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Dun & Bradstreet Corp. (DNB - Analyst Report) reported third quarter 2012 earnings of $1.76 per share, which was ahead of the Zacks Consensus Estimate of $1.60 and increased 23.9% from the year-ago quarter.

Quarter Details

Core revenue (after the effect of foreign exchange) of $413.2 million was up a modest 0.6% year over year and surpassed the Zacks Consensus Revenue Estimate of $412.0 million.

Revenue for the quarter was positively impacted by a 9.5% growth in Sales & marketing solutions segment, which offset a 2.6% annual decline in Risk management solutions and a 2.0% year-over-year decline in Internet solutions business segment.

D&B recorded a 1.2% increase in revenues (after the effect of foreign exchange) from North America, while its International revenue (after the effect of foreign exchange) was down 1.1% on a year-over-year basis. Among its international revenue, Asia-Pacific recorded growth of 3.7% offset by a 4.4% decline in revenue from Europe and other international markets.

Operating costs decreased 10.4% year over year to $303.5 million. Selling, general & administrative expenses decreased 5%; operating expenses declined 17.3% and depreciation & amortization was down 3% on a year-over-year basis in the reported quarter.

D&B’s operating profit increased 8% year over year to $127.9 million. The year-over-year increase was primarily attributable to reengineering savings and savings on account of businesses that were divested. Operating margin of 30.9% expanded 210 basis points (“bps”) from the year-ago quarter primarily due to lower costs.

Net income was $79.4 million or $1.76 per share compared with $69.9 million or $1.42 per share in the year-ago quarter. This significant year-over-year growth was driven by operating margin expansion.

D&B ended the quarter with $137.0 million in cash and cash equivalents, up from $118.6 million in the previous quarter. Total debt was $1.02 billion versus $1.01 billion at the end of the preceding quarter.

Strategic Technology Investment (MaxCV)

In February 2010, D&B initiated a two-year strategic technology investment program known as MaxCV to strengthen its leading position in commercial data and improve its current technology platform to meet the ever-growing needs of customers. The program is expected to accelerate revenue growth and reduce expenses by improving data quality and timeliness, increase the speed of product innovation and significantly reduce technology costs.

In the third quarter of 2012, D&B incurred $6.7 million in total pre-tax expenses for MaxCV. Moreover, it incurred $6.1 million in capital expenditures and additions to computer software and other intangibles related to MaxCV. D&B expects to spend $60.0 million for MaxCV in fiscal 2012.

Guidance for 2012

D&B expects core revenues to remain flat to up 3.0%, before the effect of foreign exchange. Operating income is expected to increase in the range of 4.0% to 7.0%, before non-core gains and charges.

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 $275.0 million and $305.0 million, excluding the impact of legacy tax matters but includes investments in MaxCV.

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 2012 outlook reflects a sluggish macroeconomic environment in North America and weakness in Europe. Moreover, we believe that increasing competition from companies including Equifax Inc. (EFX - Analyst Report) and Moody’s Corp (MCO - Analyst Report) will also hurt profitability going forward.

We, therefore maintain our Neutral recommendation over the long-term (6-12 months). Currently, D&B has a Zacks #3 Rank, which implies a short-term Hold rating.

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