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ACXM > SEC Filings for ACXM > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for ACXIOM CORP

Form 10-Q for ACXIOM CORP


8-Aug-2014

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.

On May 30, 2014, the Company substantially completed the sale of its U.K. call center operation, 2Touch, to Parseq Ltd., a European business process outsourcing service provider. Some assets of the 2Touch operation are subject to a second closing, expected to occur during the current fiscal year. The business qualified for treatment as discontinued operations during the current fiscal quarter. The results of operations, including the loss on the sale, cash flows, and the balance sheet amounts pertaining to 2Touch, for all periods reported, have been classified as discontinued operations in the condensed consolidated financial statements. Unless otherwise indicated, we refer to captions such as revenues, earnings, and earnings per share from continuing operations attributable to the Company simply as "revenues", "earnings", and "earnings per share" throughout this Management's Discussion and Analysis. Similarly, discussion of other matters in our condensed consolidated financial statements relates to continuing operations unless otherwise indicated.

Prior to the current fiscal quarter, the Company's business segments consisted of Marketing and data services, IT Infrastructure management, and Other services. The Other services segment consisted solely of the Company's UK fulfillment business, 2Touch. As a result of the 2Touch disposal in the current fiscal quarter, the 2Touch business unit is excluded from segment results and segregated as discontinued operations. The Marketing and data services segment includes the Company's global lines of business for Customer Data Integration (CDI), Consumer Insight Solutions, Marketing Management Services (including the Audience Operating System), and E-mail Fulfillment and Agency Services. The IT Infrastructure management segment develops and delivers IT outsourcing and transformational solutions.

Notable results and events of the quarter ended June 30, 2014 are identified below.

Revenue of $242.2 million, a 5.8% decrease from $257.2 million in the same quarter a year ago.

Total operating expenses of $246.7 million, a 5.6% increase from $233.7 million in the same quarter a year ago. Total operating expenses include restructuring charges and adjustments of $6.7 million and LiveRamp transaction costs of $0.8 million recorded in gains, losses and other items, net and business separation and transformation expenses of $12.0 million recorded in selling, general and administrative expenses.

Net loss from continuing operations of $6.1 million, compared to net earnings from continuing operations of $12.5 million in the same quarter a year ago.

Subsequent to the end of the current fiscal quarter, on July 1, 2014, the Company completed the acquisition of LiveRamp, Inc. As a result of this transaction, LiveRamp is now a wholly-owned subsidiary of the Company. The Company paid $265.7 million, net of cash acquired, in cash for all outstanding shares of LiveRamp. Results of operations for LiveRamp will be included in the Company's condensed consolidated financial statements from the date of acquisition.

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 June 30, 2014. 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 condensed 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
                                                                    June 30
                                                       2014          2013         % Change
Revenues                                             $ 242,215     $ 257,178             (6 %)
Total operating costs and expenses                     246,693       233,720              6 %
Income (loss) from operations                        $  (4,478 )   $  23,458           (119 %)
Diluted earnings (loss) per share attributable to
Acxiom stockholders                                  $   (0.10 )   $    0.17           (159 %)

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

                                                For the quarter ended
                                                       June 30
                                          2014          2013        % Change
Marketing and data services             $ 186,683     $ 187,793            (1 %)
IT Infrastructure management services      55,532        69,385           (20 %)
Total revenue                           $ 242,215     $ 257,178            (6 %)

Total revenue decreased 5.8%, or $15.0 million, to $242.2 million in the quarter ended June 30, 2014 from $257.2 million in the same quarter a year ago.

