Good day, ladies and gentlemen, and welcome to the Acxiom Second Quarter Fiscal Year 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Jay McCrary, Acxiom's Treasurer. Please go ahead, sir.

Thanks, operator. Good afternoon, and welcome. Thank you for joining us to discuss our fiscal 2014 second quarter results. With me today are Scott Howe, our CEO; and Warren Jenson, our CFO. 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'll 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, and good afternoon, everyone. Thanks for joining us today. Let me start by saying that while we have a long way to go, it is a great time to be at Acxiom. A little over 2 years ago, we started this journey with a few simple but fundamental goals: Stabilize the business, focus on our largest customers, run a better business and drive higher levels of accountability into each of our business units and return to our roots, invest in innovation and technology for our future. Since that time, we have done just that. We revitalized our management team, most notably by adding Warren, Phil and Donna [ph]. They, in turn, had significantly strengthened their teams and continue to do so. We maniacally focused on our top customers. For the last 10 sequential quarters, revenue from our top 100 customers has grown year-over-year. On the business side, we are close to being in a position where each business can operate independently. Our U.K. call center business has fully separated and as Warren will mention, by the end of Q4, ITO will be fully capable of standing on its own legs and being run independently. Further, we have clear measurements in place, a solid cadence of management reporting and a long-term roadmap. Next, under Dr. Phil's leadership, we set out not to just incrementally improve our product offering but to change the game. On September 24, we launched the Audience Operating System or AOS. For the first time in the history of marketing, advertisers and publishers can now truly market with precision at scale across all channels and all devices. Already, this is being recognized as groundbreaking, and we're just getting started. Let me mention a few points of recognition. On September 26, Gartner [indiscernible] a report entitled…

Thanks, Scott, and good afternoon, everyone. Before jumping into our second quarter results, I would like to again update you on our progress against some of our other initiatives. First, running a better business. Over the course of the coming months and quarters, we intend to take steps to improve our operating leverage and at the same time, improve our agility and ultimately transform the way we work. Specifically, we believe in the next 6 to 12 months that we can reduce our annual cost base by $20 million to $30 million. Here's how. In order that we get faster and simpler, we're going to streamline our management structure. This means minimizing the distance and management layers between Scott and our front line. Next, we will realign certain parts of our business where roles and responsibilities are not clear or duplicative or scattered. In IT, we will centralize what today is a dispersed effort into one organization. I'm pleased to announce that we have hired Dennis Self as our SVP of Technical Operations and CIO. Previously, Dennis was the CIO at Gilead and before that, worked with me at Electronic Arts. At EA, Dennis successfully led several efficiency-related and transformative technology initiatives. Under Dennis' leadership in the next couple of months, we will bring together what is now a dispersed function. We think, over time, this will result in a higher level of performance, quality of work and, of course, savings. Next Dennis, along with leaders from our delivery and engineering organizations, will be working with me to systematically redefine and standardize our workflows. While this is a longer-term effort, we believe that ultimately this can be transformative. This is about better customer service. It's about standardization, eliminating duplication and making life better for associates. Specific areas on our radar…

[Operator Instructions] And our first question comes from Mark Zgutowicz from Northland Capital Markets.

Scott, thanks for the AOS pipeline number, it's helpful. Just curious how you sort of quantify that number. Is that sort of a forward 12 months? Whatever detail you can provide there would be helpful.

It's a forward 6-month number.

A forward 6-month? Okay. And is this sort of end of sales cycle or how are you thinking about, I guess, that further?

Mark, I might just jump in here, it's Warren. I think over time, we're more than likely to move to 12-month number. Six months has been more of a traditional measure that we have used inside the company. But I think going forward -- we actually had a little bit of dialogue internally about that over the course of the last couple of weeks. More than likely, we'll move to a 12-month number as clearly we are prospecting not only for the next couple of quarters but beyond that time frame, too.

Okay. Great. That's helpful. Maybe if you could just talk about -- I think you mentioned there were 3 sort of non-beta customers that are live today. Can you talk just about what verticals they may be in and whether or not they were the -- they were original sort of beta customers prior to the launch?

