Feb 10, 2015
Executives
Kathy Guinnessey – Treasurer and Investor Relations Officer Bob Carrigan – President, Chief Executive Officer, Director Rich Veldran – Chief Financial Officer, Senior Vice President Josh Peirez – Chief Operating Officer.
Analysts
Shlomo Rosenbaum – Stifel Nicolaus Jeff Meuler – RW Baird Andrew Steinerman – JPMorgan Bill Warmington – Wells Fargo Manav Patnaik – Barclays Capital Peter Appert – Piper Jaffray Andre Benjamin – Goldman Sachs Brett Huff – Stephens
Operator
Good morning, and welcome to the Dun & Bradstreet’s 2014 Fourth Quarter Teleconference. [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.
Kathy Guinnessey
Thank you. Good morning, everyone, and thank you for joining us today.
With me on the call this morning are Bob Carrigan, our President and Chief Executive Officer; Rich Veldran, our Chief Financial Officer; and Josh Peirez, our Chief Operating Officer. Here’s what you can expect on our call.
Following my brief remarks, Bob will talk about our 2014 results including our progress on our strategy and the outlook for 2015. Rich will take you through the financial performance in the quarter, and after that we’ll open the call for 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 encourage you to review the 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 will 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. When we discuss free cash flow, this will be on a non-GAAP basis excluding the impact of any legacy tax matters, potential regulatory fines associated with the ongoing China investigation and potential payments for legal and other matters.
As noted in our most recent earnings release, effective January 2015, we refer to our non-GAAP results as “As Adjusted.” On today’s call, our 2015 guidance therefore will be presented on an “As Adjusted” basis.
You can find reconciliation between these and other non-GAAP financial measures and the most directly comparable GAAP measures in the schedules to our earnings release. They can also be found in the supplemental reconciliation schedule that we post on the Investor Relations section of our website.
You can now however provide guidance on a GAAP basis because we are unable to predict, with reasonable certainty, the future movement of foreign exchange rates or the future impact of gains and charges that do not reflect the company’s underlying business performance. Later today, you will also find a transcript of this call on our Investor Relations website.
With that, I’ll now turn the call over to Bob Carrigan. Bob?
Bob Carrigan
Thank you, Kathy. Good morning, and thanks to all of you for joining us today.
Just about a year ago, we launched a strategy to set us on a path to long term sustainable revenue growth. We said that we were transforming Dun & Bradstreet and becoming one global company delivering indispensable content through modern channels to serve new customer needs.
We’ve made quite a bit of progress on this goal. In 2014, we upped our focus and execution, delivering revenue growth in every quarter for the first time in the last several years.
As expected, we finished the year with our strongest quarter in the fourth quarter. As I said in the past, there is a palpable new energy in the company, and that is evidenced in all that we have accomplished in the last year.
After our first full year since launching our strategy, I’m really happy to be able to report that our 2014 financial results hit all of our guidance metrics for the year. Total revenue was up 2%, with growth coming from both North America and International.
While we grew revenue for the year, 100% of our operating income decline can be attributed to the choice that we made to invest in the business. We invested about $80 million last year, which was the result of a thoughtful strategy to jump start revenue and get us on a path to long term sustainable growth.
As a result of those investments, operating income declined 9% and EPS declined 2%. Despite the lower income, we still generated a healthy $262 million of free cash flow.
When we launched the strategy, we said we expected to drive growth through two primary channels; first, further penetrating our large strategic customers, and second, growing third party alliances. Growing alliances means faster growth in our existing third-party relationships and signing new ones.
These two channels are growing much faster than the rest of the business, and were the primary drivers of overall growth for the company in 2014. We also said that we would stabilize the rest of the business.
North America, our largest segment, grew 1% in 2014, with all of our sales channels showing growth except for our small business channel, where we still have some challenges. In our International business, Asia-Pacific grew nicely, but after a strong start in the first quarter, Europe weakened as the year progressed and the economic environment became more uncertain.
Overall, International revenue grew 3% in 2014, which was consistent with recent years. Now, I’ve spent a lot of time over the past year talking to investors.
I’ve talked about how we are focusing on getting the top-line moving and said that in 2015 we expected to be on the path to sustainable mid-single digit revenue growth. As we move into 2015, we expect our revenue to grow faster than in 2014.
We expect growth to accelerate to 2% to 5%, with one point of inorganic revenue from our recent NetProspex acquisition. As in 2014, we expect alliances and large strategic customers to grow the fastest.
I’ll summarize our full guidance at the end of my remarks. First, I want to talk about the progress we’ve made on our strategy over the past year, not so much as a victory lap – the work is far from over, but so that you can understand what is driving our progress, and why we expect to get the faster growth in 2015.
Let me start by talking about Alliances. During 2014, our goal was to sign more alliance partners, as they allow us to get to more small and mid-sized customers faster and more efficiently, enabling those customers to access our data where and when they need it.
Last year, we invested in data-as-a-service, or “DaaS” to widen the pipes so that we can deliver the volume of data needed for large alliance partners. In 2014, we entered into new partnerships with Sugar CRM, Oracle Cloud for Business, the Salesforce Wave analytics platform and, for higher end analytics, Lattice Engines.
These are just starting to ramp up, and we expect to start gaining traction in 2015. Today, I’m pleased to announce that we have signed a brand new alliance with KPMG, to help financial institutions comply with the Foreign Account Tax Compliance Act, or FATCA.
This is the first strategic alliance we have signed in the Risk Management space since launching our strategy. The FATCA regulation was put in place a few years ago to help the IRS uncover taxable assets held outside the United States.
The regulation requires financial institutions to identify all accounts outside the U.S. that are held by U.S.
entities. There are a few ways financial institutions can comply with this regulation.
One is to require all U.S. corporations to document ownership of the corporate accounts they hold offshore, every year.
Literally, we’re talking about millions of corporate account which is a massive undertaking and has cost some banks tens of millions of dollars already. However, the regulation also allows for a second way to comply, which plays to our strengths.
Financial institutions can use a third-party credit provider, like Dun & Bradstreet, to classify their accounts, which is a much more efficient method of complying with the regulations. To deliver a solution at scale, we formed an alliance with KPMG, who has extensive contacts on the tax and regulatory side of financial institutions, to provide a solution that will allow these customers to stay current with their FATCA requirements.
