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Acxiom Corporation (NASDAQ:ACXM)

F4Q08 Earnings Call

May 14, 2008 5:30 pm ET

Executives

Christopher Wolf – Chief Financial Officer

John Meyer – Chief Executive Officer and President

Analysts

Troy Mastin - William Blair & Company, L.L.C.

Kyle Evans – Stevens, Inc.

Todd Van Fleet - First Analysis

Mark Bacurin - Robert W. Baird & Co., Inc.

Operator

Welcome to the Acxiom fourth quarter fiscal year 2008 earnings conference call. (Operator Instructions) At this time, for opening remarks, I’d like to turn the conference over to the Chief Financial Officer, Christopher Wolf.

Christopher Wolf

Thank you for joining us to discuss our 2008 fourth quarter and fiscal year results. With me today is John Mayer, our CEO and President. Before we begin our formal remarks, I would like to remind everyone that this release and today’s conference call contains certain forward-looking statements that are subject to certain risks and uncertainties. Important factors that could cause actual results can differ materially from those expressed or implied in the forward-looking statements include but are not limited to our ability to timely complete the restatement of our historical financial results for the years ended March 31, 2006, and March 31, 2007, the ongoing review of the circumstances surrounding restatements and the consequences thereof, and those additional factors detailed under the section titled “risk factors” and elsewhere in filing with the Securities and Exchange Commission made from time to time by Acxiom including but not limited to its annual report on Form 10-K filed on May 30, 2007, and 10-K(a) on July 30, 2007, recent quarterly reports on Forms 10-Q and other current reports on forms 8-K. Acxiom undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. A copy of our press release and financial schedules including any reconciliation of non-GAAP financial measures has been posted to our web site at www.acxiom.com. At this time, I’ll turn the call over to John.

John Mayer

A couple of things I plan to address will be highlighting a number of the insights that I picked up and some of the progress that we’ve done over the past 90 days. Before doing that, as we indicated in the earnings release, I want to repeat that we’ll be not giving guidance on 2009 in this call. We have developed a number of internal operating plans that have already been rolled out to the leadership. Additionally, we are in the process of completing a more strategic view of which geographies, industries, and products we need to invest in to grow in the longer term. In fact, last week, we spent 3 days offsite discussing and resolving some of these issues. We intend an in-depth discussion of our 2009 plan and insight into our strategy at the Investors’ Day scheduled on June 17, 2008, in New York City.

Now during my first 90 days, one of the things that I focused on is meeting with our customers, our employees, but I’ve also been focusing on costs, and I will cover that in a minute. I spent a lot of time traveling and understanding the business. I spent time in California, New York, Chicago, China, and of course quite of bit of time in Conway and Little Rock, and in the next couple of weeks, I’ll be visiting Europe. The things I picked up from both our customers and our employees are that we have a good group of talented people who are really committed to the company. We have great data and great delivery assets. We’ve got blue chip clients and strong customer relationships, and we’ve good opportunities in most of our markets. I believe these things now even more than when I was evaluating joining Acxiom initially. This means we’ve got a very strong foundation to build upon.

Now during the last year, the company has faced a number of challenges. We had a bid to take the company private but ultimately did not come to pass. We had pressure in the financial services industry. We’ve had debt-related uncertainty in the economy, and we had changes in the leadership to include me. So to stabilize the company and set a path for the future, we focused on three key areas. First, we are going to create winning and accountable culture of one Acxiom. We are going to improve our operating efficiency in all our aspects, and we want to evolve into a premier market-driven and solution-based company, so let me expand a little bit on all these.

On the first one, creating a winning and accountable culture, we are going to implement and have started to implement disciplined planning and business management functions. We have consistent HR and compensation packages coming online, and we are drawing together all of the acquired skills, experience, and capabilities of our employees to beat the competition. Second, we are improving our operating efficiency in all aspects of our business. We are driving down unit cost by leveraging center’s expertise across the entire enterprise, based on both an onshore and a starting offshore strategy. We’ve built committees to prioritize our investment across research and development, M&A, and infrastructure programs, and we’re adopting consistent project management methodology to ensure we deliver what we say we’re going to do. Three, we’re going evolve into a primer market-driven solution-based company. First, we’re going to do that by implementing a new operating model with a well-defined global sales function, and I will soon be announcing a global sales leader. We’ll be productizing the existing offers and implementing a more consistent product life cycle management, and we’ll aggressively manage a detailed sales pipeline reporting, and finally, last not but not least, we’ll continue to drive for new areas of potential growth.

