LiveRamp Holdings, Inc. (RAMP) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Acxiom Q3 Fiscal Year '12 Earnings Call. [Operator Instructions] And as a reminder, today's conference is being recorded. And now I would like to introduce your host for today, Scott Howe. Scott, please go ahead.

Thank you. Good afternoon, and welcome again to everyone who has joined us on the call. Before I start, I want to call attention to the Investors section of our website, which contains slides that we'll reference in today's discussion. It's a milestone day in some respects for us at Acxiom. With me today for the first time is Warren Jenson, Acxiom's new CFO. Warren is a seasoned and well-respected public company CFO who previously served as CFO to a handful of successful public companies, including Delta Airlines, Amazon and Electronic Arts. His career highlights also include being named twice as one of the best CFOs in America by Institutional Investor Magazine, and one of the Bay Area CFOs of the Year in 2010. Most recently, Warren was Chief Operating Officer of Silver Spring Networks where he had responsibility for both operations and service delivery. Given this background, coupled with earlier experiences at General Electric, I am confident Warren will play a meaningful role in our forward direction and execution. Since Warren joined the team only a few weeks ago, after the close of our most recent quarter, he'll be relatively quiet today. In future, you'll be hearing quite a bit more from Warren as he and I continue the journey of transforming Acxiom's products, client results and business performance. Warren, do you want to say a couple of words here?

Thanks, Scott. I just really want to say hello to everyone. It's really great to be with you and thanks to many of you on the call today for the warm welcome. Over the past couple of weeks, I've been spending my time getting to know the company, our products and our associates. I've also been trying to jump in to our planning process to better understand our fiscal 2013 operating plan. Looking ahead, I'll be working with Scott and the team to execute the strategy he's laid out in order that we, first and foremost, delight our customers and in so doing, also drive shareholder value. You'll hear a lot from me in the coming weeks and quarters ahead but for now, I'll turn it back to Scott.

Thanks, Warren. In addition, I also want to say hello to Nada Stirratt, who is likely listening to today's call. Earlier today, Nada was announced as Acxiom's new Chief Revenue Officer. She will join our organization full time on February 13th and will be based in New York City, where we have a strong concentration of large clients and prospects. I can't tell you how excited I am about having Nada on board. She is considered one of the very top digital sales leaders in the world and is extremely well-known and respected for both her intellect and charisma. Nada's employment history is a roadmap of iconic brands. She worked at AOL in the 90s, helped establish advertising.com a decade ago, later managed field sales for Viacom MTV and was most recently the Chief Revenue Officer at MySpace. Throughout her career, Nada has lived at the intersection of data and marketing, which is just what Acxiom needs as we continue advancing our own transformation as a company. Finally, sitting beside me this afternoon are Art Kellam, Acxiom Controller; and Jay McCrary, Acxiom Treasurer. As I have before, I want to take a quick moment to thank both Art and Jay. Their expertise and support over the past few months afforded me a wealth of time with which to identify and recruit a world class CFO. We have a lot of information to cover this afternoon. First, we'll discuss our recent earnings release. As we promised in our last call together, we have broken our financial performance in more granular and meaningful business segments that provide greater detail and visibility into both the results we've generated and how we'll manage our business in the future. We'll go through each business in turn. Overall, we experienced strong growth of 16% in non-GAAP earnings per share and free cash flow growth of 58% this quarter, but it's not all good news. As has been a recent trend, top line growth has been slowing with even our core U.S. Marketing and Data Services segment reflecting only 1.8% growth this quarter. And performance in both our international business and some of our other ancillary business units were poor. Jay McCrary will walk through our earnings in considerably more detail in just a minute. And on the heels of those remarks, I'll share a bit more detail about our strategy. Again, this is something that I mentioned I planned to do today during our last earnings call. Over the course of my first few months at Acxiom, I've worked with the team to craft a more comprehensive and cohesive corporate strategy, created a detailed product roadmap and have begun translating our new directions into a set of operating priorities. In the very early stages of implementation, we still have much work to do, both improving our existing business and also preparing for the future. For competitive reasons, I won't share everything we're working on during this type of forum, but I hope to give you a much colorful picture of the road ahead. Finally, I hope to reserve the final few minutes of our time together for Q&A. I'll now turn it over to Jay to give us some detail about our third quarter.

