LiveRamp Holdings, Inc. (RAMP) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Acxiom Quarter 3 Fiscal Year 2013 Earnings Call. [Operator Instructions] Today's conference is being recorded. I would now like to turn the call over to Mr. Jay McCrary. Please go ahead, sir.

Thanks, operator. Good afternoon, and welcome. Thank you for joining us to discuss our fiscal 2013 third quarter results. With me today are Scott Howe, our CEO; Warren Jenson, our CFO; and Art Kellam, Corporate Controller. Today's press release and this call may contain forward-looking statements that are subject to risks 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 Factors sections 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. Also during the call today, we will be referring to the slide deck posted on our website. A link is also included in today's press release. At this time, I'll turn the call over to Scott Howe.

Thank you, Jay. Good afternoon, everyone. Over the past several calls, I have discussed our overall company vision, investment efforts and strategic initiatives. While these things are sexy, let me be clear. We are now knee-deep in implementation. In some ways, this is the hardest time. Our investment spending has ramped materially, but as excited as we are about the products we are creating, we have yet to taste the tangible rewards of meaningful revenue. This will take time and is what we have always expected. Rather than focusing on our overarching strategic priorities today, which have not changed, I thought it would be most useful to simplify my presentation and talk with you about 2 things. They are highly interrelated and together, they are laying foundations for fiscal 2014 and beyond. First, I'll spend some time discussing what we are doing in sales to improve our effectiveness and next, I'll give you a quick update on our product development. Later in the call, Warren will talk about a few things we are doing on the cost side. Sales excellence and living. Since becoming our chief revenue officer, Nada has cast a spotlight on how we sell and then has systematically tried to improve in every area. Hers is a work in process. We have made good progress in many areas, but our journey will not be complete until we see the recurring impact in our top line growth rates. Let me share just a few examples of what Nada and her team are doing. First, she and her team started with and continue to focus on building great relationships and succeeding with our largest customers. Our key sales industry leadership is in place and each knows their industry and customers well. Our largest clients have had strong input into our product development roadmap and, in many cases, have been or will be the first to beta test our new releases. Second, accountability and rewards. We have created single points of accountability where ownership was previously opaque. We also altered our compensation structure to better align rewards with success in our company's objectives. Third, stronger execution. This is about having nailed all the things that make you great when you get in front of a client: more robust account planning and pipeline management; more concise and attractive proposal generation; more thoughtful and flexible pricing strategies; more frequent conversations, particularly around new ideas, innovations and tactics and, of course, more ROI through superior campaign delivery and insights. Fourth and finally, increased digital expertise. We are building and adding the necessary field and client-facing folks who really understand the digital landscape. This quarter, Dana Hayes joined our team to run our partner enablement business. Dana joined us with over 15 years in the digital space, most recently at Tribune Interactive. These efforts seem to be bearing some fruit. Revenue from our top 20 customers has grown at a double-digit rate for the past 2 quarters, and revenue from our top 100 customers, which represent over 80% of all of U.S. marketing and data service revenue, is up just over 9% year-to-date. While we are pleased with our progress against our largest customers, we have a lot more to do, particularly, as it relates to new logo wins. Even small improvements in our new client conversion rates will accelerate our growth. To further fuel our sales efforts, we intend to continue the journey of continuous improvement against all of the things I have mentioned above and supplement these efforts via the release of new products, which will give both existing and new clients more reason to utilize Acxiom. I would now like to shift gears slightly and discuss our product development progress. Product innovation is obviously an important catalyst for sustained top line growth, particularly as it relates to generating both new forms of revenue and also to allow us to better reach different types of clients. While I intend today to be relatively brief as we don't want to say too much about our upcoming release windows or specific features for competitive reasons, let me share with you highlights of our product development efforts. Before jumping in, let me