LiveRamp Holdings, Inc. (RAMP) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen and welcome to the Acxiom Fiscal 2017 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mrs. Lauren Dillard, Senior Director of Investor Relations.

Thank you, operator. Good afternoon and welcome. Thank you for joining us to discuss our fiscal 2017 third 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. 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 to 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. At this time, I will turn the call over to Scott Howe.

Thank you, Lauren. Good afternoon and thank you for joining us. Last quarter I talked about the operating rhythm our businesses have achieved, a situation where each of our divisions was progressing but each also had room to further improve. This is where we always want to be and I'm pleased to report that we had another solid quarter highlighted by three key themes. First, strong financial results driven by top line momentum and improving profitability across each of our segments. Second, continued product innovation complemented by the recent acquisitions of Arbor and Circulate. And finally, solid execution across all of our key growth initiatives. I will now review each of our businesses in more detail highlighting both their accomplishments and emerging challenges. I'll start with Connectivity. Connectivity again had a great quarter and we continue to make good progress building out our network. Despite headwinds from the first party GMS transition, total revenue grew 36% and LiveRamp recorded another strong bookings quarter. If you turn to slide 3, I will update you on our key metrics for Q3. We signed dozens of Connectivity deals in the third quarter and added more than 50 new direct customers. In total our direct customer count grew to roughly 385. Segment revenue was approximately 39 million, up 36% compared to the prior year and LiveRamp product revenue was up over 60% again this quarter. We exited Q3 with a revenue run rate of approximately 160 million, up from 135 million at the end of Q2 and up 60% year-over-year. We continued to build out our partner ecosystem and added over 30 new integration partners in the third quarter. We're pleased to share that we were recently named a Snapchat partner. Through this partnership, marketers can onboard customer segments via LiveRamp into Snapchat’s audience match tool for targeted ad delivery. We're also deepening some of our most important existing partnerships. For example, during the recent holiday season, we saw several clients optimize their campaign performance on Google using LiveRamp to activate their customer data for targeting through customer match. This includes both Google's display ad properties and also importantly customized search. This is a game changer and the results have been pretty intriguing to date. An apparel client using Google customer match for shopping experienced a 90% lift in return on advertising spend for the segments on boarded via LiveRamp compared to the remainder of their account. A leading insurance agency saw a 7X increase in registrations for its travel product within four days of using LiveRamp compared to their prior 30-day campaign on Google. And a top consumer retailer more than doubled their reach on search when using our data append service to send to targeted audiences on Google. Ultimately, the most important measure of our performance is the results our clients achieve, and this particular use case demonstrates the power of data activation within search. In addition, we also continued to expand our used cases with strong partners that may not have as much name recognition. For example, we partnered with CMO Labs, a company that uses advanced analytics to help clients optimize their media spend. We've also partnered with Vistar Media, an out of home advertising company that helps brands reach consumers based on their behavior in the physical world. Our goal is to empower any and every legitimate use case, and in total marketers can now onboard and distribute their data to a growing network of more than 450 publishers and marketing technology providers. And finally, we continue to experience good traction with the IdentityLink roll out. On our last call, we discussed the launch of IdentityLink for brands and IdentityLink for marketing technology providers. In the coming weeks, you will hear more about IdentityLink for data owners and the availability of the data store, two solutions that make it easier for data owners to monetize their assets across the marketing ecosystem. While I am very pleased with all the recent progress, perhaps the biggest highlights from the quarter were the acquisitions of Arbor and Circulate, which materially increased the scale of our network and advanced our leadership and identity resolution. The integration has been remarkably smooth. Both deals closed within a few weeks of announcement, and we've successfully on boarded approximately 40 new employees to the LiveRamp team. David Yaffe and his Arbor team have moved into our New York City office and are leading the efforts to grow our network of publisher partners and clients. The former Circulate team will remain in Philadelphia and is focusing its efforts on international publisher development. Ari Jacoby and Todd Lieberman have already spent time in Europe with Warren strategizing on how to extend existing publisher relationships globally. From a technology standpoint, match data has been merged into our industry leading, omnichannel identity graph and we will begin integrating the respective platforms this quarter with no expected disruption to existing accounts. While still early, the reaction from clients and partners has been very positive and all leading indicators suggest these deals are on track to deliver the financial and operational results we expected. Clients are already benefiting from higher match rates and increased reach. On average, clients are experiencing a 10% improvement in deterministic web match rates and a 20% improvement in deterministic mobile match rates as a result of the combination. We would expect match rates to continue to trend up as our publisher efforts and SmartReach