LiveRamp Holdings, Inc.
Q3 2013 Earnings Call Transcript

Published: 31 Jan 2013

[Operator:]

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

[Jay McCrary:]

Thanks, operator. Good afternoon, and welcome. Thank you for joining us to discuss our fiscal 2013 third quarter results. With me today are Scott Howe, our CEO; Warren Jenson, our CFO; and Art Kellam, Corporate Controller. Today's press release and this call may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. For a detailed description of these risks, please read the Risk Factors sections of our public filings and the press release. Acxiom undertakes no obligation to release publicly any revisions to any of our forward-looking statements. A copy of our press release and financial schedules, including any reconciliation of non-GAAP financial measures, is available at acxiom.com. Also during the call today, we will be referring to the slide deck posted on our website. A link is also included in today's press release. At this time, I'll turn the call over to Scott Howe.

[Scott E. Howe:]

Thank you, Jay. Good afternoon, everyone. Over the past several calls, I have discussed our overall company vision, investment efforts and strategic initiatives. While these things are sexy, let me be clear. We are now knee-deep in implementation. In some ways, this is the hardest time. Our investment spending has ramped materially, but as excited as we are about the products we are creating, we have yet to taste the tangible rewards of meaningful revenue. This will take time and is what we have always expected. Rather than focusing on our overarching strategic priorities today, which have not changed, I thought it would be most useful to simplify my presentation and talk with you about 2 things. They are highly interrelated and together, they are laying foundations for fiscal 2014 and beyond. First, I'll spend some time discussing what we are doing in sales to improve our effectiveness and next, I'll give you a quick update on our product development. Later in the call, Warren will talk about a few things we are doing on the cost side. Sales excellence and living. Since becoming our chief revenue officer, Nada has cast a spotlight on how we sell and then has systematically tried to improve in every area. Hers is a work in process. We have made good progress in many areas, but our journey will not be complete until we see the recurring impact in our top line growth rates. Let me share just a few examples of what Nada and her team are doing. First, she and her team started with and continue to focus on building great relationships and succeeding with our largest customers. Our key sales industry leadership is in place and each knows their industry and customers well. Our largest clients have had strong input into our product development roadmap and, in many cases, have been or will be the first to beta test our new releases. Second, accountability and rewards. We have created single points of accountability where ownership was previously opaque. We also altered our compensation structure to better align rewards with success in our company's objectives. Third, stronger execution. This is about having nailed all the things that make you great when you get in front of a client

[Warren C. Jenson:]

Great, and thanks, Scott and good afternoon, everyone. Before commenting on the third quarter, I would like to again update you on our progress related to a few of our initiatives. First, our efforts to run a better business, how we are thinking about operational excellence and productivity. At the start of any journey, you have to have a destination or by definition, you will wander. This past quarter we rolled out a simplified target P&L for our business unit. Our long-term targets were done through competitive benchmarking, best practice sharing and industry comparisons. Within each of those P&Ls, there is a single owner of each line item. This is critical as line item accountability is everything. Every P&L has both short and long-term targets with maps to our overall financial plan. Next, we set a few rules as to how we would go about capturing efficiencies. Specifically, we said customer always comes first but we have to find a better way everyday, not just harder/faster but better and smarter; standard not custom; automated not manual; 1 system, not 3. Let me give you a few specific examples of things we are doing to drive smarter efficiency into Acxiom. In our engineering organization, Phil and his team have rolled out a common user interface style guide that consists of a pattern catalog, icon library, as well as the best practices guide. The UI style guide has been used for all new product development. Thus, no matter whether a forward-looking EDMP or a future large custom platform for one of our biggest customers, all will share a common user experience, look and feel and act like a seamless, integrated product suite. UI style guide not only leverages our development resources but simplifies training and accelerates feature roll out. We are instituting a product life cycle process that establishes milestones, points of coordination and accountabilities for development, product marketing and launches. The benefits are less churn, more precision and more effectiveness on how we go to market. And finally, we are building tools and a common user interface to eliminate thousands of hours of tedious error-prone work. Consider this

[Operator:]

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

[Carter Malloy:]

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

[Warren C. Jenson:]

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

[Carter Malloy:]

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

[Scott E. Howe:]

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

[Operator:]

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

[Todd Van Fleet:]

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

[Warren C. Jenson:]

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

[Todd Van Fleet:]

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

[Scott E. Howe:]

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

[Todd Van Fleet:]

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

[Scott E. Howe:]

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

[Todd Van Fleet:]

Scott, does that include social data of any kind?

[Scott E. Howe:]

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

[Operator:]

The next question comes from Dan Leben from Robert W. Baird.

[Daniel R. Leben:]

Just outside of the top 100, the drag from there. Could you help us understand how much of that was from clients that went away because they weren't in the right cost of service versus kind of what the underlying same client growth or to client loss?

[Warren C. Jenson:]

Dan, the way that I would look at it is figure if there is a 4-point drop or 3-point drop from 7% to 4% in the quarter, about 1.5 points or $2 million came from lost customers, and the rest came from everything outside of the top 100. And the same holds true for the year-to-date numbers as well.

[Daniel R. Leben:]

Great. And then I know you're still early on the attributing profitability by customer and that exercise but help us understand, to the extent that you are losing those customers, are they positive, negative, neutral margin? Help us kind of understand the dynamics there.

[Warren C. Jenson:]

Stay tuned on that front as I know Mike Lloyd and his team are working very aggressively and our account management team on this. What I can tell you is that it spans the waterfront. So what we have done is we have -- in terms of doing some background work to address this is we have literally gone client by client, looking at size of revenue against the loss and then we've done a complete prado [ph] as to where they fall out. Now what we're in the process of doing is taking those clients and then trying to alter the margin profile. And ironically the way this typically works is you don't get rid of a client, you actually challenge the account management team to come in and change the margin profile. So if you happen to be an account that is negative 5, you go about setting a goal to make it positive 5 next year and you look at different ways, either through services or products to upsell into a positive 5% margin and then the next year, 5% becomes 15%. So what I can tell you, again, in answer to your question is we have a mix of clients where we are losing money, a mix of clients that are breakeven or a mix of clients that are 0 to 5 or 0 to 10 in profitability and some higher than that. We're about just continuously raising the bar and doing that on an account-by-account basis.

[Daniel R. Leben:]

And then just last one for me. You mentioned a lot less customization of product going forward. Help us understand what the opportunity is for potential margin expansion on existing clients, transitioning them to lower cost to more standardized platforms?

[Warren C. Jenson:]

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

[Operator:]

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

[Carter Malloy:]

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

[Warren C. Jenson:]

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

[Carter Malloy:]

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

[Warren C. Jenson:]

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

[Operator:]

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

[Warren C. Jenson:]

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

[Operator:]

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