also announce that we intend to host a product briefing with the financial community on March 6 in New York City. This will proceed our annual Acxiom Client Summit, an event that will showcase many of our emerging products and techniques, highlight notable client success stories and feature keynotes from industry luminaries. Presenting at the product briefing will be Dr. Phil, members of our engineering team and Nada. Warren, Jay and I will also be there. We will follow-up with more specific details in the coming days. While there are, of course, bumps in the road from time to time, we remain on course with our product development efforts and increasing our brand reputation as thought leaders. I would like to emphasize that this is where Acxiom will separate itself from our peers. Based on what I've seen and heard both internally and through clients, our product foundation is much stronger than at any point in the last decade. Essentially, our engineering efforts can be grouped by 4 work streams. First, data. Dr. Phil and his team are improving the quality and availability of useful data. To that end, we now have the ability to digitally distribute our existing InfoBase products to most major ad platforms. We are also well down the road in building a global data integration platform. This platform will significantly improve data processing and delivery efficiency for our customers. We have also been busy adding data sources that will be incorporated into this service. Today, we have roughly 50 engineers working on various aspects of this platform and its SaaS-based applications. Consistent with our intent to build products that are globalized and can be released worldwide, this effort is now being beta-tested in the Australian market, where we intend to refine any kinks before eventual worldwide release. Second, analytics. We're improving our suite of products that transform data into insights and action. We have now developed over 1,500 industry-specific, predictive models that are available for beta client utilization. These predictive models will greatly improve the ability for our customers to identify and target consumers based on a catalog of key predictive attributes, producing real, measurable ROI. Early results seem promising. We have received strong endorsements for these models and several major deals have already been signed with customers. Through a recently signed pilot for a leading telecommunications provider, we are developing predictive models to identify U.S. consumers who are inclined to cut landlines and go completely wireless. According to the client, the tests show that Acxiom's new insight products perform 25% better than the second best alternative. In another pilot for a retail customer, Acxiom's new analytics products have enabled the client to effectively target customers of a competitive brand for its major shopping season. Acxiom's insight products helped the clients achieve a 250% increase in its ROI for this campaign. Third, we continue to build on our enterprise data management platform. As we have discussed in past calls, our EDMP is essentially a data operating system that allows clients or their partners to marry together all of their data, including both online and offline information and power whatever applications or models they want to utilize. As we mentioned during our last call, this product is in beta test with a handful of clients already. We are receiving regular feedback from our EDMP pilots with no major issues except requests to implement these faster. In fact, about 30 minutes ago, I was sitting in my office when Dr. Phil came in straight from a client meeting for someone who just turned on their EDMP beta. I asked them about their feedback and he said the first words out of the client's mouth were, "This is awesome." Fourth and finally, we are also committed to improving the quality of our legacy database products. Historically, Acxiom has been outstanding at providing highly custom database solutions to many of the world's largest marketers. These offerings can be too complex and expensive for mid-tier clients to implement. We've been investing to define and package more standardized, yet configurable offerings, and Warren will chat briefly about this in a few minutes. As I mentioned earlier, all of us at Acxiom are knee-deep in the tasks of building product and improving our processes. At times, this can seem like a slow grind, but our enthusiasm is building. For the first time in years, Acxiom is readying a slate of new products that have been beta-tested and will be released for broader commercial use in the coming quarters. I believe that our product innovation will provide the future fuel for Acxiom's growth and client successes, and while it's early, the investments we are making will start to emerge as new products. In fiscal 2014, we will deliver several aspects of this innovation to the world. This is the key driver for the transformation of Acxiom into a high-growth, innovative company, and we look forward to sharing our progress with you. Now I'll turn the call over to Warren.