initiatives progress. At the same time, publishers are benefiting from expanded distribution and the ability to more easily tap into people based marketing budgets. The addition of Arbor and Circulate more than doubled our publisher network. And we have added dozens of new publisher partners in the last few months. In addition, we are expanding existing agreements to include an international component which will improve the global scale of our identity graph. In summary, I am very impressed with the integration progress made so far recognizing there is more work still to be done. The teams are working together well and identifying some pretty interesting opportunities across the combined organization and the businesses continue to grow. Looking forward, perhaps our biggest challenge within LiveRamp is to educate the market under which use cases to prioritize and what kind of results can be expected. While new client acquisition remains a top priority, we also need to help existing clients activate their data effectively and expand their use cases. Switching gears now to Audience Solutions. Our Audience Solutions or DAS business continues to make meaningful progress against its key initiatives and posted another strong quarter of top and bottom line growth. Global revenue was up 8% and revenue in the U.S. was up 12%. Even more impressive, gross margins improved to 64% and segment margins grew to over 40%. This represents the fifth consecutive quarter of growth and margin expansion for this business. We closed several key deals during the quarter including a large multi-year renewal with a top financial services client and a new logo deal with Hilton Vacations. On a trailing 12 month basis new bookings remain up more than 20% over the comparable period. We continue to expand distribution to digital channels and added Spotify and ShareDesk [ph] as new data services partners in Q3. In addition we recently announced an expanded partnership with Data Zoo allowing Data Zoo to license our third party data for advanced TV and analytics solutions. From a TV perspective our addressable data and measurement platform is now live at all five of the Pay TV distributors or and MBPDs as well as at several of the leading over the top players. Through these partnerships Acxiom can now help add buyers reach more than 50 million U.S. households addressably. We are also seeing significant expansion opportunities with the national TV networks. Today our data is available to support targeted advertising at approximately 135 online mobile publishers, television operators, and ad tech platforms. This is up from only 70 a year ago. And as usage of our data in the digital ecosystem expands, our digital data revenue also continues to grow. During the quarter digital data revenue was roughly 18 million, up over 100% year-over-year. From a products standpoint we continue to innovate across our portfolio as we evolve our DAS offerings and move toward increased automation and more efficient distribution. Earlier this month we officially launched the Audience Cloud, a self-service tool for accessing Acxiom data that allows marketers to find the right audience for their campaigns, adjust the size, test new segments, and distribute audiences throughout the marketing ecosystem. The Audience Cloud features an easy to use self-service interface and is powered by Acxiom’s world class AbiliTec identity resolution technology, robust demographic and predictive data, and expansive distribution. Today over 70 clients including three of the five largest agency holding companies are leveraging the Audience Cloud to access and deploy Acxiom data. Over time we expect this tool to also help data owners turn raw signals and incomplete data sets into finished products ready for sale. This will be accomplished through a suite of data curation features and services that include privacy validation, quality management, recombination, modeling, and packaging. Ultimately the long-term success of our data business requires that we make the transition from standard package data manufacturing to flexible iterative data curation. This will be a major theme for our AS division for the remainder of this year and the entirety of FY18. Finally, I’ll discuss marketing services. During the quarter our core marketing database and strategy in analytics businesses grew modestly but were more than offset by the sale of Acxiom Impact. However from a bottom line perspective marketing services delivered meaningful margin improvement with segment margin up over 300 basis points. We also signed several deals in Q3 including a multi-year services contract with a top automotive manufacturer and three large marketing database renewals. In addition we recently expanded our relationship with Harley Davidson to help support its international efforts. As Harley Davidson continues its expansion into Asia, it will leverage Acxiom’s database, identity, and third party data solutions to create a customer marketing platform that will integrate all dealership data across APAC and serve as the single source of truth for people based marketing campaigns. Our biggest challenge is within marketing services remain new logo acquisition and also the up sell of packaged analytics and consulting services. Winning even a couple major new clients every year could have a significant impact on our top line growth. While we have a handful of new opportunities in active discussion, we need to drive them across the finish line in order to generate top line growth in MS for 2018. In summary I really like our business momentum right now. It feels as though each of our businesses is executing soundly against its respective opportunity. At the same time each business has room for improvement. In Connectivity we must continue to scale our network and evangelize both use cases and success stories. In Audience Solutions our biggest challenge will be to maintain and accelerate our turnaround as we evolve from old school data manufacturing to next gen data curation and monetization. And finally, in marketing services we strive to win new clients while also delivering bottom line improvement. Thanks again for joining us. I will now turn the call over to Warren.