Thank you, Scott. Today's press release in this call may contain forward-looking statements that are subject to risk and uncertainties that could cause actual results to differ materially from the forward-looking statements. For a detailed description of these risks, please read the Risk Factor section of our public filings and the press release. Acxiom undertakes no obligation to release publicly any revisions to any of our forward-looking statements. A copy of our press release and financial schedules, including any reconciliation of non-GAAP financial measures, is available at acxiom.com. We will also be referencing financial slides on today's call. These slides are available on Acxiom's website and can be accessed by clicking on News and then clicking on the link Today's Press Release. I will now be reviewing selected financial highlights for the quarter. But before I get into the detailed numbers, I'll provide a few high-level observations on the quarter. We were pleased with our free cash flow results, as well as our growth in earnings per share. Our balance sheet continued to improve due to cash generation and ongoing debt reduction. Total revenue was down in the quarter, driven mostly by international operations as the U.S. was relatively flat. Operating margins are improving but were negatively impacted by a few parts of our business that we will highlight. And finally, starting with this release, we are reporting results in segments that we believe will improve transparency into how we operate the business. Now, let me begin with the summary of financial results, which you will see on Page 3 of the slide deck. As we noted in the press release, Acxiom reached an agreement during the quarter to sell our Background Screening business, and as a result, we will be reporting results from continuing operations and discontinued operations separately. Also during the quarter, the company recorded a $17.8 million impairment related to Brazil goodwill and other intangibles. During the current quarter, the company determined that a triggering event for accounting purposes had occurred, which was related to our long-term projected revenue growth and margins in Brazil. The triggering event required the company to test these operations for possible goodwill impairment. Additionally, based on future expectations, the $3.6 million Brazil earnout liability was reduced to 0. In 3 months ended December 31, 2011, total revenue from continuing operations was $280.9 million, down by 2.4% compared to $287.9 million in the same period last year. Excluding unusual items, total operating expenses for the current quarter were $250.2 million, down by $7.5 million compared to $257.7 million in the same quarter last year. The excluded amounts primarily consist of the Brazil impairment charges, offset by the earnout reductions in the current year quarter. The prior year operating expenses exclude unusual gains of $3.6 million. Excluding the unusual items from both periods, current year operating income was $30.7 million, up from $30.2 million last year. Diluted earnings per share were $0.10 in the quarter compared to $0.25 last year. Excluding the impact of unusual items from both periods, earnings per share would be $0.22, up by 15.8% from last year. Free cash flow to equity was $55.5 million, up by 57.9% compared to $35.1 million in the same quarter last year. This represents the highest free cash flow to equity amount we have reported in 3 years. Turning now to Slide 4, I'll discuss the impact of discontinued operations on our reported results. Including the discontinued operations, revenue for the quarter was $293.2 million, down by 2% from $299.1 million in the prior year. Discontinued operations contributed $0.01 per share in both the current and prior year periods. Now on Slide 5. We have revenue detail by segment and geography to provide insight into what's driving our results. In the U.S., Marketing and Data Services and revenue was up by 1.8%. We continued to experience revenue growth in our retail, automotive and technology segments. However, the growth was offset by relatively flat growth in our financial services industry. Infrastructure management was down 2.3%, which reflects the impact of the customer loss in fiscal 2011. U.S. Other Services revenue, which includes our risk and fulfillment business, was down 11.3%, driven mostly by reductions in our risk business. On the international front, Marketing and Data Services revenue was down by $3.6 million or 10% for the quarter, largely due to declines in Brazil. Excluding the impact of the earlier Netherlands and Portugal disposals, Marketing and Data Services was only down slightly in Europe. Excluding the impact of the media [ph] divestiture, other services, which now includes only the U.K. fulfillment operation, was down [ph] $1.8 million. Slide 6 provides detailed operating margins by segment and geography. The Marketing and Data Services business in the U.S. improved to 14.3% from 13.2% in the same quarter last year. This improvement was driven by operating efficiencies including SG&A. Additionally, IT infrastructure management margins improved to 12.7% from 10.9%, driven primarily by ongoing efficiency improvements and a large IT project recognized in the quarter. Other services reflected a negative margin of 6.4% due to losses in our risk client [ph] business. International Marketing and Data Services were slightly negative compared to 3.6% last year. The negative margin in the current year was due to operating losses in our Brazil operation. The negative margin in international Other Services was due to an operating loss in our U.K. fulfillment business. Now I'll discuss a few of the highlights of the current quarter balance sheet as compared to the March 31, 2011, balance sheet on Slide 7. As of December 31, the company had cash of $145.9 million compared to $207 million in March. During the quarter, we prepaid $25 million of the term loan and have prepaid $125 million year-to-date. Accounts receivable as of December 31 were $170.7 million, down from $171.3 million at year end. Days sales outstanding was 56 days at the end of the current period, which was up from 54 days at March 31. Total debt at the end of the current period is $284.8 million, a net decrease of $137.4 million since March 31. Now I'll touch on a few highlights of cash flow on Slide 8. Net cash provided by operating activities was $82.5 million compared to $64.2 million in the same period a year ago, an increase of 28.5%. The increase in operating cash flow was primarily attributed to lower IT migration activity and changes in working capital. Total capital spending was $25.2 million in the quarter, down from $31.7 million in the third quarter last year. This total includes deferred costs, capitalized software, capital expenditures and data acquisition costs. Also included in the current quarter amount was approximately $4 million of finance purchases. The free cash flow to equity increased $55.5 million from $35.1 million in the same quarter last year, was driven by operating cash flow improvements and lower capital spending. During the quarter, we purchased 335,000 shares for $4 million. Since instituting the repurchase program, we have purchased 4 million shares for $43.1 million. This concludes our prepared comments on the financial statements. Now I'll turn it back over to Scott for his comments.

