Dun & Bradstreet Holdings Inc
NYSE:DNB
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Dun & Bradstreet Holdings Inc
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Good morning, and welcome to Dun & Bradstreet's 2018 First Quarter Teleconference. This conference is being recorded at the request of Dun & Bradstreet. If you have any objections, you may disconnect at this time. All participants will be in a listen-only mode until the question-and-answer session of the call. I would now like to turn the call over to Ms. Kathy Guinnessey, Treasurer and Investor Relations Officer. Ms. Guinnessey, you may begin.
Thank you. Good morning, everyone, and thank you for joining us today. 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. We undertake no obligation to update any forward-looking statements. Effective January 1, 2018, we adopted the new accounting standard ASC 606. As you can see in the schedules accompanying our press release issued last night, our first quarter 2018 GAAP results are reported under the new standard. For ease of comparison, we've provided supplemental schedules with results reported under ASC 605, the prior standard. We will continue to provide results under both the new standard, ASC 606, and the prior standard, ASC 605, for the remainder of 2018. Beginning in 2019, we will report under ASC 606 only. Now, during our call today, we will be discussing a number of non-GAAP financial measures, which we call as adjusted results, as that's how we manage our business. Unless otherwise noted, all metrics on the call will be presented on an as adjusted non-GAAP basis and based on the prior accounting standard, ASC 605. Now, from time to time, we may refer to sales, which we define as the annual value of committed customer contracts. In addition, we speak from time to time about deferred revenue. When we refer to the change in deferred revenue, we mean before foreign exchange, dispositions, acquisitions and the impact of the write-down of deferred revenue due to purchase accounting, unless otherwise noted. And, where appropriate, we have reclassified certain prior-year amounts to conform with the current year presentation. You can find the reconciliation between non-GAAP financial measures and our most directly-comparable GAAP measures in the schedules to our earnings release. And they can also be found in the supplemental reconciliation schedule that we post on the Investor Relations section of our website. Later today, you'll also find a transcript of our prepared remarks, as well as a financial model with historical results, on our Investor Relations site. Now, turning to our call this morning, I'm pleased to be joined on the call by: Rich Veldran, our Chief Financial Officer; and Tom Manning, our Chairman of the board and interim CEO. During the call, Tom will provide an update on our strategy and then Rich will review our first quarter results. I'd now like to hand the call over to Tom Manning. Tom?
Thank you, Kathy. Good morning, everyone, and thank you for joining us on the call today. As you know, this is a time of transition for Dun & Bradstreet. Before Rich takes you through our first quarter results, I'm going to use my time this morning to update you on the changes we announced on our last call in February. Let's start with the CEO search. As we said earlier this year, the board is acting with urgency to find a permanent CEO. We engaged a top search firm in early March to assist us in the process. We fully specked out the job and began identifying candidates with experience accelerating top and bottom-line growth. The Nominating & Governance Committee of the board is interviewing candidates now, focusing on finding someone who is a strong leader and can continue the progress we've made improving our data and analytics, developing solutions and capabilities to meet new customer use cases, and modernizing our products and platforms. I can't tell you when we'll have the role filled, but I can assure you that it is a top priority for the board. At the same time, we are not waiting for a new CEO to implement the important changes that will help get the company to sustainable growth on both the top and bottom lines. We've been working with McKinsey & Company to review our strategy and operations. The board is looking beyond incremental operating leverage and seeking a real step change in the earnings and cash flow this company can deliver. As I said on our last call, we completed Phase One of the review having validated our strategy. In that phase, we confirmed that the markets we play in are attractive and we have strong competitive positions in them. A key pillar of the strategy we launched back in 2014 was to expand our advantage in data, which is paying off. Thus far, our review has confirmed that our unique data assets continue to have differentiated value. And customers are willing to pay for that value. We have twice the data of our nearest competitor. And our data is 40% more predictive than that of our competitors. Furthermore, we have found that an overwhelming majority of our customers expect to stay with Dun & Bradstreet as they trust us, have familiarity with our brand and have confidence in the accuracy of our data. In addition, our focus on moving our business to as-a-service aligns closely with growing customer needs in the market. With Phase One of our work complete, we are now engaged in Phase Two. Specifically, we are conducting a Full Potential Analysis, which is a bottoms-up approach to identifying specific barriers to realizing our potential, sizing the opportunities and identifying actions to take. We are about 80% of the way through this work and have confirmed the board's belief that our earnings potential is far beyond where we are today. The Full Potential Analysis has uncovered areas where our complexity has been a barrier to unlocking value. In a sense, we are standing in our own way. As our customers need for data has broadened and become more sophisticated, our solutions have become highly customized, taxing the organization across the board. This complexity has made for a slow, cumbersome process for contracting, customizing pricing, onboarding and issue resolution that requires a great deal of manual intervention, all of which translates into delays for our customers. Our pricing is too complex, with thousands of products each priced separately and hundreds of product bundle combinations. This customization has left us with a large product portfolio without clear sunset plans. Beyond complexity, we have seen insufficient hunting within our sales organization. For example, while we do cross-sell today, 90% of those deals are in just one part of a customer's overall business, either risk management solutions or sales and marketing solutions. And by focusing on select strategic verticals where we have long-established customer relationships with the top players, we've limited where we hunt. For example, we are not focusing on 20% of the Fortune 1000 today. Part of the issue is having the right talent and part is structural, as our matrix product sales and service organization has led to duplicative roles and lack of role clarity. We have a great opportunity to further penetrate existing customers across both the risk management and sales