Thanks Scott and good afternoon. It's great being with everyone today. During my portion of the call, I'd like to cover a few things. First, I'll run through a few highlights then talk about each of our segments. Next, I'll update you on our guidance and finally offer preliminary thoughts on FY18. With that highlights please turn to slide 4. In many respects this was a milestone quarter. For the first time in nearly a decade our adjusted gross margin exceeded 50% and our operating margin reached 15%. Next, we are pleased with our progress in steadily driving higher levels of operational productivity and cash flow. On a trailing 12 month basis adjusted EBITDA is up 15% and our EBITDA margin reached 22% in Q3. We are also pleased that EBITDA has increased in 10 of the last 11 quarters. Equally if not more importantly, our vision of a ubiquitous universal ID and a common global marketing infrastructure is no longer just an aspiration, rather it's starting to take shape. Today we can deterministically identify more than 190 million individuals in the U.S. In fact our identity resolution capability has never been better. Our SmartReach efforts continue to gain traction and we have more than 60 brands signed. Participants are now enjoying a 30% to 50% improvement in match rates as a result. And as Scott discussed the addition of Arbor and Circulate has materially strengthened our publisher relationships and is also driving match rates higher. Today clients are experiencing web match rates to have more than 60% and deterministic mobile match rates of more than 30%. In Europe we are steadily building our match network and are beginning to approach scale in both the UK and France. In fact in France our match rates are now in the 35% to 45% range. In China we have an identity graph connecting us to more than 350 million individuals. We are connected to more than 90 million individuals in Japan and 17 million in Australia. And finally we now have a global data team focused on opening up opportunities in geographies where we have no physical presence but where our clients do business. In summary we are on the right track financially and we're pleased to be at the forefront of a massive trend that is making the power of data driven marketing and personalization available to everyone. Our role in this megatrend is to eliminate friction and waste. We allow marketers big and small to harness the power of data to make their messages more meaningful and relevant. We allow the small to compete on a level playing field with the giants. We are building the global infrastructure. That said we know it is still day one, we have a lot of work yet to do, and even more to prove. Now onto the third quarter, starting with slide 5 for summary of financial results. GAAP, total revenue was up approximately 1%, gross profit was 107 million up 12%, and gross margin improved 460 basis points to 47.8%. Op income for the quarter was 9 million compared to a small loss in the prior period and GAAP diluted earnings per share were $0.01 in the quarter compared to a loss per share of $0.01 a year ago. Next our adjusted results, adjusted revenue was up 10%, adjusted gross profit was 114 million up 14%, and gross margin improved 570 basis points to 51%. Excluding items, operating income was 33 million up 50% year-over-year and earnings per share were $0.24 as compared to $0.18 a year ago. In Q3 our tax rate was 40%. Excluded items in the quarter totaled 24 million including stock based comp of 13 million, intangible asset amortization of 5 million, separation and transformation related spend of 4 million, and restructuring and merger charges of 2 million. Slide 6 highlights our revenue results as reported and slide 7 adjusts for the sale of Acxiom Impact, the Brazil shut down, the Australia transition, and FX. Adjusted revenue was up 10% in the quarter. Year-to-date revenue was up 12%. In the U.S. revenue as reported was up 2%, revenue adjusted for items was up 11% driven by strong growth in Connectivity and Audience Solutions. International revenue as reported was down 11%. However, adjusted revenue was up 6% driven by the strength of our performance in Europe most notably the U.K. and Germany. Please note we have not adjusted for the acquisitions of Arbor and Circulate. We are well down the road of integrating our teams and merging client contracts. Given our deep integration we will not be able to discretely separate revenues. That said to assist you in your analysis we have included our acquisition guidance as a footnote. Now turning to slide 8 through 10, our segment results. First marketing services, revenue as reported was down 13%. Revenue associated with marketing database and strategy and analytics grew modestly. Globally gross margin improved 380 basis points driven by the sale of Impact and operational cost savings in the U.S. Segment income was 21 million up 4% and segment margin improved to 21%. Adjusted EBITDA was 28 million, up slightly compared to Q3 of last year. As a reminder in the appendix of our slide deck we have included a historical view of both marketing services and the total company