Now, as you see our results, we’ve already been focused on rationalizing our costs while making some changes in the structure and the alignment, and understanding and improving our cost structure will continue to be an ongoing effort. We’ve reduced staffing including but not replacing some of the most senior leaders of the company who have recently retired. We reduced our real estate portfolio in Arkansas, Chicago, London, and various other places. We re-structured some more contracts, and we closed the flight operations. Now, certainly we’ve made a good start, but our work is far from being done. We’ve put a senior leadership team in place, and the accountability and efficiency is starting to improve, and these initiatives will continue. These actions will help us reduce the existing expense run rate and allow us to invest in new skills, products, and solutions. This will include, where it make sense, standardizing our delivery capabilities. Now Chris will spend some time later going through the details about our write-downs and some of the further information around that.

Turning to the longer term, I will be working with the leadership team to develop strategic and operational plan to overcome the challenges we face today in some of our industry segments. We’ve enjoyed enormous success particularly in the financial industry and are now looking to continue a replication of that success in other industries and other geographies. In order to divide and conquer, I’ll be focused primarily on the future of our products and services as well as overseeing the new global sales force. To help me on a day-to-day basis, John Adams – and the press release have announced – a former colleague of mine is coming on board as the chief operating officer. Prior to joining Acxiom, John was the Executive Vice President of Customer Solutions for Eclipsys, a $400 million healthcare information software and services vendor. In that capacity, John had the responsibility for the company’s outsourcing and hosting units as well as a number of administrative functions. John also had some other leadership roles. He served as the Chief Financial Officer for Exult, a $500 million human resources business process outsourcing company. He was also the CFO and Vice President of AT&T business services, a $26 billion subsidiary of AT&T and as a Vice President and Controller of Electronic Ddata Systems, where he oversaw all the accounting and finance function for EDS on a worldwide basis, so John brings a lot of value, a lot experience, and a lot of capabilities to this role.

In summary, we’ve already begun to take clear actions to reduce our run rate of expenses. With the announcement of a new organization structure last week, we’re better aligned to drive more process efficiencies both in terms of savings and better leveraging existing assets. We will focus on three areas as we talked about - creating a winning accountable culture. Two, we will be improving those operational efficiencies in all aspects of our business, and we will be evolving into a premier market-driven solution-based company. However, this battle will only be won as we take more than our fair share of business and grow the top line. We will report back to you in the June analyst meeting with a lot more details around that longer strategic focus.

Christopher Wolf

I will be reviewing financial highlights for the quarter. I direct you to our web site for the reporting financial schedule to assist you with your own analysis. Let me begin with consolidated figures. For the three months ended March 31, 2008, total revenue was $349.8 million, down 1.9%, compared to $356.4 million in the same period last year. Operating loss was $76 million, compared to income of $28.4 million for the same quarter last year. Net loss was $58.3 million, compared to net income of $5.7 million last year. Fully diluted loss per share was $0.76 for the quarter, compared to earnings per share of $0.07 in the prior year quarter. These results included unusual items totaling $107.2 million. A detailed list of these items can be found on the reconciliation of GAAP to non-GAAP EPS schedule that's on page 18 of the financial schedule.

One of the unusual items relates to a correction of our accrued revenue account of $1.2 million for the fiscal year. After a review of the methodology to calculate this accrued revenue, we’ve determined that the calculation methodology is no longer sufficient to support the recorded balance. In addition, we will restate our prior period financial statement to correctly account for this change. This will result in a decrease in revenue and operating income of $3.8 million and $4.6 million for fiscal years 2006 and 2007 respectively. The net income impact for both years is $2.3 million in 2006 and $2.9 million in 2007. We expect to file the restated 10-K with our 2008 10-K filing on or about May 30, 2008.

Unusual items of $74.5 million were recorded in gains, losses, and other items. $34 million were recorded in cost of services and $2.7 million were recorded in other net. The unusual items recorded in gains, losses, and other items consisted of the following: an adjustment to the gain on the disposition of our mapping software business in France for $600,000, charges of $13.4 million related to account reductions, charges of $22.8 million related to real estate closures, contrast accruals of $6.7 million, charges of $9.5 million related to the closing of Harbinger, charges of $4 million related to the closing of our flight operation, charges of $15 million related to software disposal and impairment, and restructuring and other items of $3.7 million.

