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ACXM > SEC Filings for ACXM > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for ACXIOM CORP

Form 10-Q for ACXIOM CORP


12-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction and Overview

Acxiom is an enterprise data, analytics and software-as-a-service company. For over 40 years, Acxiom has been an innovator in harnessing the powerful potential of data to strengthen connections between people, businesses and their partners. We focus on creating better connections that enable better living for people and better results for the businesses who serve them.

Founded in 1969, Acxiom is headquartered in Little Rock, Arkansas, USA and serves clients around the world from locations in the United States, Europe, South America and the Asia-Pacific region.

During the quarter ended June 30, 2013, the Company realigned its business segments to better reflect the way management assesses the business. The e-mail fulfillment business was moved from the Other services segment to the Marketing and data services segment. The Marketing and data services segment now includes the Company's global lines of business for Customer Data Integration (CDI), Consumer Insight Solutions, the Audience Operating System, Marketing Management Services, E-mail Fulfillment Services, and Consulting and Agency Services. The IT Infrastructure management segment develops and delivers IT outsourcing and transformational solutions. The Other services segment now consists solely of the UK fulfillment business.

As announced in fiscal 2012 we continue to significantly invest in product innovation which management believes will help drive revenue growth later in fiscal 2014 and beyond. The Company launched the Acxiom Audience Operating System (AOS) on September 24, 2013. The AOS is an innovative new technology that powers more effective marketing decisions through better data, valuable insights and powerful applications. It presents marketers with a comprehensive view of their audiences and allows one-to-one marketing capabilities at scale across all channels and devices. The Company also recently launched a new consumer portal, AboutTheData.com, which is the first online consumer portal which allows individuals to view and update marketing data that Acxiom's clients use for digital marketing.

Notable results and events of the quarter ended September 30, 2013 are identified below.

Revenue of $276.3 million, a 0.4% decrease from $277.5 million in the same quarter a year ago.

Total operating expenses of $256.6 million, a 3.8% increase from $247.3 million in the same quarter a year ago. Total operating expenses include restructuring charges and loss contingency accruals of $6.4 million recorded in gains, losses and other items, net and business separation expenses of $2.2 million.

Income from operations of $19.6 million, representing a 7.1% operating margin, compared to $30.2 million, representing a 10.9% operating margin, in the same quarter a year ago.

Diluted earnings per share attributable to Acxiom stockholders of $0.13 in the quarter ended September 30, 2013 compared to $0.21 in the same quarter a year ago.

Cash used by investing activities was $17.8 million, compared to $13.6 million in the same quarter a year ago.

The Company paid $22.7 million to acquire common shares as part of the Company's common stock repurchase program.

The summary above is intended to identify to the reader some of the more significant events and transactions of the Company during the fiscal quarter ended September 30, 2013. However, this is not intended to be a full discussion of the Company's results for the quarter. This should be read in conjunction with the following discussion of Results of Operations and Capital Resources and Liquidity and with the Company's consolidated financial statements and footnotes accompanying this report.


Results of Operations

A summary of selected financial information for each of the periods reported is
presented below (dollars in thousands, except per share amounts):

                                For the quarter ended                      For the six months ended
                                     September 30                                September 30
                          2013          2012         % Change         2013          2012         % Change
Revenues                $ 276,271     $ 277,467             (0 %)   $ 542,464     $ 549,126             (1 %)
Total operating costs
and expenses              256,640       247,259              4 %      498,761       493,494              1 %
Income from
operations              $  19,631     $  30,208            (35 %)   $  43,703     $  55,632            (21 %)
Diluted earnings per
share attributable to
Acxiom stockholders     $    0.13     $    0.21            (38 %)   $    0.30     $    0.38            (21 %)

Revenues
The following table presents the Company's revenue for each of the periods
reported (dollars in thousands):

                                 For the quarter ended                       For the six months ended
                                     September 30                                  September 30
                          2013          2012         % Change           2013          2012         % Change
Marketing and data
services                $ 200,952     $ 198,602               1 %    $  388,745     $ 391,084              (1 %)
IT Infrastructure
management services        66,825        70,061              (5 %)      136,210       140,351              (3 %)
Other services              8,494         8,804              (4 %)       17,509        17,691              (1 %)
Total revenue           $ 276,271     $ 277,467               0 %    $  542,464     $ 549,126              (1 %)

Total revenue decreased 0.4%, or $1.2 million, to $276.3 million in the quarter ended September 30, 2013 from $277.5 million in the same quarter a year ago. For the six months ended September 30, 2013 total revenue was $542.5 million, a $6.7 million, or 1.2%, decrease from $549.1 million during the same period a year ago.