excluding Impact. Slide 9, Audience Solutions. For the quarter global revenue was up 8% and revenue in the U.S. was up 12%. This represents the fifth consecutive quarter of growth. Digital data revenue was approximately 18 million up over 100% compared to Q3 of last year. Globally, gross margin improved 490 basis points to 63.7% driven by revenue mix and operational cost savings in international. Segment income was 35 million up 13% and segment margin improved to 41.5%. Adjusted EBITDA was 39 million up 10% compared to Q3 of last year. Slide 10, Connectivity. For the quarter total segment revenue was 39 million up 36% year-over-year. LiveRamp product revenue grew 61%. Year-to-date segment revenue was up approximately 45% and LiveRamp product revenue was up 63%. Globally gross margin improved 280 basis points to approximately 60% despite continued match pool investments and the addition of Arbor and Circulate. Segment income improved to 2 million during the quarter and segment margin was 5%. EBITDA was 4 million up from 1 million a year ago and year-to-date adjusted EBITDA is 9 million. Next, please turn to slide 11. For the quarter operating cash flow was 49 million compared to 37 million in the prior year period. This improvement was primarily driven by higher cash earnings. Free cash flow to equity improved for the same reason. On a trailing 12 month basis both operating cash flow and free cash flow to equity were up strong double digits. Before turning to guidance, I'd like to spend a moment and talk about stock based compensation. I'll touch on both our philosophy and recent trends. Our philosophy, our compensation philosophy including the use of equity is the responsibility of our Board and ultimately falls under the stewardship of our comp committee. Therefore much of what we have to say will be a reiteration of what you will read in our proxy. To paraphrase a few key principles, we believe in pay for performance. As an example approximately 75% of our CEO's compensation is based on long-term equity incentives of which 60% is performance based. We seek to align our performance measures with those of our shareholders. We wish to maintain simple, transparent, market competitive arrangements that motivate the highest levels of performance. And finally we seek to hire, motivate, and retain top talent consistent with our vision, strategy, and aspirations. With that in mind, I'd like to dissect the last few years of stock-based compensation expense and provide some context. Our Board divides stock based compensation into three buckets. First, time based R issues. Time based R issues are a core component of every Acxiom executive's annual compensation. The annual expense is fixed at the time of grant and is ratably expensed over the vesting period. Next, performance based R issues. These awards have a three year cliff best that are only awarded if a predefined performance hurdle is met. The award can range from 0% to 200% of target depending upon actual performance. Once actual performance is determined, the award is further modified by a relative return as measured against our peer group. From an accounting perspective, the company's quarterly accrual for any given award is completely dependent on our estimate of the likely outcome. In other words it can go up or it can go down and from time to time previously accrued amounts may be reversed. When that happens you will see big swings in expense. And now the third bucket, acquisition related R issues. In making acquisitions we very purposely use equity grants to lock in employees as best we can to ensure a smooth integration and a multi-year runway. These are used to replace existing unvested shares and also to provide an inducement to further lock in key talent. We consider these grants to be completely separate from our ongoing compensation programs as they solely relate to how we structure our acquisitions. This strategy has paid enormous dividends, LiveRamp is the perfect example. When we acquired LiveRamp we issued approximately 15 million of time based replacement and inducement awards. The vesting period for these shares range from two to four years. So how do we do, in short it was a home run. Nearly three years in our employee population has grown from approximately 60 to nearly 300 and with only one exception the entire management team remains in place and is flourishing. And as I mentioned in our last call we are following the same blueprint for acquisitions of Arbor and Circulate. With this foundation in mind let me now walk you through our numbers. Slide 12 breaks down our stock based compensation into each of the three buckets based on total expense, expense as a percentage of total, and expense as a percentage of revenue. I'd like to make three points for you to consider. The increase in time and performance based stock comp is deliberate and part of a natural evolution. The estimated year-over-year increase is driven by a few items in particular. First, the acquisition of LiveRamp and our expanding divisional leadership structure. The expense run rate associated with our new employee base of LiveRamp