call this morning are Sara Mathew, our Chairman and Chief Executive Officer; Rich Veldran, our Chief Financial Officer; Byron Vielehr, our President of North America; Manny Conti, our President of International; and Josh Peirez, our President of Global Products, Marketing and Innovation. Here's what you can expect on today's call.
First, Sara will begin with a brief review of the third quarter and an update on MaxCV. Then, Rich will follow with a detailed discussion of our results with an emphasis on North America.
After that, the team will be a be available to take your questions. [Operator Instructions] 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 these forward-looking statements. These documents are available on the Investor Relations section of our website, and we encourage you to review this material.
We undertake no obligation to update any forward-looking statements. During our call today, we will be discussing a number of non-GAAP financial measures, as that's how we manage the business.
For example, when we discuss revenue growth, we'll be referring to the non-GAAP measure core revenue growth before the effect of foreign exchange unless otherwise noted. When we discuss operating income, operating margin and EPS, these will all be on a non-GAAP basis before non-core gains and charges.
A reconciliation between these and other non-GAAP financial measures and the most directly comparable GAAP measures can be found in the schedule to our earnings release. They can also be found in the supplemental reconciliation schedule that we post on the Investor Relations section of the website.
Later today, you will also find a transcript of this call on our Investor Relations site. With that, I'll now turn the call over to Sara Mathew.
Sara?
Sara Mathew
Thank you, Kathy, and good morning, everyone. Yesterday, we reported our third quarter results.
Core revenue was up 2%. Operating income was up 8%.
EPS was up 24%, and we delivered year-to-date free cash flow of $255 million. Overall, we are pleased with these results, as both North America and international performed better than expected.
North America benefited from timing of a large deal that moved from the fourth quarter into the third quarter, and international saw a strength in value-added solutions despite the weak economy in Europe. So in summary, the year is unfolding as expected.
And in a moment, Rich will discuss the quarter in more detail. With 2012 mostly behind us, we are starting to look ahead.
As a team, we are not satisfied with our top line performance, so we are focusing our efforts on better positioning ourselves for sustainable long-term growth. During the quarter coming up, there will be 3 areas of investment: first, Data-as-a-Service or DaaS solution; second, foundational data and advanced analytics for large companies; and third, the B2B portal, which is currently in test.
I'll touch on each of these beginning with DaaS. As we've shared previously, DaaS represents a very large opportunity for D&B, and we are still early in developing the market.
DaaS allows D&B to expand its footprint, as customers can easily embed D&B data directly into their workflow. Earlier this year, Salesforce.com began selling D&B data on their CRM platform.
And in Q3, Salesforce generated about half of DaaS revenue, which in total represented 2 points of growth in the S&MS segment. Based on the success of the Salesforce partnership, we are pursuing additional distribution channel to drive growth.
Next stop is Microsoft value-added reseller network to sell D&B360 directly to Microsoft's CRM customers. Demand for D&B data embedded in customer workflow remains high, and we continue to expect DaaS to be a major growth driver in the years ahead.
A secondary area of focus includes foundational investments in new data sources and innovative approaches in the way we analyze commercial activity. We call this big insight, as we are leveraging the big data within D&B and our customer base to create a step change in the level of insight we bring to market.
We are early in the development of these capabilities and see opportunities in the areas of customer prospecting, fraud, supply chain transparency and global compliance. Here's one example.
We're now in market with a new compliance solution. D&B Compliance Check to help customers understand their third-party relationships and comply with government regulations around the world.
By combining D&B company data with other third-party sources and using our matching and analytical capabilities to drive proprietary insight, we signed our first multimillion dollar deal with a Fortune 50 company in the third quarter. This solution is foundational to the global compliance program to effectively manage risk across their enterprise.
Since then, several other global customers have expressed interest in the product, and we see demand in the marketplace for D&B-led compliance solutions around the world. A final area of investment is in our new online trade portal, which is currently in test in China.
The B2B portal is an excellent example of the kind of innovation you can expect from D&B in the years ahead. The portal leverages our global database and takes our matching capabilities beyond just company-specific information to the products that companies purchase themselves.
This is a unique value proposition, as it allows Chinese suppliers to find and connect to U.S. buyers who are interested in the products they sell.
Now existing players in the space typically offer online directory where suppliers can list and advertise their products, but there is limited insight to help them find the most relevant buyer. Early reaction from customers have been very favorable, and we are trending ahead of expectations after the first few weeks in market.
We will closely watch customer adoption patterns in the fourth quarter before investing to accelerate growth. Of note, we were able to respond very quickly to these emerging customer needs I've shared with you today due to the capabilities enabled by MaxCV.
So I'll close with a discussion on MaxCV, we are on track to be up and running with the new data supply chain in one market by year end. The build was completed in August, and all of the components have been finished during the third quarter.