Yes. In fact, why don't I even just take a step back and just talk about AOS more generally. I'm pretty pleased with where we are. Our traction has been good. I mentioned, strong industry buzz, a lot of client enthusiasm. We are high double digits in terms of the number of conversations that are underway. And those conversations have been fairly enthusiastic. I also think relative to anything Acxiom's done historically, we've supported this launch with a lot more product collateral, training materials and the like. So feeling pretty good about the $35 million and high-double digits in terms of pipeline. That said, I don't want to paint things too rosy. I will also say, on the other side of the ledger, we need to tweak our execution to be more effective. And so we have had a lot of conversations with existing clients, where the strongest piece of feedback that we've gotten is that asking them to create a brand-new contract is slowing things down fairly substantially, that what they've come back to us with is, we've got to eliminate our bureaucracy and just execute riders to their existing MSAs. That's been one of the biggest deal blockers with our existing clients, and that was a little bit of a painful learning. The other thing that we've learned along the way is although we've trained our sales force, I think, exceptionally well, our clients continue to want to talk to the product managers and engineers who have actually built the technology. And so we're contemplating forming some kind of tiger team with -- that includes some product representation. So those folks, we can just parachute them into all of our prospecting and new client conversations. But with that color, I guess, I'll go back to what I said all along, which is we're pretty enthusiastic about the future, but we're also very realistic about the present that since it's a SaaS-based new product launch, the one thing I know across all of them is they never happen quite as fast as you'd like, and there are always some course corrections that are necessary. And so I guess, our continuing counsel is please be conservative in your numbers for the remainder of this year.

Mark, I might add one other thing that I think would be useful for everyone on the phone. In the past calls, we've talked about our business model involving subscription fees, usage fees and share of revenue. While I can definitively tell you, as Scott said, there's a lot of negotiation, particularly when you launch a product, I can tell you that the model is holding up. And if you were to ask me that question today, is that the model, I would say that it is holding up in the marketplace.

Okay. Lots of great color. Just on a cost efficiency side. Warren, can you just talk about the linearity of that $20 million to $30 million? Is that more back-end weighted at the end of the 12 months? Some color there would be helpful.

I would say -- and I'm not ready to say linear or back-end loaded, it's just going to be more linear than it is going to be back-end loaded. We're going to work as we speak. The one thing that we are doing, however, is that we're being very methodical and very long-term in our approach. There's no slash and burn here. So what we're doing is we're carefully examining layer by layer our management structure to figure out how we can better organize ourselves, and we're involving our associates in that effort, too, or will involve them as we go through it. We're methodically looking at our procured spend to see where we can save and where we can save it. We're then looking at areas right where we might have duplication or opportunities to centralize, and create savings like in IT. And then, finally, which is a lot more -- which is going to take longer, is working with, say, Mike Lloyd and our leaders in engineering, is we are looking at all of our workflows and see -- and looking specifically where we do things that are one-off and where they could be done in a common, in a scalable way and then with investment, but also in a very methodical way. We're going to go after those areas. Those you can't do in 2 weeks because you just -- you have to get a new process in place, and you have to build your way into it. That's going to be a longer-term effort. But I can't say definitively this month or that month but I can tell you our pace will be a lot more linear than it will be back-end loaded.

And our next question comes from Todd Van Fleet from First Analysis.

Just a quick one because it's a bit noisy here but -- then I'll hop off. But just thinking about the core business, the Marketing Services business, kind of flatlines here. I understand that there's a lot of focus and attention on AOS at this point. But what's been the biggest obstacle towards getting kind of the traditional kind of legacy business going to you guys in kind of any meaningful way?

Yes. I mean, I think, more than anything, it's execution, it's sales, quite frankly. Overall, our Marketing Data Services pipeline is down slightly from a year ago. I think it's about 8% down versus a year ago at this time, and that's driven, to your point, by the legacy database business. AOS wasn't a part of it a year ago, and it's pretty small relative to the overall numbers. We've had a couple significant sizable head-to-head opportunities. They were competitive takeaways, which we didn't win. And winning any of those would have made a pretty significant difference. It's great to get to the finish line as 1 of 2 finalists. But in a sense, it makes it more frustrating when you don't cross the finish line as the winner. We've also pushed some opportunities out of this fiscal year. So net-net, I think you nailed it. I'm pleased with where we are on AOS, but we have to improve on the database side of the business.