and added divisional leadership is normalizing. So every year for four years compensation expense will naturally increase. Obviously we are just starting with Circulate and Arbor. Second, we have made adjustments for several key leaders where our historical practices were not simply competitive. And third, with respect to performance awards it really boils down to the accounting treatment versus any change to the number of shares granted. In short we did not meet for fiscal 2015 and fiscal 2016 targets which resulted in expense reversals. Conversely for fiscal 2017 and fiscal 2018 awards we are ahead of target and therefore the accruals are much larger, hence the large swing. Second, we believe our own going stock based compensation expense as a percentage of revenue is in line with any relevant index or other market comparable. And finally, while we don't take lightly the use of equity based incentives in structuring acquisitions we won't be penny wise and pound foolish. We will always vote for stacking the deck and doing our best to lock in talent. We believe this is key to delivering great long-term returns on the capital being deployed. Now onto guidance, first our guidance excludes items including non-cash stock compensation, purchased intangible asset amortization, restructuring, merger and impairment charges, and separation and transformation costs. Given the strength of our year-to-date performance we are tightening our revenue range and raising our EPS guidance. We now expect total revenue to be in the range of 870 million and 875 million. GAAP EPS to be approximately $0.11 and adjusted EPS to be approximately $0.70. Included in our full year revenue guidance is five months of actuals or approximately 20 million from our disposed impact business. In addition consistent with the guidance we gave on our last call we have assumed Arbor and Circulate will contribute 5 million of revenue in FY17. A few additional comments on FY17, if you exclude the expected $5 million impact from Arbor and Circulate we continue to expect LiveRamp product revenue to be up between 55% and 60%. We now expect total Connectivity segment revenue to be approximately 40% given declines in first party GMS. We expect CAPEX to be slightly below our previous estimate of 65 million for the year. We now expect onetime expenditures to be no more than 8 million down from our previous estimate of 10 million. As a reminder this spend is associated with a further separation of our businesses to maintain clear lines of sight and optionality. And finally for a tax rate we recommend you continue to use approximately 40%. Before opening the call to questions I'd like to share a few early thoughts on fiscal 2018. We are now midway through the fourth quarter and feel great about our progress and momentum entering fiscal 2018. Our businesses are in solid shape. We have great leaders and teams with tight objectives and plans to match. As always we ask that you be conservative in your expectations. Growth is never linear, there will be surprises, and we will continue to invest in our future. We also believe we are at the forefront of a significant opportunity. Now a few specifics. In marketing services we see a stable business with improving margins. We expect fiscal 2018 to look a lot like fiscal 2017, a stable top line with expanding margins and improved operating efficiency and leverage. Audience Solutions we believe will cement its place as our second engine of growth. We expect another solid growth year but, also anticipate making investments. Our growth will be tempered however by a slowdown in the growth rate associated with digital revenues given shifting business models with some publishers. That said Audience Solutions will continue to demonstrate the strength of its operating model. Connectivity, in short we expect our growth rate for this segment to accelerate in FY18 and despite continued investments in new geographies and products we expect operating margins to expand and this segment to be solidly profitable. CAPEX should remain in check as a percentage of revenue and we expect our share count to be approximately 82 million. We have made no assumption relative to our buyback in this guidance. As to the buyback we remain committed but in the near-term are focused on rebuilding our cash liquidity and overall flexibility. In summary our third quarter represents another positive step forward. We are pleased to have again increased our guidance for the year and believe we are well positioned for a strong fiscal 2018. And finally we remain committed to our goals and our opportunity. Double down on Connectivity and digital data in order to drive sustained high growth and global leadership in key markets, create value through performance improvements in both Marketing Services and Audience Solutions, carefully manage our cash and maintain financial flexibility, and finally do as we have done for each of the last four years, steadily return capital to our shareholders. With that thank you again for joining us today. We look forward to updating you on our next call. Operator we will now take questions.