Marketing and data services (MDS) revenue for the quarter ended September 30, 2013 was $201.0 million, which is an increase of $2.4 million, or 1.2%, when compared to $198.6 million in the same quarter a year ago. On a geographic basis, International MDS revenue decreased $0.5 million, or 2.0%, while U.S. MDS revenue increased $2.9 million, or 1.7%, in the quarter ended September 30, 2013. International MDS revenue decreased $1.9 million primarily from decreases in Europe and Australia. The decrease was partially offset by increases in China and Brazil. In U.S. MDS revenue, increases in the Retail ($1.4 million), Financial Services ($0.9 million), Information Services ($0.9 million), and Media ($0.8 million) industries were partially offset by decreases in the Entertainment ($0.7 million) and Broker/Reseller ($0.6 million) industries from volume and project reductions. By line of business, MDS revenue increases in Marketing Management ($5.1 million or 6.2%) and Data Management ($1.0 million or 3.4%) were partially offset by decreases in Consumer Insights ($2.4 million or 4.4%) and E-mail and Agency services ($1.4 million or 7.4%). The Marketing Management increase resulted primarily from increases in existing accounts and new business that was closed in the previous year. Consumer Insights was impacted by lower project activity in the U.S., Europe and Australia.

MDS revenue for the six months ended September 30, 2013 was $388.7 million, which is a decrease of $2.3 million, or 0.6%, compared to the same period a year ago. On a geographic basis, International MDS revenue decreased $2.2 million, or 4.0%, and U.S. MDS revenue was flat when compared to the same period a year ago. International MDS revenue decreases of $4.9 million were primarily the result of lower transaction volume in Europe and Australia, partially offset by increases in China and Brazil MDS revenue. U.S. MDS revenue decreases in the Broker/Reseller ($1.3 million), Banking ($0.7 million), and Information Services ($0.6 million) industries from volume and project reductions were offset by increases in the Retail ($1.4 million), Insurance ($0.8 million), and Communications ($0.5 million) industries. By line of business, MDS revenue increases in Marketing Management ($3.4 million or 2.0%) and Consulting ($1.1 million or 5.3%) were partially offset by decreases in Consumer Insights ($4.4 million or 4.3%) and E-mail and Agency services ($3.0 million or 7.7%). The Marketing Management and Consulting increases resulted primarily from increases in existing accounts and new business that was closed in the previous year. Consumer Insights was impacted by lower project activity in the U.S., Europe and Australia and Email and Agency services were impacted by lost business.


IT Infrastructure Management (IM) revenue for the quarter ended September 30, 2013 was $66.8 million. This represents a $3.2 million, or 4.6%, decrease from the same quarter a year ago. IM revenue for the six months ended September 30, 2013 was $136.2 million, a $4.1 million, or 3.0% decrease from the same period a year ago. IM revenue included termination fees of $4.2 million and $5.3 million in the quarter and six-month period, respectively, from customers that are winding down their contractual relationship with the Company. Excluding impact of the termination fees, the IM revenue decreases in both the quarter and six-month period resulted from lower project revenue and lost business. The Company has recently received notifications of client contract terminations from certain IM clients in addition to those previously disclosed in its 2013 annual report. The Company expects to record fiscal 2014 revenue for IM customers that have given notice of termination of between $65 and $70 million, as many of these terminations are not effective immediately and there are termination penalties associated with some of them. However, these customer terminations will impact revenue in future periods as revenue from these contracts is expected to be negligible in fiscal 2015.

Other services (OS) revenue for the quarter ended September 30, 2013 was $8.5 million, a slight decrease from $8.8 million in the same quarter a year ago. OS revenue for the six months ended September 30, 2013 was $17.5 million, a slight decrease from $17.7 million in the same period a year ago. Revenue from the UK fulfillment operation increased $0.6 million and $2.8 million from new business during the quarter and six-month period ended September 30, 2013, respectively. The Company has completed transition of all risk customers previously included in the OS segment to a third-party partner as a part of the exit from that business. As a result, OS revenue decreased $1.0 million and $3.0 million during the quarter and six-month period ended September 30, 2013, respectively.