and marketing areas by creating enterprise-wide solutions with uniform pricing and clear roles within the organization. We've talked about some of these issues in the past, but our efforts to fix them have been somewhat piecemeal. The work we are engaged in today is giving us a clear end-to-end process to make significant change. And we are putting concrete measurable actions in place. We are engaging customers to make sure that we have a full rounded view of the issues and we are enrolling the organization behind the process. As we look forward to finding ways to unlock growth, we are excited about the opportunities we've identified. We have made some important progress in the last few years that will help set us up for the long-term growth. We've introduced new fast-growing use cases and modernized delivery of our solutions. We've also enhanced our data processing, which sped up innovation and doubled the throughput of our database. But to unlock the value we're capable of, we need to make systemic changes across our organization to simplify our processes and accelerate execution. And that is what we are focusing our energy on right now; however, consistent with what we said on the last call, we are simultaneously open to considering all options for maximizing shareholder value. Internally, we are developing our own private equity playbook to unlock value. A PE playbook includes taking out cost, paring the portfolio and focusing on growth opportunities to increase the value of a company. We are taking a look at our business through that lens. We are putting plans in place that we believe will generate PE-type returns for shareholders over time. The path we've identified to remove complexity in order to accelerate growth and realize our full potential has three main cross-functional components: one, strengthening and focusing product management and pricing, which means establishing a defined framework for customization, detailed product sunset plans and a defined approach to product packaging and pricing; two, destacking the go-to-market and post-sales model, where we will establish a scalable hunter-farmer model with clearer role definitions, overhaul redundant processes and minimize activity duplication for customer-facing roles; and three, streamlining and automating our Quote-to-Cash process, which means reducing administrative cost, lost selling time and unnecessary complexity. And as any PE firm would do, we are taking cost out of the business to help fund our strategic initiatives. As part of this strategic and operational review, we've done a deep dive into 90% of our cost base, including cost-benefit process analyses and benchmarking support functions. We have identified both short-term and long-term opportunities. While we are in the midst of our CEO search and we don't want to box in our new leader, there are some actions that we can take right away. We are already implementing plans to take significant cost out of our base over the next year. At the same time, we are beginning the work to streamline and automate our back-office systems that enable our Quote-to-Cash processes to address complexity. I've given you a lot, so let me pause here and recap. Our strategic and operational review, which we are conducting with the help of McKinsey, has three parts. The first was validating the strategy, which we have completed. The second is conducting a Full Potential Analysis, which is nearly complete. The third is putting together an action plan to realize that potential. The third part is in progress. We, in concert with the board, are working through a number of options to execute our playbook. We are taking actions immediately in selected areas, including the cost reductions and Quote-to-Cash system enhancements I just mentioned. And we are weighing speed, investment requirements and payback to determine how we put our playbook into action. Over the next few months, we will finalize these plans. So, with the CEO search still in process and the work on the PE playbook not complete, I am not in a position to provide 2018 guidance at this time. However, I can assure you, as you can see in the first quarter, the underlying business is stable and continues to perform reasonably well, although obviously still not where we want it to be. With that said, as I sit here today in my role as interim CEO and as Chairman of the board, I'm excited about the company's future. Our customers highly value our data, our brand, our accuracy and our reputation. Businesses like working with Dun & Bradstreet because we're the best at what we do. We look forward to seizing opportunities to continue to improve. And we're taking the steps now to grow and drive value for our shareholders. With that, I'll turn the call over to Rich, who will discuss our first quarter results.
Thanks, Tom, and good morning, everyone. Last night, we issued our press release with first quarter results. In the quarter, both total and organic revenue decreased 1%. We grew operating income 6% and EPS was up 31%, including 18 points from the benefits of tax reform. We also generated $106.7 million of free cash flow. Let me take you through the revenue results by segment in more detail. Total revenue for the company was $384.7 million. Americas revenue was $311.5 million and represented 81% of total company revenue. Non-Americas revenue was $73.2 million and 19% of the total. Revenue in the Americas segment was down 2% in the quarter. Risk Management revenue in the Americas was down 4% as our Trade Credit business declined 6% while Other Enterprise Risk grew 1%. Within Trade Credit, revenue from the D&B Credit Suite was down about 2.5%. However, this decline is not indicative of the underlying progress that we're making on getting the D&B Credit Suite performance back to growth. Almost 2 points of the decline was due to a couple of one-time items. The biggest part was a shift of revenue from customers accessing certain international reports. Under the old DNBi subscription, these reports were accessed on a transactional basis, where the revenue was recognized at the time of sale. Under the new D&B Credit solution, international reports are generally part of the overall subscription. The value for that international access is priced into the solution, but the revenue is now recognized ratably over the life of the subscription. The rest of the decline was due to a few one-time items last year that did not repeat in 2018; the important thing that we're continuing to drive the D&B Credit Suite back toward growth. Underlying sales in the category were flat for the full year 2017 and down slightly in the first quarter of 2018, so revenue should be flattening out over the course of the year and we still expect to get the D&B Credit Suite to at least flat this year. The decline in Other Trade Credit was primarily due to customer shifts to other D&B products as well as the timing of certain worldwide network partnership fees. Adjusting for those, Other Trade Credit was down mid-single digits. Other Enterprise Risk benefited from continued strength in our Supply and Compliance solutions as well as D&B Direct. This was largely offset by weakness on Credit on Self solutions. As we mentioned on our last call, we had some staffing issues last year that