Filing and reporting period
The supplied filing is Acxiom Corporation’s Form 10-K for the fiscal year ended March 31, 2014, including the quarter ended that date. It is not a Liveramp Holdings, Inc. filing; the filing describes Acxiom and a subsequent proposed acquisition of LiveRamp, Inc.
Acxiom provides marketing and data services, IT infrastructure management, and other services. In fiscal 2014 it moved e-mail fulfillment into Marketing and data services and reported prior periods on the revised segment basis.
Key financial metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $1,097.5 million | $1,099.4 million |
| Income from operations | $48.3 million | $102.7 million |
| Operating margin | 4.4% | 9.3% |
| Net earnings from continuing operations | $8.8 million | $57.1 million |
| Diluted EPS from continuing operations | $0.11 | $0.75 |
| Cash provided by operating activities | $165.0 million | $150.1 million |
| Cash and cash equivalents at year-end | $418.6 million | $223.0 million |
| Long-term debt, excluding current installments | $289.0 million | $237.4 million |
| Working capital | $416.1 million | $236.5 million |
Gross margin improved to 24.5% from 23.5%. Reported operating results included $28.8 million of impairment charges, $22.1 million of restructuring and legal-contingency charges, and $14.0 million of business separation and transformation costs. Excluding the identified unusual items, management reported operating margin of 10.3%, versus 9.5% in FY2013; this is a company-presented adjusted comparison, not GAAP operating margin.
Material changes versus the prior comparable period
- Total revenue was essentially flat, down $1.8 million. Marketing and data services revenue rose 2.1% to $805.1 million, while IT Infrastructure management revenue fell 6.7% to $257.1 million. Other services revenue was broadly unchanged at $35.3 million.
- Marketing Management growth was partly offset by declines in customer data integration and e-mail fulfillment. IT Infrastructure declines reflected lower project revenue and contract losses, partly offset by termination fees.
- Five IT Infrastructure customers gave termination notices; these customers generated about $69 million of FY2014 revenue. Acxiom expected about $9 million from those contracts in FY2015.
- Operating income declined by $54.4 million, primarily reflecting impairment, restructuring/legal charges, and separation costs. Reported net earnings from continuing operations fell by $48.3 million.
- Operating cash flow increased $14.8 million. Investing activities used $68.2 million, including $39.3 million in capital expenditures and $24.5 million in capitalized software development; financing activities provided $98.3 million.
- Working capital rose mainly because cash increased. Year-end cash included $22.2 million held outside the U.S.; the company said it had no current plans to repatriate that cash.
Outlook, management commentary, risks and unusual items
- Management expected to continue increased product-development investment in FY2015. Engineering investment, defined as R&D expense plus capitalized software, was $48.1 million in FY2014, compared with $31.6 million in FY2013 and $10.8 million in FY2012. The Acxiom Audience Operating System launched in September 2013.
- A cost-reduction initiative targeting roughly $20–$30 million in annual savings over six to twelve months was described as substantially completed. Management said it would not reduce ongoing investment in the Audience Operating System and innovation.
- After year-end, Acxiom announced a proposed $310 million cash acquisition of LiveRamp, Inc., expected to close in mid-summer 2014 subject to customary conditions. Acxiom said it expected to use available cash to fund it.
- FY2014 impairment charges included $20.3 million of goodwill and $4.6 million of data assets in European Marketing and data services, and $3.0 million of goodwill and $0.9 million of other assets in Other services. The affected reporting units’ goodwill was fully impaired. Acxiom cited European restructuring, including exiting the analog paper survey business, and a potential exit from Other services.
- The effective tax rate was 77.1%, affected by foreign deferred-tax valuation allowances and nondeductible goodwill impairment. The filing reports $7.7 million of expense from valuation-allowance increases, partly offset by a $3.1 million tax-reserve adjustment.
- Acxiom refinanced its debt in October 2013 with a $300 million term loan and a $300 million revolving facility. No revolver borrowings were outstanding at year-end; the term-loan rate was 2.4%, and the company was in compliance with its covenants. It also had a $50 million interest-rate swap hedging floating-rate exposure.
- Key risks include data privacy regulation and public sentiment, cyberattacks or service disruptions, dependence on third-party data suppliers, competitive and technology change, client concentration and contract losses, long sales cycles, and continued decline in traditional direct mail. The ten largest clients accounted for about 38% of FY2014 revenue; no client exceeded 10%.
- A Fair Credit Reporting Act class action had a tentative settlement; Acxiom accrued $3.7 million and said additional loss was remote. A separate GoDigital dispute was settled during FY2014, with $0.7 million recorded as settlement expense. Management said the legal matters were not expected to materially adversely affect consolidated results or cash flows.
- Acxiom reported a $1.5 million maximum potential payment under a lease guarantee, $2.2 million in letters of credit, $0.4 million in surety bonds, and $124.8 million in future operating lease payments. Total contractual cash obligations were $442.4 million, excluding interest.
Most important facts for investors to verify
- Confirm the issuer and period: the source is Acxiom’s FY2014 10-K, not a Liveramp Holdings 10-K or a calendar 2013 Q4 filing.
- Review the full audited statements and notes for the drivers of the earnings decline, unusual charges, tax rate, and adjusted margin reconciliation.
- Assess the scale and timing of the five IT Infrastructure customer exits, and whether projected replacement revenue or cost actions offset lost business.
- Verify the proposed LiveRamp acquisition’s closing, funding, purchase accounting, and expected effect on liquidity and leverage; it was announced after the reporting date.
- Monitor data-protection rules, security incidents, supplier access to data, goodwill valuations, and the resolution of the disclosed litigation.