Thanks, Jay. During our last earnings call, I discussed my initial observations 90 days into the job. These insights were based on meetings with most of our major clients, discussions with hundreds of our Acxiom associates and a deep dive analysis into all elements of our business, including our product roadmaps, customer profitability and satisfaction, historical financial performance and organizational effectiveness. No stone was left unturned. At the end of this period, I was left feeling optimistic. We have 3 fundamental strengths on which to build: excellent and strong client relationships, with 47% coverage of Fortune 500 companies; a sophisticated, passionate and experienced team of associates who really understand our business and, in many cases, have been with Acxiom for decades; and a track record of building strong technology and being an innovator in the database space. Before folks started talking about big data, data security and privacy, or DMPs, Acxiom was pioneering efforts against each topic. This excitement was tempered with a realistic assessment that a brighter future would have to be earned through a lot of hard work. In short, I discovered an organization that needed to move faster, execute better and innovate more frequently. There were no surprises here, and my findings validated my decision to join Acxiom. More specifically, to recap what I told you. First, we need to improve our operational effectiveness. Over the past quarter, we generated $55 million in cash flow, and over the past year, we prepaid $125 million in debt and repurchased $43 million in shares. This demonstrates what we can accomplish with the right focus and leadership. In order to generate consistently better financial performance, we must singularly align the deep expertise of an entire organization behind our strategy and tactical priorities, so that everyone is moving together with speed and purpose. This will require focus, strong execution and leadership. Second, our customers love what we do but they want more. This represents a long-term opportunity for Acxiom. We can, over time, enhance top line growth, even in an environment in which clients carefully scrutinize their spending. And third, we are at an inflection point in our company's evolution. Continuing the current course is not an attractive long-term path. Rather, we must have the courage to fund our future by increasing our investment in R&D and accelerating our pace of innovation. Today, rather than focusing entirely on what we need to do, I'm going to start sharing a bit more detail about how we intend to do it. Two caveats. Caveat one, I've always believed that the real mark of a great company is not just its ability to craft the winning strategy but also then execute quickly and effectively against this plan. That said, for competitive reasons, I don't intend to share all of the details of our strategy during today's call. Caveat two, several months ago, I talked about how I wanted to present our business segment performance in greater detail, which we've now provided. It's a first step, but it's not enough. Looking forward, both Warren and I want to increase our level of forward transparency and earnings guidance. We are still fine-tuning our fiscal year '13 operating plan. The numbers I share with you today are early estimates and will likely be refined in the coming weeks. Over the past 90 days, all of us at Acxiom have begun working hard at a handful of strategic imperatives. Without taking you through each of them, I'll instead focus on 4 areas of emphasis. First, fixing our foundations. Over the next 12 to 18 months, we aspire to increase the speed and efficiency of everything we do. A first step in this effort is to upgrade the quality of our most senior leadership, which has been one of my top priorities since joining Acxiom. I believe that world-class management talent, working together as a team, can capitalize and accelerate the efforts of an entire organization. When I joined Acxiom, our organizational structure was confusing and overly bureaucratic. We're working to change that. Earlier this month, we announced that Warren Jenson had joined our team as CFO. Warren is a proven public company CFO, who is already working with me and the team to improve our operational focus and execution. There is no aspect of our portfolio that is not undergoing a comprehensive examination. And today, we announced the hiring of Nada Stirratt as our Chief Revenue Officer. Under her leadership, all client-facing activities within the marketing and data services business, which has been residing throughout the organization in a confusing matrix, will be aligned to provide a more cohesive and unified sales account management and delivery experience to our clients. In addition to an outstanding track record and reputation, Nada is a rainmaker with a deep Rolodex of Chief Marketing Officers; has a strong knowledge of the digital marketing space, which our clients believe is increasingly important to our future; and loves being in front of clients, leading by example. We're still looking for one additional Executive Officer to round out our senior leadership team, a Chief Product Officer who was a strong track record of designing innovative products and then bringing them to market quickly and flawlessly. We have engaged the top-tier recruiting firm with strong ties to Silicon Valley and digital marketing to help us land the ideal leader. In addition, we are working to increase visibility and accountability across our various portfolio businesses. Today and going forward, you'll see our results presented by major business segment, and we manage the business according to these same categories. This is already providing an increased focus on the unique characteristics, operating plan and fit of each business against our overall portfolio. And this portfolio approach has already led to one important change. In December, we announced the pending sale of our security screening business for approximately $74 million. As we prepare our operating plan for 2013, we're working to establish appropriate performance measures, both financial and strategic, that will be cascaded throughout the organization, reviewed at a monthly or weekly interval and course corrected if necessary. As a result of our efforts to fix our foundations, we expect cost and operational savings over time, which should spur longer-term margin improvements. But as importantly, these efforts should accelerate the speed and quality with which we service our customers. Our second area of emphasis is a maniacal focus on the needs of our largest clients. A significant portion of our revenue is recurring, and many of our largest clients have worked with Acxiom for a decade or more. As a result, it's incredibly important for the predictability and growth of our top line revenues that we maniacally focus on protecting and extending our most valuable clients. More than anything, this involves soliciting recurring feedback from these clients as part of our product development efforts. We want to build to the highest common denominator, knowing that if we increasingly create products that our largest clients embrace, the rest of the market will follow. Over the past few months, we have revamped our product road map based on the feedback from many of our largest clients, which gives us greater confidence in both the R&D bets that we are making and ability to secure incremental revenue from existing clients. In addition, we've begun to measure and focus on client level profitability. Not all clients are created equal. We have a handful of unprofitable clients that, together, put downward pressure on our overall margins. If we can turn this group around, either by raising prices or determining how to deliver our services more effectively, then we believe we can improve our margins in this area over time also. This will certainly be a focus for our team throughout the rest of the fiscal year, but we're still evaluating the timing and upside of what this might look like. Our