LiveRamp Holdings, Inc.
Q2 2010 Earnings Call Transcript

Published: 29 Oct 2009

[Operator:]

Good day, ladies and gentlemen. Welcome to the Acxiom's second quarter fiscal year 2010 earnings conference call. As a reminder, today’s call is being recorded. At this time for opening remarks and introductions, I’d like to turn the conference over to the Chief Operating Officer, Mr. John Adams. Please go ahead.

[John Adams:]

Thank you. Good afternoon and welcome. Thank you for joining us to discuss our fiscal 2010 second quarter results. With me today are John Meyer, our CEO and President, and Chris Wolf, 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 section of our public filings and the press release. Acxiom undertakes no obligation to release publicly any revisions to any of our forward-looking statements. A copy of our press release and financial schedules, including any reconciliation of non-GAAP financial measures, is available at acxiom.com. At this time, I will turn the call over to John Meyer. John?

[John Meyer:]

Great. Thank you, John. And thank you, everyone, for joining us at Acxiom’s second quarter earnings call. Today I’ll share a few remarks about our financial results and then add additional color around our four key focus areas; insight, integration, international, and incubator. Then I’ll close with a few comments summarizing what we are seeing in the marketplace and how this plays to our historical strength. As you saw in our earnings release, we are still experiencing revenue challenges as far as a year-over-year revenue growth comparison. However, quarter-to-quarter revenue was up 6%. And more importantly than the number itself is that each of our industry groups, even financial services and retail, saw revenue growth. Now, this holds true for our key growth lines of business; multi-channel marketing, consumer insight products, and information management. Q2 also brought several new logo wins to include United Airlines, Symantec Interactive and NetSpend; and key incremental deals, including Dun & Bradstreet, Rodale and E-Trade. Now as the results show, we are beginning to see the benefits to the bottom line of being able to better leverage our expense base. Our continued focus on cost management and changing the way that we are doing the work allow us to carry more of that growth to the bottom line. That is evident from our earnings per share for the September quarter being up 140% over the June quarter. One area that is still a concern is our European business, especially the UK, where our product business remains under pressure. We are seeing many UK customers cut back or delay campaigns causing several of our smaller competitors to go out of our business, and all of this being made worse by a protracted postal strike. But on a more positive note, the services business there is holding it down quarter-over-quarter despite the effect of unfavorable exchange rates. Now, as we previously announced, we have new leadership in place in Europe with Chief Executive Stephen Whyte, along with a new multi-channel marketing leader and a chief financial officer for the region. Stephen comes to us from the agency world on the belief that Acxiom stands apart in our ability to create insight and add value for clients across the full marketing spectrum. This ranges from data analysis to channel optimization to creative services and measurements. And as I said in the beginning, I wanted to update you on some of the specific examples on our progress in those four key areas of focus for FY ’10. The first area is insights where we are creating actionable data points to driven decision-making. As you know, we have been investing aggressively for 18 months in new products that merge our capabilities in the new flexible tool for clients to use in the digital and direct marketing space. One tool of gaining traction is collaborative targeting. Now, collaborative targeting is a way for advertisers to target specific customers and prospects with relevant promotions as precisely the moment they are online on the publishers’ network and therefore most perceptive to that message. A large advertiser in the global manufacturing sector used this solution to sell more than 90,000 