Thank you sir. [Operator Instructions]. Our first question comes from Brett Huff of Stephens, your question please.

Good afternoon guys and congrats on a nice quarter.

Great, thanks Brett.

Just first question on the GMS first party stuff, it sounds like we're lowering our guidance a little bit in light on LiveRamp , not the product stuff that we're more focused on, but the overall, I assume that’s is just a faster decline in that first party of GMS commission than we expected, is that the right way to think about that?

That's exactly right Brett. And then just a little bit of added color, we would expect those negative comps to be there for Q4 as well. It was down sort of mid-60s for the quarter, same sort of thing in Q4. The negativity if you will, they will be also negative in Q1, not quite as bad and then we will be through the negative comps as we roll into Q2.

Okay, so we kind of lap all this stuff as we exit fiscal 1Q next year?

That's correct.

Okay, and then can you tell us, I think you've been talking about a metric that seems really important in addition just to the overall match rates which obviously are turning in the right direction. I think the question was asked last time that a year ago last quarter -- the number of connections per advertiser used was 1 or 1.5, it got up to 8, is that a metric you can share with us again and is that a metric that you can kind of continue to share with us and is that the right way to think about how we should view the LiveRamp business?

I think it is one of the right ways Brett. This is Scott. For the last quarter, it was a little bit North of 9 so we're making progress. What will temper that number going forward, is we know that as we sign new advertisers typically they start with one or two used cases. So we might have to play with that number a little bit and give you kind of a steady state, same store kind of number. The other thing I should say, I mean, in my remarks today I talked a little bit about Google match. I am hopeful that that has the possibility of expanding the number of new advertisers into the fold because that really helps drive transformational performance and search. So, for our existing clients we hope that they add that as used case. We also hope that a number of new clients take notice and that attracts them to our business.

Okay and then last question from me is you mentioned changing business models and Audience Solutions, can you be any more specific than that, I mean it's been a great grower and it sounds like it will continue to be, but it sounds like we are being -- trying to be a little more conservative as we look forward, what is that changing business model that you're referring to?

Brett, I will go ahead and jump in, and Scott may want to comment. Over the last couple of quarters, we've talked about the possibility that certain publishers, our business model might change as it relates to digital data and that's specifically what we're referring to. So, as we look into FY18, that will happen. We expect that our growth rate in digital data will slow. So it's not going to be North of 100, we would expect that it's going to be probably 15% to 20% next year. That said, we would reiterate a couple of things; one, for Audience Solutions we feel our long-term growth rate of 5% to 10% is intact. We're going to expect a great year in FY18 from Audience Solutions. And then finally, I'd point out that the long-term trends as it relates to digital data are very, very strong and very much intact across the entire ecosystem both in the U.S. and internationally.

Great, that's it from me, thanks guys.

Thank you.

Thank you. Our next question comes from Kip Paulson of Cantor Fitzgerald, your question please.

Hi, thanks and congrats on another solid quarter, just a couple from me. First, you guys have made a lot of interesting announcements in recent months, could you help us rank order the potential revenue contribution or even importance of Audience Cloud, the IdentityLink expansion last October, Arbor, Circulate, and even incremental opportunities from location data via that Verve partnership? And then second, regarding the expanded DataView partnership you announced recently, is this all Audience Solutions revenue, and if so how is it split between AbiliTec and InfoBase? Thanks.

Yeah, this is Scott and I’ll start. So of the things you mentioned to me, the most important development is the acquisition of Arbor and Circulate, and I say that because it's truly a foundational capability. We saw significant improvements in both our online and mobile match rates. We nearly doubled our publisher network and that provides both additional distribution, but also access to additional data for ingestion. And perhaps most importantly, we brought on some phenomenally talented people who we can trust to carry the ball forward and do great things for us. At the end of the day, our success is always driven by smart people and we've brought on two great teams of people that can make a real contribution to Acxiom in the coming years. Beyond that we are focused on expanding the number of used cases that we offer and, so I think search is a really big deal given how big search spend is as a percentage of total advertising spend. This is a new way to potentially buy search and make it work better. And even things like what I talked about today with in-home advertising, it's small, it's very early, but that's a $5 billion plus channel that hasn't had a whole lot of innovation in it for decades, and so long-term our mantra is data driven everything, data driven everywhere, and these are all good steps forward towards achieving that.

Okay, and then the Audience Cloud is -- that’s relatively smaller opportunity compared to the first two?

You know the way I'd characterize Audience Cloud is we've talked in recent months about digital data. Well digital data is not a different product. Data is just data but, what is happening is a fundamental transformation in how data is consumed. And so the data cloud first and foremost replaces kind of the batch file processing and manual sending of data with real time APIs, real time ingestion. Publishers, platforms, and agencies that's how they want to ingest data and so if we can deliver them real time data they're going to consume more of it. And in addition included in the release and our plans going forward is the ability to curate data much more efficiently. Today that team if they want to change a data segment, they have to write a custom sequel query and it can take weeks or even months to create a manufacturing data segment with the introduction of data store and advanced curation tools we will be able to reduce the cycle time of data curation from days, weeks, and months to minutes in hours and that's a big deal given the wave of new data sets that is now appearing on the market.

Hey Kip, you know I'd add a couple of things to your second question about size of opportunity and I’d make couple of points. I think for almost every one of the things you mentioned it's really day one. And I'd just reflect on customer visits that I know I've had in the last 30 days. Take IdentityLink we're starting to explore used cases where companies, medium sized and very, very large are looking at how to use IdentityLink across their entire partner networks in order to create a common identity with all of their suppliers partners and everybody that they touch. So we're just right at the very beginning. I was with a large agency who was trying to figure out how to use Lat/Long and Vocation data to measure billboard usage and views. So, really all kinds of interesting opportunities that are just now getting started. So I think size of the opportunity, size of the temp is yet to be determined but we're certainly at the beginning and a lot of real positive signs.