In the fourth quarter, we expect to complete the user acceptance testing, so we can migrate our products and customers over to the new infrastructure. At that point, the physical build-out of the new data supply chain will be behind us, and as previously communicated, all expenses incurred to connect the U.S.
and other MaxCV markets to the new supply chains will be included in our core operating expense. We're in the midst of our annual planning process and will be able to give you more color on these costs when we provide guidance next year.
So with that, let me turn the call over to Rich Veldran to review our third quarter results in more detail. Rich?
Richard H. Veldran
Thank you, Sara, and good morning, everyone. This morning, I'm going to walk through our third quarter results and provide you with some color on our outlook for the remainder of the year.
Let me start with revenue. Total company core revenue was $413 million, up 2% from last year and slightly ahead of our expectations.
North America, which represents about 75% of the total, was up 1%, and international grew 5%, of which 3 points was organic. As expected, after declining 2% during the first half of the year, North America's trajectory improved during Q3, helped in part by a timing benefit from Q4.
Specifically, one point of growth came from a large government contract that last year signed in the fourth quarter. Overall, our revenue expectations for North America are unchanged at about flat for 2012.
The improved revenue, coupled with the large Compliance Check sale that Sara referenced in her comments has resulted in deferred revenue being up about 1% in the quarter. Turning to our solution set, Risk Management or RMS was down 2% in the third quarter.
During the quarter, we continued to face the same pressures we've seen all year, although results were helped by the timing shift. The majority of the RMS decline in the quarter was due to continuing pressure on non-DNBi subscription revenue.
Budget constraints led customers to continue to trade down from data subscriptions to smaller usage-based plans. Total DNBi was down 1%, in line with expectations with retention in the low 90% range and mid-single digit price lifts on renewals.
Similar to Q2, 1% growth in our core DNBi product was not enough to offset double-digit declines in revenue from DNBi modules. DNBi modules provide additional functionality the core DNBi platform and represent about 10% of total DNBi revenue.
With the exception of DNBi PRM, we have not graded our module -- upgraded our modules in the past few years, as we move DNBi development to Ireland. With customer budgets under pressure, some customers are choosing to stay with the core DNBi product to handle their risk management needs, and this has been putting pressure on our module sales over the last 9 months.
Our newest module, PRM, was introduced late last year, and we missed the 2012 budget cycle for renewal. We are beginning to see a pick-up in sales of PRM and expect it to improve as we enter the annual renewal season in Q4 and then into Q1 of next year.
Turning to Sales and Marketing. Revenue increased 10% during the quarter, driven by strong growth in our value-added solutions.
Traditional S&MS was down 4% in the quarter, an improvement from the double-digit decline posted last quarter. Revenue in traditional S&MS can be volatile quarter-to-quarter, as the total revenue was small and large contracts have a significant impact on quarterly results.
The robust 16% growth in value-added solutions was largely driven by the continued strength of Optimizer and traction in our Data-as-a-Service product that contributed about 2 points total S&MS growth in the quarter. Lastly, Internet Solutions, our smallest segment, were down 3% during the quarter due to tight customer spending and competitive pressures.
Most of the revenue was subscription, and we could see that the negative revenue trend will likely worsen over the next several quarters, and this is factored into our guidance for the year. Looking ahead, we continue to expect North America revenue to be about flat for the full year.
Given the timing benefit to the third quarter result, the Q4 revenue is likely to be about flat as well. Turning to international, which represents 25% of company revenue, total core revenue increased 5% during the third quarter, slightly ahead of our expectations.
Organic revenue grew 3%. Our Europe and other segment, which represents 57% of total international revenue, grew 3% during the quarter.
Continued penetration of DNBi across our owned markets as well as strong cross-border demand are helping us grow despite the difficult macroeconomic environment. Moving to Asia Pacific, which represented 43% of total international, revenue grew 9% during the quarter.
The strong performance was driven by 3 key factors: first, continued organic growth in Australia; second, the benefit from the reorganization of Japan into a partnership earlier in the year that provides a lift to our cross-border revenue; and third, the acquisition of MicroMarketing in China at the end of last year, which contributed 6 points of inorganic growth to Asia-Pacific results. International is on track to post mid-single-digit growth for the full year.
Let me now discuss our overall profitability during the quarter. Total company operating income was up 8% in the third quarter, which was better than our going in expectations.
North America income was up 5%, including growth from the timing benefit from revenue, which I discussed earlier, as well as the benefits of our reengineering program. International operating income was up 16% due to the benefits of reengineering and the positive impact from the recent restructuring of our Japan operation, where we exited the domestic market and retained the high-margin cross-border business.
Looking ahead to the fourth quarter, as Sara had mentioned earlier, we expect to increase the level of investments in both North America and international behind Data-as-a-Service, data and analytics and the B2B portal. As a result, we expect total operating income to be up in the low single digits in the fourth quarter.