Marketing and data services (MDS) revenue for the quarter ended June 30, 2014 was $186.7 million, a $1.1 million, or 0.6%, decrease from the same quarter a year ago. On a geographic basis, International MDS revenue decreased $0.2 million, or 0.8%, while U.S. MDS revenue decreased $0.9 million, or 0.6%, when compared to the same quarter a year ago. For U.S. MDS revenue, decreases in the Data Brokerage ($1.4 million), Automotive ($1.1 million), Communications ($1.3 million) and Travel and Entertainment ($1.1 million) industries from volume reductions were partially offset by increases in Technology ($2.4 million) and Media and Publishing ($1.7 million) industries from new business and volume increases. By line of business, an MDS revenue increase in Marketing Management ($1.4 million or 4.7%) was offset by decreases in CDI ($1.3 million or 4.7%) and Consumer Insight Solutions ($0.7 million or 1.5%). The Consumer Insight Solutions decrease resulted primarily from Europe restructuring activities and the CDI decrease primarily resulted from lower volume in the U.S. The Marketing Management increase resulted primarily from increases in gross media spend through the AOS platform.

IT Infrastructure Management (IM) revenue for the quarter ended June 30, 2014 was $55.5 million, a $13.9 million, or 20.0% decrease from the same quarter a year ago. IM revenue included termination fees of approximately $2.2 million from customers that are winding down their contractual relationship with the Company. Excluding the impact of the termination fees, the IM revenue decrease resulted from lower project revenue from existing customers and the approximate $10.5 million impact of lost business. The Company received notifications of client contract terminations from certain IM clients as disclosed in its 2014 annual report. During the current fiscal quarter, the Company recorded revenue of approximately $9.3 million from one of these customers as their services wind down.


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
                                                     June 30
                                        2014          2013        % Change
Cost of revenue                       $ 192,303     $ 196,105            (2 %)
Selling, general and administrative      46,938        37,615            25 %
Gains, losses and other items, net,       7,452             -           100 %
Total operations costs and expenses   $ 246,693     $ 233,720             6 %

Cost of revenue was $192.3 million for the quarter ended June 30, 2014, a $3.8 million, or 1.9%, decrease from the same quarter a year ago. Gross margins decreased from 23.7% to 20.6% between the two comparable periods. U.S. gross margins decreased from 25.3% to 21.3% and International gross margins increased from 9.0% to 14.7%. U.S. margins were primarily impacted by declining IM margins resulting from contract terminations, but were also impacted by increases in research and development expenses and lower revenue. International margins benefitted from cost reductions in Europe and Australia.

Selling, general, and administrative (SG&A) expenses were $46.9 million for the quarter ended June 30, 2014, a $9.3 million, or 24.8%, increase when compared to the same quarter a year ago. In the current fiscal quarter, SG&A included $12.0 million of costs associated with business transformation expenses and, to a lesser extent, cost of separating shared operations of the MDS and IM operating segments. Excluding these costs, SG&A expense decreased 7.2% and, as a percentage of total revenue, was 14.4% compared to 14.6% in the same quarter a year ago.

The Company continues to develop and execute plans to further transform the business and finalize the separation of its operating segments. As the Company executes these plans, it is likely to continue to incur incremental outside consulting and other third-party expenses.

Gains, losses and other items, net was $7.5 million for the quarter ended June 30, 2014. This amount results primarily from restructuring charges and adjustments of $6.7 million and LiveRamp transaction costs of $0.8 million.

Operating Profit and Profit Margins
The following table presents the Company's operating profit (loss) and margin by
segment for each of the periods presented (dollars in thousands):
                                                      For the quarter ended
                                                             June 30
                                                        2014            2013
Operating profit (loss) and profit (loss) margin:
Marketing and data services                         $     10,272      $ 12,697
                                                             5.5 %         6.8 %
IT Infrastructure management services               $      4,739      $ 10,761
                                                             8.5 %        15.5 %
Corporate                                           $    (19,489 )    $      -
Total operating profit (loss)                       $     (4,478 )    $ 23,458
Total operating profit margin                               (1.8 %)        9.1 %

MDS income from operations was $10.3 million, a 5.5% margin, for the quarter ended June 30, 2014 compared to $12.7 million, a 6.8% margin, for the same quarter a year ago. Margins in the U.S. declined from 10.2% to 8.3% and International losses decreased $0.8 million, to $3.3 million, between the two comparable periods. The U.S. margin decline primarily resulted from costs associated with additional personnel and data costs required to support investment initiatives and lower revenue that was partially offset by cost reductions. International operating margin increases primarily resulted from revenue increases in Europe.