additional products, generating millions in additional revenue, at the same time saving more than $18 million in advertising costs. Ultimately, we will make it possible to target specific customers and prospects with advertising through any digital medium, from email to banner ads to interactive television to social media, with the same precision that Acxiom has long been known for in the offline space. Another example of providing this insight is our work with a leading insurance company for customer data integration, risk data and our pre-fill solution, which speeds the application process so that agents can book revenue more quickly and at a lower cost. Our second area of focus is integration, both internal and external. Externally, the integration of our portfolio of capabilities enables a seamless execution of end-to-end digital and database marketing solutions. Clients can track and measure that success across those multiple channels. An example is the large retail that uses text messaging as an entry point to drive consumers to their website, a promotion that resulted in a 750% increase in online spending with that retailer. As a result, they were able to grow their email database by 300% in short four months, and so they could create follow-on future email campaigns. Internally, we work to integrate our capabilities to align around solutions which our clients buy and how they do their work. As an example, we kicked off a pilot with 54 clients to improve delivery speed and manage both offline and online processes for that true multi-channel viewpoint. Early indicative results of that individual client level show an initial savings of about 20% in processing time per month. That’s five days each month and improved reporting that saves 35 hours of effort each month, representing significant efficiencies. Now this tool focuses on both external and internal integration is why we are being reviewed as an attractive business partner for outsourcing entire marketing functions, as our customers and Acxiom better align our operations together. In the first month of Q3, we signed a first of a kind agreement with a large financial services company to take over an entire marketing function and transform that business model. We are pursuing more of these deals in the second half of the fiscal year. Now let’s look at our international focus. During Q2, we announced our expansion into the Middle East and North Africa with the acquisition of DMS, or Direct Marketing Services, in the kingdom of Saudi Arabia and United Arab Emirates. What’s most exciting about this developing market is where less than 1% of the $3 billion in advertising spend goes towards the targeted marketing like the services Acxiom provides. As the only full service marketing services group in that area, DMS gives us an attractive entry point into a region of 300 million people. It also gives us a physical presence to answer the expansion need with our multi-national clients. Our fourth area of focus is incubator, which is simply our efforts to assess opportunities for creating the next 100 million plus revenue business at Acxiom. One area of continued promise is an incubator in our identity management and authentication offers, from government to healthcare to education to financial services, organizations are already benefiting from Acxiom’s ability to verify the identity of those who go online to complete any member of personal and financial transactions. As an example of where we have brought significant value in this area already, we recently signed a financial institution engaging us for identity verification on new online account application. Within a few months, our solution uncovered a fraud ring that helped the company prevent which could have been a significant loss. Now if more organizations substantially increase the amount of business they do online, we expect Acxiom’s identity services will meet that growing and ever-present need. Okay. So this gives you a snapshot of where we are seeing along the way in progress in our four areas of focus. In a moment, I have some closing comments about the second half of our fiscal year. But first, I’ll turn it over to Chris to review our Q2 financials. Chris?