Diluted EPS was up 24% during the quarter. This strong performance reflects the higher operating income plus 11 points of accretion from share repurchases and 6 points from a lower tax rate in the quarter versus last year.
Year-to-date, we have repurchased $236 million of shares under the discretionary share repurchase program at an average price of $69.29 per share. That leaves $734 million left under our current discretionary authorization, which we expect to complete over the next 2 years.
Our tax rate was 32.5% in the third quarter, which was lower than prior quarters due to the closeout of prior year open audit and in the third quarter. We expect our full year tax rate to be approximately 33%.
And finally, year-to-date, we generated $255 million of free cash flow compared to $230 million during the same period last year. I'll now turn the call back over to Sara.
Sara Mathew
Thank you, Rich. So in summary, 2012 is unfolding as we expected, and we're on track to deliver our full year guidance, specifically, revenue growth of 0% to 3%, operating income between 4% and 7%, EPS at the high end of the range of 8% to 11%, and free cash flow between $275 million and $305 million.
Looking ahead, we're focused on 3 areas of investment: DaaS, foundational data and advanced analytics, and the B2B portal, all of which offer exciting opportunities for sustainable growth. Let me close by congratulating Byron and Manny on their new responsibilities.
As we announced yesterday, Byron will become President of International and Global Operations, and Manny will become President of North America. Both Byron and Manny have deep and broad expertise across the company, and this rotation is designed to continue to grow and develop these leaders.
Manny and Byron will be transitioning their responsibilities during the fourth quarter, so we close 2012 and start 2013 with minimal disruption. And with that, we would like to open the call for your questions.
Operator, could you open the lines please?
Operator
[Operator Instructions] Our first question or comment comes from Andrew Steinerman from JPMorgan.
Andrew C. Steinerman - JP Morgan Chase & Co, Research Division
Rich, my question is about the share buyback. This is the first quarter of a 2-year intention for the company to buy back 25% of its share count.
Could you describe the level of share buyback in the third quarter? Should we consider this kind of like a foundational normal level of share buyback?
What would be gating factors as we go over the next 2 years of quarters where you buy less or more in a given quarter?
Richard H. Veldran
Sure. Let me talk about that, Andrew.
I mean, a couple of things, as you may recall -- although you haven't been covering this as long as some of the others. We don't comment on our specific strategy within any given quarter.
It's just not our policy to do so. I can tell you that we do not blindly buy shares on just a programmatic basis.
It wouldn't make sense for us to do that. Thus far, during this year, we bought 236 million shares, which is well above the level we said we'd do going in.
And you can be sure that we will finish our full authorization for the remaining 730 million over the next couple of years.
Andrew C. Steinerman - JP Morgan Chase & Co, Research Division
Okay. That sounds good.
And could you just comment in general -- I know you've used the word difficult environment. When you look at trade credit in the U.S., meaning terms that businesses are giving each other, how would you describe the current environment versus 3 months ago?
Sara Mathew
Why don't I take that, and I'll ask Byron to add color commentary. If we look at our database and if we look at the insight we generate from all of our businesses, we're actually seeing delinquencies fall across the U.S.
In terms of new credits, which is a company is extending credit to new -- to totally new customers, there's definitely less of that. And there's a portion of our transactional business, as you can imagine, that's impacted by it.
But overall, delinquency's down, new credit to new customers not showing any sign of significant change. Byron, anything you would add to that?
Byron C. Vielehr
As I look at some of our major sector exposures, in manufacturing, we're not seeing expansions of trade lines, so we don't see a large expansion going on there. We have seen some acceleration in the financial services sector.
So some of the large FIs are starting to get back into card marketing, and so they're starting to extend more credit. And they're a leading indicator over time that may flow to other sectors.
We've not seen that at this point.
Operator
Our next question or comment comes from Carter Malloy, Stephens Inc.
Carter Malloy - Stephens Inc., Research Division
Actually, the last question brought one up for me on the buyback, which is if you're planning on buying back 1/4 of your business and being opportunistic about that, what would keep you out of the market this quarter? And again, understanding that you're already ahead of plan for the year, but it would seem if you only have 2 years to complete that, it seems like a decent window to approach the stocks.
So is it that you guys expect to have better shots at buying back in your stock? Or why not now if the stock is anticipated to be higher a year from now?
Richard H. Veldran
And as always, Carter, unfortunately, I will not comment on specific buying strategies. It just isn't prudent for me to do so and doesn't help us to do so.
Sara Mathew
But Carter, we have finished every share buyback that we have announced in the 10 years that I've been in this company, and we will finish this, and we will finish it on time as we did with all the others.
Carter Malloy - Stephens Inc., Research Division
That is an exceptionally good point. And then on the Sales and Marketing growth, you said that Optimizer had slowed.
Data-as-a-Service contributed a couple of million in the quarter. Where was the delta growth driver there?
Was that on that EDU side of the business? Or what else drove that strength?
Byron C. Vielehr
Carter, this is Byron. No, Optimizer is actually very strong.