The $34 million expense recorded in cost of services was due to an IT contrast restructuring. The $2.7 million expense recorded in other net was due to an investment loss. The unusual items net of tax decreased fully diluted earnings per share by $0.91 in the quarter. Operating expenses in the prior year included unusual expense of $9.1 million. The prior year unusual expenses resulted from the closing of our Spain operations of $6.6 million and $2.5 million resulting from US restructuring costs. Excluding unusual expenses for both periods, operating expenses decreased from $318.9 million to $317.3 million, or 0.5%. Excluding all unusual items from both periods, earnings per share was $0.15 in the fourth quarter of 2008, down from $0.20 in the fourth quarter of 2007.

Turning to revenue, services revenue for the quarter ended March 31, 2008, was $259.9 million. This represents a $6.6 million decrease, or 2.5% compared to the prior year period. For the period, US services declined $9.7 million to $237.1 million. International services increased $3.2 million to $22.8 million. Approximately $1 million of the international services revenue increase was due to favorable exchange rate variances in Europe and Australia.

In US services, our digital services group increased revenue 15.6% year over year, and risk services was up 11.2% for the quarter. These increases were offset by decreases in IT management and our traditional service lines. IT management revenue was down $12 million, or 13.6% primarily related to contrast reductions with one major IT client. Most of the revenue reduction with this client was due to recording pass-through revenue net versus gross under the terms of a new contrast effective April 1, 2007. Our traditional service lines were down by $3.2 million or 2.5% compared to last year, due primarily to decreases in the financial services industry. Services revenue from financial services customers were impacted by lower volumes from certain large clients. These reductions were somewhat offset by new business in some other industries, in particular insurance and automotive.

Data revenue for the quarter ended March 31, 2008, was $89.9 million, which was flat compared to the same period last year. International data revenue was down approximately $2.4 million; however, after adjusting for the impact of exchange rates in Europe, revenue was actually down $5.7 million or approximately 18%. This decrease is due in part to the sale of the French mapping software business effective December 1, 2007. The French mapping software business generated approximately $3 million in the same quarter last year. Additionally, the Europe data business was negatively impacted by lower marketing list volume, particularly in Germany. US data revenue increased $2.4 million compared to last year. As noted on the data revenue and cost of data supplemental schedule, pass-through data revenue increased almost $1.7 million compared to the same quarter a year ago. Additionally, US data revenue was positively impacted by the MKTG acquisition in Q2 of this year, which added $1.5 million to the current quarter’s revenue results. Otherwise, US data revenue was relatively flat.

Turning to operating costs and expenses for the quarter, cost of services revenue of $235.7 million represents an increase of $25.9 million, or 12.3% compared to the same quarter a year ago. As previously noted, cost of services revenue includes unusual expenses of $34 million related to an IT contract restructuring. Gross margin for services revenue decreased from 21.2% to 9.3%. Excluding the unusual expenses, cost of services was down by $8.1, and gross margin in the current year quarter was 21.1%.

Cost of data revenue of $58.2 million represents an increase of $5.2 million compared to the same quarter a year ago. Data revenue gross margins decreased from 41.1% a year ago to 35.3% in this quarter. Excluding the pass-through data costs, data costs increased $3.4 million, and margin on non pass-through data decreased to 46.8% from 53.1% a year ago. Approximately $500,000 of the increase was related to cost increases for international operations, primarily due to exchange rate variances. The remainder is related to US operations. Most of the increase is due to head count increases as nonpass-through data content costs were relatively flat compared to the same quarter a year ago.

SG&A expense was $57.3 million for the quarter ended March 31, 2008, or 16.4% of revenue. This represents a $1.3 million increase over the same quarter last year. The current year expense included approximately $1.1 million related to the MKTG operations which was acquired in November 2007. Additionally, the current year includes higher restricted stock expense of approximately $800,000 due to new grants in fiscal year ’08. These increases were partially offset by staff reductions and lower corporate bonuses.