IM income from operations was $4.7 million, an 8.5% margin, for the quarter ended June 30, 2014 compared to $10.8 million, a 15.5% margin, for the same quarter a year ago. IM margins declined in the current-year quarter as a result of revenue decreases from lost business.

Corporate loss from operations was $19.5 million in the quarter ended June 30, 2014. The losses primarily consist of restructuring charges and adjustments of $6.7 million and LiveRamp transaction costs of $0.8 million recorded in gains, losses and other items, net and business separation and transformation expenses of $12.0 million recorded in selling, general and administrative expenses on the consolidated statement of operations.

Other Expense, Income Taxes and Other Items Interest expense was $2.6 million for the quarter ended June 30, 2014 compared to $3.0 million for the same quarter a year ago. On October 9, 2013, the Company refinanced its prior credit agreement. As a result, the average term loan balance increased approximately $75 million and the average interest rate decreased approximately 140 basis points causing interest expense to decrease during the quarter ended June 30, 2014 when compared to the same quarter a year ago. Interest expense on other debt, such as capital leases, also decreased.

Other expense was $0.4 million for the quarter ended June 30, 2014 compared to other income of $0.1 million in the same quarter a year ago. Other income and expense primarily consists of foreign currency transaction gains and losses in both periods.

The effective tax rate for the quarter ended June 30, 2014 was 18.6% compared to 39.1% for the same quarter a year ago. Both 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 in the prior year period included the noncontrolling interest in the Company's Brazilian subsidiary. During fiscal 2014, the Company acquired the remaining noncontrolling interest in Acxiom Brazil.

Capital Resources and Liquidity

Working Capital and Cash Flow
Working capital at June 30, 2014 totaled $401.9 million, a $14.2 million decrease when compared to $416.1 million at March 31, 2014. Total current assets decreased $45.5 million primarily from decreases in cash and cash equivalents of $25.7 million, trade accounts receivable, net of $10.1 million, and assets of discontinued operations of $6.2 million. Current liabilities decreased $31.3 million primarily from decreases in accrued payroll and related expenses of $31.2 million and deferred revenue of $4.2 million which were partially offset by an increase in trade accounts payable of $6.6 million.

The Company's cash is primarily located in the United States. Approximately $17.1 million of the total cash balance of $392.9 million, or approximately 4.4%, 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, from continuing operations, was 57 days at June 30, 2014 compared to 54 days at March 31, 2014, and is calculated as follows (dollars in thousands):

                                             June 30,      March 31,
                                                2014          2014
Numerator - trade accounts receivable, net   $ 150,605     $  160,718
Denominator:
Quarter revenue                                242,215        268,562
Number of days in quarter                           91             90
Average daily revenue                        $   2,662     $    2,984
Days sales outstanding                              57             54


Net cash provided by operating activities was $1.9 million for the three months ended June 30, 2014, compared to $16.5 million in the same period a year ago. The $14.6 million decrease primarily resulted from the decrease in net earnings ($20.7 million) partially offset by changes in operating assets and liabilities.

Investing activities used $24.6 million in cash during the three months ended June 30, 2014 compared to $16.8 million in the same period a year ago. Current year investing activities primarily consisted of capital expenditures ($19.0 million) and capitalization of software ($5.0 million). The $7.8 million increase from the prior year primarily results from a $10.1 million increase in capital expenditures due to increased investment in facilities and data processing and network infrastructure.

