A provider of business information, Dun & Bradstreet Corp. (DNB) reported first quarter earnings before non-core gains and one-time charges of $1.29 per share, which surpassed the Zacks Consensus Estimate of $1.27.
Operating Performance
Earnings per share (EPS) on a pro forma basis were flat year over year. Net income, before non-core gains and one-time charges, was $64.5 million, down 3.0% year over year, with net margin falling 70 basis points (bps) to 16.0%.
In the first quarter, GAAP operating expenses increased 3.7% year over year to $137.2 million. Selling and administrative expenses were up 1.0% year over year to $153.5 million.
Pro forma operating income was $103.4 million, up 1.0% year over year, while operating margin dipped 30 bps to 25.6% in the first quarter, reflecting higher total operating costs (77.9% as a percentage of revenue, up 140 bps from the prior-year quarter). Additional expenses related to the Strategic Technology Investment led to the increase in total operating expense.
Revenue
Total revenue spiked 2.0% (including foreign exchange effect of 1.0%) year over year to $403.6 million and missed the Zacks Consensus Estimate of $413.0 million. Core revenue also increased 5.0% year over year (both before and after including foreign exchange impact) in the first quarter.
Segment-wise Revenue
In the reported quarter, core revenues were positively impacted by higher Risk Management Solutions revenues (66.0% of total core revenue), which were up 8.0% year over year to $266.5 million. However, Sales & Marketing Solutions revenues (26.6% of total core revenue) were flat year over year to $107.2 million. Internet Solutions revenues (7.4% of total core revenue) climbed 6.0% to $29.9 million, after the foreign exchange impact.
Region-wise Revenue
Strong performance in the overseas market resulted in robust first quarter results. Core revenues in the International segment rose 22.0% year over year to $112.4 million, after the foreign exchange impact. The growth was primarily attributed to significant upside in emerging Asia-Pacific markets, which fully offset the weak results in Europe and Other International markets.
Within International, Risk Management Solutions revenues were up 28.0%, Sales & Marketing Solutions revenues grew 5% and Internet Solutions revenues rose 4.0% year over year, after the impact of foreign exchange.
North American revenue plunged 5.0% year over year to $291.2 million, after the foreign exchange impact, with core revenue growth flat on a year-over-year basis.
Within the North America business, Risk Management Solutions were flat year over year after the effect of foreign exchange. Sales & Marketing Solutions dipped 2.0%, while Internet Solutions revenues increased 7.0% on a year-over-year basis.
Balance Sheet and Cash Flow
D&B ended the quarter with $83.6 million in cash and cash equivalents, up from $78.5 million in the previous quarter. Total debt came in at $890.7 million versus $973.5 million at the end of the preceding quarter. Net debt (long-term and short-term debt less cash) increased to $807.1 million or $16.14 per share at the end of the quarter versus $895.0 million or $17.58 per share in the previous quarter.
Operating cash flow was 128.3 million in the reported quarter, flat year over year. Free cash flow, excluding the impact of legacy tax matters, was $118.8 million compared with $110.1 million in the prior-year quarter.
Share repurchases during the first quarter of 2011, under the company’s discretionary repurchase program, totaled $15.0 million (approximately 182,000 shares), while repurchases made to offset the dilutive effect of shares issued under employee benefit plans were an additional $18.7 million (approximately 230,000 shares).
Strategic Technology Investment
D&B 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 revenue growth and reduce expenses by improving data quality and timeliness, increasing the speed of product innovation and significantly reducing technology costs.
Quarterly operating expenses included $9.9 million (or 16 cents per share) related to the Strategic Technology Investment.
D&B expects to spend $55 million to $65 million in fiscal 2011.
2011 Guidance
D&B expects core revenues to increase 5.0% to 8.0%, before the effect of foreign exchange. Operating income is expected to increase 2.0% to 6.0%, before non-core gains and charges.
The company expects earnings to grow in the 6.0% to 10.0% range, before non-core gains and charges. D&B expects free cash flow of between $240 million and $270 million, excluding the impact of legacy tax matters but including the new Strategic Technology Investment.
Currently, the Zacks Consensus Estimate is pegged at $6.00 per share for fiscal 2011, in line with the lower end of the guided range. For the second quarter of 2011, the Zacks Consensus Estimate is pegged at $1.31.
Our Take
Our long-term view is positive, attributable to D&B’s high-margin business model, international growth potential, emerging market growth opportunities, strategic investments, incremental cost savings and new product pipeline.
However, a sluggish macro environment in North America and weakness in Europe remain concerns. Moreover, a high net debt will hurt financial stability going forward.
D&B also faces strong competition from companies including Equifax Inc. (EFX) and Moody’s Corp (MCO), which may hurt its profitability going forward.
We maintain our Neutral recommendation on a long-term basis (6-12 months). Currently, D&B has a Zacks #3 Rank, which implies a Hold rating over the short term (1-3 months).
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