clients have also asked us to provide increased levels of intellectual leadership. They look to us to provide clear, actionable advice. We're simplifying our product nomenclature, putting greater emphasis on speaking and writing in industry forums and we'll continue to build our analytics consulting capabilities. Recently, we published a book of over 50 case studies that our sales team can utilize with their clients as appropriate. The numbers don't lie. We've generated transformational improvements as measured by return on investment, customer acquisition volume and customer retention rates for many of the world leading marketers. But we now need to do a far better job of quantifying and sharing those successes with new prospects in order that we may accelerate our top line growth. Our third area of emphasis is profitably serving the largest global markets. And on this, I want to be clear. Acxiom is committed to operating in markets outside the United States. We believe that it is important to be in international markets for 3 fundamental reasons: Global markets are sizable and growing, in many cases much faster than the U.S.; many of our legacy clients wanted to work with us in other geographies; and we believe our products and capabilities can be extended to new markets. As Jay discussed in his earlier earnings remarks, our International Marketing and Data Services businesses have not grown in line with market rates and have not generating acceptable profit margins. Acxiom's global assets are largely the result of various historical acquisitions. And one of our goals in coming months will be to ensure these businesses are better aligned and supported. Part of this involves determining how we can accelerate our growth and improve our bottom line profitability by making better use of our global assets. For example, we're already working on incentives to ensure sales teams from across the world work together to extend our largest clients across countries. And we've also established globalization as a fundamental R&D principle so that new products can be released everywhere. Warren and I view profitability as a core requirement of doing business, with every client and every market we serve. This will certainly involve rethinking our operating and service models in some global markets. This will be a priority for us over the next 90 days. And our fourth strategic imperative is funding our future. There is nothing more important to Acxiom's future than investing in innovative new products and capabilities. The world around Acxiom has changed dramatically in recent years, and clients are asking us to evolve our offerings. 20 years ago, most of our clients had a fairly simple existence. They collected consumer names, home phone numbers and addresses, determined who might be most receptive to a call or direct mail, analyzed the results and then repeated the process. But today, the world is infinitely more complex, and our clients need a far broader array of services. In addition to direct mail, clients must manage e-mail, mobile phone, search banner affiliate, social marketing efforts. As the array and complexity of choice has exploded, identifying and reaching consumers across all these various touch points is a deviating [ph] challenge. In determining the ideal messages, mix and sequences, it's daunting. Throughout our history, Acxiom has built and managed marketing databases for large global clients. Our Marketing and Data Services business comprises the majority of our revenues and generates the most attractive profit margins. Many of our clients have worked with us for decades but are now increasingly asking us to expand our capabilities to include a broader array of meaningful data and enhanced capabilities to ingest this data; more tools, technology and techniques with which to refine the data and derive insights; and enablement of marketing partners, to use this refined data and insights. Together, these 3 overarching innovations, supplemented by a renewed emphasis on intellectual leadership, will ultimately fuel better client performance. Executed well, they will also vastly improve our clients' experience with Acxiom, and we believe will accelerate our top line growth over the next decade. I've explained this in the past with building a data refinery, with collection capabilities, refinement tools and pipelines to those who consume data. I've also called it an enterprise data management platform, or DMP, one that effectively serves all of the clients' data needs. Regardless of what we call it, it's what our clients need and what they are asking Acxiom to build. To help us accelerate the pace of product development, we plan to significantly increase our level of product investment over the next 2 years. The investment will be sequenced over time and we intend to pursue a monthly release calendar of key product enhancements. These monthly sprints are now starting and new features will typically be designed and deployed for a small handful of current clients to beta test the concepts before mass-market release. The annual incremental investment will likely be in the neighborhood of $30 million, with the vast majority of that earmarked toward R&D. We believe these product investments will have an impact to earnings from continuous operations of $0.03 or $0.04 per quarter over the next year compared to a business as usual model for the next year. But over the next 12 to 36 months, we believe this heightened investment will spur faster top line growth in our Marketing and Data Services business, squarely position us as leaders in the digital world and spur stronger operating margins as we deploy more innovative yet standardized products across our client base. Longer-term, we believe double digit top line growth rates are possible, spurred by 3 major factors. We've always had a strong share in the traditional marketing database space, but our new capability should allow us to extend our leadership in the faster growing digital markets. In addition, we believe our product innovations will accelerate our growth from existing clients. We have listened closely to their feedback in creating our product blueprints and expect that many of our existing clients will be the first to deploy our new capabilities. Finally, we've had a stronger concentration in some industries such as financial services and automotive. By extending our database prowess across a wider array of digital channels, we expect that our sales efforts will resonate more effectively with a broader range of industry verticals, including consumer, retail and other sectors that have been quicker to embrace digital tactics. We believe longer-term operating margin levels for our U.S. Marketing and Data Services business could be in the high teens as we move from a model of significant customization for every client to one in which we design for highest common denominator needs and incorporate more standardization into our software solutions. I should also mention that it's possible that the near-term negative impact of our planned investments will be tempered by the operating improvements we can achieve by better aligning our investments and improving our operating efficiencies. But forging any concrete conclusion at this time would be premature. Warren and I are currently refining our economic models for 2013 and beyond, so that we can provide better forward guidance in coming months. Let me close my formal remarks by summarizing our situation more succinctly. We have a strong client roster, a talented team of associates and good technology. But we can do better and it's time for us to fund our future. We're assembling a leadership team that is scrutinizing every aspect of our business and working to improve our existing performance. But in parallel, we also intend to increase our investment in our products. We believe this investment will position us for future success and provide a stronger foundation for the next decade of our growth. That concludes my formal remarks, and I'll now turn things over for questions.

