Dun & Bradstreet Corp. (DNB), a provider of business information reported second quarter 2010 earnings before non-core gains and one-time charges of $1.23 per share, in line with the Zacks Consensus Estimate. Earnings per share increased 1.7% from the year-ago profit of $1.21 per share.
Although earnings were in line with the Zacks Consensus Estimate, total revenue was $397.3 million, below the Consensus Estimate of $411.0 million.
Operating expenses were flat year over year and came in at $129.4 million. Selling and Administrative Expenses inched up 1% year over year to $159.8 million as a result of higher Strategic Technology investment. Therefore, operating income before non-core gains and charges fell 6% to $106.5 million from the prior year.
Management said that the International business performed well in the quarter as the economy improves and demand strengthens. However, the North American businesses witnessed an uneven recovery, particularly in the Sales & Marketing solution.
Second quarter 2010 core revenues were $397.3 million in the quarter, down 3% compared with the year-ago period, before any foreign exchange impact and down 2% after the effect of foreign exchange. However, management expects revenues to improve in the second half of 2010.
Including the impact of $11.6 million in the divested business (the domestic portion of Italian operations in the second quarter of 2009) and the unfavorable impact of foreign exchange total revenue declined 5% year over year to $397.2 million.
Core revenues were negatively impacted by Risk Management Solutions revenues (66.2% of total core revenue), which were down 1% year over year to $263.0 million, Sales & Marketing Solutions revenues (26.4% of total core revenue) down 4% year over year to $105.0 million and Internet Solutions revenues (7.4% of total core revenue) decreased 6% to $29.3 million, after the foreign exchange impact.
Revenues by Segment
Quarterly results were positively impacted by the strong performance of the International segment. Core revenues in the International segment increased 11% year over year (8% inorganically) to $96.4 million after the foreign exchange impact. The growth was primarily driven by strength in emerging markets and a robust demand for the company’s products and service.
Within the International, Risk Management Solutions revenues were up 11% and Sales & Marketing Solutions revenues upped 23%, partially offset by a 22% decline in the Internet Solutions revenues after the effect of foreign exchange.
For 2010, management anticipates that total International revenue will increase at a low double digit growth rate, driven by the launch of DNBi International and a continued growth in emerging markets.
However, the fall in North America sales offset the increase in International revenues. Core revenues from the segment plunged 6% year over year to $300.9 million after the foreign exchange impact.
Within the North America business, Risk Management Solutions were above the company’s expectations, but fell 4% after the effect of foreign exchange. DNBi continued to perform well in the quarter due to the transaction based customers opting for DNBi solution. Rise in price led to increased penetration to 63% of Risk Management Solutions revenue, compared with 54% in the year-ago quarter led to a higher DNBi growth. However, DNBi’s growth was more than offset by a continued decline in legacy transactional products. The company expects Risk Management Solutions revenues to gradually improve in the second half of the year.
Sales & Marketing Solutions were weak in the quarter and was down fell 10% mainly due to the tight customer budget constraints and a weak demand as well as late contract renewals impacting the company’s traditional lists and labels business.
A decrease of 5% in Internet Solutions revenues was primarily driven by weak 2009 upfront commitments and the subscription nature of these products and a loss of one-time licensing fee in the reported quarter. Management noted that Subscriptions continued to grow in the quarter, which will boost revenues going forward.
Balance Sheet and Cash Flow
The company ended the quarter with $209.7 million in cash and cash equivalents, down $9 million from the previous quarter. Total debt came in at $926.4 million at the quarter end. Net debt (long-term and short-term debt less cash) decreased to $716.7 million or $14.19 per share at the end of the quarter versus $733.7 million or $14.41 per share in the previous quarter.
Operating cash flow was $76.9 million, excluding the impact of legacy tax matters, resulting in a free cash flow of $62.4 million in the quarter. Last quarter, the company generated an operating cash flow of $128.9 million, excluding the impact of legacy tax matters that resulted in free cash flow of $110.1 million. Capital expenditure in the reported quarter leaped 94% to $3.1 million year over year. During the first quarter, D&B repurchased 0.3 million shares worth $20 million.
Deferred revenues totaled $535.9 million, up 3% year over year. Last quarter, the company had deferred revenues of $577.2 million.
Strategic Technology Investment
The company announced a two-year strategic technology investment program aimed at strengthening its leading position in commercial data and improving its current technology platform in February 2010. The program is expected to accelerate revenues and reduce expenses by improving data quality and timeliness, increasing the speed of product innovation and significantly reducing technology costs once the investment is complete.
In the second quarter of 2010, the company incurred $7.7 million of total pre-tax expense (or 11 cents per share) on the Strategic Technology Investment.
D&B expects to spend $110 million to $130 million over approximately the next two years to complete the program, with $45 million to $55 million of the spending expected to be incurred in 2010. Approximately, 60% of the amount spent will be recognized as an increase to D&B’s non-core expenses and the remainder will be capitalized.
Sale of North America Self Awareness Solutions
To help address the weakness in North America business and focus on core business, D&B announced that it has sold substantially all of the assets and liabilities of its North America Self Awareness Solutions (SAS) business unit that provides credit on self products for small and micro businesses for $100 million to Credibility Corp, a privately-held company based in Los Angeles.
The transaction is expected to close on July 30, 2010. At closing of the deal, D&B will receive $10 million in cash and is entitled to annual royalty payments for data and brand licensing. Under the deal, the buyer will operate the acquired business under the name of Dun & Bradstreet Credibility Corp. and distribute D&B’s Credit-on-Self solutions in North America. The new company will address customers’ need to establish, monitor and build their credit and credibility.
D&B said that it expects the transaction to reduce its full year core revenues by approximately $51 million and full year 2009 core revenues by approximately $70 million. However, the company pointed that there will be no impact on its total operating income or its overall guidance for 2010.
Guidance Reaffirmed
D&B reiterated its 2010 guidance. Core revenues are expected to be up 1% to 3%, before the effect of foreign exchange. Operating income is expected to be down 2% to up 2%, before non-core gains and charges. Growth in earnings per share is expected to be 1% to 6%, before non-core gains and charges. The company expects free cash flow of $240 million to $270 million, excluding the impact of legacy tax matters but including the new strategic technology investment.
The company is expected to benefit from its Strategic Technology Investment and new product launches. However, the sale of North America Self Awareness Solutions business could be a drag on revenues. We currently have a short-term Zacks #3 Rank (Hold) rating on D&B’s stock. Over the long term, we have a Neutral rating on the stock.
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