Great, and thanks, Scott and good afternoon, everyone. Before commenting on the third quarter, I would like to again update you on our progress related to a few of our initiatives. First, our efforts to run a better business, how we are thinking about operational excellence and productivity. At the start of any journey, you have to have a destination or by definition, you will wander. This past quarter we rolled out a simplified target P&L for our business unit. Our long-term targets were done through competitive benchmarking, best practice sharing and industry comparisons. Within each of those P&Ls, there is a single owner of each line item. This is critical as line item accountability is everything. Every P&L has both short and long-term targets with maps to our overall financial plan. Next, we set a few rules as to how we would go about capturing efficiencies. Specifically, we said customer always comes first but we have to find a better way everyday, not just harder/faster but better and smarter; standard not custom; automated not manual; 1 system, not 3. Let me give you a few specific examples of things we are doing to drive smarter efficiency into Acxiom. In our engineering organization, Phil and his team have rolled out a common user interface style guide that consists of a pattern catalog, icon library, as well as the best practices guide. The UI style guide has been used for all new product development. Thus, no matter whether a forward-looking EDMP or a future large custom platform for one of our biggest customers, all will share a common user experience, look and feel and act like a seamless, integrated product suite. UI style guide not only leverages our development resources but simplifies training and accelerates feature roll out. We are instituting a product life cycle process that establishes milestones, points of coordination and accountabilities for development, product marketing and launches. The benefits are less churn, more precision and more effectiveness on how we go to market. And finally, we are building tools and a common user interface to eliminate thousands of hours of tedious error-prone work. Consider this: we have lots of clients. Now that's a good thing. We frequently want to add or update data sources in order to make our products even more effective. Well, that too is a great thing. Now here's the rub. Today, every one of those updates is manual. In order to begin to address this, we now have a standard and automated approach for data ingestion. We expect to pilot this technology the first quarter of 2014. Next, delivery. One of Acxiom's strengths is our ability to offer customized data solutions for some big companies. The challenge that we have, however, is that this customized approach doesn't really scale for mid-tier clients. Literally, every data refresh, every code modification doesn't happen just once. Rather, it happens hundreds, if not, in some cases, thousands of times. To fix this, Mike Lloyd and his team are working with Phil to build a standard framework and platform for our mid-tier client -- database clients. While this will be a gradual implementation, we think this can be transformational for how we serve this important set of customers. Our delivery teams have also been active in reviewing things like spans and layers and working on eliminating situations where we are losing money or operating at a low margin. Finally, let me also say that this is not easy stuff. But at the same time, it's incredibly exciting. Better tools and technology make for better, more interesting jobs and also enable our associates to provide better customer service while at the same time, helping us become more efficient. We are committed to capturing the benefits when we have the chance. Lastly, we are in the final stages of making our business segments operationally independent. During the past quarter, we have organized associates into the proper entity structure, separated the majority of our shared IT network function into respective organizations and, as a result, we are nearly complete in the separation, giving us the ability to create auditable financial statements for each. In summary, all of these efforts are about simplification, efficiency and accountability. Now our third quarter results. First, a few highlights. U.S. Marketing and Data Service revenue was up 4% to $160 million. For the quarter, 14 out of our top 20 customers in the U.S. -- in U.S. Marketing and Data Services showed year-over-year growth. In fact, revenue for the top 20 customers was up double digits year-over-year for the second quarter in a row. While overall margins were down, Infrastructure Management operating margin improved to 13.8% compared to 12.7% in the prior year as a result of continued improvement in our cost structure. Today, we have repurchased approximately $131 million of our stock and retired almost 12% of our outstanding common shares. Finally, this year, we have added over 150 associates and contractors who are focused on our new product development effort. Now I would like to discuss our third quarter