[Operator Instructions] And we'll take our first question from Mark Zgutowicz from Piper Jaffray.

Scott, I was wondering if you could maybe just talk a little bit about the outlook for the Infrastructure Management business. And just a clarification there, my understanding was that the D&B comparisons that have been negatively impacting results anniversaried in the September quarter, this past September quarter, so if you can just maybe clarify that. And then was curious, you had mentioned despite the down in top line mentioned, the positive margin growth you saw there was helped by a new outsourcing contract. So maybe if you can just talk about that new outsourcing contract and what it contributed to revenue and margins in the quarter?

Yes, so first off, any year-on-year comparison in terms of D&B implementation expenses, Mark, I think those are behind us now...

We had mentioned a new ITO outsourcing contract.

Yes. I'll say our focus on our ITO business, as it is with all of our businesses is, first, you cast a spotlight on it. And what we've tried to do in disaggregating our portfolio is to focus on each of the underlying businesses, all of which have some different operating characteristics, different competitive sets and different financial outlooks. And so within each business, we're pushing hard to figure out where are the levers to improve our performance. So that's where we are. That's been a strong cash flow generator for us over the last quarter, and we think that there's continued strength in that business going forward. But beyond that, I don't have a whole lot of specifics for you.

Fair enough. Scott, in terms of the international opportunity, can you just discuss some of the challenges with data gathering outside the U.S.? Obviously, the challenges on a country-by-country basis not as easily accessible as it is here in the States. Maybe how you look at that as challenge, if you do look at that as a challenge, in growth there and how maybe that has influenced the growth that you've seen thus far?

Yes, it is a challenge certainly. Every country has different standards but I kind of look at that, Mark, as an opportunity as well as a challenge. We have 30 years of experience in data security and privacy, and we were the first company to have a Chief Privacy Officer. So the fact that we're really comfortable handling data sets and ensuring customer privacy should actually be a competitive differentiator for us. I think the bigger problem in some of international markets is they're just not hitting at all cylinders and for that, in some respects, we have to look in the mirror. I mean, as I think about international, I think I talked about this before, there's kind of 3 things that we ask ourselves. One, are they growing fast? And check, they are. Two, are our products extensible? And yes, we think they should be. And third, are our clients extensible? And yes, they're telling us that they want to move across international borders. That said, because all of our international businesses are more largely acquisitions, they've kind of evolved in a way such that instead of looking like one holistic international business, they still look too much like 7 different fiefdoms. And we need to snap to a common operating blueprint and a common set of product offerings such that we really get the advantages of having global scale. The second piece of that is ensuring that our teams are working together to extend clients and historically, when I joined the organization, international and domestic sales [indiscernible] client service for a long time, they sat in different parts of the organization. They have different incentives programs and they didn't work well together to identify opportunities in one market that could be extended to other markets. Just by tweaking on incentive compensation programs and realigning the sales teams such that they work together, we think that there's going to be a boost there. But I also say that I think there's some real hard work to do on international markets, in particular looking at our staffing models and level of what's local versus what's globalized. I'm a big believer that when you build a business, you first have to get your unit [ph] economics right, knowing that you had a good baseline business and then you extend off of that. To the extent that some of our international businesses, for whatever reason, aren't healthy, we have some work to do to get them to that place.

And Mark, I want a follow-up. I think your question earlier was probably more on the comment on the onetime project IT -- IT management project, which was about a few million dollars and it was onetime and somewhat unusual for the quarter.

Okay. And I think you mentioned that the results were impacted negatively by a lost contract last year, which I'm assuming was D&B, and I thought we anniversaried that last quarter, if I'm not mistaken.

D&B has been a customer. That was not the customer that we lost last year.

Okay. Fair enough. I just have one final question, Scott. Just in terms of -- you mentioned small profitable customers and curious if you can put some color around sort of the concentration of revenue there and if you look at some of these new R&D initiatives, is that really focused here? I mean it sounds to me like you have opportunity here to really start to scale some of these unprofitable accounts. But maybe you can talk about some of these new R&D initiatives and how and sort of where those are focused specifically?

Yes. At the risk of disclosing way more information than Jay or Warren is going to be comfortable with me disclosing, I'm going to do it anyway, which is one the first things that we did is we did an analysis when we came on board that looked at our client profitability for the marketing data and services business, all 800-plus clients that we have. And now it's the standard kind of 80/20 curve that you see in any business, whereby which, there's a small subset of customers that really are incredibly important customers for us to take care of. Now the good news is, many of them have been with us for decades and they want to do more with us if we continue to extend our capabilities. Conversely, there's also a small, call it, call them mid-tail, if you will, clients that are unprofitable for us. And it's one of the things that you can't [indiscernible] that you can't expect it. And so by casting the spotlight on those unprofitable clients, they have 3 choices. For that tail, we can either raise prices, and in many cases, my hypothesis is that we can, we just -- we haven't. Second, we can change the way we serve those clients, either through our staffing model or as you're referring to, Mark, I think as we develop some of our product there will be elements of that, which are more self-served and thus will work [ph] our service cost. And the third, and the one we don't want to do, is just to part ways with those clients. But I have a pretty simple view, which is unprofitable revenue isn't the kind of revenue that we want. And so as we think about areas for focus, this is where -- whether it be unprofitable clients are unprofitable products or unprofitable markets, those are areas that we're focusing on because we think those are areas for improvement.