Our competitive advantage in the compliance space is that we have the world’s largest commercial database, and have essentially mapped the global business landscape. We can identify companies at the legal entity level, and link them across their ownership structures around the world.
This allows us to reliably classify the status of a financial institution’s corporate accountholders. With the largest commercial database and our corporate linkage capabilities, we are in the best position to help financial companies comply with this massive undertaking.
Another big area of focus in our strategy has been investing in our data, which goes to the very heart of what we offer to our customers, and represented about third of our 2014 investment program. I’m happy to say we hit all of our major milestones with respect to those investments last year.
We already have the broadest coverage of businesses around the world, which is a big competitive advantage for us. In 2014, we invested to further the distance between D&B and our nearest competitors by improving the quality and consistency of our data and adding new proprietary data sources.
Our data strategy is not just about having the best foundational data, but also providing insights to help our customers make critical business decisions. For example, our customers are looking for a consistent way of assessing market risk worldwide.
To help them do this, in 2014 we launched 19 new scores, most of them outside the U.S., consistent with our global strategy. And we have increased the predictive capability of our scores with new data sources and analytic models.
In the last month, we’ve announced two new initiatives that will do even more to improve our data offerings and support new use cases. First, on January 5th, we acquired the Massachusetts based company, NetProspex.
This is a key strategic move for us. NetProspex is a company that collects and cleanses individual contact data in the context of a person’s professional life.
In other words, their database has contact data that includes business e-mail addresses, phone numbers and titles. This information is critically important to marketers who are more and more, leveraging marketing technology and digital capabilities to efficiently engage with customers.
You know that D&B is already the world heavyweight champ in terms of delivering key information on business entities. Now we have the 1-2 punch of delivering not just the largest global database with the most important businesses, but also the people within those businesses that are the key influencers and decision makers, the folks that are actually running those businesses.
We constantly hear from our customers that they want contact data, and they want the degree of data quality that they get in D&B’s company data. Other companies with contact data mainly rely on unvalidated user generated or web scraping models that frankly, can’t provide the level of accuracy required by today’s sophisticated marketers.
NetProspex’s business model is unique in that they do not rely on web scraping, or users updating their own profiles. Just as D&B does with company data, they gather contact data from multiple sources, then curate and validate it to make it as accurate as possible.
By not relying on any single source of data, and having built a robust validation engine, NetProspex has the best contact data quality in the market. They are the equivalent of D&B for contacts, which is why we wanted them.
So, with the acquisition of NetProspex, we are now in a unique position to do what no other company can, provide marketers with the access to the largest, most accurate and actionable database of business contacts, in a way that allows them to directly reach key decision makers. And we can do it at scale.
Put simply, by combining NetProspex contact data with D&B’s global business database, this acquisition allows us to answer what marketers really want to know: What company is most likely to buy my product and who is the right person at the company for me to target? But this acquisition is not just about improving our data and the competitive advantage it brings.
NetProspex has developed a great product to help their customers manage their contact data, called Workbench. You can think of Workbench as “Optimizer for Contacts”.
If you recall, we have an Optimizer product with over $200 million of revenue and very high retention that companies rely on to cleanse their customer data and ensure it is up-to-date and reliable. NetProspex’s Workbench platform does for contact data what our Optimizer product does for company data and more.
It helps customers keep their company contact information updated on an ongoing basis and it seamlessly integrates with customers’ CRM and marketing automation systems. The Workbench platform was just introduced in 2014 and the growth built dramatically over the year.
This new capability is a great complement to Optimizer. And it’s something our customers have been asking us for, as they are focused on building relationships and driving more digital engagement with the people who actually make the buying decisions at their customers and prospects.
Our Salesforce is excited to bring “Optimizer for Contacts” to their customers and we are moving quickly to get the new platform to market in the first quarter. When we announced NetProspex, we said that it would dilute EPS by two points in 2015 before amortization and deal costs, as the company was not yet profitable on a standalone basis.
That’s because they just launched the Workbench platform in the first half of 2014, and invested to increase the size of their Salesforce to grow that business. Given the rate of growth we are seeing in this business, we expect NetProspex, or should I say “Dun & Bradstreet NetProspex” to become profitable in 2016.
Last month, we also announced that Dun & Bradstreet was named the first certified vendor of the Small Business Financial Exchange, or SBFE. This certification gives D&B access to financial information on 24 million small businesses.
With our big footprint in the financial services industry, access to this data allows us to deliver even more predictive analytics on small businesses for our customers. SBFE is a data repository of information on small businesses contributed by major banks who are the biggest lenders to small business community.
With our strength in predictive risk analytics, we expect to bring new value to these important customers. Finally, as we move forward into 2015, we are putting the final pieces together on our brand work.
Over the next 1-2 months, we are going to reveal our newly modernized creative expression – including our new logo and brand purpose. Our brand work will help us expand our value proposition into adjacent risk areas such as Compliance and Supplier Risk Management.
We’ve also talked a lot about the big opportunity we see in Sales & Marketing as corporate budgets are flowing to CMO’s as they build more sophisticated digital marketing programs where the right data is vital to their success. The newly modernized brand will better position us in these higher growth markets.
You can see the momentum we are starting to build on our strategy. These new initiatives will help fuel our growth in our larger customers and alliances.
On the small business side, we still have work to do. The vast majority of the revenue in our small business channel comes from DNBi and Hoovers.
We expect our small business channel to improve over time, as we put DNBi in the cloud, and add value to Hoovers including mobile solutions and better contact information from NetProspex. We do not expect this to happen overnight, and our outlook for 2015 assumes both Hoovers and DNBi continue to decline.
Let me give you a quick update on where we are regarding the DNBi re-build. Per the plan we laid out, we built a prototype by the end of last year, and we are currently testing it with a representative customer set.
We expect to have a staged roll-out outside the U.S. later in 2015.
The growth we expect in our business this year comes from the investments we made, largely in the second half of 2014. And investment will be an ongoing part of our strategy to grow Dun & Bradstreet.