Scott, is there any anti-selection going on in the client base at this point in that core business?

I'm sorry, is there any what selection?

Deselection or anti-selection. Are you kind of selecting certain customers out based on profile and given where the business is moving or are you looking kind of holistically or strategically at the book of business and you're saying, well, we should be in these areas, and shouldn't be in others?

Yes -- I guess, yes and no. So short term, the answer is absolutely that we have made a decision as a company over the last 2 years to really focus in around our largest clients and build for their needs. So many of our top 20 clients were instrumental in creating the blueprint for AOS. In fact, at our launch party, which was a party where all of them were at of. But this isn't a launch, this is a celebration of you because you guys built this thing. It literally came exactly from the blueprints they specified. So yes, there was a conscious decision to focus in around the big folks. That said, we believe that going forward, AOS offers a pull-through to the core database business. We haven't seen that yet but we hope to over time, because AOS can be deployed not only on top of our own first party databases but on the other folks as well. So to the extent someone has a homegrown database or they're using a competitive offering, AOS gives us the opportunity to have a layer on top of what they're already using. And in so doing, develop relationships with clients or prospects that we wouldn't necessarily be talking to about the custom database business. As we foster those relationships, we're hopeful that, over time, that will pull through additional database business.

And our next question comes from Dan Salmon from BMO Capital Markets.

I jumped on a little late, so I apologize if some of this was covered. But I had 2 questions, 1 for Scott and 1 for Warren. So you talked a little bit about top 20 client take-up and sort of direct conversations with clients. I was curious if you have any insight on selling into the agency channel and whether that's a near-term priority, a longer-term priority once you work through your own client base. And then second, just for Warren on the $20 million to $30 million of cost reductions, is there any associated revenue with that, that you anticipate?

Yes. So, Dan, first off, thanks so much for your question. We actually talked about that substantially before you got on the call. I'm just messing with you, we didn't. With the top -- the agencies, really good question. And we think that is an untapped opportunity for us. We haven't talked about it a lot, but that's not because we haven't been in there having quite a number of conversations. And remember, I'm an ex-agency guy, so I've walked in their shoes and I feel like I can go in and have a conversation with anyone in the industry and really understand what they're trying to accomplish, their business model and how AOS can help them achieve spectacular new things. Sometimes working for an agency is like getting hit in the head with a hammer every day. It's always about we want you to do more for less, more for less, more for less, every day. Well, AOS gives agencies a ton of new data information with which to make their existing campaigns perform more effectively and allows them through the open architecture to build applications on top of our stack and generate new revenue streams for those agencies. We've been very deliberate about how we're going to work with agencies. And so what you won't see us do is announce 12 partnerships tomorrow because we really sequence, and we've been methodical about how we want to -- we'll bring on someone first, we'll work, we'll make sure it really works for them before we connect with the second agency. So more to come on that but it's certainly -- they've been part of our prospecting efforts.

And then, Dan, to your second question, we see no negative revenue impact from our cost action. And in fact, I'd like to elaborate that -- elaborate on that just a touch. Both Scott and I, I'd say, the minute we wake up in the morning and every day when we come into work, we think about our customers. On a personal level, I try to go on customer calls and the first priority I make is when there's a pricing issue to drop everything else and jump on the phone to try to create quick resolution. And then Scott does that every single minute of his day. So as we think about cost takedowns, the first priority is protecting and actually enhancing our customer service. So when we think about taking cost out, it's actually to make our business simpler so that we can do customer service better. That's our priority. That's the way we're focused in the separate as well.

And our last question comes from Brett Huff from Stephens Inc.

One point of definition. Not to put too fine point on this, but I think in the past, you guys had talked about tens of millions of either bookings or pipeline related to AOS, and is that prior number equivalent to the $35 million that you talked about today?