impacted sales. That will play out in revenue over the next several quarters. Sales and Marketing revenue in the Americas was up 1% for the quarter. We continued to see strong growth in Advanced Marketing Solutions, where revenue grew 7% during the quarter. Advanced Marketing includes both our Master Data solutions, which were up high single digits, and our newer Audience Solutions, where revenue is continuing to build at a very strong pace. This growth was partially offset by a decline in Sales Acceleration of 3%. Revenue from the D&B Hoovers Suite, which includes traditional Hoovers and Avention products, data.com and the new D&B Hoovers product, was down 7%. More than half of that decline was due to data.com. As a reminder, we said that we expected data.com revenue to decline this year due to normal attrition, which would impact the total company growth rate by about a point. We believe that we're making headway penetrating the customer base of Salesforce with sales of new D&B Hoovers as the overwhelming majority of new customers buy the premium offering with CRM integration. To summarize the performance of our Americas segment, we are continuing to see strong growth in our newer use cases in Advanced Marketing, including Master Data and Audience Solutions, and supply and compliance solutions in Other Enterprise Risk. And we're making progress getting our legacy use cases in trade credit and sales acceleration back to growth. As we look to the rest of the year in the Americas, while we are not yet providing full year guidance, I do want to let you know about some timing shifts that we expect to play out during the year. There are several very large contracts in the Americas where revenue that was realized in the second quarter of 2017 will be recognized in the fourth quarter of 2018. As a result, there will be about a 3 point drag in the second quarter revenue growth offset by an expected 3 point gain in the fourth quarter. Shifting to Non-Americas, first quarter revenue was up 2% and organic revenue grew 3%. The organic revenue growth was primarily due to strong performance in the UK and Ireland. We are pleased with the performance in Non-Americas, which was up against a tough comp last year, where organic revenue was up over 10%. Deferred revenue was up 3% for the company, before M&A activity and the impact of foreign exchange. Deferred revenue in the Americas was up 4% and Non-Americas deferred revenue declined 2%. Now, let me turn to profitability. Operating income was up 6% in the first quarter. Included in this are one-time benefits from equity forfeitures related to the senior management changes in the first quarter, which offset the increased costs from our strategic and operational review. So despite these items, we still had healthy growth in operating income, which reflects the benefit of the actions that we're taking this year that Tom referred to earlier, as well as costs that we took out during the course of last year. And we're doing this while continuing to invest in the business. EPS was $1.24 for the first quarter, up 31% over last year. As I said earlier, about 18 points of this growth came from the change in the U.S. tax rate due to tax reform. As we said on the last call, as a result of tax reform, we expect our go-forward annual tax rate to be in the mid-20% range. The remainder is primarily due to growth in operating income. Turning to the balance sheet, we ended the quarter with $1.3 billion of debt. Our cash balance at the end of the quarter was $188.1 million for net debt of $1.1 billion. We repatriated almost $300 million of cash in March, which we used to pay down debt. At the end of the quarter, our debt included about $600 million of fixed rate senior notes and about $700 million of floating rate debt. With that, we'll now open up the call for your questions. Operator?
Thank you. Our first question today comes from Jeff Meuler from Baird. Please go ahead.
Yeah, good morning, guys. You got Nick Nikitas on for Jeff.
Good Morning.
Good morning. Tom, you mentioned a potential step change in margins coming out of the review, but it also sounds like other areas – you talk about automation, process changes, that could involve somewhat more significant near-term spend. So can you just talk about your comfort level with the amount of investment currently in the business? I guess, is this just about shifting around the level of spend or could it be a near-term step-up related to some of the changes?
Yes. Thank you for the call. With regard to our plans, we're really looking at the full cost base of the business as well as our revenue potential in total and reviewing all of that. We are putting together a number of actions, as I indicated, that are really PE playbook style actions that would enable us to establish a real headstrong approach to taking cost out of the business, eliminating the complexity that has been part of our problem, as I referred to, and clearing the way for additional growth. So it's with that notion in mind that we're reviewing the business. I think the McKinsey work has really been strong to-date. I've been directly involved in it weekly. And it's very akin to what I've done in part of my career, so I'm very familiar with the techniques and so on. So I am confident that we're actually going to be able to take a real strong approach to generating additional cost savings, but additional revenue growth as well.
Okay. Thanks. And just with the Phase One complete, were there areas of opportunity that were maybe a little surprising to you guys or data sets or solutions that haven't been emphasized in the past and could be areas for significant opportunity coming out of the review? Or is it just really – it sounds like a lot of it just seems to be execution on your end?
Well, I think there is a good deal of validation in Phase One around our current strategies and the spaces in which we currently operate. We were encouraged by some of the recognition of upside opportunities in some of our younger businesses, such as the compliance business and the audience-based solutions business. So we're clearly mindful of that as we plan for the future, because we think those will represent continued growth opportunities for us.
Okay. And then, just last one on the organic revenue growth, I know you're not providing an outlook for 2018, which is understandable given the amount of changes that are ongoing, but just given the Q1 growth and trend versus Q4 and some of the timing items you guys called out in the quarter, any additional info you can give there and just would you expect the full year trend to improve from that current level?
Yeah, here's what I'd say. Again, we're not going to give guidance at this point. What you can see is that the first quarter was down a bit. We did have pretty strong deferred, so I think that gives you some indication of the stability of the business and the underlying trends. Beyond that, we really don't want to start giving out piecemeal sets of information because we need to give you a comprehensive full view of guidance in the context of all of the work that we're doing coming out of the PE playbook work.
Yes.
Okay. Fair enough. Thanks for taking the questions.
Our next question comes from Peter Appert from Piper Jaffray. Please go ahead.