Operating Costs and Expenses
The following table presents the Company's operating costs and expenses for each
of the periods presented (dollars in thousands):

                                 For the quarter ended                       For the six months ended
                                     September 30                                  September 30
                          2013          2012         % Change           2013          2012         % Change
Cost of revenue         $ 207,394     $ 209,164              (1 %)   $  411,900     $ 418,475              (2 %)
Selling, general and
administrative             42,859        38,063              13 %        80,474        74,827               8 %
Gains, losses and
other items, net,           6,387            32                           6,387           192
Total operations
costs and expenses      $ 256,640     $ 247,259               4 %    $  498,761     $ 493,494               1 %

Cost of revenue was $207.4 million for the quarter ended September 30, 2013, a $1.8 million, or 0.8%, decrease when compared to the same quarter a year ago. Gross margins increased from 24.6% to 24.9% between the two comparable periods. Margins were impacted by a $1.2 million improvement in OS gross margins resulting from the Company's exit from the U.S. risk business. Margins also improved from the positive impact of the IM termination fee revenue. U.S. gross margins increased from 25.7% to 26.4% and International gross margins decreased from 17.7% to 15.6%. U.S. margins benefited from the OS margin increase and improving IM margins but was partially offset by increased investment spending (data and engineering) in the MDS segment. International margins were impacted by revenue declines in Europe.

Cost of revenue was $411.9 million for the six months ended September 30, 2012, a $6.6 million, or 1.6%, decrease from $418.5 million in the same period a year ago. Gross margins increased from 23.8% to 24.1% between the two comparable periods. Margins were impacted by a $3.5 million improvement in OS gross margins resulting from the Company's exit from the U.S. risk business. Margins also improved from the positive impact of the IM termination fee revenue. U.S. gross margins increased from 25.1% to 25.8% and International gross margins decreased from 15.0% to 12.1%. U.S. margins benefited from the OS margin increase and improving IM margins but was partially offset by increased investment spending (data and engineering) in the MDS segment. International margins were impacted by revenue declines in Europe and Australia.

Selling, general, and administrative (SG&A) expenses were $42.9 million for the quarter ended September 30, 2013, a $4.8 million, or 12.6%, increase when compared to the same quarter a year ago. SG&A included $2.2 million of costs associated with separating shared operations of the MDS and IM operating segments. Excluding those separation costs, SG&A expense increased $2.6 million, or 6.9%. As a percentage of total revenue, and excluding the separation costs, SG&A expenses were 14.7% compared to 13.7% a year ago. The increase primarily resulted from higher marketing costs related to the launch of AOS, higher legal fees and other consulting expenses.


SG&A expenses were $80.5 million for the six months ended September 30, 2013, a $5.6 million, or 7.5%, increase when compared to the same period a year ago. The current period SG&A included $2.2 million of costs associated with separating the MDS and IM operating segments. Excluding those separation costs, SG&A expense increased $3.5 million, or 4.6%. As a percentage of total revenue, and excluding the separation costs, SG&A expenses were 14.4% compared to 13.6% a year ago. The increase primarily resulted from higher marketing costs related to the launch of AOS, higher legal fees and other consulting expenses.

The Company continues to develop and execute plans to create operating independence between its operating segments. As the Company executes these plans, it is likely to incur incremental outside consulting and other third-party expenses to create formal documentation of intercompany agreements and to separate IT and network operations.

Gains, losses and other items, net was $6.4 million for the quarter and six months ended September 30, 2013. The current-year periods include restructuring charges and adjustments of $3.2 million, of which $2.5 million was for a lease accrual, (see note 9) and loss contingency accruals of $3.2 million (see note 10).

Operating Profit and Profit Margins
The following table presents the Company's operating profit margin by segment
for each of the periods presented (dollars in thousands):

                                              For the quarter ended            For the six months ended
                                                  September 30                       September 30
                                              2013             2012             2013               2012
Operating profit and profit margin:
Marketing and data services                $    16,014       $  22,262      $     28,671       $     40,965
                                                   8.0 %          11.2 %             7.4 %             10.5 %
IT Infrastructure management services      $    11,967       $   8,520      $     22,728       $     17,351
                                                  17.9 %          12.2 %            16.7 %             12.4 %
Other services                             $       223       $    (542 )    $        877       $     (2,492 )
                                                   2.6 %          (6.2 %)            5.0 %            (14.1 %)
Corporate                                  $    (8,573 )     $     (32 )    $     (8,573 )     $       (192 )
Total operating profit                     $    19,631       $  30,208      $     43,703       $     55,632
Total operating profit margin                      7.1 %          10.9 %             8.1 %             10.1 %