The answer to that question is yes.

And that's pipeline, not bookings, correct?

That is correct.

Okay, that's helpful. And then in terms of the cost cuts, if I just do quick math and assume kind of -- run it through the P&L, it seems like those that -- taking the midpoint of that $20 million to $30 million or $25 million, that give you about $0.20 worth of help on the margin line or on the EPS line. Could you give us a sense of when that comes in? I think this was asked a little bit differently on the linear versus back-end loaded. But can you -- is there a way you can parse that a little bit this year versus next year?

Well, I won't say anything more, Brett, relative to the timing. I will tell you what will be -- just as I said to the earlier question, it will be more linear than it's going to be. Just -- we're not going to show up next December and say -- or next October, November and say, gee, and suddenly all of it appeared. We're going to work as we speak. So it will be more linear. The second thing that I want to point out is we're talking about run rate savings. So like in any other company, you've got to invest and you have to save. And there are going to be other parts of the company where we want to invest. We are all in for AOS and should be all-in for AOS and AboutTheData.com. So like any other technology company, if you don't invest, if you don't innovate, you don't survive. So think about this as run rate savings. There are going to be other parts of the company where we will invest, but we also will look for ways to save.

Okay. And then a couple more questions, just a couple of more questions then I'll hop off. In terms of the customers you have on now or some of the betas that are on, can you give us any anecdotal thoughts on the kind of lift that people are seeing who are using this? Obviously, there's a lot of folks who are excited to hear about the kind of results. I think ultimately, it's about lift and better targeting. Do you have any anecdotes that you could share with us that give us a sense of that or as a proof point?

Yes. Probably not right now, but I will tell you, I think that's the biggest single proof point that we need. We always struggle, quite frankly, in getting our clients to allow us to create case studies. We all kind of believe that their data-driven marketing strategies are their competitive differentiator or one of them. And so it's always a challenge to get them to sign up and offer up case studies. But I kind of -- I would tell you that I think that's one of the things that over the next 3 months you'll see more of, because we need more proof points from some of those, even if it's white boxed and disguised to say what kind of lists they're generating and be very specific about it really channel by channel, what kinds of things are they seeing in television versus mobile versus social versus online.

Okay. And then one last question. In terms of -- I think this question was asked a little bit before but I want to try a different angle. In terms of -- I think, maybe it was Scott, you addressed this in your opening comments, why Acxiom can succeed at this and not other data management providers? And can you just -- is my takeaway on that, should that be -- is it primarily the data assets that you can leverage, your history, or is there more -- is there a different answer that I should also be aware of?

Yes, it starts with data but it's not just the data and the first party data. It's also this construct of the safe haven. So the ability to connect both online and offline data such that people, it's not just about creating a platform for online nor is it just about creating a platform for offline. But it's both of those together, it's connecting what historically folks have been talking about as a DMP versus what historically they talked about as their CRM or first party database and making both of those things work seamlessly. And then finally, it's about the open architecture or flexibility. Our intent here isn't to create the be all, end all marketing stack. Rather the existing applications that we've built are largely to illustrate what can be done with AOS. And so we don't want -- as I said earlier, we don't want to go necessarily head-to-head with all the entrenched players, rather we see an opportunity for them to connect with what we've built and we become a catalyst for helping them do what they already do even more effectively. Going back to my first few weeks on the job as the AOS idea was just starting to take shape, I went and talked to a number of clients and I asked them about going down the path of becoming a full-service, broad-based offering versus creating the AOS engine that powers the offering. What I heard consistently from those clients is that they want to choose best-of-breed providers, but they want one system to link it all together. And so we'd like to believe that we are the underlying system that helps link it all together, but not necessarily the company that will ever operate the full suite supermarket for every need a client may have.

I would now like to turn the call back to Warren Jenson for any further remarks.

Well, let me just simply wrap up, everybody, by thanking you again for your support on our journey. We're very appreciative of all your help and suggestions and we look forward to reporting in the coming quarters. Thanks for joining us today.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.