LiveRamp Holdings, Inc. — Q3 FY2019 Form 10-Q
Reporting period: Three and nine months ended December 31, 2018; financial statements are unaudited. LiveRamp provides an identity and data platform for marketing. The company completed its sale of Acxiom Marketing Solutions (AMS) to IPG on October 1, 2018, and reports AMS as discontinued operations.
Financial performance and condition
- Q3 continuing-operations revenue: $80.0 million, up 35.4% year over year. Subscription revenue rose 42.0% to $65.0 million; Marketplace and Other revenue increased 13.4% to $15.0 million.
- Q3 profitability: Gross profit was $45.2 million; gross margin fell to 56.5% from 58.5%. Operating expenses rose 49.9% to $93.4 million, producing an operating loss of $48.2 million versus $27.7 million. Continuing-operations net loss was $15.3 million, or $0.20 per diluted share, compared with income of $2.5 million, or $0.03 per diluted share.
- Nine-month results: Revenue was $207.3 million, up 29.7%; gross margin improved to 60.0% from 54.6%. Operating loss was $116.0 million versus $105.6 million, and continuing-operations net loss was $84.3 million versus $50.5 million.
- Reported net income: $1.056 billion for Q3 and $1.074 billion for nine months, largely reflecting after-tax discontinued-operations earnings that included the AMS sale gain. These totals are not representative of continuing operating profitability.
- Cash flow: Continuing operations used $40.3 million of operating cash in the first nine months, versus $4.8 million used a year earlier. Cash provided by discontinued operations was $2.277 billion, primarily reflecting AMS sale proceeds; total cash increased by $1.407 billion to $1.547 billion. Management reported Q3 operating cash use of $10.9 million, versus $14.1 million provided in the prior-year quarter.
- Liquidity and debt: Working capital was $1.105 billion. Cash was $1.547 billion at December 31, 2018; long-term debt was zero, following repayment of $230.5 million of debt and interest from sale proceeds. Current income taxes payable were $443.6 million. Approximately $7.5 million of cash was held outside the U.S.
- Margins and costs: Q3 gross margin pressure reflected higher identity-graph data and security costs, accelerated depreciation, and migration to a new cloud infrastructure. Nine-month margin improvement reflected revenue growth. Nine-month operating expenses included $61.6 million of stock-based compensation and $5.5 million of restructuring charges.
Material changes versus prior comparable periods
- Q3 revenue growth was led by subscriptions, attributed primarily to new customer wins and expansion with existing customers. Marketplace growth was constrained by a lost customer under a revenue-sharing arrangement; international revenue declined 3.8% in the quarter.
- Q3 operating losses widened as expenses grew faster than revenue, including higher research and development, sales and marketing, and stock-based compensation. The prior-year quarter included a $24.2 million one-time tax benefit from remeasurement of deferred tax liabilities under the U.S. tax law change.
- AMS was sold for stated consideration of $2.3 billion, less $49.0 million of closing adjustments, transaction costs and other items. The company recognized a reported $1.7 billion gain on the sale. AMS results are presented as discontinued operations, so continuing-revenue comparisons exclude AMS.
- The company repurchased 11.2 million shares in a Dutch auction tender offer for $503.4 million, including fees, and repurchased an additional 2.3 million shares for $64.1 million under its ongoing program during the nine-month period.
Outlook, commentary and risks
- No specific revenue, earnings or margin guidance is provided. Management stated that existing cash was expected to fund working capital and capital expenditure needs for the foreseeable future.
- Management disclosed $335.1 million of fixed customer-contract revenue obligations not yet recognized, with substantially all expected to be recognized by March 31, 2021 and the remainder thereafter.
- Key disclosed risks include privacy, data-protection and data-use regulation; security breaches or service interruptions; loss of data suppliers or customers; competition and changing tracking technologies; sales-cycle and contract uncertainty; and foreign-exchange exposure. The company reported no material pending legal matters and believes recorded legal accruals are adequate, while noting outcomes remain uncertain.
- Other commitments include $50.2 million of future operating-lease payments and $38.6 million of purchase commitments. Uncertain-tax-position liabilities of $17.5 million were excluded from the contractual-obligations schedule because payment timing could not be predicted.
- Topic 606 adoption increased opening retained earnings by $12.7 million and resulted in capitalization of contract-acquisition commissions, with a four-year amortization period. The company reported $9.5 million of unamortized deferred commissions at period end.
Important facts for investors to verify
- Separate recurring LiveRamp performance from the large, nonrecurring AMS disposal gain and discontinued-operations results.
- Assess whether subscription growth can continue and whether lost-customer effects or international weakness persist.
- Track gross margin recovery against identity-data, security, depreciation and cloud-migration costs, alongside operating-expense and stock-compensation growth.
- Review cash available after tax payments, repurchases and other commitments; the balance sheet includes $443.6 million of current income taxes payable.
- Confirm the timing and realization of the $335.1 million remaining performance obligations, and monitor privacy, data-security and data-supplier risks.