Alright, great and that's really helpful. And then yeah, just on the data view, whether that's all Audience Solutions revenue, how it's split between AbiliTec and InfoBase and maybe even if anything you can comment on as far as how you are going to be recognizing revenue with regard to these sorts of data deals?

Well most of it will be Audience Solutions revenue as sort of the digital data. So we also have a partnership with Data Zoo with LiveRamp so but in this case it will be through Audience Solutions. Yeah, from time to time we're going to have relationships like this which will be both with Audience Solutions and with LiveRamp.

Alright, great, thanks guys. And congrats again.

Great, thank you very much.

Thank you. Our next question comes from Dan Salmon of BMO Capital Markets. Your line is open.

Hey guys, good afternoon, maybe one for Scott and then one for Warren. Scott if I can just follow up on your comments about how the changes that are going on in search and applying customer data are much more a big opportunity for you and I think you mentioned in a prior answer specifically around it sort of opening up the client opportunity. By that do you mean that we are opening up to certain new logos, new verticals that you hadn’t tapped earlier I think of being search spenders like online travel and e-commerce and digital businesses, so just maybe if you could follow up on that a little bit more? And then Warren my question for you is just on marketing services gross margins which improved so much, is that largely the balance of mix shift with the impact business leaving or there are real fundamental changes driving that or a little bit of both? Thanks.

Hi Dan, on the first the answer is yes, with an exclamation point after it. But we have some work to do to achieve that and it's largely around evangelizing the kinds of case studies that I shared with you today and really extending our audiences from Fortune 500 type advertisers really more towards torso and even long tail type advertisers. Essentially for a long time only the very biggest companies were effective at using their data. But search was the domain of a lot of smaller companies. It was the one thing that worked. Customer match allows even a small advertiser to utilize their data affectively and achieve much better search results. So our hope is that over time as folks try this, succeed with it, word will spread and yes, will attract new customers to the franchise.

And then Dan I think that looking at gross margin and even looking into FY18 I can tell you we will always be at this level but it's not too far off from where we're expecting in the near term margins to be for the business going forward. Some benefit from Impact as clearly was accretive to exit that business. I would also tell you that our IT and operations team both in delivery and also in our IT core infrastructure are doing really a great job of driving productivity. We've set long-term targets as a percentage of revenue where we want our cost of revenue to be associated with operations. And I'll tell you, [indiscernible] and our teams are hitting the bogie. So we're pretty proud of those accomplishments and think there's more to come.

Okay, great, thank you.

Thank you, our next question comes from Katling Young [ph] of William Blair. Your line is open.

Hi, thanks and congrats on the quarter. The first question I have for you guys the Connectivity revenue run rate 160 million up 60% obviously that’s a great metric. I guess my question is, understanding a big part of that growth comes from just sheer number of customers being added on to the platform but imaginative questions that comes from just increases in customer efforts -- I know you talked about connections for customer increasing overtime quite often its seen that's not necessarily hand in hand with the revenue backlog. So, I was just curious if you could give a little more color on the level or thoughts of customer listing and how much that is contributing to the run rate movement?

Yeah, I can start and Warren should chime in. But I would say increased customer usage is not what's driving revenue today. We talked a little bit about last quarter, about the price changes that we're making where we're moving from, really records under management pricing approach in large part to one that incorporates greater usage variables that as you expand to new use cases your flat monthly fee increases by some amount. That pricing adoption we just rolled that out. That's standard now for new clients. But for existing clients it will really take a couple years to roll them all over as their contracts come up for renewal. So it's not something you'll see, it's not something we've seen to date and I don't think it's something that will be a growth driver for the next few quarters. Longer term as we look a couple three years out we think it's going to be a major driver for us.

I would add only one thing, and it's not really directly on point with your question but I think very relevant for everybody because it's been an absolute focus of our team at LiveRamp and that is just think of everything that we're doing to make our service better and more sticky and more relevant. And all of this over the long-term will drive volume. The increase in match rates is huge to what we're doing in extending the value of our network for example through our publisher network is really significant in terms of creating value. The reach in mobile all of these things are all designed to make the power of the network more significant and the value of our service offering more broad. So over time we think those are all positive signs that should continue to help us grow this business.