Thank you. Good morning.
Morning, Peter.
Tom, you said you continue to be open to considering any option to maximize value. How proactively are you pursuing other options?
Well, Peter, as I mentioned, we're obviously open-minded as to how to create value for shareholders. And we're certainly in a listening mode. We feel that the kind of work we're doing around the PE playbook is really educating the board thoroughly around the potential in this business. And we continue to believe that we can actually get at that potential through the course of the next months and we're very focused on that. Now, that said, obviously, our fiduciary responsibility requires us to listen to alternatives and be aware of those alternatives, so we are fully open-minded around all of that.
Okay. And then, Rich, can you provide any quantification in terms of the magnitude of the cost savings you think some of the more recent initiatives could drive?
Yeah. Here's what I'd say to it, if you think about historically, we've tended, in any given year, to take out 2% to 3% of the cost base, some of which we reinvest, some of which at certain times we've dropped to the bottom line. What we're talking about now, without giving specific numbers, is much deeper, is much broader across the company, but we are focused acutely on making sure that as we take costs out through reducing complexity, we are at the same time focused on the growth side of the equation, right. So we're going to take cost out. I do expect that we're going to spend money as well against investment areas, but in a PE playbook, the goal is to drive that top line, become very efficient, drive your bottom line at the same time, and create lots of value. And that's what we're focused on. We'll obviously give you more guidance in what that looks like ahead. And we'll also give you a multi-year view, because we're going to need to do that. I think the last thing I'd emphasize, because I think it is important, is on a $1.3 billion cost base, there are opportunities to do all that work without cutting into muscle. So we are not going to sit there and cut off our nose to spite her face. This is all about driving value creation for this company, which means drive that top line and drive profitability.
Would you be willing to sacrifice lower margin revenues to try to drive margin improvement?
We will look at everything. So the reality is as part of a portfolio review – and again, there's no guidance here, but a very logical and smart way to look at a business is if there is something that is not pulling its weight, you have to consider alternatives for that part of the business. So, yeah, we're going to look at everything, because it's the right and it's the smart thing to do as a company looking to create value.
Got it. And last thing, on the sales force restructuring, where are we in that process?
You want to talk about sales team?
Sure. Yeah, let me take that up, Rich. Peter, in terms of our go-to-market approach, we're obviously evaluating a number of improvement ideas that have come up through the McKinsey work, but also through the contributions of David Godfrey, who I think we mentioned on our last call. David's been instrumental in teaming with both me, McKinsey and our leadership team around identifying areas of greater effectiveness that we should be striving for. And we've got a number of ideas now that we're just about to decide upon that will lead us, we believe, to a much more effective approach there. So I'll be able to talk more specifically about that on our next call, but we've been doing a great deal of work on that. We view that as a very high leverage area for ourselves.
Got it. Thank you.
Our next question comes from Andrew Steinerman from JPMorgan. Please go ahead.
Hi. Good morning. This is Michael Cho on for Andrew.
Hey – morning.
I know you touched on this a couple of times, but let me just try to ask again. What level of incremental investment do you think, just broadly, would it take to implement a Phase Two? And I think you said it's 80% complete now.
Michael, this is Tom. I'm not in a position right at this moment to actually describe the dimensions of either investment or returns that we're likely to get from these action plans that we're considering, but I can assure you that we're doing very careful trade-offs around the different priorities and the different benefits that will result from these efforts. And, frankly, we're probably about 80% of the way along with the program at this stage in terms of that identification, so we've got a little ways to go yet to determine some of the additional potential. And once we have that in hand, we will be full bore on implementation planning. So in our next call, we'll clearly be in a better position to give you the information you're hoping to receive and which we obviously want to provide. We just want to provide it an accurate way just as soon as we can.
Okay, understood. That makes sense. And then, just one quick follow-up, you referenced PE playbook and PE-type returns a couple of times as well. Can you just clarify what you mean by PE-type returns?
Well, sure. I think, as you know, I spent a bit of time in the industry. And the fact is, generally, if a PE firm is involved in a situation where they're investing, they will look for cost efficiencies, greater effectiveness. They'll look for ways to unlock growth and the like. And depending on the nature of the industry, in an information industry, that could well lead to returns that are significant and significantly higher than where we are currently. And we believe that that is a good objective for us to have. That's the kind of objective we need to use to motivate our thinking and really clarify our prioritization. So we want to adopt that aggressive approach, if you will, to actually generating that additional set of returns for our shareholders.
Understood. Thank you.
Our next question comes from the line of Bill Warmington with Wells Fargo. Your line is open.
Good morning, everyone.
Hey, Bill.
So a question for you on the leverage in the business, if you could just help me with the calculation on the current gross and net leverage as the rating agencies see it now, meaning adjusted for pension and other factors. Where are we?
Yeah. Hey, Bill. I'll give you a rough. I would say we're tracking to be this year on an S&P basis, which takes into account pension, all those things, probably closer to the low 3s.
Low 3s.
Which technically is in an investment-grade bucket.
Exactly.
But they don't automatically upgrade you the day you cross the line. It usually takes a while to prove that you're there, but the reality is we've actually delevered pretty quickly, so if we end up in the low 3s, which we fully expect to do, technically, that's the breakpoint investment grade for S&P. But I wouldn't expect them to turn around and upgrade us at that point.
So that's low 3 – but I'm saying right now, as of the end of the quarter, including the repatriated cash, netting that out, you're at about the low 3s on a gross basis or...?