Now, I’ll provide a little official color on the restructuring charges and other unusual items in the quarter. Of the $111.2 million in nonrevenue unusual items this quarter, approximately $63.2 million will not result in cash expenditure. Items in this category include $34 million for the write-off of a deferred cost of an IT contract, $15 million to write-off for software, $9.5 million of goodwill and intangible write-offs, and $4.7 million of other asset write-off. The actual cash impact in the current quarter was relatively insignificant. Of the expected total cash outlays of approximately $48 million, almost half, or $22 million, are for items such as lease reserves that the company would have been contingent to pay in the normal course of operations. Of the incremental cash outlays of approximately $26 million, $11.5 million was for workforce reduction in the US and overseas, with $3.4 million attributable to a lease payment on the disposal of an aircraft and the remainder for other contractual obligations.

Interest expense for the quarter was $11 million compared to $15 million a year ago. The decrease in interest expense is due primarily to primarily to lower average balance and rate on a term loan. Balance was approximately $75 million lower, and the rate was about 130 basis points lower. Interest on other borrowings such as capital leases was down approximately $600,000 compared to the same quarter a year ago. The current quarter other net includes a $2.7 million loss related to Acxiom’s investment in a real estate venture. Our valuation indicated that the investment is fully impaired. This is the primary reason for the year-over-year decrease. Otherwise, other income primarily consists of interest income from notes and invested cash. The current quarter tax benefit was $30.4 million or 34.3%. The current quarter rate was impacted by foreign losses for which no tax benefit is available due to one-time charges in Europe and the expiration of net operating loss carried forward due to the losses generated in the quarter by the unusual charges. The prior year rate was 61.5%. Net year rate was also negatively impacted by foreign losses, primarily unusual costs related to the closing of the Spain operation. The prior year rate was also impacted by the adjustment to the research tax credit reserve.

Diluted loss per share for the quarter was $0.76 compared to earnings per share of $0.07 in the same period last year. Again, the current quarter includes $0.91 of unusual items. Diluted weighted average shares outstanding for the quarter were 77.3 million compared to 80.1 million a year. The earnings per share calculation in the current year were based on 77.1 million shares. The dilutive effect of approximately 200,000 options and warrants were excluded because due to the current quarter loss, they were anti-dilutive.

Now, let me touch on a few of the highlights of the current quarter balance sheet as compared to the March 31, 2007, balance sheet. As of March 31, 2008, the company had cash of $62.7 million, up from $37.8 million in March 2007. During the quarter, the company paid down $11.5 million of the term loan, retired an $11.5 million loan on our Phoenix facility, paid $4.6 million in dividends, and repurchased approximately $5 million worth of our common stock.

Accounts receivable as of March 31, 2008, were $216.5 million, down from $234.5 million in March 2007. Accounts receivable days sales outstanding were 56 days at March 31, 2008, down from 59 days at March 31, 2007, and also down 5 days from December 31, 2007. Goodwill was $484.8 million as of March 31, 2008, down from $522 million a year ago. The decrease in goodwill was primarily driven by the sale of our French mapping software business, which reduced the balance by $7 million, the closing of Harbinger which reduced the balance by $8 million, and $38 million due to adjustment of acquisition-related tax valuation allowances on the acquisitions of the European entities and digital impact. These decreases were partially offset by a foreign currency adjustment of approximately $1500.

Deferred revenue decreased to $64.1 million as of March 31, 2008, from $113.3 million in the prior year. The decrease in deferred revenue was primarily revenue was primarily due to one significant IT customer choosing to purchase equipment outside of the company’s contrast and due to the IT contracts that were restructured during the year. Due to lower equipment purchased by this particular customer, previously recorded deferred revenue is decreased and is not being replaced by new deferrals.

Total debt as of March 31, 2008, was $644.6 million, down from $765.8 million in March 2007. In addition to the debt payments mentioned previously, total debt has been reduced by an additional $88.2 million, for a total reduction of $111.2 million since last March.

Turning to cash flow, for the quarter ended March 31, 2008, free cash flow to equity was $14.7 million compared to $15.4 million in the same quarter last year. The $700,000 decrease reflects an increase in operating cash flow of $13.9 million, offset by higher payments on software and data license liabilities and other required debt payments. Total capital expenditures for the acquisition for property and equipment were $12.3 million in the quarter and $52.2 million for the full year. Included in these amounts were $5.8 million and $30.6 million respectively of finance purchases. Total capital expenditures represent a fairly significant reduction from the prior period of $22.9 million in Q4 and $91.5 million for the full year. Capitalized software was lower than the prior period primarily due to the ending of development and capitalization related to the EM Secret project. For the year, capitalized development was $33.3 million, compared to $27.4 million last year.