And we'll take our next question from Carter Malloy from Stephens.

So first off, appreciate all the color you've given us and certainly the help on the R&D expenses and efficiencies going forward. I know you guys are reluctant to give guidance but could we expect the company to return to growth in the near term or should we sort of be modeling this, the same type of decline here, just to stay conservative?

Yes. Well, I don't think that the double-digit growth rate, but certainly we'll build those into the model in the coming year, Carter, and there's just no way to spin it. Our top line growth over the last couple of years is just disappointing. I will say, though, I think if you dig into the numbers, a more interesting story starts to emerge. And I know you're talking mostly about Marketing and Data Services. But as an example, if you look at the whole marketing data service revenue looks flat but in fact, it was up 2% in the U.S., down 10%, non-U.S. And as Jay alluded to, even in the U.S., there's some mix changes that are masking those trends. That's true in both industries where our growth rates vary by industry. So, financial services were relatively flat. But there were many other industries: consumer, retail, for instance, that vastly outpaced that. But financial services is such a big part of our mix that, that's pulling it down. And there's also a change in our revenue composition. There's a mix issue there where it's the case that some of our more profitable and sophisticated products like analytics have grown faster than some of our more commoditized products, and that's, you see, an inherent improvement in our margins as well. So not all revenue is created equal. We want to grow the most profitable revenue faster than the less profitable revenue. But that said, that's a recipe for increasing top line growth. While we think it's going to take some time, but let me say that even before we make product enhancements or increase our level of intellectual leadership, I think it starts with management leadership. And so to that end, the ability to bring someone of Nada's stature to our team is, I think, a really exciting move for us. She's a proven rainmaker. She has strong digital experience. And she has a track record of leading teams by example. So that will help but in addition, we have to -- there's no substitute for innovation. And as we roll out new products in 12, 18, 36 months, we expect that top line to increase as well. So think of that as kind of a 1-2 punch. And then as you look at our client concentration, we are very strong in certain verticals, but we are making some new verticals and, in particular, things like retail and media that care a lot about digital media and care a lot about what we're building. We think those are going to be more fertile areas for us in the future. So all this to say, I know you're asking me this from a modeling perspective, I would say, we should be really conservative over the next year, but I would think as we -- and I say that because most of our purchases are long-term considered purchases. So the top line growth of today is a reflection of conversations that have taken place over the last 12 to 18 months. So as we ramp the conversations we're having going forward and improve our product innovation, I expect a bigger payoff for that to be in FY 2014, if that we consider -- potentially next year.

I just want to point out one quick thing, Carter. I know Q3 is kind of a tough comp, but for year-to-date in both the U.S. and international marketing services, I mean, we're growing approximately 5%, which is good or better as some of the past previous years.

That's all very helpful. And then...

And Carter, may I put aside, before you ask me your next question. I'd like to know who you're picking in the Super Bowl, because I did read your earnings note earlier this week. It didn't escape me that you said that you project us to spend $30 million on R&D next year, which is I think the same guidance I just gave you back.

Lucky dice roll, man. That's all that was. So as you guys look out on mix, and you talked about mix a little bit being a negative effect, can you tell us what the other segment is, why the decision to break that out, a little bit more just on what actually risk and fulfillment are, if they matter, if it's something your reviewing and that's why you broke it out, just any sort of color or direction you can give us there would be helpful?

Yes, the other services segments are U.S. fulfillment...

U.K. fulfillment and our risk business.

In fulfillment, do you mean e-mail or do you mean print?

E-mail for U.S.

In international it includes our call center and pretouch [ph] that also has a print element to it.

Okay. So if I were to take what you stated about your e-mail being placed in the other and couple that up with some of your statements around the Forrester wave [ph] recently, I think that'll give me some indication of the outlook there?

I've said throughout that at our core, we're about managing complex databases, right? And our marketing clients have a dizzying array of fulfillment partners that they use and they're tied to the array of things they do: e-mail, search, banner, et cetera. I have a simple philosophy, which is, it's really difficult to compete in every single tactic, because that essentially has us operating in multiple different business against many different competitors. Yes, maybe Google can do that but Acxiom quite frankly cannot. So we're focusing on collecting data mining [ph], enabling those partners and for the most part, that's what our clients value. That's why they've worked with us for the last 30 years and that's what they want to have us continue to build. We'll continue to offer e-mail fulfillment and agency services to those clients who want a one-stop shop, but for those clients who don't, for those clients who want to choose the best of breed as partner, we're going to let them do that and our focus instead will be on providing the data and the intelligence that enables whatever partner a client wants to choose.

Okay. Understood and appreciate the color as well. And then lastly, you're not going to want to do it, but maybe if you could describe to us one new product that's on the map over the next couple of years, something you think is a lay up for action without giving away your competitive secret sauce.

Sure. Broadly, I will give you the real throwaway because I think the entire world knows we're doing this. But we've talked, for instance, a lot about enablement [ph] of partners. And so part of what we need to do is our clients are asking us to enable the partners that they work with and so we're really focusing on building legions of ATIs such that other industry participants can access clients' data and use that to manage clients' marketing tactics. I won't say that this is the sexiest area but when I think about what our clients really want, they want a single intelligence system that drives all of their efforts. And so in order to be that single intelligence system, we need to work with a much broader array of industry participants.