Yeah, so we're talking about for S&P purposes, they do give you credit for the cash, Bill. They've just changed the methodology with tax reform since there isn't a penalty on bringing cash in. You get to use a little bit more of it in the calculation. That's all baked into what we're talking about. So what we've seen is we brought cash back, paid down debt. We're getting a little help on pension because interest rates are going up, so that's helping the calculation of the liability. So we ended up with our estimates are pretty good quarter pension debt-wise. So we are coming down. First quarter is a big cash flow quarter for us, so we ended the year last year just below 4. We – probably moving fairly significantly, but there's a lot of moving pieces. That's why we tend not to peg the quarter and the pension is a question mark till the end of the year. So we definitely feel on track, though, for getting from the high 3s, the very high 3s, down to the low 3s this year.
Got it. And then, how much leverage you think the business could take, just theoretically? Let's say as part of your strategic review, you look and you say, we're going to make these investments and in order to do them, we're going to lever up to do it. How much leverage do you feel the business could handle on a gross or a net?
I'm not going to give you a specific number and do a model there, but what I will tell you is obviously a very stable business with a very high embedded base that's mostly subscriptions, that throws off lots of cash...
Yes.
...on a very consistent basis. It's a stable base to build on. You could lever the business. That's not what we're talking about here as we sit here today. We've got a PE playbook that is about taking costs out of the business, making the right investments to drive growth. But, yeah, it's a very, very stable business with lots of free cash flow generation, so it could certainly take on some leverage if it needed to.
Yeah, I think the other thing I would just add to that is that while the rating could move, it is not just about the cost of debt that you're concerned with rating, but it's the access to the capital markets. And that has continued to be – it's been a little stronger in the last year or so, but it's had its lumps, especially in the high-yield area, where there are periods where you can't get at the market. So we have to keep all of those things in mind as we think about leverage.
Yeah, and then, a couple of operating unit questions. What was happening with Hoovers Suite this past quarter? Saw that that was down about 10% year over year in the Americas.
Yeah, so one of the biggest pieces within the Hoovers Suite was the data.com piece, right.
Got it.
As we told you going into the year, we expected that business to decline, call it, a point for the company, which, if you do the math, it's, call it, $15 million to $18 million. Again, that's just our assumption based on what we believe attrition rates would be. It was down a couple million bucks in the quarter and that's a pretty disproportionate share that does impact the overall rate. The rest of the Hoovers business had a pretty good year last year. We did have one customer actually shift over to another product over on the Master Data side, so we lost a little bit of revenue there, not to the company but it did shift. And you'll see in the nature of our business, there are shifts between categories and products, which does make it a little harder for you guys to follow the actual trends, but we do see that. And we always try to do what's right for the customer. So there's a little bit going on there but, overall, I feel pretty good about our progress on the Hoovers Suite in general.
The one thing I would add, Bill, is it's down 7% in the Americas and 4% overall.
Got it. And then within the Americas, the constant currency deferred was pretty strong. I just wanted to know if you could give us a little more color in terms of what was driving that.
Yeah, so we just had a little bit of a mix shift. So if you look at the Americas, right, and you'll see that it looks like it was down 2% in the quarter on revenue, right, which was actually 1.6% but rounds to 2%. The underlying sales were actually a little bit better than that. They were down a tad. We had some mix shift so we did have a little bit more usage products there were sold in the quarter, which shifts some of the recognition out of it. So you saw the deferred pop a bit. So it's actually a good thing because it means that the sales were a little bit rather better than the revenue in the quarter and you put a little bit more on the balance sheet that will be recognized later.
Got it. All right. Well, thank you very much.
Yes.
Our next question comes from the line of Tim McHugh with William Blair. Your line is open.
Thanks. Just coming back to the comments around complexity and reducing that within the business in terms of contracts and pricing and so forth, I guess what's the risk around that when you look at that? Obviously, I'm sure some of the customers like the customization. You probably haven't made this change already for a reason. So what's the breakage risk as you think about trying to reduce that complexity in the organization?
Thank you, Tim. This is Tom. I'll respond to that. I've been investigating more of the go-to-market over the last several weeks. I just want to assure you. We're still going to customize certain products for those customers who demand customization, so we're not abandoning the notion of customer-specific products. Obviously, our products, one of their great strengths, is they are versatile in terms of how they fit customer needs, and we like that versatility. It does allow us to suit certain customers in specific ways. What we're trying to do, however, is for those customers who don't require the customization, we're trying to streamline those product sets toward those customers so that we can actually be more efficient in serving them and enable our selling personnel to actually have more face time with customers, because if we require customization of everything all the time, but in fact customers don't require that to that extent, then obviously we're keeping selling personnel off the road, out of the field, et cetera, and they're inside the house adjudicating design issues or other kinds of things. So really net-net, this is all about getting more face time with customers, more time in the field, and using our selling capabilities to their best potential. Additionally, I would say by taking a customer focus and really standing in the shoes of the customer, we're actually going to design this process in ways that the customer most appreciates. And that's a shift that began a number of years ago, but I think one that now needs to accelerate completely so that we are very customer-centric over the next few years as we go through the kinds of improvements we're talking about.
So is this across the entirety of the business or is there a particular area or product suite where you need to make the biggest change, I guess?