MDS income from operations was $16.0 million, an 8.0% margin, for the quarter ended September 30, 2013 compared to $22.3 million, an 11.2% margin, for the same quarter a year ago. Margins in the U.S. declined from 13.5% to 9.9% and International operating losses increased from $0.7 million to $1.1 million between the two comparable periods. The U.S. margin decrease primarily resulted from additional personnel and data costs required to support investment initiatives and higher levels of general and administrative costs in the current fiscal year, including higher marketing costs related to the AOS product launch on September 24, 2013. International operating losses primarily resulted from revenue reductions in Europe.

MDS income from operations was $28.7 million, a 7.4% margin, for the six months ended September 30, 2013 compared to $41.0 million, a 10.5% margin, for the same period a year ago. Margins in the U.S. declined from 13.2% to 10.1% and International operating losses increased from $3.6 million to $5.2 million between the two comparable periods. The U.S. margin decrease primarily resulted from additional personnel and data costs required to support investment initiatives and higher levels of general and administrative costs in the current fiscal year. International operating losses primarily resulted from increasing losses in Europe and Australia.

IM income from operations was $12.0 million, a 17.9% margin, for the quarter ended September 30, 2013 compared to $8.5 million, a 12.2% margin, for the same quarter a year ago. IM income from operations was $22.7 million, a 16.7% margin, for the six months ended September 30, 2013 compared to $17.4 million, a 12.4% margin, for the same period a year ago. IM margins benefited from termination fee revenue in the current-year periods.


OS income from operations was $0.2 million for the quarter ended September 30, 2013 compared to a loss of $0.5 million in the same quarter a year ago. OS income from operations was $0.9 million for the six months ended September 30, 2013 compared to a loss of $2.5 million in the same period a year ago. The improvement resulted from the Company's exit from the risk business which lost $1.1 million and $3.5 million in the quarter and six months ended September 30, 2012, respectively.

Corporate loss from operations of $8.6 million in the quarter and six months ended September 30, 2013 consists of the restructuring charges and legal contingency costs recorded in gains, losses and other items, net and the business segment separation costs included in SG&A on the consolidated statement of operations.

Management expects over the next six to twelve months to reduce its annual operating costs and expenses by roughly $20 to $30 million. These reductions will not impact the Company's ongoing investment in the AOS or continued investment in innovation. The initiative seeks to improve the Company's performance by simplifying the Company's management structure, centralizing duplicative efforts, and standardizing work flows. The components of the restructuring program are not finalized and actual total savings and timing may vary from those estimated due to changes in the scope or assumptions underlying the restructuring program.

Other Expense, Income Taxes and Other Items Interest expense was $3.0 million for the quarter ended September 30, 2013 compared to $3.3 million for the same quarter a year ago. Interest expense was $6.0 million for the six months ended September 30, 2013 compared to $6.6 million for the same period a year ago. The Company's term loan interest expense declined slightly over both comparable periods. The average term loan balance declined approximately $6.0 million and the average interest rate was unchanged. Interest expense on other debt, such as capital leases, also declined over both comparable periods.

Other expense was $0.4 million for the quarter ended September 30, 2013 compared to other expense of $0.1 million in the same quarter a year ago. Other expense was $0.2 million for the six months ended September 30, 2013 compared to other expense of $0.6 million in the same period a year ago. Other expense is primarily from foreign currency transaction gains and losses in both years.

The effective tax rate for the quarter ended September 30, 2013 was 39.5% compared to 39.0% for the same quarter a year ago. The effective tax rate for the six months ended September 30, 2013 was 38.7% compared to 39.0% in the same period a year ago. All period tax rates were impacted by losses in foreign jurisdictions. The Company does not record the tax benefit of certain of those losses due to uncertainty of future benefit.

Losses attributable to noncontrolling interest include the noncontrolling interest in the Company's Brazilian subsidiary for all periods presented.

Capital Resources and Liquidity

Working Capital and Cash Flow
Working capital at September 30, 2013 totaled $254.7 million, an $18.2 million increase when compared to $236.5 million at March 31, 2013. Total current assets decreased $0.6 million primarily from decreases in cash and cash equivalents of $6.4 million and refundable income taxes of $3.9 million, partially offset by increases in trade accounts receivable, net of $8.1 million and other current assets of $1.1 million. Current liabilities decreased $18.8 million primarily from decreases in accrued payroll and related expenses of $24.6 million, trade accounts payable of $7.2 million, and current installments of long-term debt of $2.5 million, partially offset by increases in other accrued expenses of $9.6 million and deferred revenue of $6.0 million.