For a big data product, it is one of the core drivers of S&MS, and it's a driver of the DaaS performance. DaaS is starting to accelerate, but we still see very strong performance out of Optimizer.
Carter Malloy - Stephens Inc., Research Division
Oh, okay. I'm sorry.
I must have misheard that earlier, apologies. And on DaaS, at a, call it $8 million or $10 million year run rate as we sit today, do you guys still see that as a million dollar -- like 3-figure millions type of business?
I mean, they could be above $100 million run rate at some point soon?
Byron C. Vielehr
Yes, absolutely. It's growing slower than we had anticipated, but we see still see DaaS as $100 million opportunity.
We're still pursuing our strategy, so we've built that product that we're selling through our direct sales force. We've partnered with Salesforce.com of course, and we're now working in various partnerships with Microsoft as well.
We think this is a major driver of future growth for us.
Carter Malloy - Stephens Inc., Research Division
Great. And just, Rich, one quick model one, which is you said 1 point of growth came from that government contract.
Were you saying 1 point of overall growth or 1 point of RMS growth?
Richard H. Veldran
No, in North America, it was about 1 point of growth.
Operator
Our next question is from Dan Leben from Robert W. Baird.
Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division
Congratulations, Byron and Manny, on your new roles. One point of clarification, on the large government deal, that was non-DNBi and non-subscription or was that non-D&Bi subscription revenue?
Richard H. Veldran
Yes. It was not DNBi and not subscription.
[indiscernible]
Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division
Okay. Great.
And then within S&MS, fourth quarter is traditionally seasonally strong, very good quarter there, this quarter. Any ability for you guys to look in and see if there were any contracts, similar to that government contract signed early?
Or is it just too volatile and aggregate to tell?
Sara Mathew
No, not really. I -- the fourth quarter, as you know, is just seasonally large, and we are watchful of what customer behavior is relative to what's going on outside.
We're not oblivious to the broader economic environment. We feel comfortable with our guidance ranges, where they are, and there is no timing issues that we talked about.
The government deal was something very unique, something from last year really at the request of the government that we accommodated.
Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division
Okay. Great.
And as we're looking forward to the completion of the data supply chain in rolling out MaxCV in the U.S. and some of these other markets, help us get a sense just directionally of the impact that could have on margins next year.
Is this something that's kind of minor drag? Or is this a situation where we may be talking about flattish-type margins next year because of that with the catch-up in '14?
Sara Mathew
We are currently in the midst of our planning. We'll be able to give you much greater visibility 3 months from now, so I'm going to ask you to hold that question.
And personally, what we're going to do and what we're trying to do is really think about how can we maximize customer value to get the top line moving. That is the primary objective because we're not satisfied with how we performed in '12.
And how we leverage MaxCV is critical to that decision. And that's what we're going through right now.
So give us 3 months, and we'll have that answer for you.
Operator
Our next question is from Bill Warmington from Raymond James.
William A. Warmington - Raymond James & Associates, Inc., Research Division
And also congratulations to Byron and Manny on their new positions. So the -- a quick question for you on the deal that got pulled forward, I just wanted to understand what -- was that in RMS?
And a little color around that deal in terms of what it was and what would growth in RMS have been on a constant currency basis had that deal not been pulled forward?
Byron C. Vielehr
Sure, Bill. This is Byron.
Let me talk to that. Specifically, it was not a pull-forward.
We had a deal in the fourth quarter of last year with the government. They had funding for less than 12 months, so we did an odd month deal with them.
That deal renewed in the third quarter for a full year, and so we got the benefit of it in Q3 as opposed to Q4 of last year. It was split between RMS and S&MS, although it was primarily RMS.
Without that deal, RMS is around minus 4, and so it shows slight improvement.
William A. Warmington - Raymond James & Associates, Inc., Research Division
Okay. Now I also wanted to ask about whether you're finding the presence of some of the smaller competitors out there who have got some lower-priced models, whether that's affecting customers' willingness to accept price increases in some of your products?
Byron C. Vielehr
Sure. There's a couple of way to think about it.
First, relative to DNBi, as were mentioned in the prepared remarks, DNBi retention held up very well in the low 90s and lift was in the mid single digit, and so we continue to enjoy pricing power around DNBi. If I look across our entire business and I look at retention rates as well as lift rates, they're very consistent, so we're not seeing downward pricing pressure.
That said, we watch the competition very closely. We look at all deals that go to the competition, both renewals and new deals.
Competitive losses are down in Q3 relative to Q2 as well as relative to Q3 of 2011. Where we're really seeing the most pressure is on the project side of our business, and it's not a competitive pressure.
It's just customer spend. In this environment, we continue to see customers being cautious about spend, really being focused on value, and we're working with them.
We see deals that they don't have as much budget, and so we will right size those deals for them to make sure we're putting as much value on the table as we can given the budgets that they have. We're also working on putting new value props into the marketplace.