Well, we're going to do it across the business because we, again, have asked for the full potential review, which is company-wide. So the holistic nature of that is quite essential. In fact, if anything, we've noticed that some of the frustration of past improvement efforts has really been due to the piecemeal nature of those efforts. And in some of these cases, you simply need to change several things simultaneously in order to get the clear benefit. And since we've been organized in a way that's been partly functional, partly by line of business, we feel that the matrix is a little too complicated and we really need to reset that matrix so that there's a more deliberate focus around customer needs. And obviously, the three processes I mentioned are cross-cutting. They go across the company. They support the various lines of business. Naturally, there will be some tuning for each line of business, so that we can get specific benefits for those areas in the business. So it won't be a generic fix across the board, but it'll be a holistic approach to fixing.
Okay, great. And then, just a numbers one, the revenue shift from 2Q to 4Q this year, what product area, I guess, would that be in? And can you talk any more color on why it would shift six months like that, I guess?
Yeah, sure. So what you're going to see, it's all in Advanced Marketing. We had essentially three large customers. Two of them have longer than a year deal, so 18-month deals. Oftentimes, a customer will not just have a set pay, it's a one-year deal. Sometimes, they'll have a requirement that requires them to have an 18-month deal. We see that from time to time. We see it more in the government business. You may recall us talking about that. So it so happens in the second quarter, there are two deals that are in multi-year deals, so the revenue's already locked in, but the renewal date is actually going to happen in the fourth quarter instead of the second. Then the third deal is one of those government deals, where those are dependent upon funding cycles, so they will often bounce around from quarter to quarter. Lots of times we have these. It just so happens three of them happened to be in the second quarter, which is why we wanted to just alert you to it and let you know that that's happening. But we're not, in any way, worried about the revenue hitting within the year, but there will be that shift in timing.
Okay. Thank you.
Our next question comes from the line of George Tong with Goldman Sachs. Your line is open.
Hi. Thanks. Good morning. You've discussed high-level findings from your Phase Two of the strategic and operational review. Can you elaborate on which of the initiatives you're prioritizing to drive improved execution?
George, I can give you a little color on this. We'll have more to share in the next call, of course, but, as I indicated, there are three key processes that are drawing our attention. And we're working through some actions related to all of those. But we are putting an emphasis on our Quote-to-Cash process because we think that one is profoundly influencing the complexity that we're dealing with across the business right now. And once again, I mentioned a little bit earlier in one of the questions or one of the answers, just the need to get sales people out of the office, not dealing with changes and order forms and other things, but in the field. By fixing our Quote-to-Cash system, modernizing it, more fully automating it, we really think we'll see a very significant step change in that achievement level. So that's a clear priority for us as we move forward.
Yeah, that's very helpful.
Let me give you a little more color on that, just to give you a sense. If you think about legacy systems, many companies who have been around awhile have brought systems together over time that don't necessarily always speak to each other. So if you think about our CRM system, contracting, billing, reporting systems, in a sense, many of those are older systems that are, in a sense, siloed and they don't necessarily speak to each other. The problem with that is it then slows down the throughput for the company in general, but sales people have a lot of extra work to do as they go through administrative tasks to make sure that things go through smoothly. So it's an area that we're going to focus on. It's not always the sexiest area. People want to invest in customer-facing systems. But the reality is internal systems ultimately touch your customers, because if you're slower in getting things through, it's ultimately going to have some impact on customers. So we're doubling-down on this and we are going to do a comprehensive overhaul of those systems, which I'm pretty excited about.
Got it. That's helpful. And then can you discuss the progress in converting your customers over to D&B Credit and D&B Hoovers and how much of a revenue lift you expect from the remaining conversion?
Yeah, I can talk a bit about that. Let's start with D&B Credit first. We continue to shift customers over to that. Right now, about a little over actually 50% of the customer base is on D&B Credit. It's less of that in revenue. It's a little over 25% in revenue. If you think about it, the biggest growth has come from very small companies in the emerging business unit. We are seeing lifts in terms of pricing for upgrades. So in the first quarter, it was in the neighborhood of about a 5% lift on companies that upgraded to the new product. And that's a global number. So we like the progress, not as fast as you know in terms of the overall penetration as we initially expected, but we're making good progress and we are seeing some good pricing as we convert folks over. On the D&B Hoovers side, again, we're seeing pretty good progress there. The overall business, we've converted, I'll give you rough numbers, about 3,000 of 8,000 customers, so pretty good progress. The first quarter was actually quite good in that about 1,000 customers converted over there. ASP overall for that product is up about 7% over last year, and it's really driven by the new customers. So upon conversion, we're not seeing as much of an uplift. They've been flattish, but as new customers come on, we're getting better pricing. So we think we're moving in the right direction. We could always move faster, always like to move faster, but the underlying statistics are pretty good.
Very helpful. And then lastly, could you provide a brief update on how the Microsoft partnership is progressing?
Yeah, so it's still early days on the Microsoft partnership. I would say we haven't seen material revenue come out of that yet. The reality is we're about a quarter in or so. These things do generally take some time to get traction. If you go all the way back to the initial deal that we did with Salesforce, it had a pretty big ramp-up time and then it kicked in and was very successful, as we all know, over time. So we're still in that mode right now with Microsoft, working out some of the early kinks. We still have good hopes for that partnership, but it's nothing material as of today.
Got it. Very helpful. Thank you.
Our next question comes from Shlomo Rosenbaum from Stifel. Please go ahead.
Hey, Shlomo.
Hey, good morning. Thank you for taking my questions. Hey, Rich, maybe you can give me a historical perspective and maybe, Tom, you can help me with what you're seeing more recently. But I've seen the company focus on cost cutting for a really long period of time, like for a greater part of the last 10 years. A lot of times what I'm seeing is the bigger focus on cost cutting, the less progress they make on moving the revenue up. And I just wanted to ask you to contrast the focus in what's going on now in reducing costs within the business versus what we've seen for many, many years and what will be different here and why were things not successful in terms of taking some of those costs beforehand? And it's more holistic now versus pinpointing? Could you just contrast what you're doing now versus what was happening?