The Company's cash is primarily located in the United States. Approximately $12.7 million of the total cash balance of $216.6 million, or approximately 5.8%, is located outside of the United States. The Company has no current plans to repatriate this cash to the United States.


Accounts receivable days sales outstanding was 56 days at September 30, 2013 compared to 52 days at March 31, 2013, and is calculated as follows (dollars in thousands):

                                              September 30,      March 31,
                                                  2013              2013
Numerator - trade accounts receivable, net    $      167,979      $ 159,882
Denominator:
Quarter revenue                                      276,271        277,131
Number of days in quarter                                 92             90
Average daily revenue                         $        3,003      $   3,079
Days sales outstanding                                    56             52

Net cash provided by operating activities was $57.4 million for the six months ended September 30, 2013, compared to $37.4 million in the same period a year ago. The $20.0 million increase primarily resulted from favorable working capital changes related to other assets ($4.9 million), deferred revenue ($16.5 million), and accounts payable and other liabilities ($17.5 million), offset by a $9.7 million decrease in depreciation and amortization and unfavorable working capital change related to accounts receivable, net ($7.8 million).

Investing activities used $34.7 million in cash during the six months ended September 30, 2013 compared to $23.2 million in the same period a year ago. Current year investing activities include capital expenditures ($18.2 million), capitalization of software ($13.6 million), and data acquisition costs ($2.9 million). The $11.5 million increase from the prior year primarily results from a $5.9 million increase in capitalization of software and a $6.5 million increase in capital expenditures.

Financing activities used $29.5 million in cash during the six months ended September 30, 2013. Financing activities include payments of debt of $9.2 million and acquisition of treasury stock of $38.8 million, offset by $18.6 million in proceeds from the sale of common stock, which are primarily due to the exercise of employee stock options. The payments of debt include capital lease and installment credit payments of $5.2 million and other debt payments of $4.0 million. The acquisition of treasury stock consists of payments of $38.8 million for 1.6 million shares of the Company's stock pursuant to the board of directors' approved stock repurchase plan. Under the Company's common stock repurchase program, the Company may purchase up to $200.0 million of its common stock through the period ending February 4, 2014. Through September 30, 2013, the Company has purchased a total of 12.0 million shares of its stock for $178.8 million, leaving remaining capacity of $21.2 million under the program.

Non-cash investing and financing activities included acquisition of property and equipment under capital leases and installment payment arrangements of $2.2 million in the prior-year six-month period. Future payments under these arrangements will be reflected as debt payments.

Credit and Debt Facilities
As of September 30, 2013, the Company's amended and restated credit agreement provided for (1) term loans up to an aggregate principal amount of $600 million and (2) revolving credit facility borrowings consisting of revolving loans, letter of credit participations and swing-line loans up to an aggregate amount of $120 million.

The term loan was payable in quarterly installments of approximately $1.5 million each, through December 31, 2014, with a final payment of approximately $207.5 million due March 15, 2015. The revolving loan commitment expired March 15, 2014.

Revolving credit facility borrowings bore interest at LIBOR plus a credit spread, or at an alternative base rate or at the Federal Funds rate plus a credit spread, depending on the type of borrowing. The LIBOR credit spread was 2.75%. There were no revolving credit borrowings outstanding at September 30, 2013 or March 31, 2013. Term loan borrowings bore interest at LIBOR plus a credit spread of 3.00% or at an alternative base rate. The weighted-average interest rate on term loan borrowings at September 30, 2013 was 4.1%. Outstanding letters of credit at September 30, 2013 were $2.2 million.


The term loan allowed prepayments before maturity. The credit agreement was secured by the accounts receivable of Acxiom and its domestic subsidiaries, as well as by the outstanding stock of certain Acxiom subsidiaries.

Under the terms of the term loan, the Company was required to maintain certain debt-to-cash flow and debt service coverage ratios, among other restrictions. At September 30, 2013, the Company was in compliance with these covenants and restrictions. In addition, if certain financial ratios and other conditions were not satisfied, the revolving credit facility limited the Company's ability to pay dividends in excess of $30 million in any fiscal year (plus additional amounts in certain circumstances).

. . .

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