Financing activities used $6.2 million in cash during the three months ended June 30, 2014 compared to $15.3 million in the same period a year ago. Financing activities primarily consists of payments of debt of $5.5 million, including capital lease and installment credit payments of $1.2 million and other debt payments of $4.3 million. Financing activities used $15.3 million in cash during the quarter ended June 30, 2013 and included payments of debt of $4.9 million and acquisition of treasury stock of $16.1 million, offset by $5.8 million in proceeds from the sale of common stock. The payments of debt included capital lease and installment credit payments of $2.9 million and other debt payments of $2.0 million. The acquisition of treasury stock consisted of payments of $16.1 million for 0.7 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 $250.0 million of its common stock through the period ending November 18, 2014. Through June 30, 2014, the Company has purchased a total of 12.3 million shares of its stock for $192.6 million, leaving remaining capacity of $57.4 million under the program.

Net cash provided by discontinued operations was $2.9 million during the three months ended June 20, 3014 compared to $0.3 million in the same period a year ago. The current-year activity primarily results from the $2.9 million of proceeds received for the sale of 2Touch.

Credit and Debt Facilities
The Company's amended and restated credit agreement provides for (1) term loans up to an aggregate principal amount of $300 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 $300 million.

The term loan agreement is payable in quarterly installments of $3.8 million through September 2014, followed by quarterly installments of $7.5 million through September 2017, followed by quarterly installments of $11.3 million through June 2018, with a final payment of $161.3 million due October 9, 2018. The revolving loan commitment expires October 9, 2018.

Term loan and revolving credit facility borrowings bear interest at LIBOR or at an alternative base rate plus a credit spread. At June 30, 2014, the LIBOR credit spread was 2.00%. There were no revolving credit borrowings outstanding at June 30, 2014 or March 31, 2014. The weighted-average interest rate on term loan borrowings at June 30, 2014 was 2.3%. Outstanding letters of credit at June 30, 2014 were $2.2 million.

The term loan allows for prepayments before maturity. The credit agreement is 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 is required to maintain certain debt-to-cash flow and debt service coverage ratios, among other restrictions. At June 30, 2014, the Company was in compliance with these covenants and restrictions. In addition, if certain financial ratios and other conditions are not satisfied, the revolving credit facility limits the Company's ability to pay dividends in excess of $30 million in any fiscal year (plus additional amounts in certain circumstances).

On March 10, 2014, the Company entered into an interest rate swap agreement. The agreement provides for the Company to pay interest through March 10, 2017 at a fixed rate of 0.98% plus the applicable credit spread on $50.0 million notional amount, while receiving interest for the same period at the LIBOR rate on the same notional amount. The LIBOR rate as of June 30, 2014 was 0.23%. The swap was entered into as a cash flow hedge against LIBOR interest rate movements on the term loan. The Company assesses the effectiveness of the hedge based on the hypothetical derivative method. There was no ineffectiveness for the period ended June 30, 2014. Under the hypothetical derivative method, the cumulative change in fair value of the actual swap is compared to the cumulative change in fair value of the hypothetical swap, which has terms that identically match the critical terms of the hedged transaction. Thus, the hypothetical swap is presumed to perfectly offset the hedged cash flows. The change in the fair value of the hypothetical swap will then be regarded as a proxy for the present value of the cumulative change in the expected future cash flows from the hedged transactions. All of the fair values are derived from an interest-rate futures model. As of June 30, 2014, the hedge relationship qualified as an effective hedge under applicable accounting


standards. Consequently, all changes in fair value of the derivative will be deferred and recorded in other comprehensive income (loss) until the related forecasted transaction is recognized in the consolidated statement of operations. The fair market value of the derivative was zero at inception and an unrealized loss of $0.2 million since inception is recorded in other comprehensive income (loss) with the offset recorded to other noncurrent liabilities. The fair value of the interest rate swap agreement recorded in accumulated other comprehensive income (loss) may be recognized in the statement of operations if certain terms of the floating-rate debt change, if the floating-rate debt is extinguished or if the interest rate swap agreement is terminated prior to maturity. The Company has assessed the creditworthiness of the counterparty of the swap and concludes that no substantial risk of default exists as of June 30, 2014.

