Dun & Bradstreet Q1: Achieving The High End Of Medium-Term Growth Guide Is Possible (DNB) (2024)

Investment action

I recommended a buy rating for Dun & Bradstreet Holdings, Inc. (NYSE:DNB) when I wrote about it in late February this year, as I had a positive outlook for organic growth and margin expansion. Based on my current outlook and analysis, I continue to recommend a buy rating. My key update to my thesis is that I expect DNB to see growth acceleration in the coming years, hitting the high end of management's medium-term guidance of 7% organic growth. The strong traction in DNB's Master Data Management [MDM] and production innovations gives me confidence that DNB can continue to raise prices and sustain its retention rate. If growth accelerates as I expected, the market should eventually rerate multiples upward.

Review

DNB reported 1Q24 earnings earlier this month, with revenue growth coming in at 4.5%, driving total revenue to $564.5 million, in line with consensus estimate of 4.7%. Importantly, organic growth maintained a mid-single-digit percentage level, growing 4.3% in 1Q24, 110 bps above 1Q23 at 3.2%. International organic revenue growth came in even better at 6.8%, an acceleration from 4Q23 of 5.3% and 1Q24 of 5.5%, implying strong underlying strength, and also showing the potential for organic growth acceleration for the North America segment. Down the P&L line, EBITDA margins expanded 50 bps y/y to 35.7%, above the consensus of 35.4%, driven by lower data acquisition costs and operating leverage. At the EPS level, DNB reported 1Q24 EPS of $0.20, in line with the consensus estimate of $0.19.

I remain buy-rated for DNB as organic growth remains strong with positive momentum, and I see two major catalysts to continue supporting this growth.

Firstly, the DNB MDM product is seeing very strong traction (as I discussed in my previous post), growing by more than 10% in Sales & Marketing and 30% in Finance & Risk in 1Q24. I believe this is very indicative of the potential growth ahead for DNB. As DNB continues to integrate more data sets and map out supply chain relationships, it brings more value to customers that are looking to leverage AI capabilities for their internal analytics. This puts DNB in a very favorable position to continue penetrating the $15 billion addressable market for MDM. The beauty here is that once DNB starts to layer their AI analytics on top of DNB's dataset, DNB becomes a lot more sticky than it already is, which gives more pricing power in the future.

Secondly, DNB investments in new product innovations and product enhancements are also gaining positive traction, as seen from the strong Vitality Index (32% in 1Q24), and this should give DNB more justification to increase pricing. Management guided to raise prices by 2.5% in FY24 and 3 to 3.5% in FY25. If we look at the highlighted product launches during the call, like Ask Procurement and D&B Hoovers Conversational List Builder [HCLB], the common characteristic between them is that they are aimed at improving productivity for customers. For Ask Procurement, it essentially simplifies and accelerates procurement and supplier decisions. For HCLB, it helps generate a targeted prospect contact list. Both of these help customers cut down on a lot of man hours that were previously used to facilitate these functions. As such, I think customers are going to be willing to pay for the price increases.

One additional thing I like to mention is that I think the FY24 revenue guidance of 4.1% to 5.1% organic growth is not representative of the true organic strength because of three reasons, which gives me further confidence that DNB can see better organic growth performance in the coming years:

• North America is facing headwinds (due to a change in accounting methods) from revenue shifting from on-delivery to ratable recognition (mentioned in the 4Q23 earnings call).
• DNB continued to experience a drag on SMB renewals due to the FTC consent order on legacy credibility solutions in North America Finance & Risk, impacting total company organic revenue growth by 60 bps y/y in the quarter. Adjusting for this headwind, guidance would be up by 60 bps.
• 90% of revenue is already growing by more than 6% (above the midpoint of management's 5 to 7% medium-term target).

Valuation

I believe DNB can grow at an even faster organic growth pace than I previously expected. To reflect my optimism, I upgraded my FY24 growth from 4.1% to 5.1% (high end of the guide), followed by 6% in FY25 and 7% in FY26, assuming that DNB will achieve the high end of management's medium-term growth target of 7%. I kept my margin expectations flat vs. my previous model despite the improved growth outlook, as I recognize the fact that DNB needs to reinvest in product innovation to drive growth but also believe that the growth acceleration and positive pricing contribution should improve margins due to the high incremental margins. The market continues to price DNB at a cheap multiple of 10x forward PE, which, I believe, does not reflect the potential improvement in organic growth and margins. Assuming I am right on earnings, the current valuation implies that DNB trades at 8x FY26e PE, which is a level that DNB has never traded at before. To give a sense of the potential magnitude of rerating, in 4Q21, DNB traded at ~15x forward earnings with organic growth of 4.8%. If DNB can accelerate organic growth to where I expect, valuation could easily re-rate back to 15x. However, I am cognizant of the fact that rates are higher today; hence, I assumed that DNB would only see a re-rating to 12x forward earnings (the midpoint of where it is trading today vs. 15x).

Risk

DNB's reiterated full-year 2024 guidance implies EBITDA margins of 38.8% at the midpoint, pointing to just ~30 bps of margin expansion from 38.6% in 2023, reflecting increased investments in generative AI. Although I am positive about these investments, the magnitude of such investments matters as they could dampen the near-term earnings growth outlook, which may continue to put pressure on DNB stock's ability to see an upgrade.

Final thoughts

My recommendation is a buy rating for DNB. Strong organic growth momentum and positive traction with the MDM product and product innovations give me confidence that organic growth can accelerate in the coming years. While the near-term margin expansion might be limited due to reinvestments, I believe such investments are needed to drive growth, which should justify a higher valuation. Assuming DNB achieves the high end of management's medium-term guidance and a more conservative multiple rerating, I see compelling upside potential.

GS Investing