Deferred costs includes deferral of costs relating to contract setup and IT migration activities as well as deferred data acquisition costs. Deferred costs for the quarter were $21.5 million, compared to $17.1 million last year. Year to date deferred costs were $80 million, compared to $66.7 million in the same period a year ago. The current year additions include a finance purchase of data for $15.3 million. Additionally, approximately $21 million of the current year additions were related to the IT contract restructured in the current quarter. Future additions related to this quarter will be minimal.

This concludes our prepared comments from the financial statements. Now, operator, we are prepared to begin the question-and-answer session of our call.

Question-And-Answer Session

Operator

(Operator Instructions). Your first question from Troy Mastin with William Blair & Company.

Troy Mastin - William Blair & Company

Good evening, thank you. I’m curious as to how much benefit you realized in the current quarter pro forma P&L from the restructuring activities that you’ve initiated so far? How much on a quarterly basis you think you’ll ultimately get to from those activities that you’ve executed so far, and if we don’t get all the way there, say in the first quarter of ’09, when will you reach that full equilibrium level?

Christopher Wolf

As far as the early restructuring, I would say that the effect in the current quarter was relatively nil. We were expecting to see more results, but we didn’t have the full impact there that we expected. As far as the run rate for next year, I think that’s one of the things that we wanted to talk about when we go to June. We’re still compiling all of those items, and we’re trying to figure out at period of time during the fiscal they’ll pass through. We do expect a fair amount of the cash to give us benefit in fiscal ’09, but we’re still compiling that data.

John Meyer

We do expect a positive impact on it needless to say. Just so it’s clear to the people that are on the phone, I’m not sure that we’re done with all of our restructuring efforts, especially people related. As we sort through the organization structure and as we learn more about the accountability and where people aren’t delivering relative to that, we may find that we’ll have to reduce staff in different places, and so although we try to get the obvious things out here within this first 90 days, there’s still potential for some going forward. It goes without saying though that the things we’re doing will have a positive impact going forward, and at the meeting in June, we’ll be much more detailed on where and when and what quarter those things have an impact.

Troy Mastin - William Blair & Company

Would it be fair to assume that you should begin to see a meaningful impact at least by the June quarter?

John Meyer

You should expect to see benefit of this June 1, barring any other people restructuring costs that we might put in during that timeframe.

Troy Mastin - William Blair & Company

Yeah, that’s good, and then maybe if you could talk a little bit about top line. It sounds like maybe you’re considering giving us some guidance at some point in time in the near future, and maybe you can comment on your thoughts regarding guidance, but at a high level, the trends you’re seeing in revenue – it feels like the revenue picture is not deteriorating in a meaningful way. If you could give maybe some high-level thoughts as to what you’re seeing in those revenue trends, maybe in the financial services vertical in particular since that’s seems to be the trouble spot, so we can get a gauge on the trajectory of the business here for the next few months until we get to that meeting.

John Meyer

Well, the June meeting is, say, 4 weeks away, so we’ll be prepared to go into a lot more detail. What we’re seeing in revenue line is some swings and roundabouts. We’re not seeing substantial drop off in any major sectors, but we’re not seeing big upticks yet because we still haven’t ramped up our sales organizations, so my perspectives is that we’ll stay within the range of where we have been performing, adjusted for any seasonality.

Troy Mastin - William Blair & Company

Okay, good.

Christopher Wolf

Troy, I’ll just echo on that. As far as financial services, we talked a lot about it today. We have seen a little benefit in some of the other verticals, and we did mention insurance in particular and automotive. So, we’ve seen some verticals then. The other thing that, I think, we do want to mention is in the areas [inaudible] increases there.

Troy Mastin - William Blair & Company

Okay, and then in your core services business, a lot of that revenue is fixed under long-terms projects. Is there any sign that when these come up for renewal, and maybe you’ve had some recent renewals that you can give us some insight, that large financial services clients or other vertical clients would be looking to scale back on their needs, so you may be in the short term cushioned from a downturn and longer term, is there more risk from what you see?