On July 1, 2014, subsequent to the end of the quarter, the Company paid $265.7 million, net of cash acquired, to acquire LiveRamp. The Company used available cash to fund the transaction. There were no revolving credit borrowings related to the purchase.

Based on our current expectations, we believe our liquidity and capital resources will be sufficient to operate our business. However, we may take advantage of opportunities to generate additional liquidity or refinance existing debt through capital market transactions. The amount, nature and timing of any capital market transactions will depend on: our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.

Off-Balance Sheet Items and Commitments
In connection with the disposal of certain assets, the Company has guaranteed a lease for the buyer of the assets. This guarantee was made by the Company primarily to facilitate favorable financing terms for the third party. Should the third party default, the Company would be required to perform under this guarantee. At June 30, 2014 the Company's maximum potential future payments under this guarantee were $1.4 million.

Contractual Commitments
The following table presents Acxiom's contractual cash obligations, exclusive of
interest, and purchase commitments at June 30, 2014.  The table does not include
the future payment of gross unrealized tax benefit liabilities of $2.8 million
or the future payment, if any, against the Company's interest rate swap
liability of $0.2 million as the Company is not able to predict the periods in
which these payments will be made. The column for 2015 represents the nine
months ending March 31, 2015. All other columns represent fiscal years ending
March 31 (dollars in thousands).

                                                For the years ending March 31
                 2015          2016          2017          2018          2019         Thereafter        Total
Term loan      $  18,750     $  30,000     $  30,000     $  37,500     $ 172,500     $          -     $ 288,750
Capital
lease and
installment
payment
obligations        2,558           688           763           919         1,096            3,965         9,989
Other
long-term
debt               1,580         2,168         2,243         2,319         1,583            1,711        11,604
Total
long-term
obligations       22,888        32,856        33,006        40,738       175,179            5,676       310,343
Operating
lease
payments          16,601        20,144        17,443        15,056        12,206           42,149       123,599
Total
contractual
cash
obligations    $  39,489     $  53,000     $  50,449     $  55,794     $ 187,385     $     47,825     $ 433,942



                                                For the years ending March 31
                 2015          2016          2017          2018          2019         Thereafter        Total
Total
purchase
commitments    $  51,896     $  36,453     $  22,420     $   2,637     $     520     $        737     $ 114,663

Purchase commitments include contractual commitments for the purchase of data and open purchase orders for equipment, paper, office supplies, construction and other items. Purchase commitments in some cases will be satisfied by entering into future operating leases, capital leases, or other financing arrangements, rather than payment of cash. The above commitments relating to long-term obligations do not include future payments of interest. The Company estimates future interest payments on debt and capital leases for the remainder of fiscal 2015 of $12.3 million.


The following are contingencies or guarantees under which the Company could be required, in certain circumstances, to make cash payments as of June 30, 2014 (dollars in thousands):

Lease guarantee                 $ 1,394
Outstanding letters of credit     2,168
Surety bonds                        420

While the Company does not have any other material contractual commitments for capital expenditures, certain levels of investments in facilities and computer equipment continue to be necessary to support the growth of the business. In some cases, the Company also licenses software and sells hardware to clients. In addition, new outsourcing or facilities management contracts frequently require substantial up-front capital expenditures to acquire or replace existing assets. Management believes that the Company's existing available debt and cash flow from operations will be sufficient to meet the Company's working capital and capital expenditure requirements for the foreseeable future. The Company also evaluates acquisitions from time to time, which may require up-front payments of cash.

To help accelerate the pace of product development, the Company has significantly increased the level of product investment. Notwithstanding the Company's cost reduction efforts, the Company expects to continue to maintain this level of investment spending, primarily for engineering labor, capitalized software, and new data sources for at least the remainder of this fiscal year.

For a description of certain risks that could have an impact on results of operations or financial condition, including liquidity and capital resources, see "Risk Factors" contained in Part I, Item 1A, of the Company's 2014 Annual Report.

. . .

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