In 2014, we felt we needed to jump start the revenue engine with a thoughtful investment plan geared toward driving sustainable, and profitable long-term growth. The beauty of our business model is that we generate very high incremental margins, so over time, as we get to higher revenue growth we will be able to both support ongoing investment and grow operating income and margins.
But the key is getting that revenue growing, which is the focus of our strategy. So, in 2015 we continue to make investments on top of those in 2014 that are focused on furthering the strategy, including global data, and alliances, both in capabilities needed to ramp-up the recently announced alliances, and in broadening the reach of our team to sign more new alliances.
And, we are investing in DNBi to continue our strategy of re-platforming it in the cloud. So in summary, our guidance for 2015 is as follows.
We expect revenue growth of 2% to 5% before the effect of foreign exchange, and including one point of inorganic contribution from NetProspex. Operating income of minus 2% to plus 2%.
Within this range, we’ve absorbed two points of dilution from NetProspex, as well as two points of foreign exchange headwinds. EPS down 3% to up 1%, again, including the impact of NetProspex dilution and FX headwinds, and free cash flow of $255 to $285 million.
As I reflect on the past year I’m happy with what I see. In 2014, we improved execution and invested to advance our strategy.
With the results we saw in 2014, I enter 2015 with a high degree of confidence that we are on the path to sustainable and profitable revenue growth. Revenue growth is expected to accelerate this year and we are continuing to invest in the strategy.
With everything I see today, I believe we can get mid single-digit organic revenue growth in 2016. I’d now like to turn the call over to Rich who will discuss our fourth quarter 2014 results and provide more detail on our expectations for 2015.
Rich?
Rich Veldran
Thank you, Bob and good morning everyone. As Bob mentioned, we finished 2014 hitting all of our full year guidance metrics capped off with a strong fourth quarter.
For the quarter, core revenue was up 4%, operating income and EPS were down 7% and 5% respectively, both fully due to our planned strategic investment. As expected and consistent with prior years, the fourth quarter was our fastest growing quarter.
Now before I get into the details of the quarter, I want to talk a little bit about how we expect our 2015 guidance that Bob just covered to play out over the course of the year. There were a few factors that will cause our revenue and operating income growth to skew to the back half of the year.
First, our 2015 revenue growth will be consistent with a pattern that we’ve seen over the past few years, with a slow start to the year, followed by a stronger second half, especially the fourth quarter. This is primarily due to the fact that our project and usage-based revenue is growing faster than our subscription-based business, which has been declining.
Project and usage based products include our fastest growing solutions like D&B Direct in RMS and Optimizer in S&MS, that customers use as they prepare for the year ahead, thus fuelling our strong fourth quarter results. We expect to see this pattern play out again in 2015, with revenue growth at the end of the year much stronger than at the beginning.
In addition, we expect the revenue growth from the many initiatives as Bob just talked about to ramp as the year progresses. The second factor skewing our results is the impact of the timing of our investment spending on operating income.
If you remember, our investment spending was light in the beginning of 2014, with the majority of the spend occurring in the second half of the year. Since much of our 2014 investment remains in our cost base that second half spend carries over into 2015 as it is annualized, disproportionately impacting the first half of 2015.
And finally, the dilutive impact of NetProspex is more heavily weighted to the first half of the year. So the combination of the revenue timing, carryover of last year’s investments, and the timing of NetProspex dilution will cause operating income to be down in the 10% range in the first half of the year, before recovering in the second half, particularly in the fourth quarter.
Now, let me give you some insight into the fourth quarter results. North America, which represented 78% of our revenue, was up 4%, and that was on top of 4% growth in the fourth quarter of 2013.
RMS was up 3%, driven by strong growth in our Projects and other risk management solutions. This category was up 13% year-over-year as we continued to see strong performance from newer use cases, like compliance, and newer delivery channels, like D&B Direct.
We have mentioned all year that the timing of these revenues can be lumpy, and that our full year growth is more indicative of the category’s performance. For the year, projects were up a robust 9%.
The strength of projects and other risk management solutions more than offset the 4% decline in DNBi, which was consistent with recent performance. We are in the process of upgrading DNBi to the cloud, but as I’ve said on recent calls, this will take time and we do not expect it to have an impact on North America revenue in 2015.
In Sales and Marketing, revenue was up 5% in the quarter. Value added solutions, which represent about two-thirds of S&MS, were up 10% as we continued to see good performance in our DaaS alliance business, primarily Data.com, and strength in our Optimizer product line.
As with RMS projects, growth in S&MS VAPS is lumpy from quarter-to-quarter, primarily due to the timing and size of Optimizer engagements. For the full year, VAPS growth was up a healthy 8% and we expect continued strong growth going forward.
Traditional products, which represent about a third of S&MS, were down 4% in the quarter. We believe the recent NetProspex acquisition and the infusion of NetProspex’s full professional contact database will help Hoovers’ growth rate over time, but this will continue to be a work in progress in 2015.
More broadly for 2015, we expect the projects, both in RMS and S&MS, will drive growth due to continued strong performance from a large strategic accounts, as these customers are big users of our more sophisticated data and analytics, including D&B Direct, Optimizer and Compliance. North America deferred revenue was down about 1% in the quarter.
This does not reflect committed sales through alliances that would have added over a point to balance. International, which represented 22% of revenue, grew 2% in the quarter, driven by a strong increase in Asia-Pacific, where we continued to see good growth from all 3 major markets.
Turning to profitability, operating income in the quarter was down 7% entirely due to our planned strategic investments. As expected, we increased our investment spend in the fourth quarter and finished the year having invested around $80 million in our strategy.
I’m going to stop here a moment and address foreign exchange expectations for 2015, as it’s a pretty hot topic right now and you may need help with your models. As you know, the dollar has strengthened against most major currencies compared with 2014.
About 28% of our revenue was from outside the U.S. last year and that includes Canada, which is in our North America segment.
While our revenue growth guidance is before the impact of foreign exchange, based on current rates, we expect about a 2 to 3 point hit to our reported revenue dollars from currency in 2015. Our operating income guidance includes FX, so the minus 2% to plus 2% guidance, Bob gave you includes an estimated 2 points of hit from currency, again, based on current rates.
Now moving on, EPS declined 5% in the fourth quarter, to $2.61 per share. The decline was due to the lower operating income and a higher tax rate in the quarter, partially offset by the impact of share repurchases in the first half of 2014.
