Dun & Bradstreet Corp. (DNB), a provider of business information, reported third quarter 2010 earnings before non-core gains and one-time charges of $1.21 per share, beating the Zacks Consensus Estimate of $1.91 by 2 cents. Earnings per share increased 7.1% from the year-ago profit of $1.13 per share.
Operating expenses increased year over year and came in at $146.9 million. Selling and Administrative Expenses inched up 2% year over year to $157.5 million as a result of higher Strategic Technology investment. Therefore, operating income before non-core gains and charges fell 1% to $104.3 million from the prior year.
Management pointed out that the International business performed well in the quarter as the economy improves and demand strengthens. Moreover, the North American businesses witnessed a recovery, driven primarily by strengthened sales execution.
Third quarter 2010 core revenues were $396.0 million in the quarter, up 3.3% compared with the year-ago quarter, both before and after any foreign exchange impact. Total revenue was in line with the Zacks Consensus Estimate.
Including the impact of $4.4 million in the divested business ( the North American Self Awareness Solution business in the third quarter of 2010) and the unfavorable impact of foreign exchange, total revenue of $400.4 million was flat compared with year-ago quarter.
Core revenues were positively impacted by Risk Management Solutions revenues (64.4% of total core revenue), which were up 2.7% year over year to $254.9.0 million, Sales & Marketing Solutions revenues (28.3% of total core revenue) were up 5.7% year over year to $111.9 million and Internet Solutions revenues (7.3% of total core revenue) increased 3.6% to $29.2 million, after the foreign exchange impact.
Revenues by Segment
Quarterly results were positively impacted by the strong performance at the International segment that grew double digit. Core revenues in the International segment rose 7.5% year over year (11.0% inorganically) to $94.8 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 7% and Sales & Marketing Solutions revenues grew 9%. The Internet Solutions revenues were flat year over year after the effect of foreign exchange.
However, the fall in North America sales partially offset the increase in International revenues. Core revenues from the segment plunged 2% year over year to $305.6 million after the foreign exchange impact.
Within the North America business, Risk Management Solutions were above the company’s expectations, and increased 1% after the effect of foreign exchange. Sales & Marketing Solutions were strong in the quarter, up 5.0%, and Internet Solutions revenues increased 4% year over year.
Balance Sheet and Cash Flow
The company ended the quarter with $77.2 million in cash and cash equivalents, down $132.5 million from the previous quarter. Total debt came in at $956.0 million at the quarter end versus $926.4 million in the previous quarter. Net debt (long-term and short-term debt less cash) increased to $878.8 million or $17.54 per share at the end of the quarter versus $716.7 million or $14.19 per share in the previous quarter.
Operating cash flow was $278.9 million in the first nine months of 2010. Free cash flow for the first nine months of 2010, excluding the impact of legacy tax matters, was $225.5 million, including approximately $15 million related to the Strategic Technology Investment, compared with $244.1 million in the prior-year quarter.
During the quarter, D&B repurchased 264,000 shares worth $18 million.
Deferred revenues totaled $516.2 million, up 8% year over year. Last quarter, the company had deferred revenues of $535.9 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 third quarter 2010, the company incurred $11.9 million of total pre-tax expense (or 18 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 fiscal 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 current Zacks Consensus Estimate is $5.54 per share for fiscal 2010 and $1.83 for the fourth quarter of 2010. The company is expected to benefit from its Strategic Technology Investment and new product launches.
Recommendation
We remain encouraged by D&B’s growth strategy through its high margin business model, international growth potential, emerging market growth, profitability improvement measures, strategic investments, incremental cost savings and new product pipeline, impressive cash flow and increased payout that position it for long-term growth.
However, we remain cautious about the actual benefit extended by ongoing economic developments to the top line, which is not expected to grow much in 2010. Additionally, integration related risks, weakness in Europe and high debts are areas of concern.
Estimates are likely to remain same in the coming days since the company reaffirmed its 2010 guidance. We therefore maintain our Neutral rating over the long term. Currently, the stock has a Zacks #3 Rank, indicating a short-term Hold rating, meaning that there is no directional move/change in estimates.
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