So Compliance Check is a great product, as people have compliance issues they're dealing with. We're trying to find new ways to get at customer budgets, either existing budgets or new budgets that they have in this marketplace.
William A. Warmington - Raymond James & Associates, Inc., Research Division
And then last question would be on the -- if you will comment a little bit about that environment and budgets because what the feedback we've been getting is that budgets are -- have been very tight. And I wanted to know if you'd comment about that kind of heading into the renewal season.
How much of DNBi is typically renewed in the fourth quarter, first quarter time frame? And if the budgets are really tight, are you able to put through additional modules like PRM?
Or does it result in cannibalization basically?
Sara Mathew
Sure. So I'll speak about budgets in general, and then I'll pass it on to Byron to answer your specific question on DNBi.
Our budgets are tight, but it's very clear to us that when we put new value propositions on the table, budgets open wide. So if there is a specific need, customers are willing to spend -- and we're not talking a few million dollars -- multiple million dollars in order to be able to address the specific issue.
Compliance Check is just a great example of one such situation. So on an overall level, customers are spending where they need to spend.
Now budget season as we go into 2013 is very important, and I'll ask Byron to talk about the 2013 budget cycle relative to DNBi.
Byron C. Vielehr
Sure. Bill, in the marketplace, we continue to see customers under a lot of pressure, and so they're very focused on getting value.
We deal both with direct business owners as well as procurement, and everyone's trying to make sure they're maximizing value. And I think as you know, we have a competitive advantage with our product sets, and so our product sets are holding up relatively well.
One trend that we have seen, if you look kind of down into DNBi, you'll see that DNBi core is actually growing, so the core platform. And we've seen pressure on the module side, which is more discretionary from a customer's perspective.
So they still need access to the data. They still need to make decisions.
But in Q3, we saw modules come down double digits. And so they're looking at the piece and saying, "How do I make sure I secure the core value prop?"
PRM was introduced to put more value on the module line, and we think that will bring the module line back to growth as we look at 2013. As we're looking at -- you had a question about how much of DNBi is in the fourth quarter.
The fourth quarter and the first quarter are very big DNBi renewal quarters. December and January are very large renewal quarter -- or months for us.
William A. Warmington - Raymond James & Associates, Inc., Research Division
Got it. One housekeeping question for Rich.
The deferred revenue growth, what was the -- if you will, the organic or adjusted...
Richard H. Veldran
Yes. Let me give you all the pieces because I think it's a lot more helpful if I give you those, especially for your modeling.
So overall, as we said in the release, the total company was minus 2, but that includes the divestiture of a couple of businesses last year when we partnered off Japan as you know. We also sold our market research business in China at the end of last year.
So if you exclude those and then you also adjust for a point of FX because there were some unfavorability from foreign exchange, the company would be 2.5, so plus 2.5. North America, of that is plus 1 and international is plus 9.
So hopefully that'll help.
Operator
Our next question or comment comes from Shlomo Rosenbaum from Stifel, Nicolaus.
Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division
Can you share some of the non-GAAP metrics, like pipeline and stuff like that, that you've talked about in the past in terms of the Salesforce.com, D&B360, just something where we can get an idea of what the trajectory looks like?
Sara Mathew
So North America base, Byron?
Byron C. Vielehr
Sure. Well, I'll give you 2 metrics.
I don't actually have the metrics for Salesforce.com. They're obviously selling directly, and they're ahead of our plans, so we're very pleased with the progress they've been making.
On 2 of the DaaS products, D&B Direct, we have about a $40 million pipeline. It's growing.
It's actually accelerating into the back half of this year, and we have about half of that on D&B360 as well. And so both those pipelines are growing and have been accelerating in growth.
Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division
Okay. And what was the deferred revenue?
The -- if you make all the adjustments in the North American -- in the RMS business versus the Sales and Marketing side, just trying to isolate, are you getting traction to be able to grow on the risk side of the business?
Richard H. Veldran
Yes. We don't actually break it out that way.
So we don't look at it that way even internally. Some of it's hard to do because we sell contracts that's sometimes uneventful [ph] ?
Sara Mathew
But just remember, North America deferred is predominantly influenced by Risk Management. So you -- that should give you enough to go on because S&MS is mostly [ph] up front.
Richard H. Veldran
Tends to be more upfront. Yes, not all of it, but it tends to be more upfront.
Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division
Okay. So what you're saying is that the sense of the 1% growth in North America is that predominantly it's advanced sales on the risk side where you're starting to get traction?
Sara Mathew
That's correct.
Richard H. Veldran
Yes. That's correct.
And Sara alluded to the Compliance Check product as an example. Those are the kinds of things that we're starting to see that'll make a difference in the long run.
Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division
Okay. And then the -- sequentially, the costs were decently lower.
Could you just elaborate on what's going on over there? Is this level sustainable?