For the full year our tax rate was 31.4%, compared with 32.8% in the prior year. Turning to the balance sheet, we ended the year with $1.7 billion of debt.
You will see that we moved $300 million of notes to short-term debt as they will be maturing in November. We expect to refinance these notes prior to their maturity.
The coupon on the maturing notes is very low, at 2 to 7%, 8%. Interest rates have increased over the 5 years since these notes were issued, and we expect the new notes to have a higher coupon, which is factored into our EPS guidance.
As we think about capital allocation in 2015, our priorities remain consistent. First, continue to invest in our business to drive organic growth, second, M&A where it can advance our strategy and third, return excess cash to shareholders.
We have said that we are committed to maintaining our investment grade credit rating, while having flexibility for M&A. As such, we are not currently planning any discretionary share repurchases in 2015.
Just one housekeeping note before we open the call for your questions. We expect to hold an Investor Day in the second quarter when we look forward to sharing more details on our plans to get to sustainable long-term growth.
So with that, on to Q&A. Operator?
Operator
[Operator Instructions] Our first question comes from Shlomo Rosenbaum with Stifel Nicolaus. You may ask for questions.
Shlomo Rosenbaum
Thank you very much for taking my questions. Bob, I want to ask a little bit more of a longer term questions terms of the DNBi cloud based offerings.
Understand it’s kind of being data tested and it’s not expected to impacts of U.S. in 2015.
From anything – is there any indications or early indications that this is kind of hitting your internal metrics and should we think of – if that continues that should be able to stabilize DNBi in the U.S. in 2016, just what’s your longer term plan for this.
Bob Carrigan
Right, so we’ve been pretty clear that this is a top priority for us and per the plan that we laid out, we obviously acquired Indicee and we’ve been working hard to – on this prototype that we finished by the end of last year and we’re working with a representative subset of customers because we want to make sure – this is an important product to so many of our customers. We want to make sure about it has the futures in functionality that meets their needs.
We said we do intend to start to roll it out as we approach the end of 2015 outside of the U.S. And, look, our goal is to certainly get back to stability with this.
We see tremendous growth potential outside of the U.S. in particular.
DNBi is not available in most of the markets in which we operate in outside of the U.S., and so by making a globally available cloud based solution. We are excited about the potential to grow outside of the U.S.
and obviously it’s our ambition to upgrade the existing customers in the U.S. and certainly we want to make sure that we get back to at least – at least flat.
That is our ambition. But we’re right on schedule, and the one thing to keep in mind, our plans contemplate the decline in DNBi and we grew revenue in 2014 despite the drag from that particular product.
So our overall goal and our strategy is to grow revenue and we have lots of new use cases, lots of products, lots of alliances. You’ve got to keep it in balance.
I know it’s an important product and it’s certainly important to us. But in the aggregate we’re growing revenue and we’re pretty excited about that.
Shlomo Rosenbaum
Okay. I understand and just once you’re talking about the RMS and the DNBi, the non-DNBi subscription revenue was flat year-over-year, and this is the first time it’s been not negative for about four years.
Excuse me, is this a change in trend or is this kind of an anomaly, how should we think of that will be non-DNBi revenue stream [indiscernible] kind of the goal at least the near-term goal of it being not a drag anymore on a regular basis.
Rich Veldran
Yeah. This is Rich, first of all, it’s a pretty small line item at this point about $13 million in the quarter.
I would look at it as more of anomaly, less of a trend, it’s not our strategy certainly to new more people to that, but we did have a couple of big customer shift and that caused the change. But, again pretty small line item, really not a strategic focus for us.
Shlomo Rosenbaum
Hey, Rich, What tax breaks should we use for 2015?
Rich Veldran
I’m expecting my tax rate to be either the same or slightly below this year’s because we’re continuing to work through the benefits of (indiscernible) which has been helping us over time. So I think that will be fair thing for you guys to use.
About the same or slightly less…
Shlomo Rosenbaum
So just in terms of number is that a low 30s number?
RichVeldran
Yeah, we’ve been into 30, 14 I would say somewhere between that and 50 basis points below.
Shlomo Rosenbaum
All right, very good. I’ll get back in line.
Thank you.
BobCarrigan
Thank you.
Operator
Our next question comes from Jeff Meuler with RW Baird. You may ask your question.
Jeff Meuler
Thank you. Just on the guidance on the revenue guidance in particular, just thinking through the one point of inorganic growth, so on an organic basis I guess we’re one to four, which kind of at the midpoint and the upper end implies acceleration, but at the low end would actually imply a look that a deceleration I guess.
What would have to happen for that to occur? And I understand we don’t get the significant DNBi lift until the cloud product is rolled out.
But there are any incremental headwind that you guys are seeing is it Europe or anything that we should be thinking of?
RichVeldran
Look, this is Rich. This is certainly not our intention to go backwards and nothing that we’re doing is geared towards that, but it’s an imperfect world, so, we live in the world of ranges and quite frankly it’s just for that.
But our tension certainly is in no way to go backwards and nothing that we see would send us there.
Bob Carrigan
Okay, but in an imperfect world.
Jeff Meuler
Understood. And I understand the financial model for alliance partners means it takes some time to ramp and see it come through the P&L.
But fully recognizing it’s early but wondering if you could comment on some of the more recently signed alliance partners and you don’t have to comment on them specifically if you don’t want to, but just as a class, where are we at as a pipeline right now, or are you starting to see sales come through and we’re just not seeing the meaningful revenue contribution yet. Any update there?
Bob Carrigan
Yes, so it does take a little time for these alliances to build, and I hope you can see that we’ve been stepping up our alliance activity in the last year we’ve announced several new alliances, and we’re pretty excited about the alliance with KPMG as it’s our first big risk alliance. We’re excited about that one.
We’re striving for a portfolio of alliances with, best in class blue chip companies and we’re – we continue to invest to put resources against these alliances because it’s important that we – you know, that we dedicate resources to it and we help to build these things. So, we’re again very excited about all the alliances that we’ve struck.
We do have a healthy pipeline of alliances. The trends are in our direction.