In that case, are you charging the industry participants or your clients for the API and ability to port [ph] in there?

Yes. It varies. We're still working on the pricing models for that. I would say for the near-term, the vast majority of our revenue is going to be from direct clients as it has been historically.

And our next question is coming from Dan Salmon from BMO Capital Markets.

It sounds, Scott, from -- you've got still, it sounds like sort of 4 key executives at the top, including yourself, but a little bit of shift in roles towards you mentioning filling a Chief Product Officer. Will that sort of imply that perhaps Warren would have a bit more of an operational role, I think, with his background places like Amazon and previously, you saw from the CFO and just, generally, how you expect the sort of sea level to be sort of realigned here. And then just secondly, we've talked a bit about ITO and update us on any thoughts you're thinking around strategic options for that business long-term.

Yes, so first off, I think your question's a smart one. I think you kind of nailed with how you asked it. I have a simple view, either build stuff, you sell it or you improve it, right? When I think about the Chief Product Officer, that is all about building better products. When I think about Nada's role as Chief Revenue Officer, it's ensuring that we're absolutely brilliant in how we market to clients, how we sell them, how we service them. And then Warren, his task, in addition to being a world class CFO, he's also a proven operator. So I feel like he is a great partner to all of our business and sales leaders ask the hard questions around, how can we be better? So you have, I think, it's as simple as that. What I tried to do when I came on board is to simplify everything, how we talk about ourselves to clients, what we're building, our businesses, all of those things. But that starts with how we're [ph] structured. So you build it, you sell it or you measure it and improve it. And then on ITO, I think I understand what your real question is there because, particularly given recent divestiture of the securities screening business, I think you're asking, is that business for sale. Because that's the question that I get about a whole lot of our businesses, probably the most common question I get is, is blank for sale. And so I'll tell you whatever blank is, including Marketing and Data Services, the short answer is yes. As a public company, we're always on sale. If someone makes us a reasonable offer, it's our duty to at least listen. But 2 things are true, two things are true, and the first I'm learning every day with the security screening business. It's much easier to talk than to actually do it. Divestitures are complicated and resource intensive. Someone told me that it's 10x harder to sell something than it is to buy it, and that's incredibly true. So although there's a lot of speculation, we kind of ignore most of it because buyer sales just aren't a key element of our strategy. Our focus is on building great businesses. But every business that we own, we look at it and say what's the role we expect it to -- what's the role? What contribution do we expect it to make to our overall efforts? And for the ITO business, we expect them to improve their operating margins, generate an additional stream of cash that we can use to invest against our major priorities and they are also fairly instrumental in some of the R&D decision that we're going to make going forward. Part of our marketing data services business is managing major databases, hosting those databases for our clients. And so, the fact that we do that gives us insights into data architecture and structure that, in turn, feeds our product development decisions. So all this to say, our focus is on managing the businesses that we have, recognizing that all of them always are for sale.

And we'll go to our next question from Dan Leben from Robert W. Baird.

First one, a couple for Jay here on the infrastructure management business, the margin bump this quarter, how much of that was due to the onetime project versus some of the efficiencies of getting some of these projects up and running that you had some expense with previously?

As we talked about, we have cycled the D&B efficiencies we talked about previously but a lot of it was the onetime project. The onetime project was highly profitable.

Okay. And then on the marketing business, you mentioned that growth rate for the year is 5%. We've kind of come from 10% to 5% to 0. Help us understand what the international versus the U.S. has looked like in the last 3 quarters as the segment's reported today.

For marketing data services?

Yes.

They're both approximately 5% for the last 3 quarters, for the 9 months year-to-date, both the U.S. and international.

So in the first 2 quarters, both segments were growing 5% or has there been a pretty divergent performance between the 2?

There's been a pretty consistent performance between the 2. The real dropoff was this quarter from international perspective, we had a significant dropoff in revenue.

And then the $30 million investment in product, is that -- should we think about that as the P&L impact or the cash basis and some of that's going to be capitalized?

I think from our perspective, there will be a portion of it will be capitalized. I think you need to -- the majority of it is probably going to go through the P&L.

And then one quick one for Warren, if you're still on the line, just if we could get your views as you come into Acxiom, kind of early takes on the financial and reporting structure in place at Acxiom and your views that you developed over time on how you want to think about providing guidance.

Just let me mention a couple of things what I've been up to is I've pretty much tried to spend my time over the past few weeks of really just getting to know the business, getting to know our associates and getting to know our products. As I think about our priorities, I really very strongly feel that the things Scott has outlined are exactly the right things for us to focus on. So what I'm trying to do, working with the finance team and my operational partners is just make sure that we've got the best focused reporting that really focuses on the signals and then eliminates the noise, makes us get out and nail those things that are important for our accomplishing all of the objectives. On the finance side to your question, I feel very fortunate to have a couple of great partners with Art and Jay and the whole team. I think the company's in great shape. They've got a great team. Everybody's very energized, very much focused on accomplishing the goals that Scott's laid out.

And our final question coming from Todd Van Fleet from First Analysis.

Jay, first, I apologize if I missed it but what was the forex impact on international in the quarter?

It was negligible, about $100,000.