results in more detail. I will be referring to this slide deck, which was posted on our website. A link was also included in our press release. I will start with Page 3 and our summary financial results. Total revenue from continuing operations was $273 million, down 2.8% from last year. U.S. Marketing and Data Service revenue was up approximately 4% for the quarter, while IT Infrastructure Management and International Marketing and Data Services were down approximately 9% and 10%, respectively. Operating expense for the current quarter was $246 million, down approximately 2% adjusting the prior year for unusual items. The reduction in expense was primarily attributable to efficiencies in the IT Infrastructure Management segment. GAAP diluted earnings per share were $0.19 in the quarter compared to $0.10 last year, reflecting a 90% increase. Diluted earnings per share decreased 14% as compared to $0.22 last year, excluding the impact of unusual items. Now onto Slide 4 and our top line performance. U.S. Marketing and Data Services revenue was up 4% for the quarter. As I mentioned earlier, 14 of our top 20 customers grew year-over-year. In total, our top 20 customers grew at a double-digit rate. IT Infrastructure Management was down 9%. This decline continues to reflect the impact of a prior-year customer loss. Excluding this customer loss, revenue was down 3%. U.S. Other Service revenue, which includes our Risk Products and Fulfillment business, was $5.6 million, down roughly 40%. This decline was the result of lower email volumes and a continuing transition of our Risk business. For the quarter, International Marketing and Data Service revenue was $30 million, down approximately $3 million or 10%. There was no material FX impact in the quarter. Slide 5. For the third quarter, our company's operating margin was 9.8% compared to 5.5% in the same period a year ago. Excluding the unusual items, our margin decreased approximately 110 basis points from 10.9% in the prior period. In the U.S., Marketing and Data Service margin was 12.2%, down from 14.1% last year. This margin decrease reflects higher delivery-related expenditures and higher data-related cost associated with new product development. IT Infrastructure Management margin improved 110 basis points to 13.8% compared to 12.7% last year. The increase was a result of continued improvements in cost management. Losses from International Marketing and Data Services were $1.6 million as compared to roughly breakeven a year ago. Now to a few comments on Slide 6 and 7. On a trailing 12-month basis, free cash flow to equity was $117 million compared to $115 million in the prior period. Excluding the net proceeds from the sale of the background screening business, free cash flow to equity decreased $55 million. This decrease is due to higher cash taxes, as well as slower quarter-end customer collections and other working capital changes. While we expect a decline in cash flows for the full fiscal year, we do anticipate our cash collection patterns to rebound to more normal levels this quarter. During the second quarter, the company repurchased 18 million in stock and to date, has retired approximately 12% of our common stock for approximately $131 million. We have $19 million remaining on our $115 million share repurchase authorization. We also maintained our strong cash position and have a sound leverage profile. Now onto guidance. As previously stated, we are still in a year of transition, and we expect our investment spending to again ramp this order as the pace of development continues to accelerate. So we again ask that you be conservative in your outlook. Additionally, our guidance does not take into account any unusual charges. For fiscal 2013, on the top line, we expect revenue to be down roughly 2.5%. This compares to our previous guidance of flat to down. On the bottom line, we now expect diluted earnings per share of up to $0.73 as compared to the previous estimate of roughly $0.70 for fiscal 2013. Finally, before opening the call to your questions, let me talk generally about the quarters ahead and to some degree, about fiscal 2014. While today we don't plan to provide guidance for fiscal 2014, there are a few things we would ask you to keep in mind in shaping your thoughts: First, the next few quarters, we expect to continue to see margin pressure in U.S. Marketing and Data Services as our spend on both development and data will accelerate ahead of our product launches. This margin pressure will be very noticeable in Q4 as we expect a material drop in margin year-over-year. Next, while we think you will love what you will see when we meet in March, please remember that new product revenues will build slowly, especially early on. With that, we all want to thank you for joining us today. On behalf of all of our associates, we know that we have a lot of work to do, but we're excited about what we're building and look forward to reporting our results in the quarters and years ahead. We also look forward to seeing you in New York. Operator, we will now open the call to questions.