There is lots of recognition of the opportunity of data embedded in software. That’s a trend that plays to our strengths, and as the world’s leading company in the commercial data area, we are engaged as you can imagine with a variety of potential new partners and we continue to step up our activity in that area.
But, again it does take a bit of time for these things to ramp and so, again a lot of activity last year, and looking in a portfolio, some things work out great, some will work it at all and some are sort of in the middle. It’s our ambition to obviously make these as successful as possible, but it is a portfolio and we’re really excited with the growing portfolio of blue chip companies that we’re aligned with.
Jeff Meuler
Very helpful. And then just finally for me, any additional detail on the proprietary data sources you are adding and I know improved analytics to help the scores is also a part of it, but just any additional color on the new proprietary data sources.
Josh Peirez
Hey, Jeff, it’s Josh. Yeah, I think as a data and analytics company, it’s really important.
We continue to invest in our core assets of the data and the analytics. And what I can say is in 2014, about a third of our strategic investment went towards data and analytics and a large portion of that would directed towards global data quality to bring it on par with the U.S.
so alternatives to trade another thing that gives us a predictive list. Both things we can bring in as well as actually identified and creating data that are already within our wall, but we haven’t been using and giving to customers.
So I’m proud that in 2014 based on this new information we did launch 19 new scores which was a huge step up for us over historical level where we’re doing about one or two a year. And of the new scores, 17 of those were in international market throughout Europe and Asia.
We also to your point on the data itself, we improved our market coverage and data richness in several key emerging markets for our customers like Brazil, South Korea, Turkey, India among others. So we made really good progress.
We continue to have a roadmap to enhance our data quality through this year and expect to keep upping our game there.
Jeff Meuler
Okay, thank you all. Sounds like I’ll see you in Q2.
Josh Peirez
Thanks.
Operator
Our next question comes from Andrew Steinerman with JPMorgan. Thank you, you may ask your question.
Andrew Steinerman
Good morning, Rich. I wanted to ask you about seasonality, the usage based revenues and specifically your comments about growth rates and surely we recognize the fourth quarter is your largest quarter and there is more usage based revenue in the fourth quarter but I think you said expect lower growth rates overall in the first half of the year.
Since we’re talking year-over-year, why would seasonality bring lower growth rates than the second half if we’re talking year-over-year.
Rich Veldran
Yeah, Andrew, let me just restate in case you missed part of it. It’s not that we’re expecting lower growth rates in revenue in the first half.
It’s the operating income that you expect. Because you get a bit of a ramp in the revenue, right, because you’ve got more carryover investment from last year which hits the first half as opposed to the second, and because NetProspex is a little bit more of a delusion in the first half than the second.
You’ll see the operating income suppressed. In terms of revenue, I’d say a somewhat similar pattern as you’ve seen in the past couple of years and we go back and look at that, think of a two to five range and then kind of layered against the pattern you see in the last couple of years.
That will give you a pretty good indication.
Andrew Steinerman
Right, but I got your point, larger quarters means larger operating margins, but did you mean to say that there will be lower growth rates in the first half than the second half year-over-year or not necessarily.
Rich Veldran
Yeah, think about the fourth quarter, the last couple of years, the absolute dollars are bigger but the growth rate is bigger as well because the fastest growth project so optimizer, direct etcetera. Those growing – those happen to be in the fourth quarter.
Andrew Steinerman
Yeah, I don’t think that happened in 2012, I mean, I definitely understand year end has the opportunity for the largest growth rates as the customers look at their budgets and often want to spend it, but if we’re talking year-over-year isn’t you know kind of fourth quarter always kind of your largest revenue quarter and the growth rate will determine by – really the customers spending patterns not, just seasonality.
Rich Veldran
Yeah, it’s largest both in absolute dollars and in growth rates, now don’t forget, the first of the year, it is still going to grow. We’re not going to go backward, it’s not going to go exactly the fourth quarter and again if you go back to the last two years, I am not telling about the ’12, there were lot of things going on in ’12 that were different than today, but if you go to the last two years, we saw a spike in the fourth quarter, and we do see that because things that are growing the fastest are also more prevalent in the fourth quarter, so you do get a bigger overall growth rate, but the first half will still grow.
Andrew Steinerman
Okay, let me just try it one more time and then I appreciate your time. So when you look at the fourth quarter that you just reported could you describe the type of the budget flush happened in fourth quarter 2014 and do you expect that same type of budget slash in 2015 fourth quarter.
Rich Veldran
That typically happens in the fourth quarter, you get a lot of companies buying, using Direct. So you’ll recognize a lot of the revenue in D&B Direct in the fourth quarter.
So that’s not even budget slash that’s just Dun & Brad for example. You have a lot of people doing their optimized project work for the year ahead, and that is the big growth area for us, most of that, the biggest – percentage of it happens in the fourth quarter.
So you do get the biggest growth rate there.
Andrew Steinerman
Okay, thank you very much.
Rich Veldran
Thanks.
Operator
Our next question comes from the Bill Warmington with Wells Fargo. Thank you, you may ask your question.
Bill Warmington
Good morning, everyone.
Rich Veldran
Hi, Bill.
Bill Warmington
The first question for you is on the -- continue on the theme of the project work in the fourth quarter. I just wanted to ask a little bit about specifically what was driving that and then also, to what extent the strong revenue in Q4 had pulled forward some of the revenue from Q1.
Rich Veldran
Yeah, so if you go to the – and I’ll talk about both RMS and S&MS. On the S&MS side, Optimizer contributed two points of growth of year and 4 points in the fourth quarter to S&MS.
If you look at S&MS line that was up 5, 4 of that was from Optimizer, so that’s really a big project work that you talk about there. On the RMS side, we had pretty big spike in compliance in D&B Direct.
The combination of those two contributed essentially all of the projects and other growth of 8 points in the fourth quarter. So you can see that’s the pattern, it wasn’t really a go forward in any way.
If you think about Direct, let’s take D&B Direct as an example. You sell that certain amount of usage for that for the year and it just so happened that’s a biggest chunk of usage happened in the fourth quarter.
So it’s actually based on the contract that we sold in 2014. So it won’t be a quick volley.
Bill Warmington
Got it, okay, also question on the DNBi subscription, how did the renewal season go this year?