Yeah. Why don't I start? I'll give a little bit of the historical perspective, then
I'll jump in.
And Tom will jump in. I would say there's a couple of things at play here that will make a difference. Obviously, we're doing a very holistic look, but we are approaching this through the lens of a PE playbook, which says we are going to drive the top line and identify very specific things, not just new areas to invest in, but very specific things in terms of our execution that we will address. And we will take out costs, looking at every element, and reinvest where we need to reinvest to drive that growth. So it's a comprehensive playbook and we're taking a rigorous view through that PE lens. So that's, I think, an important point. If I go back historically, and I'll talk about two periods, one was during the financial crisis. Well, actually, I'm going to go three periods, because I think it's important. If I go back pre-financial crisis, we actually took out a lot of cost, reinvested it back into the business and the business grew. And that was actually the right mix, the mix you want. You take costs out rigorously, you invest them back into innovation, and the company grows. So pre-financial crisis, that equation, which is a great, in a sense, PE equation, worked very well. During the financial crisis, when we were challenged for growth, and were investing in the technology initiative that, as we all know, didn't work out as well as we would have liked, we did take a lot of cost out, but we did not do a lot of investment back into innovation. So now you had one half of the equation. If you have one half of the equation, it's not going to work. So the growth did not reignite. In the last four years, we did invest a lot, as you know, to get back into growth. We did take cost out, but I would say it wasn't as comprehensive in terms of cost take-out. We did some. We didn't go as aggressively as we perhaps could have, so we did let profitability edge down a bit. And we're at a stage now where we've identified the very specific things we need to do to drive the operations. We did bring in some outside help to identify those things, validated many things that we suspected, also gave us some new insights. Importantly, we have David Godfrey along with us to help understand some best-in-class techniques to really drive the go-to-market, which is an important piece. I mean, his success record at Gartner speaks for itself. That's going to help us. We've identified things we need to do. We're going to take a very rigorous view of cost, but we're going to do those things in concert. So everything that we take out and everything that we invest in for growth are going to sing together. And that, I believe, is going to make a big, big difference for us. And I'll hand it to Tom to give his perspective.
Yes, thank you. I would just add that, first of all, in terms of understanding our full potential, I think we're doing something that was not done in the past, in my view. And again, I've been with the company five years on the board, so I've got some perspective on this. But we're doing much more outside-in referencing. We're benchmarking ourselves against industry standards, against other B2B service company and information players. We're really looking at this from an objective vantage point, if you will. And I think that's allowing us to see where we need to be much more ambitious, where we need to raise our level of aspiration around both cost efficiencies, but also around some of the processes like product innovation. Many of our product development efforts in the past have been necessary, but probably not sufficient in the sense that we have come out with products that have spelled new revenues for us and yet, we may have set targets for ourselves that were not as high as they might have been around the newness or the boldness of the features of the new products. I think what our analysis is showing us is that we need to have that additional level of ambition. And, frankly, as somewhat new eyes, at least inside the company, I'm encouraged by what I see as opportunity areas for investment in our current business portfolio. And, as Rich mentioned, we are looking at the entire portfolio to make sure it's balanced in terms of growth opportunity and return potential and the like. But we're also identifying, as we have these conversations, additional white space in the market where the kind of brand that Dun & Bradstreet commands in the market ought to be able to really use to umbrella in or extend, if you will, into other information need categories that our clients have. And we have plenty of examples where we're selling into customer demand areas one-off kinds of situations or customized situations which could be productized, packaged, scaled up to a greater degree, if we go at that with that ambition and that discipline. So I'm just very encouraged by what I see as the upside potential.
So if you don't mind, I'm going to follow up on the other side now, on the sales thing. I know there's competitive issues, but maybe you could pick one thing. What did you see – can you give us one of those examples where, hey, we have a one-off solution that we could productize this? And then, as a separate thing on the sales, I've seen a number of CEOs and D&B talk about the issues with the sales force and the hunters versus the miners and the farmers. And I've seen, at least from telling the analysts that they've changed the compensation mix and stuff like that. We all have seen the same results. And could you talk a little bit what David Godfrey might be talking about that's so vastly different than some of the things that have been tried before?