And how should we think about the cost base of the company in general with the restructurings that have been going on?
Richard H. Veldran
Sure. Let me talk about a couple of things.
Let me talk about it 2 ways, right, sequentially but then also year-over-year. And to me, year-over-year is clearly the better indicator of where we are.
Sequentially, we tend to have some seasonality in the business. So just for example, the increase in revenue, I'll use that as a proxy for sale, between the second quarter and the third quarter is plus 10% on the company.
So commissions, those kind of things go with that on a sequential basis. If you go year-over-year, which is again a little more relevant, our costs are down quite a bit.
There is a few things that -- I'll choose one example from the press release. You'll see that our OpEx is down about $16 million or so year-over-year.
As -- if you go and disaggregate that, about 2/3 of that piece is from the businesses that we either divested or restructured, so Japan, the China market research and Roadway. So that's about 2/3.
But the rest is really primarily from reengineering that we continue to do throughout the business, and I think that it's -- if you look at where we are today short of investments, which we clearly want to make and short of the final MaxCV, once we figure that out into the core, we're at a pretty reasonably sustainable level.
Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division
Okay. And if you could bear with me for one last one, the government contract that was kind of pulled forward did that have to do with the government budget year end and potentially the fiscal cliff?
I mean what was just going on over there?
Byron C. Vielehr
Yes, so Shlomo, let me go reiterate that. It was not a pull-forward.
So Q4 of last year, so we are into the government year, but Q4 of last year, they wanted to do less than a full year contract because of the way they were funded. So we did an odd month contract with them.
They did a full year contract with us in Q3 of this year. That will show up in Q3 of next year.
But it's going to get pulled from the fourth quarter of this year into Q3.
Sara Mathew
The cash, Shlomo, it's a year ago, a 9-month deal.
Operator
Our next question comes from Peter Appert from Piper Jaffray.
Peter P. Appert - Piper Jaffray Companies, Research Division
So, Sara, how big do you think the market is for the Compliance Check offering?
Sara Mathew
I could throw a number out. What I'd like to do is instead put some revenue on the books and then share it with you as over the course of 2013.
This was with a single company, and this is a very large deal, and the value we brought to the table came primarily from data and advanced analytics investments we're making. I just touched on it.
I believe this is just one example. You're going to see a lot more of this from us.
And beyond that, I don't want to size the market other than I could tell you interest is really high. But just give us the next 9 to 12 months, and let's put the numbers up on the board.
And then we'll -- you can, yes, see. Then, I can give you a size of the market that would be I believe.
Peter P. Appert - Piper Jaffray Companies, Research Division
No, I guess part of the reason for the questions, I'm trying to understand better growth dynamics over the next couple of years for Dun & Bradstreet because it feels like the growth potential in the core old line D&B risk business is relatively modest. So you're going to be very dependent on these new product offerings over the next couple of years for revenue growth.
So the question is number one, do you agree with that as a correct observation? And number two, how do we scale just the opportunity for revenue growth, realistic expectations of what revenue growth could be over the next couple of years given fairly modest growth over the last couple of years?
Sara Mathew
Sure. I think that's a very fair question.
In a minute, I'm going to ask Byron to talk about risk in North America, how are we going to get the risk business to grow because I think that's at the heart of the question. I continue to believe the growth opportunities for us are significant, but you should remember a significant amount of my resource.
My team is focused on getting the infrastructure completed. That has consumed us pretty much for the last couple of years, and we're now getting to the tail end of finishing up the build of the global data supply chain, so we can refocus on driving innovation and which I believe is at the heart of delivering growth.
I'm going to ask Byron now to talk about how do we think about North America, specifically North America RMS because we know that once we get back to growth, then the numbers we put up will become clearer and more easily explainable to all of you. Byron?
Byron C. Vielehr
Sure. Thanks, Sara.
Peter, the way I think about the risk business is there's 2 pieces to it. There's DNBi and there's projects, all the non-DNBi stuff.
DNBi is about 60%, and we've not been satisfied with the growth rates there. We had a weak start to the year, and we introduced the Portfolio Risk Manager too late for the renewal cycle last year.
And so as we think about that core piece, we need to grow DNBi. We think that PRM is a new module, it will help drive growth there.
We also think some of the innovations around data and analytics, which we can talk about in the next call, will start to drive growth in DNBi. On the project side of the business, as I've said, we've seen some cautious customer spend, and there's been some rightsizing of deals there.
Things like Compliance Check can drive that, so bringing new value props into the marketplace. And improved data can also drive the core projects that we enjoy today.
And just relative to Compliance Check, as Sara said, it's a new product. We're still trying to figure out how big that can be.
But it's some very difficult problems that without some of the MaxCV capabilities, we would not have been able to introduce into the marketplace. We're taking our data.