Rich Veldran
Actually for DNBi it was pretty consistent, actually again. The retention rates were in that low to mid actually in the actual quarter itself, it was slightly better than we had seen in the prior part of the year and the price list were again 2% to 4% range.
So pretty consistent we believe we’ve seen.
Bill Warmington
When do you think you start to see some improvement in the growth rate on the DNBi subscription plan side? Do we have to wait until for that 2016 for that or…
Bob Carrigan
This is Bob. We said we’re focused on DNBi, but again I want to bring back to the overall opportunity for us in the market we’re addressing.
We are very focused on growing across multiple used cases and we grew in 2014 even with DNBi being down. So we’re very focused on execution in moving it out of the cloud.
We feel that will get us on a better path than certainly the one we are on today. We intend to at least stabilize that in U.S.
and we certainly want to grow outside of the U.S. where not even available in many of the market in which we operate.
As you can see that does represent a big opportunity if we execute successfully, that’s why we’re dedicating a lot of resources against that and we are very focused on that. But at the same time we are focused on the broader opportunity for Dun & Bradstreet in a world where data is becoming increasingly important across multiple used cases and we starting to see that in our numbers, we are growing anyway.
Bill Warmington
So in that NetProspex, and so the initial reaction I got from some of the people I talked to in the industry, when you guys made that acquisition was a surprise just because the perception was that you guys already were strong in the contact data side on B2B. And so I heard your comments today talking about sort of a more accurate contact database.
And so my question is can you measure that and can we get paid for that?
Bob Carrigan
Look, we did have a business in the contact space, although not a substantial business and we are basically buying data from a number of suppliers including NetProspex, so we’re buying with NetProspex is the factory to be able to do this and it will – their quality control process and validation process is very similar to what we do in the business entity side. And you could see that one big used case for us is that we are moving aggressively into more and more of sales and marketing world and quality contacts are of paramount importance in that world where marketers today are getting lots of budget, you see studies that they are getting more technology budgets than CIOs in some cases to basically build that marketing automation stack, leveraging all sorts of new digital ways to engage with customers using more science and art in the marketing approach.
And data is the key part of that and we felt that having coming to them one of two punch I talked about, we already are dominant in the business space with business entities. Being able to identify and control and have the validation engine for the best quality contacts, we knew that we could certainly improved our position in that marketplace and yes, absolutely we believe that as we improve the quality will certainly get paid for it.
That is our ambition. We’re in this to grow revenue – this is a revenue growth strategy and we fully expect and we talk about right away we’re moving, you know, we have this very successful product in Optimizer for businesses, right at the $200 million product.
A lot of our customers and I met with them, we had a high-tech forum last year and a number of customers said hey, can you do it Optimizer for contacts because we have – we have a mass of contacts in our database. We need to clean it.
We need to enhance it. We do the same thing you guys do for us with company information.
And so we took that feedback and now we’re able to offer a product which we are getting into market this quarter, a Optimizer for contacts. So we’re moving quickly to be able to monetize this yet paid for it and deliver the best quality kind of one of two punch of business contacts and business company information.
Bill Warmington
Appreciate the insight. Thank you.
Bob Carrigan
Fair.
Operator
Our next question comes from Manav Patnaik with Barclays Capital. Thank you, you may ask your question.
Manav Patnaik
Good morning. Just a follow-up on the Bill’s questions on NetProspex.
Now that you’re getting into I guess it’s the individual’s contact data, grant it’s business, can you just help me understand like if you have any – does it come with restrictions or privacy laws or something like that could restrict your ability to go to market with that.
Josh Peirez
Hey, Manav, it’s Josh. So the assets that NetProspex have today are compliant with required regulations.
We do not have a restrictions and how we’re able to go to market with it. It’s all commissioned properly, and so our expectation is and Bob highlighted a little bit of this in his remarks, is that gives us the opportunity to actually go broadly into the market to help our customers to be able to use this data to really enrich how they do marketing and how they get their Salesforce focused the right people at the right companies.
Unlike others, who actually have user generated information it’s not validated or have information that they maybe web scraped and can’t use more broadly. So, in those areas, yes, now as we look at expanding to other international market, some of those markets will have more restrictive regimes which will require us to have opt-ins that of course anticipating in our plans.
But it’s one of the thing – we think actually really differentiates us in the states versus some of the companies you might think of its competitor which is the broad uses cases we can enable.
Manav Patnaik
Okay. And Bob, do you – in terms of the M&A strategy, obviously this one was a little larger than Indicee and Fliptop and so forth.
And then going forward based on I guess what you’re seeing in your pipeline, should we be expecting more of these mid-sized deals or what’s the plan there?
Bob Carrigan
Look, I’ll just say broadly speaking that you know, we continue to look at M&A that can advance our strategy. We’ve been pretty clear about our strategy about driving long-term sustainable organic revenue growth.
And we are very focused on that, NetProspex again is a great example. They bring a lot of high quality assets that are very complementary to our business, hope that drive revenue of customer demanding it and that combination of their data sets and their data cleansing capabilities, that brings powerful solutions that you help up, continue to be able to grow revenue, that’s the length which we’re looking at M&A.
Manav Patnaik
It just last one, it sounds like you said everything will sort of on track with the plans except the small business. Can you just maybe elaborate on that, is that competition or was that just referring to Hoover?
Bob Carrigan
Yeah, so again while we did have a lots of small business occurring in 2013, I just want to say that our total revenue, again, did increase 2% and in 2015, we expect have continued challenges with that channel, we do expect overall growth for the company in 2015. We changed leadership in 2014 and we do continue to focus on better sales execution, but it’s not about the sales execution.
Right, if you look at we’re doing, some of the underlying products that support and are sold is proportionately in that channel, predominantly DNBi and Hoover’s, initiative as we know at DNBi we talked about that on this call. It’s a big focus of our and once we get modernize solution in the hands of our small business folks.
We feel that will be very helpful and also with NetProspex, we talk a lot of that [indiscernible], we haven’t talked about the ability to improve our contacts quality within Hoover’s, it’s enhancing Hoover’s drill the new contacts that we’re going to be bringing with NetProspex that will also help in the small business channel.
Manav Patnaik
Thanks a lot guys.
Operator
Our next question comes from Peter Appert with Piper Jaffray. Thank you, you may ask the question.