John Meyer

Whenever you come up for contract renewals, you find that customers are looking to get more value out of what we’re producing. Those things translate into multiple solutions. In many cases, what we are doing is upgrading clients into the digital direction, where we might have been doing just regular direct marketing services. We’re finding that there’s a lot more receptivity on implementing our digital capabilities within those, and so we work at trying to preserve the overall value that we get from a client by adding more services into the existing base. Okay, so the cost savings we take out may not drop to increased bottomline, but we don’t give up the margin either. So, that’s what we try to do. So far, we’re holding our own, and do we always receive customer pressure? Sure. Will direct mail always be something that comes under pressure? Always, but we’ve got a few more tricks up our sleeve.

Troy Mastin - William Blair & Company

So, would it be fair to say that you’re not seeing, as a result of financial services, a situation that exists today of some general move towards smaller data environment for the large financial services companies?

John Meyer

I think what we said is that revenue seems to be holding its own. So wait till June 17, and I’ll break it out by industry, by geography, and give it to you in all different kinds of details, but right now, we think the revenue is holding its own.

Troy Mastin - William Blair & Company

One more question – regarding guidance, do you have plans to provide guidance when you do the meeting in June?

John Meyer

We intend to provide annual guidance in June.

Operator

We go next to Kyle Evans with Stevens

Kyle Evans – Stevens, Inc.

Hi, guys. Thanks for taking my questions. My first one I guess is kind of a followup to a prior question you’ve already gotten. Is the financial services sector still roughly a quarter of your revenue and are 20 of the 25 points still credit card or has that shifted in meaningful way?

Christopher Wolf

I think those figures are still accurate.

Kyle Evans – Stevens, Inc.

Okay. Can you dig down a little bit on the IT contract restructuring and provide a little bit more detail and give us some comfort that there’s not more of those waiting to happen in future periods?

John Meyer

Like any new person that comes into the world, Kyle – I actually turned over a bunch of rocks in this first 90 days and pushed the team very aggressively to identify where we were with customer relationships, where we were with respect to software assets, and where we were with things that were put on the balance sheet – and in one case, we found that we had put some things on the balance sheet that just weren’t carrying the value that was reflected in the balance sheet, and the customer had started the process of acknowledging that they weren’t getting what they expected from us, and so over this 90-day period, we have an active discussion with the customer on we think we’re delivering and they think we’re not, etc., to where it became very clear to us that the asset that we had on the balance sheet was not worth what was there. I think that generally we’ve turned over most of those rocks. You never say never, but I think we’ve identified all of those things that we have as potential big problems out there, and I don’t expect and I wouldn’t be happy if the leadership team pops up another one in the next year.

Christopher Wolf

I just wanted to add one thing to that just for clarity. I think there are a couple of contracts that we’re talking over and John had mentioned the write-off there, but the other contract that we alluded to and we’ve talked about this a number of time over the past previous quarters – this one contract in particular, we were buying hardware for the company and we would recognize that revenue, and so we stopped that practice or substantially diminished it with this particular client, so that was probably the bigger driver of why you saw the revenue decrease. So they are buying their equipment themselves, and so we do not book their revenue.

Kyle Evans – Stevens, Inc.

Okay, maybe two more rocks that were flipped over. The real estate venture loss in the period – what is that?

Christopher Wolf

It was not one of the buildings that we occupied. It was an entity – a venture that we picked up a couple of years ago. I actually think it was a debt settlement from a couple of years ago, and unfortunately the property has depreciated in value and actually I believe the loan was under water, so we had to make an assessment of the asset, and the economics came back that we had to take a charge of roughly $2.7 million.

Kyle Evans – Stevens, Inc.

And the last rock – the accounting on the accrued service revenue affecting the AR reduction, can you give a little more detail there?

Christopher Wolf

It’s a little complicated to explain, but basically we had a work-in-process account where we were trying to estimate revenue on jobs that we were performing in process where billing would come later, and we had a methodology that was essentially an estimate, and so when we looked at that methodology, we really didn’t get comfortable that that was the methodology that we could keep going forward as the basis to recognize revenue, and so we made the decision to take the asset off the books and not to recognize revenue on this proportional performance method going forward.

Kyle Evans – Stevens, Inc.