We're taking bad guide data, lots of data sets from around the world, combining them together and giving people insight into what their supply chains look like and distribution networks look like. We think that's a great new use case for us that we think we can scale, and we're seeing a lot of near-term interest in the product, as people are trying to deal with various compliance issues that they're seeing around the world.
But that's how I think about RMS growth. It's really DNBi and non-DNBi.
Operator
Next question or comment comes from Manav Patnaik from Barclays.
Manav Patnaik - Barclays Capital, Research Division
I just wanted to congratulate Manny and Byron as well for their role switches. So one question I guess just on the cost savings, you mentioned so far, I guess, 2/3 are coming from the divestitures, 1/3 from the reengineering.
Can you just remind us when we should expect the divestiture, I guess, impact to anniversary? And then going forward, I guess just trying to get a better sense of what these reengineering initiatives are and how come there are so many, I guess, opportunities to lower cost and what the outlook for future years looks like.
Richard H. Veldran
Sure. Let me take both of those.
So first, the market research business in China, that will anniversary at the end of this year. So we did that in the fourth quarter of last year.
The Japan restructure we actually completed during the first quarter, early in the first quarter of this year. So that'll anniversary as we get into the first quarter of next year.
And Roadway, as you know, we closed down really into the second quarter of this year, so you'll see some anniversary there as well. Okay?
As we go forward, part of our business philosophy and the way we run the company is we relook the cost base every year. We have $1 billion risk cost base, and they have continued to be opportunities.
They tend to be -- they tend to differ year-to-year, but we will tend to focus on certain areas. So if I look at, say, the technology front, there is opportunity to look at a number of things, some vendor consolidation; virtualization of the servers, which is really moving some of our infrastructure to a newer, better and cheaper way of doing things, so those kinds of things are on the plate.
And we're looking at creating some more centers of excellence, I think we've talked about some of that in the past. The global operations that Byron now runs, that's -- if you look at the old days, we had disparate units of work around data collection, around data distribution, spread throughout the world.
We've consolidated pieces of that, and we're managing that globally. So there's always opportunities to do things better.
You just can't do them all at once because it takes a while, and you want to do them well. So because of that, it gives us a pipeline that we can always refresh.
Manav Patnaik - Barclays Capital, Research Division
Got it. And then just on the sort of innovation, the new product pipeline, I guess you've put out the Compliance Check, and it feels like -- I mean, those sound like good products, but they still aren't, I guess, the big innovation or stream big innovations coming.
So I just wanted to get a sense of timeline and obviously without actually giving away the product or the solution, like what the, I guess, pipeline and excitement is internally.
Sara Mathew
Sure. I'm going to ask Josh to talk about innovation and our pipeline ahead.
Josh?
Joshua L. Peirez
Manav, thanks for the question. Yes.
Let me remind you that we're still in the midst of a significant technology infrastructure project that's nearing completion, and as such, our innovation has been hampered due to the resources that have been focused on completing MaxCV. But that said, we do have a strong pipeline of new products that we introduced during 2011 and 2012 as you referenced, our Data-as-a-Service solution set, the Portfolio Risk Manager module and then recently, the Compliance Check and the B2B supplier portal.
And we see a number of those as actually having very exciting prospects and big market opportunities. That said, we've yet to see the full benefit of the new products.
We are disappointed in the fact that they've ramped slower than we would like, but we are looking to scale them significantly through go-to market efforts through the course of '13 and beyond. So as a reminder, the products are all ratable, and therefore, the ramp to the top line will take some time to build.
Manav Patnaik - Barclays Capital, Research Division
Got it. And one last one, just on capital allocation again.
I just wanted to, I guess, hear thoughts in terms of the entire -- some leverage share buybacks and dividends. It feels like you could easily be a lot more levered.
You could easily do a lot more buybacks, and the dividend could be higher as well. So I just wanted to get what the current thoughts there were.
There's obviously discussions around that, just thoughts around there.
Richard H. Veldran
Yes, I'll -- let me talk a little bit about that. So I mean a couple of things.
We tend to be relatively conservative, and in this fiscal environment, it is prudent to have some ability to access the capital markets. So we're not going to go crazy out on a limb.
That said, this year, we did make the overall decision to increase our level of repurchase as you all know and increase to a degree our leverage. We think it's a unique opportunity in terms of interest rates that are out there to go ahead and do that, but we're not going to push the envelope in this world.
Was that helpful?
Sara Mathew
If we think about buying back 25% of the company, I think is a fairly significant shift relative to what we've ever announced in the past. At least, I think so.
And we're going to do that. So you could take that to the bank.
Operator
Our next question comes from Carter Malloy from Stephens Inc.
Carter Malloy - Stephens Inc., Research Division
My follow-ups were answered for the most part, but just to go back on the OpEx or the corporate expense savings again, most of that is structural and therefore, sustainable. Is that correct?
Richard H. Veldran
Most of the things that we are doing, I would say, are structural. This year costs were a little lower just because commissions are a little lower, for example, right?