Sure, let me take a cut at both of those questions. First of all, in terms of areas of upside potential, I would point to a conversation I had with one of our customers recently about the value of our analytics. I was with the lead customer making buying decisions in a very large financial institution. And he went out of his way to compliment our analytics team and their ability to work with his risk people and analytics teams around generating new insights and some new methods for actually being more precise around risk management and control for them. And, as you know, in a financial institution, that really means money. They basically want to avoid loss. They want to use our data to help predict loss potential, try to avoid unnecessary risk, et cetera. So it was a very meaningful value proposition that he was describing. And in my view, it begged two questions. Should we, can we, how could we be having more of those conversations with more of our customers at that high level, at that conceptual level, where we're actually brainstorming direct solutions for them that make great value contributions to their business model? And then secondly, is there a way to productize some of what we developed for that client, so that we can actually commercialize it to a greater extent? Because we're not necessarily in the business of consulting, per se, although we do a lot of advisory work alongside our products in the way of analytics, but I think there is an opportunity to think about the analytics capabilities that clients are increasingly needing and wanting and how those analytic capabilities can be delivered in a variety of forms. So I would just point to that one area that is an area, I think, of great opportunity within the industry and certainly for us, in particular. And fortunately, we've got a very good foundation there upon which to build. I think we just need to ramp up our process for product innovation and commercialization to a greater degree. Your second question on go-to-market, there, and I understand your concern that a lot of effectiveness has been talked about before, I'm sure. Some of the tools and techniques are quite common across companies, et cetera. So there clearly is a question, why doesn't it all come together easily? Or why hasn't it yet? And so on. And I've asked some of the same questions myself as I've gotten out into the field, talked with our teams and the like. And I can assure you our teams are certainly working very hard within the current structure to do everything they can to really sell effectively and market effectively. What we've noticed, though, is that there are some structural ideas that could be brought forward. There's some refinement to the compensation and incentive programs that could be addressed that would further tune what we have. So we're not in any way looking at this as a complete remodel of go-to-market. We're actually looking at it as a strengthening of the process that we currently have, much of which was put into place over the last few years. So it's not antiquated. It's modern. And we've got highly capable people in a lot of the slots working very hard at it. We really want to optimize that to a much greater degree, however, and that's what our sales leadership teams, advised by David Godfrey and McKinsey, are now at work doing, to try to identify those action steps and resource those appropriately.
Yeah, and let me add one example because I think in some ways, it'll bring it a little bit to light, but one of the most important things, obviously, for us has been to get in front of the customer. And in some ways over the last several years, we may have created too many touch points with customers, in that we created an organization with lots of folks who were charged with parts of that customer relationship and probably weren't as organized in our approach to the customer. So we'd have specialists calling on folks. We'd have the customer support teams calling on folks and sometimes the generalists calling on folks. And that can be streamlined and coordinated in a better way so that it is a better experience for the customer and actually a more refined way for us to do it and more cost-effective way for us to do it. In some way, it was the sin of wanting to be too customer-centric, but we needed to sharpen our focus a little bit more. And that's just one area as we've looked at the model, we said, hey, we could actually sharpen this thing and get much more bang for the buck; still have all those folks, but apportion the work slightly differently. So that's some of the work that we're looking at right now.
And once again, even there, we're looking at what customer segments are needing and requiring. And, as Rich points out, we'll actually be tailoring our approach to the needs of those customer segments. So there is a common theme throughout much of what we're emphasizing here as important changes and that is to be customer-driven in making these changes.
Yes.
Okay, thank you.
Our next question comes from Manav Patnaik from Barclays. Please go ahead.
Thank you. Good morning.
Hey, Manav.
Good morning. I have a few questions. I understand we're at the hour. So the first one for you, Tom, is a lot of these systemic issues you identified, I guess it's been somewhat visible for investors and, like Shlomo, I think, said, prior management identified it as well. So why five years later, did you decide you needed to hire McKinsey, is my first question?
Hello, Manav. Thank you for the question. The fact is we saw, I think as I mentioned on our prior call, we saw growth decelerating early last year and we became concerned about that. We felt that we needed a deeper assessment of the situation to determine what was fundamental, what was execution, et cetera. And so it just became apparent that getting an impartial outsider to come in, do an assessment, provide us with facts that we needed to hear, whether we wanted to hear them or not, and use that, if you will, to kind of guide our decisions about leadership or resourcing or other changes.
Okay. And I guess the PE playbook that you've talked about and obviously you have that background there, that makes complete sense, but I think you know, as well, that the advantage of PE, obviously, is being private to make the heavy changes, which it sounds like you guys need to do as well. So you talked about fiduciary duty and so forth. Like why not just officially look at alternatives, as opposed to just waiting to listen to offers, is the way I heard your statement?
Well, I think, as I indicated, we're certainly open to every possible way to create shareholder value. So the board is very open-minded in that regard. And I think that's the way the board needs to operate and wants to operate. I think we felt that having our own playbook designed with our own knowledge and yet helped by the impartiality of an outside firm working with us, would actually establish for us a true read of the potential, so that we would know where to prioritize, how to prioritize and so forth. And obviously, this next month or two, as we get into the selection of these actions and the prioritization of these actions, we're going to get very granular around which actions make the most sense, what the timing of those would be, how they overlap, how they will affect revenue growth and earnings growth and the like. So we're just going to be in a much better position to really address the heart of your question on our next call.
Okay, got it. And then, just a last one, Rich, in terms of the business being stable, you've pointed to the deferred growth. I mean, in the past, we've gone from look at it, don't look at it. It's been positive for some time, but still I think in your commentary, most of the numbers, except for Non-Americas, were negative growth, basically. So, I mean, what is it that gives you the comfort that it truly is stable and that we're not falling down a hole here?
Well, here's what I'd say, Manav. We're clearly not satisfied with where we are. I think that should be fairly evident from management changes, from our discussions, and from the work that we're doing with McKinsey and around the PE playbook. We're not happy with where we are. This is not the potential that this company has. We're not fulfilling that in the moment. In terms of stability, though, clearly, we have a highly embedded base, high recurring revenue. The numbers are hovering around zero in the first quarter. The deferred is decent. So, yeah, it's a stable business. It's not falling off a cliff, by every measure, right. It's not going to fall off a cliff. But the reality is we are not where we need to be. We are not where we want to be. And we are driving to change that and to drive this value equation forward.
Okay, got it. Thanks a lot for taking my questions, guys.
Yes.
Thank you.
And we have no one else in queue at this time. I'll turn the call back for closing remarks.
Okay, great. Well, thank you very much for your interest and we look forward to talking to you next quarter.
This concludes today's conference and you may now disconnect.