[Chris Wolf:]

Thank you, John. I’ll be reviewing selected financial highlights for the quarter. I direct you to our website for the supporting financial schedule to assist you with your own analysis. Let me begin with consolidated figures. For the three months ended September 30th, total revenue was $271.1 million compared to $307.4 million, excluding the $21.5 million of revenue from a pass-through data contract in the same period last year. As we have discussed with you previously, the company now recognizes revenue on a net basis on this data contract. Total operating expenses for the quarter decreased 9.3% to $149.9 million compared to $275.5 million, excluding expenses related to the pass-through contract for the same three-month period last year. Operating income was $21.2 million this quarter and $34.3 million a year ago. And net income was $9.4 million compared to $15.9 million last year. Fully diluted earnings per share were $0.12, down from $0.18 before the effect of unusual gain items in the second quarter of last year. GAAP diluted earnings per share in the prior year were $0.20. I would also like to comment on our second quarter results as compared to our first quarter. Total revenue was up by $15.1 million or 5.9%, and operating income was up by $8.8 million or 70%. Operating margin improved to 7.8 % in the second quarter from 4.9% in the first. Turning to revenue. As I previously mentioned, revenue for the quarter was $271.1 million, down from $328.9 million in the same quarter last year. $25.3 million of the decrease was due to a change in revenue recognition on the previously mentioned pass-through data contract and the unfavorable impact of foreign exchange rate. Excluding these items, total revenue was down by $32.5 million or 10.7%. Services revenue for the quarter ended September 30th was $210.2 million. This represents a $23.4 million decrease or 10% compared to the prior year period. Services revenue was down across most lines of business. Customer data integration, or CDI, and marketing services experienced the largest declines. The declines in both CDI and marketing services were driven largely by the financial services vertical. Over the last year, revenue declines have occurred in financial services due to contract renegotiations for reduced scope, volume reductions and customer consolidation. Other industry verticals have been impacted by similar issues, but to a lesser degree. On a geographic basis, international services revenue was up by over 9%, driven by our services business in the UK before the impact of exchange rates. Including the impact of exchange rates, international services revenue was down slightly. Products revenue for the quarter ended September 30th was $60.9 million, which was down $12.9 million or 17.5%, excluding the pass-through data contract, when compared to the same period last year. US operations were down $5.7 million and the international operations were down $7.2 million. Approximately $1.2 million of the decline in international products was a result of unfavorable exchange rate movements. The US products revenue reductions were most notable in financial services and the employment screening businesses, while international products revenue was down in all countries. Turning to operating costs and expenses for the quarter, at $165.8 million, cost of services decreased by $15.2 million or 8.4% compared to the same quarter a year ago. Expenses had been reduced significantly over the past 12 months since revenues declined. However, due to the reduction in high margin volume-based revenue, margins have suffered. Gross margin for services revenue decreased from 22.5% to 22.1%. The margin impact on this volume-based business has been mitigated by efficiency improvement in consolidated IT and delivery areas. Cost of products of $46.1 million represents a decrease of $30.9 million compared to the same quarter a year ago. $21.5 million of the decrease was due to the pass-through data contract mentioned previously. Excluding the pass-through data, product costs actually decreased by 18.9% and margins on non-pass through products decreased slightly to 24.2% from 24.8% a year ago. The decrease in products margin is primarily due to revenue declines in Europe. SG&A expense was $38 million for the quarter ended September 30th, down by 2.6% compared to $39 million in the prior year period. The prior year amount included the reduction of approximately $2.5 million to correct the classification of bonuses included in the first quarter last year. Excluding this reclassification, SG&A expense is down by $3.5 million compared to last year. The decrease is due to cost reduction initiatives in many G&A cost centers, including personnel costs, sales and marketing costs, as well as lower incentive compensation accruals. Interest expense for the quarter was $5.4 million compared to $8.6 million a year ago. The decrease in interest expense is due primarily to a lower interest rate and average balance on the term loan. The rate is approximately 170 basis points lower and the average balance is approximately $21 million lower. Interest on other debt such as capital leases was also low due to lower lease amounts outstanding. In the current quarter, year-to-date income taxes were adjusted to the expected full year tax rate of 40.5%, which resulted in a current quarter tax rate of 41.1%. The increase from the first quarter assumption of 39% is due to higher than expected income tax expense in foreign jurisdictions. The prior year rate was 39%. Now I’ll discuss a few of the highlights of the current quarter balance sheet as compared to the March 31, 2009 balance sheet. Accounts receivable as of September 30th were $182.6 million, down from $184.8 million in March. We remain focused on cash collection and our liquidity position. Days sales outstanding were 62 days at September 30th compared to 56 days at March 31 and 68 days at June 30th. Our current ratio as of September 30th is 1.9 compared to 1.8 at March 31. Total debt as of September 30th was $534.2 million, a decrease of $44 million since March 31. Total debt as of September 30th consisted of $457.5 million in the term loan, $41.9 million in capital leases, $10.2 million in software licenses, and $24.6 million in other debt. During the quarter, we did prepay $30 million on the term loan. In addition to the outstanding debt, we have a $200 million undrawn line of credit and we are currently in compliance with all our debt covenants under our credit facility. Now turning to cash flow, as of September 30th, the company had cash of $167.6 million, up from $93.4 million a year ago. For the current quarter ended September 30, free cash flow to equity was $29.4 million compared to $71.6 million in the same quarter last year. Current quarter cash flow was negatively impacted by lower earnings in the quarter and lower depreciation and amortization included in operating results. The prior year quarter included $24.2 million of benefit from the sale of a real estate asset. As I mentioned before, we used some of this free cash flow to prepay $30 million of the term loan debt in the quarter. Total capital expenditures for the acquisition of property and equipment were $21 million in the quarter. Included in this amount were $6.6 million of finance purchases. Now turning to the outlook. As we mentioned in the press release, we are beginning to see signs of progress in the business. However, we continue to be challenging our ability to estimate the time when our clients will execute the marketing program. And as such, we will not provide any guidance at this time. This concludes our prepared comments on the financial statements. Now, operator, we are prepared to begin the question-and-answer session of the call.