Peter Appert
Thanks, so looks to me like we’re starting to see pretty good traction from your – our investments I think revenue perspective. It also looks maybe like the investment spending needs to remain at higher level and we’ve seen historically.
The question is mid-single digit revenue growth starting with 16 going to be sufficient to drive margin leverage or drive margin upside for the business.
Bob Carrigan
Well, look, with the guidance we gave in ’15, we were certainly envisioning operating income to grow actually roughly taking system with the revenue range we gave – we obviously have the NetProspex transaction with 2 point dilutive and then we have the FX headwind. So as we get to that, mid-single digit growth rate, which is the past that we were on and that we intend to say on and continue to be on, we see a given the model that we have given that were data company and we have high incremental margins.
We see that we continue to invest in the business, right as we go operating income and certainly as we get to – as we continue to grow and we get to higher revenue growth rate. We certainly see the opportunity to expand margins again.
Peter Appert
Do have a target in mind or thought mind – thought in terms of what they, where you would like to see the margins over the next couple of years. I mean that I’m not sure if you focus more on EBITDA or operating margin, but just looking at operating margin the company used to do in the high 20s.
Is that a reasonable expectation is that too aggressive?
Bob Carrigan
Look, the key is the revenue growth, again we have relatively high incremental margin. I believe look we’re investing – we are investing in 2015 on top of the investments we made in ’14 and again the upside of the acquisition and the FX headwinds we would have grown operating income.
So you know, I certainly see – usually the room in our incremental margin to be able to continue to invest and to grow margins, right, and we’ll talk more about this by the way – we’re going to do an Investor Day in Q2, and we certainly lay that out a bit more for you then. We’re not going to give you multiyear today, but if you concern is that, can we get back to generally speaking, margins and high 20s, absolutely.
But the key thing as we’ve got to get revenue growing and we have this junk part of investment that we absolutely needed in 2014 and we’ve been really consistent in clear about that. We’re making some additional investments in ’15 again, contemplated in the guidance we gave you and we see all of that will get this – our goal is to get this kind of virtuous cycle going of nice revenue growth and then we create the capacity within that, be able to invest and grow up income and grow margins over time.
Peter Appert
Great.
Bob Carrigan
It’s very doable within our model, very doable.
Peter Appert
Got it. Understood.
And Rich could I ask you one other thing. I don’t know if we call it financial flexibility anymore, but do you have any anticipated charges in 2015 and share with us.
Rich Veldran
Yes, so, obviously we are addressing variable cost and other things through cost savings projects. I’m expecting a charge similar to this year, maybe a tad less, but in the same neighborhood, we have a number of efficiency programs that we’ve got in place.
Certainly to a much lower scale than we did in the past and the business model is not solely financial flexibility. But as good stewards of cash, it is our responsibility to look at the model every year and find ways to become more efficient, and we will continue to do that.
Peter Appert
Great. And as always that’s not incorporated into the EPS guidance.
Okay, thank you.
Operator
Our next question comes from Andre Benjamin with Goldman Sachs. Thank you, you may ask your question.
Andre Benjamin
Thank you, good morning.
Bob Carrigan
Good morning, Andre.
Andre Benjamin
First question, I think you already touched on this a bit with your answer, but I was wondering if you could help us understand why you are deciding to do the data test in launch of DNBi internationally instead of in the U.S. where you have a lot of your days.
And the second question that are you anticipating on a like-for-like basis with the existing customers that they’re going to now look to spend materially more with now that they have an improved product versus what they’re spending today. Should we think about this is simply helping to retain them and then get a little bit of pricing power back?
Josh Peirez
Thanks, Andre, its Josh. Let me first up I think that the test set of customers we’re using to look at the prototype does include some of our U.S.
customers of all different sizes, so that we make sure that the capabilities were building. We’ll actually meet their needs.
So I just wanted to clarify that. The reason for a rollout beginning outside the U.S.
is actually for few reasons. First of all, the primary driver as we believe that will give us faster growth, which will help us to fund the ongoing rollout in investment.
So because we see more white space, Greenfield outside the U.S. where we do not have a product that can service the subscription needs of customers wherein some cases, we’re not servicing their trade credit needs at all and also we’re even four U.S.
customers, we’re not actually offering them a solution they can use in other markets where they operate, it’s our belief that by launching outside the U.S. that will give us the opportunity to actually get growth faster.
Also just as a product person in my background, I like to launch in markets where you can scale more quickly and get more of a learning on exactly how to do things before you go into your largest market with the product we’re going to impact in existing user base. So, we can have our U.S.
customers see what we’re doing outside the U.S. give us feedback on that and make sure that as the U.S.
product rolls out. It’s something that view as the upgrade we intended to be and are eager and excited to move to.
So the primary driver is growth. Frankly, I like launching outside the U.S.
when I can anyway to get early results and be able to then take the biggest market by storm with a product we know works and worked out the kinks and made ourselves really effective for those U.S. customers.
To answer the second part of your question, we absolutely see it helping us with the existing customers in the U.S. stabilized because it will allow us to give innovation to that more quickly and effectively, so that they can see couple of major releases a year rather than having see things much frequently that we’re able to make those changes the usability for them more quickly build-in additional modules and additional capability sets and also give them the global action.
I should note we’re not resting on just waiting for that. You know, we are continuing to invest in the existing DNBi product that our customers views giving them some capability for mobile alerts this year.
As I mentioned on the last couple of call, also giving them a connector to Salesforce.com CRM system, so that our customers can allow their salespeople to get instant credit decisions in the CRM while they’re operating. Those enhancements are rolling out this year just to continue giving our customer something and really to maintain as Rich said the very consistent retention and same store sales lifts that we’ve been seeing.
So, we’re doing both things.
Operator
And our next question comes from Brett Huff with Stephens Inc. Thank you, you may ask your question.
Brett Huff
Good morning and thanks for taking my call.
Bob Carrigan
Hi Brett.
Brett Huff
On the growth that you outlined in the guidance, I think 25% this year, and then the mid-single digit sort of goal for ’16. When we look at the kind of major puts and takes of DNBi, it’s a big chunk of business and it’s still declining, and then you have the VAPS growth which is a meaningful contributor to growth this year.