Alright, thank you.

Thank you.

Thank you. [Operator Instructions]. Our next question comes from Bill Warmington of Wells Fargo. Your line is open.

Good evening everyone.

Hey Bill.

Congratulations on the strong quarter and especially on the gross margin improvement across all three segments is impressive.

Thank you.

So a question for you on IdentityLink, you'd launched it back in October and I just wanted to ask how the adoption was going by brands and the marketing applications and kind of and ask also if as LiveRamp on boarding contracts come up for renewal are they converting over to IdentityLink contracts, is that the way you are handling that?

Yeah, that is the plan because all of our products essentially migrate into IdentityLink. You know Bill, I'd say the biggest benefit that we've seen from the IdentityLink segmentation thus far is really just having much greater line of sight into each of our businesses. Travis had me sit in on his business reviews a couple weeks ago and to go through publishers and agencies and platforms and direct brands and to have a hour long session on each one of those businesses, talking about what the customers were looking for, the kind of traction that we're getting, having a specialized sales force in place for each of those, we're just getting started. But the quality of the conversation that the granularity of the observations and the go dos that came out of it were transformational. It reminded me of splitting into the divisional structure a couple of years ago at Acxiom and the benefits we saw in each of our divisions. Well Travis is now doing that within LiveRamp by having IdentityLink for publishers, IdentityLink for brands and so on. And I think that's going to pay some dividends for him going forward.

And then a question for you on SmartReach and so how many clients are sharing authentication data to SmartReach these days and how's that trending and what kind of improvement and match rates are the clients seeing?

Yes, so rough number little bit North of 60. And it depends by client where their starting point was but it really works well. I mean call it on average maybe 30% to 50% match rate improvements are what those clients are experiencing. Importantly we're also now extending that. Originally the focus was largely on online, now we're using it to improve our offline matching capabilities and Warren, I should let you talk about this. It's been really successful as we've expanded that capability internationally.

What I would tell you is we've been using SmartReach to actually build the reach that I mentioned in the formal part of my remarks. So when we talk about our identity graph in China, in Australia and Japan we've done that without cookies. So that's entirely based on reading approach predicated on SmartReach.

Interesting, so just to make sure I have the numbers right, I think the last client count that you guys had given was 20, so you've gone from 20 to 60?

Yeah, I'm not sure you give us that much credit. I think we were probably a little bit higher than that but it is a major focus for us and will continue to be. I mean ultimately we want every single customer across our entire franchise to sign up for this.

Well, I think what’s being confused is there are client signs but implementation lags this signing. So you're probably looking at those who have been implemented and a number Scott quoting of those that have signed today. Not all of those are yet implemented. That's probably the disconnect.

So what would be an apples to apples number then?

Our view is somewhere call it 40ish the last time we net to today at 50.

So, 40 to 50 and that represents implemented.

So implemented today would be about 30.

Got it, okay. Alright, well congratulations and thank you very much for the insight.

Right, thank you.

Thank you.

Thank you. I will now turn the call back over to Warren Jenson.

Great. Operator, thank you very much. If there are any more questions operator we would be happy to take a couple more given the fact our remarks went a little bit long.

[Operator Instructions].

Great, operator then I will wrap up our call today. First of all let me again thank all of you for joining us today. We're obviously pleased with our results for the third quarter. This does represent another positive step forward for the company but, we know we've got a big opportunity ahead of us and we're looking forward to delivering going forward and also reporting on our results. Couple of quick housekeeping items before we adjourn, a reminder for everyone, Ramp Up is in San Francisco on March 6th and 7th at the Fairmont. We hope you can join us. You can register by visiting rampup2017.com or call us and we can help you get registered. I would also note and again that's on March 6th and 7th. On March 6th at 2 P.M. we will be hosting an investor breakout which we hope you can all attend, which will do a little deeper dive into that which we're doing at LiveRamp, should be a great hour to spend with you all. Secondly, between now and our next earnings call Lauren will be taking a little break because she's expecting a new little girl into the Dillard family. So all of you is -- we are doing our calls this afternoon and tomorrow and over the course of the next few weeks please wish her best. We are all looking forward to having a new little girl in the Dillard family and wishing her and her husband the absolute very best. So, thank you all for joining us and we look forward to talking this afternoon and tomorrow.

Ladies and gentlemen this does conclude your program. You may disconnect your lines at this time. Have a wonderful day.