[Operator Instructions] The first question comes from Carter Malloy from Stephens Inc.

First, is on the Infrastructure Management business. Can you speak to the business with and without the customer loss there? And is that something that -- forming all the considerations in '14, even beyond that, is that a business we should continue to see pressure in or something that you think will stabilize?

Carter, I'll go ahead on this one. I'll go ahead and comment on that. I believe excluding the customer loss, we were down about 3%. So obviously, a lot less than where we were including the customer loss. As we look forward, this is the last quarter where you will have that negative comp. So while we would expect margin -- while we would expect revenue to be down in Q4, it's not going to be down anywhere near the level that it is today. The second thing that I would point out is these guys are running a great business, and it is a healthy business. And it's evidenced by the strength in our margins and the way the results are coming through.

Agreed. And then also, you called out your top 100 as outperforming, but what's going on in the non-top 100 to drive that group to underperform?

Carter, it's Scott. So growth of top 100, about 7%, top 20, up double digits and you're correct, the implication there is that there was leakage from smaller clients, and this is accurate. Those smaller clients in U.S. Marketing and Data Services were down about 8%. And so why? I mean this is a combination of both focus and product. Our goal for this year was explicitly to maniacally focus on the needs of our largest clients, and I think the results suggest that we have done that. Our legacy database products are highly customized and don't necessarily lend themselves to the mid-tier clients. In fact, if you look at our win-loss reports, we sometimes get criticized for over-architecting and being too pricey. So over time, we're only going to profitably serve those mid-tier clients through more standardized, yet configurable offering and you heard both Warren and I touch on our upcoming development efforts against this.

Your next question comes from Todd Van Fleet from First Analysis.

Just thinking about the strategic value of the IT management and the other businesses at this point, I'm just -- where are your heads at I guess, on those? I mean, you've done a fantastic job kind of cleaning up IT management, creating the separation, the accountability and so forth operationally, financially. Just wondering what you're thinking strategically on those 2 businesses.

Our focus today is to run a great business, and we don't have any announcements nor would we ever comment, one way or another, on any of our portfolio relative to a sale or disposition or anything like that. Our focus is to run a healthy business, to build on it and to perform well and that's what this team is accomplishing.

Okay. Let me turn to Marketing and Data Services then. So I think we hear you on the margin front on being cautious in terms of the growth outlook for fiscal 2014. I guess I'm wondering. It seems to me as though the comps will become a bit easier here as we exit this fiscal year, and I'm just wondering if the expectation is, Scott, that as we enter 2014, should we start to see at least some signs of organic revenue growth as we enter fiscal 2014?

I think it's early for us to provide guidance. We'll do that next quarter. I would say our focus right now over the course of the year is conceptually, kind of in order of priority. The first goal for us was to protect our base and our retention rate amongst existing clients is 95% plus. The second is to upsell our major accounts and really factor in their needs in our product development. Again, there you're seeing some progress, and 18 of the top 20 posted growth. Going forward in the next year, I think you'll start to hear us talk more about revenue kind of decomposed a little bit, deconstructed, around the new products that we're launching, so data, analytics, our EDMP, partner enablement, the concept of Acxiom data or services embedded in someone else's products and then also, managed databases. And as Warren had said, I think the hardest thing we have is to temper our enthusiasm. We're in a space right now where we're investing heavily in products but yet, we don't expect the return from revenue to be until at least, the latter half of 2014.

And then, just curious, on the types of, I think Warren was suggesting that the margin being under pressure as you continue to buy more, purchase more data and so forth ahead of actually getting new products to ramp for you. I'm assuming that we'll see that mainly in the gross margin of the business. I'm just curious, are there new data sets that you're introducing for your customers into your database that you're kind of incorporating into your analytical capabilities? I'm just -- is it more of the same types of data that's been purchased? I'm just curious if you can give us a little bit more detail on the types of purchases being made of third-party data information.

Well, first off, I would say ask that question again on March 6 because Dr. Phil is going to answer it far more eloquently than I ever could. That said, I would say that there's a few things going on. One is that there are new data types being constantly invented in the world, and we want to ensure that we are on the cutting edge. That when someone has new data types, we are amongst the first to test them, to marry them into our existing data sets and determine when are those new data elements valuable and what kind of lift can they generate, so how do we become experts in data procurement and data utilization. The second piece of that is it's not so much even the single data element, but it's the marriage together of all of the data together that is an even greater focus for us. And so the concept of what we're doing in Australia with our launch there of the unified data management platform and the beta we have going on there, that's ultimately about how do we marry all of the data together that's so for any individual, we have a real breadth of insights into the behaviors they have, the things that they may like or any relevant information. So it's really new data types but then, how do we bring it all together in a symphony.

Scott, does that include social data of any kind?

Yes. Again, I'll defer to Phil but yes, we have experimented with social data.