[Operator:]

(Operator instructions) We’ll go first to Todd Van Fleet with First Analysis.

[Todd Van Fleet:]

Hi, good afternoon, guys. Nice quarter.

[John Meyer:]

Hi, Todd, thanks.

[Todd Van Fleet:]

September is generally – from a seasonality point of view, isn’t it generally a little bit stronger quarter than December quarter? I’m just trying to refresh my memory here on the different service or the different lines of business.

[John Meyer:]

Are you saying – you're talking about second quarter –?

[Todd Van Fleet:]

Yes. Yes, the September quarter, as I recall, is generally a little bit stronger from a seasonal point of view than the December quarter from a revenue perspective. Is that right?

[John Meyer:]

No. No, I don’t think that’s the case. I think it’s the other way around.

[Todd Van Fleet:]

The other way around.

[John Meyer:]

Yes. Historically, Todd, the third quarter, our December quarter, is stronger. The only difference was last year we did go down sequentially, but I would consider last year an anomaly.

[Todd Van Fleet:]

Okay. So the holiday purchases are generally made in the December quarter than in terms of the –?

[John Meyer:]

The holiday purchase is probably another thing (inaudible) a lot of people’s fiscal year ends. And so pricing and campaigns and stuff at the last bit of budget that they may have where we help them spend it.

[Todd Van Fleet:]

Okay. How should we think about the impact of the Saudi Arabian acquisition then in the December quarter? Is there a way you can help us kind of understand what the magnitude of the impact is there?

[John Meyer:]

It’s not a giant revenue producer. And we haven’t closed yet, but it won’t be significant to our results in the quarter.

[Todd Van Fleet:]

Yes. Okay. Just thinking about the next quarter or two, which – well, from a – would you say that visibility now is better than it was maybe a quarter or two quarters ago in terms of the desire to spend, it’s not actually writing the check to spend?

[John Meyer:]

I think that’s a fair characterization. We are seeing people who had plans to do things, actually starting to free up the budget, and it appears that they are planning on spending it. And the timing of when they spend it is still under question, but there is the optimism that you see in the market space. Marketers are looking at this and saying, this is a time for me to be prepared to do the marketing campaigns. It will take advantage of the revenue opportunities towards the remaining part of the year and the beginning of next year.

[Todd Van Fleet:]

Okay. Do you anticipate – John, over the course of the next couple quarters, given what you see in the marketplace, do you anticipate making maybe some additions here and there personnel-wise, maybe sales-wise to capitalize on certain opportunities or just to understand how you feel about the company, where it’s at from a staffing point of view in terms of meeting the market demand?

[John Meyer:]

I mean, as far as staffing, I think we are okay as far as delivering the results that we expect for the next couple quarters. We will be making probably some investments, as we look at new markets to move into, like new industries that we decided we have an opportunity to penetrate. We did make some changes that I talked about in Europe with personnel. Those were more of a replacement people than they were augmentation. And we are going through a process of evaluating account managers, and it’s a good time for us to pick up great talent on the market space that has relationships with our existing and potential clients. And we can – we are looking at upgrading the talent in that area.

[Todd Van Fleet:]

Okay. One more before I jump out. What was the – what a digital do in the quarter maybe on a sequential basis as probably more –?

[John Meyer:]

We kind of lumped it together in multi-channel, and so you will see that it actually increased just like the rest of the industry groups plus our consumer information group and our information management group, as I said. So it went up.

[Todd Van Fleet:]

Okay. Thanks, guys.

[Operator:]

We’ll go next to Carter Malloy with Stephens.

[Carter Malloy:]

Hey, guys, thanks for taking my questions. On the pass-through revenue, I’m just trying to clear up in my model. And so I think you had $29 million last year and $21.5 million this quarter. There is $7.5 million to $8.0 million in easing comp sequentially. And I’m just – looking forward, should I expect that same type of movement for the next quarter or two?

