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Dun & Bradstreet Corp. (DNB - Analyst Report) reported second quarter 2013 earnings of $1.53 per share, which beat the Zacks Consensus Estimate by 3 cents. Earnings per share climbed 2.0% from the year-ago quarter but jumped 12.5% sequentially.

Revenues

Core revenues increased a modest 0.7% year over year and 1.4% sequentially to $386.4 million, which beat the Zacks Consensus Estimate by $2.4 million.

The modest year-over-year growth was primarily due to better-than-expected performance from Risk Management Solutions (up 1.0%). Sales & Marketing Solutions revenues remained almost flat year over year.

Sequentially, revenues were negatively impacted by a 4.5% decline in Sales & Marketing Solutions, which was fully offset by a 4.6% increase in Risk Management Solutions.

D&B recorded flattish year-over-year growth in revenues from North America. International revenues increased 2.9% from the year-ago quarter, primarily due to strong results from Asia-Pacific (up 6.3%). Europe and other International markets remained almost flat in the second quarter.

Revenues from North America decreased 1.6% sequentially. International increased 10.1% from the previous quarter, primarily due to a 19.1% jump in revenues from Asia-Pacific region. Europe and other international markets climbed 3.5% from the previous quarter.

Margins

Operating margin contracted 390 basis points (“bps) from the year-ago quarter but expanded 170 bps sequentially to 25.8%. The year-over-year contraction was primarily due to higher operating costs, which fully offset the improvement in revenue base.  

Operating costs as a percentage of revenues jumped 390 bps from the year-ago quarter, driven by significantly higher operating (up 370 bps) and selling & administration expense (up 70 bps), partially offset by lower depreciation & amortization expense (down 50 bps) from the year-ago quarter.

Sequentially, operating cost declined 170 bps due to a sharp decrease in selling & administration expense (down 210 bps) and lower depreciation & amortization expense (down 20 bps), which fully offset higher operating expense (up 60 bps).

Net income margin plunged 260 bps from the year-ago quarter but increased 120 bps from the previous quarter to 15.8%.

Balance Sheet

D&B ended the quarter with $196.5 million in cash and cash equivalents, up from $172.8 million in the previous quarter. Total debt was $1.41 billion versus $1.30 billion at the end of the preceding quarter.

Guidance

For fiscal 2013, D&B expects core revenues to increase in the range of 0% to 3.0%, before the effect of foreign exchange. Operating income is expected to decrease in the range of 6.0% to 3.0%. Earnings are expected to grow in the 8.0% to 11.0% range, before non-core gains and charges. D&B expects free cash flow between $270.0 million and $300.0 million.

Recommendation

We believe that D&B’s high-margin business model, strong international growth potential, emerging market growth opportunities, strategic investments, incremental cost savings and new product pipeline will drive growth over the long term.

However, we believe that the 2013 outlook reflects a sluggish macroeconomic environment in its operating markets. Moreover, we believe that increasing competition from companies including Equifax Inc. (EFX - Analyst Report), Yahoo! (YHOO - Analyst Report) and Moody’s Corp (MCO - Analyst Report) will also hurt profitability going forward.

Currently, D&B has a Zacks Rank #4 (Sell).

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