Okay. Scott, I guess, a couple, you said that there's a small group or group of customers that are currently unprofitable. Are these the types of relationships that are unprofitable at the gross profit level or is it going down kind of, is it kind of at the operating margin level, because I'm just thinking about the ability for Acxiom to really adjust this expense structure should it decide to have to walk away from those relationships at some point.

Yes, that's a good question. I'm reporting back -- I think maybe out of I think we did it before corporate overhead allocation. But I would almost have to loop back with you on that to confirm. I mean irrespective though, it just changes, it changes the absolute value because those corporate overhead allocations are largely based on percentage of revenue. So if they're not profitable because of corporate overhead, we should have just had a higher price to account for that corporate overhead. But I mean we've all -- I don't want to throw any clients under the bus, but we've all seen this in the client service business, where it's the squeaky wheel get's the grease and oftentimes your staffing model isn't around who are your biggest clients but it's about just having a client. So oftentimes, folks that don't generate a whole lot of revenue tend to suck up a lot of time. And so you got to think about do you serve them exactly the same way, there's a chance to grow the top line because it's our first experience with that client and that's one thing. If it's a client that's been with us for 5 years and has consistently been an unprofitable client and hasn't grown its spend, then we got to ask ourselves, are we serving this client in the right way? And there's a little bit of a work to be done there. There's no formula. The only way you ever get out of this is by casting the spotlight. It's through account planning. So it's client by client, the first nuance [ph] that, that client, they know that they own the profitability or lack thereof with the client and essentially, in our sales teams, in our field teams, we have hundreds of individuals, call them General Managers and they own their own P&L. And so we've got to work with them to figure out, well, how do we change the shape of their client P&L.

I guess looking at the disclosures that you made here in the quarter, I mean, are these companies kind of across the company that is in the various segments, marketing data services or is it kind of primarily international and then in the risk area?

Probably, we can do that, call it, profitability curve. In any one of our businesses and I would venture any one of our competitors, I would say all of this looks pretty much the same. The question is, is your bottom quartile unprofitable or are they just less profitable? And then if you can get them from unprofitable to less profitable in the median, that's a major accomplishment. And once you get them to less profitable, then you look through your bottom quartile and you say, how can we get it another step up? But it's that kind of -- it's that kind of attention to detail around constant optimization, kind of what we do for our clients, right? You know there's only that campaign [indiscernible] and all of a sudden overnight, it's all unicorns and rainbows. Rather, you do it one step at a time and in constant test control, test refined, and [indiscernible] with the clients that every quarter you say, "How can I improve the profitability this quarter a little bit? How can I move them up to the next quartile?" Then you do it again. So kind of harbinger of things to come for our field organization, no matter how much progress they make, I'll always say it's not good enough and now we've got to take the next step.

Maybe one last one, on the core Marketing and Data Services business, as I look at the U.S. revenue, 1.8% growth year-over-year, I guess it probably declined on a sequential basis. Is that right for that segment?

Yes, it is.

What's the impediment -- what's keeping that segment in particular, the U.S. segment, from growing mid-to upper single digits? I mean is it because of these investments are required to capture more of the wallet from your partners and the areas that you're asking -- that they're asking you to move into? Is that there just -- there's wallet out there that you're just simply not capturing right now and the share wallet that you are getting is effectively diminishing because it's primarily the offline world that you're servicing rather than the online world? I mean is that -- why isn't that business segment performing better from a growth perspective?

You're asking about just kind of the same store clients, is that right? No sequential client growth?

Yes. I mean, you could incorporate, I guess, some new client activity but, yes, same store -- I would have to assume that same store, things are declining, but again, I don't want to make too many assumptions.

I mean for same-store, the big story there is product innovation. The area of growth, when I look at the overall market trend kind of traditional database side is a lot to grow in those single digit [indiscernible]. The digital marketing side, which is far away, kind of new digital entrants, that call themselves DMPs, that's growing in high double digits. And so our clients are looking to us there and says, we don't want -- a database is a database is a database. We don't want to have multiple providers. We want work [ph]. We want one source of truth, one way, one method of accounting across all the things we do and if they're working with Acxiom in traditional, they want us to be their digital capability as well. And we think that's a big opportunity across our client base but with all our clients, we've already taken steps there. We've developed some beta products that allow us to do so there. But this is what I'm talking about in terms of design for the highest common denominator such that whatever we create, it is customized for one client or for a half a dozen clients but can be deployed across all of our clients. We think it's a significant need there. And with new clients, it's that and it also just making sure that we're calling on those clients, that we're bringing innovative ideas and switching in our space is hard. It's hard to do. Switching costs are fairly significant and so the conversations that we've been having over the last quarter in many cases won't materialize in the business until 6 to 9 months from now. So that is just a matter of staying with it, always bringing good ideas. To give you an example from my very distant past, years ago, I was working with a quarter [ph] and we're trying to win Weight Watchers as a client and they were using another agency and we kept calling on them and calling on them and calling on them and finally after 9 months, we wore them down and they said, "The key thing here was that you're working with all their [ph] client business, with our incumbent agency, who we pay a lot of money to and we were [indiscernible]." So that kind of cadence of always bringing good ideas, great case studies and [indiscernible] products that ultimately gets someone across the line and causes them to switch, and we got to continue to be doing that. All right. I think that's it. Thanks, everybody for participating in the call and look forward to doing this again in 3 months' time.

Okay. Ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.