[John Meyer:]

Yes. I don’t – we don’t have an issue – I mean, I think that was public.

[Chris Wolf:]

Yes. We just want to confirm the amount. Carter, it’s Chris, that you are right. For Q3 in December, you would see number of that kind of scale, which Q4 will taper off because the contract was renegotiated in February of last year. So that’s where you will see a decrease.

[John Meyer:]

And we only have two months out of the three in that last fourth quarter. So –

[Carter Malloy:]

Okay. So I shouldn’t see a sequential – I don’t want to call it a benefit, but easing of comps maybe on the pass-through that we did.

[John Meyer:]

Right. You’ll see something in the neighborhood of plus $20 million, again just as you did in this quarter.

[Carter Malloy:]

Okay. And then on the DMV contract, I don’t know if you can quantify how much is in the quarter, but can you maybe tell us if you are up to speed now or if you’re close to or at a full run rate on that?

[John Meyer:]

We are not up to the full run rate in this quarter, but we did get a portion of the revenue in this quarter. So next quarter, we expect to be at full speed.

[Carter Malloy:]

So, of that, call it, $7 million or $8 million sequential improvement outside of the pass-through data can – is it fair to say that DMV was a good piece of that?

[John Meyer:]

Yes, it would be fair to say that DMV was a piece of that.

[Chris Wolf:]

And it’s a good piece, but I think the thing we are trying to stress is we saw each of the industry group improve a little bit (inaudible) John’s comments around little green shoots (inaudible) going on these days. So it wasn’t just in DMV, but it was modestly in all the other industry groups as well.

[Carter Malloy:]

Okay. That’s good to hear. And then, Chris, just a couple housekeeping – can you – I'm sorry, I missed the FX as a whole for the company in the quarter?

[Chris Wolf:]

Yes. It was about, I would say, $3.2 million for the quarter.

[Carter Malloy:]

Okay.

[Chris Wolf:]

I’m sorry. $3.8 million, Carter.

[Carter Malloy:]

Okay, thanks. And looking at your operating margins, I know you guys aren’t giving guidance, but I’m just curious what your long-term thinking is on that as far as target, a goal to get to.

[Chris Wolf:]

I think I quoted a couple of times that we’d like to get up in the mid-teens.

[John Meyer:]

And to be fair, I mean, with the revenue challenges that we had in the short run, the margins have been compressed in the near-term. But we do believe we have tremendous operating leverage once we return to previous revenue levels.

[Carter Malloy:]

Okay. And then this is probably too detail of a question, but can you explain a little more on the Symantec Interactive? What are you doing for those guys?

[John Meyer:]

Sorry, I don’t know.

[Carter Malloy:]

Okay, that’s fine.

[John Meyer:]

We’ll get back to you.

[Carter Malloy:]

Okay, thanks.

[Operator:]

We will go next to Dan Leben with Robert W. Baird.

[Dan Leben:]

Great, thank you. Just looking at the sequential increase in revenues versus the cost ticking up, could you help us understand in terms of as we start going forward into revenue growth, how we should think about kind of pull-through margins on the bulk of the business? Are there any mix issues that we should be aware of?

[John Meyer:]

We have talked in the past two quarters the importance or the belief the economic leverage is going to pay dividend as the revenue kick up. And I think this is the first example of you seeing that in a quarter. We would expect – and I’ve talked to many of you and said that I think we could go 10% to 15% more revenue depending on what type of revenue it is, without adding any additional expense. And so you can draw your own conclusions off of that statement.

[Chris Wolf:]

Just one thing I would add is DMV was a product as it’s in its early stages. There is not much profitability in that contract in the early stages. So we would expect to see margin expansion in that area.

[John Meyer:]

Yes, sure. That’s a good point.

[Dan Leben:]

Okay. So you didn’t see any issues in the quarter where there was a mix to less profitable products or any of those types of things?