That isn't necessarily sustainable. We had a lousy year versus our initial expectation.
So some of the compensation's a little bit lower. That will pop back up.
But other than that, everything we do is with an eye towards it being structural. You make change -- and that's the concept of reengineering.
You make changes that are sustainable.
Operator
Our next question comes from Shlomo Rosenbaum from Stifel, Nicolaus.
Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division
Can you talk a little bit more about your product innovation team? What are you doing there, like people wise, your targets, how are you thinking of growing that?
And has there been like a hampering to growing that team because you need to finish that MaxCV, you can't get the cart in front of the horse? Can you just talk about that a little?
Sara Mathew
Byron?
Byron C. Vielehr
Sure. Thanks, Shlomo.
We have ramped up our resources on innovation, and we do have an innovation lab that's made up of very creative product developers as well as designers, tech resources, created in a pod-type innovation, start-up environment here in our Short Hills facility, as well as a similar construct in Austin. We have ramped that up significantly over the last 2 years, but we have also chosen to keep it at a level that's sustainable right now while we complete the MaxCV work.
But all the work those teams have done are focused on our services layer in using the new capabilities we've built for MaxCV and the B2B portal. As well as our D&B Direct products were initiated in those facilities.
Sara Mathew
But at a high level, it is fair to say that we've had our resources stretched pretty thin because the infrastructure or project has taken a lot of their mind share, and there's only so much you can actually do effectively. So we're really looking forward to coming out of MaxCV so we can get focused back on hardcore innovation.
Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division
And is there some kind of targets that you have in there? I mean seeing like there are other companies that have a target of having 10% of their growth coming out of something they developed the last 3 or 5 years.
What -- how do you think of that?
Joshua L. Peirez
Yes. Shlomo, it's Josh.
We have a goal of having 25% of our revenue from products that were introduced within the previous 3 years. As I said, we're a little bit behind on what we would have liked from some of our new products, so we do think that will take a few years from now.
But that is our goal, 25%.
Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division
And do you think that it's really the innovation side of things that needs to be focused on? Or is there any changes that need to happen within the sales force?
Or is it kind of the combination of the 2?
Joshua L. Peirez
Shlomo, I think the first thing that we are doing and Sara referenced it in her opening remarks is really having a core focus on our foundational data and our significant analytics investment as well. We've really been ramping up those teams, as well as bringing in the new data sources and using our new systems that we've been building to deliver a higher-value analytics to our customers that are more predictive and that are predictive in ways that are open spaces in the market today.
And so that's an investment Sara referenced we're ramping up now into Q4 and into next year. That is a key investment.
That is also innovation. It's data and analytical and innovation that we can then deliver through the products.
Sara Mathew
And we'll talk a lot more about that in our next call. Again, we don't want to just get ahead of our keys in terms of what we're planning to do there.
But the -- what we believe we can do, what I referenced in my comments as big insight is real because we are in -- within D&B able, able to show lift and predictiveness at levels that we have never been able to show before. So those are exciting new prospects that have to be productized, so customers can receive benefits.
And that's really what we're going to focus on in '13 and beyond.
Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division
So my understanding, you're right that you're saying it's not a sales force issue. It's a -- what you call it?
It's a focus on innovation in getting the products out there?
Sara Mathew
It is always both, right, because once you get the innovation into market, you need to ensure you go to market in a way that actually puts revenue on the books. So I don't want to say it is not a sales force issue at all, but we clearly believe that the first step is to get great products and then get it to markets.
So, Byron, what would you like to comment on sales?
Byron C. Vielehr
We are -- look, we're in a new normal. We believe it's a new normal, and so we are doubling down on training our sales teams as well, really training them on core value selling.
We want to make sure that they have the skills and capabilities to be successful in this marketplace. We're also -- as Josh had mentioned, we're making sure they understand some of the new value props and some of the new products, so we're training on -- them on that as well.
Just doing innovation without making sure that we have a distribution system that can ramp isn't helpful. And then my last comment would be we're also going beyond our direct distribution, so our Salesforce deal, the thinking with Microsoft, this is all about making sure that from a marketplace and distribution perspective, we can maximize the value of the products and innovation that we have.
And we're trying to do that in a very coordinated fashion.
Sara Mathew
Integrating all this end-to-end is really the key to success. I do believe one of our advantages as a company is our very large talented sales team that we have in place, as I do believe in the case of my products and data analytics team.
Operator
I'd like to turn it back over to the speakers for closing comments.
Sara Mathew
Okay. I'd like to just close with a brief message to my D&B team.
Many of them are on the call with us today. Thank you for delivering a solid Q3.
Your dedication and commitment is greatly appreciated. And to all our investors on the call, thank you for your time.
If there are any additional questions, please feel free to call us once we sign off. And with that, operator, thank you, and we will talk to you in 90 days.
Operator
That concludes today's conference call. Thank you for your participation.
You may disconnect at this time.