martin-dm
Investment action
Based on my current view and analysis of Dun & Bradstreet Holdings (NYSE:DNB), I recommend a stable rating as it underperforms its peers in terms of growth outlook and net margins. Although the third quarter of DNB reported income growth, its growth outlook is mid-single digit, while its peers are expected to grow by double digits. Furthermore, DNB’s net margin is negative, while its peers are positive. However, I notice that they have taken the initiative to develop their AI capabilities and are also partnering with IBM. With the rapid growth of the AI market, I believe these initiatives can be a key driver of revenue growth, but it is important to monitor next quarter’s performance to gauge the success of these initiatives.
Basic information
DNB provides commercial data, data analytics solutions and data insights that support business decision-making processes. It also offers a wide range of products, such as risk management, finance solutions, sales and marketing, and supply chain management.
Over the past 5 years, its revenue CAGR has been around 5.3%. Revenues have grown since 2018 from $1.7 billion to $2.2 billion in 2023. Its gross margins have remained at a consistent rate of around 68% over the years. In terms of net margin, it has improved significantly. In 2018, it reported a negative net income margin of 41%, but by 2022, it had improved to a negative 0.1%, almost breaking even. The high net loss of 2018 is attributed to high interest expenses, which accounted for about 21% of revenue. But over the years, it has gradually improved to 8.6%. Additionally, its total operating expenses as a percentage of sales improved from 66% in 2018 to 58% in 2022.
Review
ABOUT THE the third trimester of 2023 reported on November 1, DNB’s revenue increased 6% year-over-year to $589 million. Adjusted EBITDA increased 6% year-over-year to $235 million. Therefore, the adjusted EBITDA margin is around 40%. Compared to the results of the previous quarter, it shows that DNB is growing both in revenue and adjusted EBITDA. In the previous quarter, adjusted EBITDA margin was 37.2%, representing an improvement of 2.8%. In terms of revenue growth, it accelerated from last quarter’s 3% growth to 6% currently.
The organic growth of DNB’s income has been in a positive trend. For the third quarter, it reported organic revenue growth of 4.8%. This is a 0.9% improvement over last quarter’s reported organic revenue growth of 3.9%. The increase in organic revenue growth indicates that demand for DNB’s products is strong. Not just organic growth and demand; Another important metric I look at is retention rate because it drives recurring revenue. It is important to capture market share, but equally important to maintain it. In the third quarter, DNB reported a retention rate of 96% for North America and 93% for the international segment. A high retention rate is a signal of the general popularity and stickiness of its solutions. So far, it’s been trending in the high 90s, as last quarter’s international retention rate was 94%.
Currently, multi-year contracts account for 55% of North American revenue and 53% of overall revenue. Management expressed its goal of achieving 60% of total revenue under multi-year contracts. While some may argue that locking in prices with a multi-year contract could make them lose out in terms of pricing strategy, I believe otherwise, as locking in contracts improves long-term growth visibility and also allows them to make more informed decisions. good investment as they are. able to predict cash flow. This is important for DNB, as at the moment the third quarter net income margin is very close to breaking even.
As mentioned by management, they are still seeing strong demand for AI-powered data analytics solutions due to the need to improve financial and operational performance. In response to this demand for AI-powered solutions, DNB has already embarked on its AI journey.
“North America and International continued to benefit from the need for businesses to better use data and analytics to drive financial and operational improvements, which is only further amplified by advances in generative AI solutions.” 3Q23 call
First, DNB launched it D&B.AI Laboratories again in June 2023. This platform allows co-development with its customers to create specific and tailored solutions for them. I believe that such a co-development platform will further enhance DNB’s brand and increase demand. Its off-the-shelf solutions have already won the hearts of many customers, as demonstrated by its high retention rate. By offering a customized solution, I expect this product to further increase its demand, further strengthening its long-term growth.
In addition to internal AI development, DNB is also creating strategic partnerships. It has teamed up with IBM to create and bring innovative new products to market. Since DNB’s solution is primarily focused on data analytics, I believe that integrating DNB’s data with IBM’s Watsonx will create significant value for DNB. IBM Watsonx is an AI platform that is built for enterprises. Thus, it empowers and allows DNB solutions to have AI capabilities built into them, making them more sophisticated and intelligent and increasing their data analytics efficiency. It thus positions DNB well to create additional value for its existing customers, which will support retention. Furthermore, such a solution and partnership will attract more new customers, further increasing its organic growth momentum. The AI market size expected to grow to $2.5 trillion by 2032 from the current $538 billion, and this represents a huge market opportunity for DNB. Together with IBM, I believe this partnership will drive DNB’s long-term growth prospects and allow them to tap into this rapidly growing AI market.
ASSESSMENT
I believe DNB will grow 4% in 2023 and 2024. Management guided 2023 revenue to $2.3 billion, or about 4% growth. This growth rate is also in line with market estimates. I believe 4% is very achievable given the strong revenue growth reported in the quarter. In addition, its multi-year contracts, which account for more than half of total revenue, will ensure long-term stable income. DNB’s initiatives to develop and incorporate AI capabilities into its existing solution and its partnership with IBM further support its growth as the AI market is expanding at a rapid pace and they are well positioned to capture that growth .
Author’s work
DNB is currently trading at 3.16x forward EV/Earnings. His peers are trading at an average of 8.25x. As GNI’s negative net margin of 1.14% is significantly lower than the peer average of 17.36%, and the NTM growth rate of 4% is lower than the peer average of 12%, it is right for DNB to trade lower. My price target is $9.54, which represents no profit. Given the fact that its net margin is negative and its NTM growth rate is 66% below the peer average, I recommend a hold rating for DNB.
Author’s work
Risk and final thoughts
With DNB’s continued revenue and EBITDA growth, combined with its high retention rate and AI investments, if DNB were to report better-than-expected results for the next few quarters, I would expect to see its multiple approaching the peer average if its growth outlook and net margin were inches higher.
DNB’s third-quarter results were strong, with revenue and adjusted EBITDA growing by mid-single digits. Organic revenue growth has consistently improved due to its strong brand and market positioning in the data analytics segment. With more than half of its revenue under multi-year contracts, its future revenue growth has become more certain, and with that visibility, management guided full-year revenue growth by mid-single digits. Currently, there is demand for AI-powered solutions and DNB has already jumped on the bandwagon by launching a new AI-powered product as well as teaming up with some of the biggest names in the market. However, DNB does not underperform peers in terms of growth outlook and margin strength. His share price is trading at my target price based on his current future earnings EV, which I argued to be fair. With that in mind, I’m recommending a hold rating.