[Chris Wolf:]

I don’t think we did. I mean, the issue is always around the volume of the pure product business because (inaudible) more profitable with other threshold of basic expense (inaudible) nothing in any particular area. And I think it’s been a lot of time talking about absolute cost reduction. So what we’ve really been trying to do is essentially reengineer the way we deliver so that we understand that leverage model, which John was talking about a little bit earlier, rather better. So we have some flexibility as we grow. We see it somewhat fixed – not originally [ph], but somewhat fixed our expense base. But it will give us flexibility the other way where we can verbalize it on the downward side [ph]. So we’ve spent a lot of time focused on how as well as the cost of delivery.

[Dan Leben:]

Okay, great. And John, you talked a little bit about seeing some – from some customers’ budgets picking up or at least talking about it picking up. Could you give us an idea of kind of the ways you are looking at doing it? Is it more in terms of spending more on the digital? Is it kind of across the board? Could you give us some color there, please?

[John Meyer:]

It really depends on the customer and what the customer is trying to achieve, because there are certain customers that still view direct mail as a great way to acquire customers because of the pinpoint nature of being able to send a mail through the person that they are trying to reach. I’d say in the retention space, we see a lot of opportunity in growing that, but that’s mostly (inaudible) directive where they are opting (inaudible) and then we manage those campaigns on behalf of the customer. Especially in the publishing space, we see a lot of movement in that area. And then across probably the one big thing that I’d like to leave you with is we’re seeing clients play across those channels and that we think that puts us in the unique position of being, yes, we have the customer database, which is a critical core to everything. But sometimes they want to use that customer base and information to do mail. Sometimes they wanted to use email. Sometimes they want to run it through banner ads and multiple different channels. And the investments that we’ve made over the past 18 months give us the opportunity to do that customer recognition regardless of the channel that they want to deliver the message on.

[Dan Leben:]

Great. And then just one last one for me, just a follow-up on Todd’s question about the seasonality going to the third quarter, looking back over the last several years, last year excluded, it looks like the seasonal uptick is only kind of maybe 1% of revenue or so. Is that the right magnitude to think about it? Just wanted to make sure we don’t get out in front of the skis on this.

[John Meyer:]

Is that a guidance question?

[Dan Leben:]

Well, it’s not guidance. I mean, just in terms of when you’re thinking seasonality, just that we don’t model in a 10% uptick or something crazy and set the bar too high. It’s a modest seasonal uptick, but it’s not like we are going to see a huge kind of technology spending fourth quarter where it’s twice as high as the third quarter.

[John Meyer:]

Yes, but that – you know, that uptick or that 1% that you’re talking about, that was probably after normal run rate. I would look at the past couple quarters and say that those weren’t normal times. And so you’d have to draw your own conclusion, but I think if we return to some semblance of normality in Q3, 1% uptick will be enough.

[Dan Leben:]

Okay, great. Thanks, guys.

[Operator:]

And that does conclude our question-and-answer session. I’d now like to turn the call back over to Mr. John Meyer for any additional or closing remarks.

[John Meyer:]

Great. Thank you, Jay. And once again, thanks to all of you for showing up on the call. I’ll close with a few comments on how we view the current marketplace conditions and how those marketplace conditions play to our historical strengths. More and more the marketplace is recognizing the need to leverage all the channels to present a coordinated cohesive message through a more discerning consumer base. As we celebrate our 40th anniversary of our founding, which was on October of 1969, Acxiom is uniquely positioned to bring all these efforts into play, either on a hosted solution or in a completely outsourced offer like the client engagement I talked about earlier. Our customer database expertise paired with our unique ability to recognize the individual while preserving privacy is entering the needs of regardless the channel our clients want to use and how they want to use them. We are creating a 360 view of that customer across all these channels, reflecting our belief that traditional separate, both digital and direct channels are now essentially one and the same and they are multi-channel. Acxiom’s traditional consumer database insights combined with our multi-channel expertise allow our clients to achieve what is truly now a personalized marketing. All of this gives us a reason for confidence on positive results in the second half. So, thank you for joining us and look forward to talking to you throughout the next quarter.

[Operator:]

That does conclude today’s conference. We thank you for your participation.