Dun & Bradstreet: Organic Growth Continues To Accelerate

Overview

Dun & Bradstreet (NYSE:DNB) continues to look promising. The company is making strides toward accelerating organic revenue growth, which in my opinion is the primary factor supporting the stock price. I find it encouraging that DNB has been able to increase its organic revenue growth from 2.2% in the previous quarter to 3.2% in the current quarter (1Q23). In addition, management reaffirmed FY23 organic revenue growth guidance of 3.5-4.5%, which I believed was a strong message and show of confidence that ought to have been a catalyst for optimism. I would further emphasize that DNB has clearly demonstrated the business is very resilience to macrocycles as evident through their impressive client retention rates, and acceleration in organic growth. Against, it appears to me that DNB is slowly reaching the range of growing at mid-single-digits organically, and it in another 2 quarters, the 3Q23 results would be strong evidence that DNB has achieved this target. I reiterate my buy rating on DNB.

Organic growth

DNB's 1Q23 performance was encouraging, with organic revenue growth quickening from 2.2% in 4Q22 to 3.2% in 1Q23. This is where I believe all eyes are currently focused on the company. This exemplifies DNB's efforts to revitalize its organic growth profile despite the weak macro environment and demonstrates the management's ability to walk the talk by achieving key targets. If the macro environment continues to improve, I have no doubt that DNB will be able to achieve its goal for FY23, and may even exceed the high end of the guided range. With regards to macro, it was heartening to know the operating environment for DNB remained stable for 1Q23, with consistent sales cycles and >?>90% retention rates. I would go 1 step further to highlight the initiatives to optimize internal operations has helped DNB fend against the macro headwinds. As such, I believe the market will eventually give DNB the credit it deserve, which I think its being heavily discounted given the lack of visibility. I think the "credit" will come much earlier somewhere in 3Q23 when DNB has already locked in 3 quarters worth of 3-4.5% organic growth (the probably of 4Q23 missing target by a huge mile is less likely given the nature of DNB business).

Product innovation

The steady advancements DNB has made in enhancing their technology and products have given me even more faith in the company's ability to sustain its planned organic growth. As an illustration, DNB has reduced its reliance on mainframe hardware by half since migrating a key software application to Google Cloud. Management also hopes to wean itself off of this dependency entirely within the next two years. I anticipate that this strategic action will improve the architecture of DNB's data supply chain and drastically cut processing latency. DNB's product vitality index has increased in both North America and internationally, indicating strong advances in product innovation, as was also revealed in the most recent earnings report.

AI impact is not as big

I believe a part of the reason why DNB shares traded down was because of the worry about how generative AI is going to eat the lunch of DNB, particularly for the SMB segment. While this has some merits, I believe the concern is overblown for couple of reasons. First, DNB exposure to SMB is small, so even if the AI threat were to gain traction, it will not have a huge impact on the financials. Secondly, we must remember that DNB portfolio of databases are proprietary data that an external AI will not be able to search through. If anything, DNB is in the prime position to leverage generative AI to enable users to search for what they want easily, in a more intuitive manner.

GSA

DNB is hampered not only by the effects of AI, but also by the revenue headwinds caused by its overlapping GSA contract and the FTC consent order, both of which put a damper on renewals from DNB's SMB clientele. If we take out the effect of the GSA contract, it implies that organic revenue growth slows from 4.4% in 2022 to 4.1% in 2023 at the midpoint, so I can see why people are worried about the sustainability of DNB organic growth trend.

Conclusion

DNB shows promise with its efforts to accelerate organic revenue growth. The company's strong performance in 1Q23, with organic revenue growth reaching 3.2%, demonstrates its resilience in a challenging macro environment. Management's reaffirmation of the FY23 organic revenue growth guidance and the steady advancements in technology and products further contribute to my positive outlook. I believe DNB is on track to achieve mid-single-digit organic growth and that the market will recognize its value eventually. While revenue headwinds from the GSA contract and FTC consent order exist, DNB's strong performance suggests sustainability in its organic growth trend. Therefore, I maintain my buy rating on DNB.