How do you see those, first of all do you see those two things as the major levers that you are working on, and when we contemplate mid-single digit growth in ’16, how do each of those components look, is DNBi now stable, and therefore we have got 100 basis points of more room, and is VAPS now 2.5% driver of growth kind of can you give us the levers on that mid-single digit view?
Bob Carrigan
Yeah, so this is Bob. Broadly speaking, when you look at our guidance for ’15, I mean it’s helpful if I separate North America and International.
With North America, we expect the growth will continue to come from the areas we saw growth in ’14, our large strategic customers and alliances. Those channels are little less than half of our North America business and they are starting to hit high single digits with further room for growth.
And then we have midsized customers which are little less than a third of North America, we are starting to see stability in that channel, and they are actually up slightly in 2014, and we expect that to continue to ’15, and then we talked about small business again which is disproportionately impacted in DNBi which we mentioned in Hoover’s and we do expect that to be a continuous drag in 2015, but we are addressing both sales execution and product issues there. And then for International, we are seeing some sluggish conditions in Europe, but we expect that we will continue to get good performance more broadly in International, as our investments, a lot of our investments in data that are outside of the U.S.
and we also have a new global account program that better served our largest, most global customers, and as we expand with those customers into new markets, we expect to drive higher growth that way as well. So that informs the 2 to 5 range that we gave you, also including the point from that cost back.
Brett Huff
Okay, and then as we think about ’16 though is that any change to kind of how ’15 levers I guess, any major change, or where is the acceleration in the particular business line, or where is the – is the DNBi and Hoover’s that stopped being a drag in ’16 as we contemplated the mid-single digit goal in ’16.
Bob Carrigan
Yeah that’s certainly our ambition stop that drag as we get there, again, we will talk more about that at Investor Day. We announced a bunch of new alliances, and we hope to continue to grow our alliance opportunity and those things take some time to ramp.
Our global accounts program, we are hiring global business directors who will lead on these global accounts, we hadn’t had a global accounts program where we were proactively managing these accounts for global growth, we have invested in a team there of global account leaders, that will help us drive that business and as we expand again, that has – we get tremendous leverage as we grow into new markets in a much more proactive way. So lots of – you see lots of opportunities for us to get that revenue ramping over time, and certainly, I think we are making investments in our strategy that are again the ambition is to get us on this path of long term sustainable growth, we are already seeing revenue growth, part of that comes from better sales execution, but we are seeing that already, but we certainly see as we get a lot of these things in place.
Overtime that we can get to a much higher revenue growth rate, we will talk much more about that at our Investor Day.
Brett Huff
Okay and then just one last one from me. When we think about, there is a question before about can we get back to sort of the margin profile in the past and your answer was, largely yes, just depending on how the revenue growth happens.
Can you just – as we look out into the next couple of years, when you think about that margin improvement, are we – in your mind are you kind of assuming that that $70 million to $80 million of spending is now part of the strategic spending. Does that became kind of built into the base and recur or does it taper at all, or just give us a thought there and then or is the margin expansion, you know if that remains the same, is it really just a function of as you mentioned the high incrementals once revenue growth starts to accelerate.
Bob Carrigan
Right, so the $70 million to $80 million we invested in 2014 was to jumpstart our revenue. Look, we had laid out our strategy, we had years of under investment in critical areas, when you look that ways, that would get us on this path to growth.
So we made a substantial investment in 2014. And while we do contemplate additional investments as we move that was a very large investment and so, we don’t – while we continue, we will continue to invest.
We feel that with revenue growth, we will be able to cover a more modest level of investment, which will help us continue our path to growth, and so that’s the vision. And look, my point earlier is, we certainly see ourselves being able to get back to the margin level certainly within our control.
We are purposely investing right now to get us on that path to growth, and then once we get there, you know we can continue to invest, grow -- grow margins and being a much more solid part.
Brett Huff – Stephens Inc
Great, that’s what I need. Thanks for your time.
Bob Carrigan
Sure.
Operator
[Operator Instructions] Our next question comes from Shlomo Rosenbaum with Stifel Nicolaus. Thank you, you may ask your question.
Shlomo Rosenbaum
Hi, thank you for squeezing me in for one last one over here. Just Bob and Josh, as we look at how the business is growing in kind of the ways that you are pushing on in order to improve the revenue growth, it seems that there is more project work and extending the addressable market, and what you can do with your assets is leading to more project work, can you just talk about your confidence that that work is as valuable as subscription based work, lot of investors look at subscription based revenue as repeatable and visible.
Can you talk about your level of repeatability and visibility to the project work that you guys are doing right now, again kind of give us confidence that we should look at that the same way that we would directly look at the subscription work inside D&B?
Josh Peirez
Hi Shlomo, this is Josh. So let me take a crack at it.
So first of all, we see very high repeat rates on our project business. And so in a lot of ways, they would perform the way you would think of subscriptions performing that’s something customers except, if you are doing, there are of course an occasional thing that we have a customer with specific needs.
But overall, if you look at what we talked about through last year, we expected on the RMS side and the S&MS side to see very high single digit rates on those project lines, we saw 9% and 8% for the year, which is consistent with what we had told you kind of throughout the year, which is sort of the annualized growth rate to expect. When you look at the drivers, it will give you a little more detail on and think about where you might see these kinds of project work come out, you are looking at the advanced used cases, we have like compliance and supply, like the custom analytics work, which have a pretty consistent data pull through, so the building of the model itself that first pull through might be a project, that then they are going to want to keep getting that data to keep filling that model year-after-year.
Also things you know that we have like D&B Direct or DaaS alliances they don’t show up purely a subscription, they show up more usage base as you go along, and so those things as we look at them, these strategic products, the used cases that we look they did drive three points of growth for North American revenue in 2014, which is something that we are proud of and we continue to expect to be large drivers of our strategic growth going forward. Hopefully that helps.
Shlomo Rosenbaum
Yeah thank you very much.
Kathy Guinnessey
Alright, I guess we are a little over an hour now, so we are going to go ahead and call it too close. We want to thank everyone for their questions and your interest in D&B, and we look forward to talking to you next quarter.
Operator
Thank you all for participating in today’s conference. You may disconnect at this time.