The next question comes from Dan Leben from Robert W. Baird. Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division: Just outside of the top 100, the drag from there. Could you help us understand how much of that was from clients that went away because they weren't in the right cost of service versus kind of what the underlying same client growth or to client loss?

Dan, the way that I would look at it is figure if there is a 4-point drop or 3-point drop from 7% to 4% in the quarter, about 1.5 points or $2 million came from lost customers, and the rest came from everything outside of the top 100. And the same holds true for the year-to-date numbers as well. Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division: Great. And then I know you're still early on the attributing profitability by customer and that exercise but help us understand, to the extent that you are losing those customers, are they positive, negative, neutral margin? Help us kind of understand the dynamics there.

Stay tuned on that front as I know Mike Lloyd and his team are working very aggressively and our account management team on this. What I can tell you is that it spans the waterfront. So what we have done is we have -- in terms of doing some background work to address this is we have literally gone client by client, looking at size of revenue against the loss and then we've done a complete prado [ph] as to where they fall out. Now what we're in the process of doing is taking those clients and then trying to alter the margin profile. And ironically the way this typically works is you don't get rid of a client, you actually challenge the account management team to come in and change the margin profile. So if you happen to be an account that is negative 5, you go about setting a goal to make it positive 5 next year and you look at different ways, either through services or products to upsell into a positive 5% margin and then the next year, 5% becomes 15%. So what I can tell you, again, in answer to your question is we have a mix of clients where we are losing money, a mix of clients that are breakeven or a mix of clients that are 0 to 5 or 0 to 10 in profitability and some higher than that. We're about just continuously raising the bar and doing that on an account-by-account basis. Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division: And then just last one for me. You mentioned a lot less customization of product going forward. Help us understand what the opportunity is for potential margin expansion on existing clients, transitioning them to lower cost to more standardized platforms?

I think this happens over time. Everyday, productivity and rising margin is about getting a few points better in a year and in the next year, adding a few more points and then next year, adding a few more points. So I don't think it would be appropriate for me to put an exact number on that, but we do believe that we can considerably increase the margin level of our existing clients and our future clients just by working smarter, but it just takes time and it is a progression. In fact, one of the things that we did, if I can add just a touch more color, is we built out our target P&Ls and did our benchmarking at service organizations, we try to reflect that in our target. So we didn't go for the moonshot in terms of productivity but just every quarter, every year, get better.

For our last question, we have a follow-up from Carter Malloy.

Warren, in terms of the spend coming in, in the fourth quarter and next year as well, is that primarily going to be via R&D or are we going to see that on the cash flow statement via the capitalized software CapEx or is the mix of all of the above? And maybe if you can give us a little more detail in terms of how you think -- to flow them along over time?

Carter, let me answer the first question and the second one, I didn't quite catch. When we think about the investments, then we're not going to put a lot on the balance sheet. It might the a slight step up in the fourth quarter but it's going to be relatively small to historical levels but where we expect to see the pressure, as was mentioned earlier in the call, is in gross margin as it relates as a data content and compilation cost and then also, to a lesser degree, but to some degree, down in the engineering line. And then the second part of the question I couldn't quite catch.

Just in terms of that spending. You said it's going to ramp up through this fiscal year but does that persist or grow further next year in a meaningful way that we need to be [indiscernible] where we have in our models?

Again, we will look to give our guidance as we come to our next call, and I think it would be inappropriate for me to talk about it right now, but I do think and I'd repeat what I mentioned in the formal part of the script is that I would look beyond this quarter because it's going to be into 2014 that we launch these products, and it will be into latter part of 2014 before we start to see material forms of revenue. So while I won't give guidance, again, I would reiterate that I would take what I said and I would look to the end of this year and start to look into 2014 as well.

I am showing no further questions. I would now like to turn the call back over to Warren Jenson.

Again, let me wrap up the call just by thanking everyone for joining us. It's a pleasure to be with you. We are very much looking forward to having everybody in New York on March 6 and to talking in a lot more detail about our products. Thank you very much.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.