Right, and one last one and then I’ll get back in queue. I think I heard you mention a pretty decent growth rate on the risk management business. If you would give that one more time, and also I didn’t hear one for the digital business.

John Meyer

Well, the digital business – let me pull out the exact number, but I think the risk business is 11.2%, and the digital services business grew 15.6%.

Kyle Evans – Stevens, Inc.

And as a percent of total, where is the digital now?

John Meyer

Do we break those out?

Kyle Evans – Stevens, Inc.

Used to be kind of mid single?

John Meyer

It’s getting closer to the high single.

Christopher Wolf

Mid single is probably closer. I’ll page you both and sent it to high (everyone laughs).

Kyle Evans – Stevens, Inc.

Okay, thanks guys.

Operator

We’ll go next to Mark Bacurin with Robert W. Baird & Co., Inc.

Mark Bacurin - Robert W. Baird & Co., Inc.

Hi, good afternoon! Just one question – looking at the revenue performance in the quarter, it looks like most of the year-to-year decline was in that IT outsourcing business which I think is more a function of your moving to a capital light strategy, so I was hoping that maybe you could quantify for us either in that segment or specifically on a consolidative basis, how much of the revenue decline would have been driven by you basically letting contracts go as you move into this capital light strategy?

John Meyer

Mark, this is John. I would tell you it’s not letting contracts go. It is looking at each individual piece of the contracts and deciding that if we can’t get the corresponding value for making the capital investment, we will forego the revenue recognition and get the client to use their own capital. We still continue to perform the service. So what we’ve done is restructure those relationships to where if we’re not getting the return on capital that we expected for it, we let them use their own money to buy it, and so what that does is it takes the revenue out of the numbers, but it gives us a much higher quality revenue.

Mark Bacurin - Robert W. Baird & Co., Inc.

So if we look at that Q4 number you reported, is there any way to strip out for us how much of that is specifically related to equipment sales that weren’t put into contracts, so we can get a sense of how much of this might still be at risk of being assessed down the road?

Christopher Wolf

Mark, this is Chris. I don’t have that number handy. What I can tell you is of the $12 million decrease for the quarter, essentially all of it was because of the capital light model that you mentioned.

Mark Bacurin - Robert W. Baird & Co., Inc.

Okay, just to followup then – given some of the weakness we heard out of companies like Equifax and Fair Isaac as it relates to prescreen and credit marketing-related stuff, actually surprised to see you guys putting up some modest growth in the services business given your exposure to financial services, and it sounded like maybe some of the growth was coming out of non-financial services vertical, so was there something you can maybe give us some color by industry vertical of growth trends?

John Meyer

We did kind of insurance and automotive as two big growth areas. On the 17th, I’ll break that out into major segments that we put forward. Mark, we’re seeing a flattening in the financial services business – and by the way, I’m not accepting that because a big part of our business is in the credit card marketplace, but as far as I know, and I know the financial industry reasonably well, retail banks, mortgage banks, everybody else thinks they know about their customers too, and so while we haven’t played as aggressively in that area, I am pushing the team and not accepting the excuse to say, well, credit card market might be down. While credit card market might be down, we expect those other parts in the financial institutions and other geographical locations in the financial institution we should be pursuing. Now, it goes without saying we haven’t seen the results out of that push in the first 90 days, but over the past 5-year period, Acxiom as a company has expanded into a number of different industries and made some major inroads into helping them know their customers better and help them in their marketing efforts. So we see growth probably on a percentage basis insurance and automotive jump out the most, but overall we see as much increase and you’ll see that business outside of financial services and outside of data is probably as big as our financial business and growing, so I guess hold that space till the 17th, and we’ll give it to you broken out by respective industry in June.

Mark Bacurin - Robert W. Baird & Co., Inc.

Okay. Thank you very much.

Christopher Wolf

Thanks Mark.

Operator

We’ll go next to Todd Van Fleet with First Analysis.

Todd Van Fleet - First Analysis

Good afternoon, guys.

John Meyer

Hi, Todd.

Todd Van Fleet - First Analysis

Just a couple of quick ones – first, did I miss a balance sheet somewhere or did you guys not put one out?

John Meyer

I think you might have missed it.

Todd Van Fleet - First Analysis

I missed it. Okay, well, I’ll back to you on that then. Chris, could you help us identify the $107 million in unusual items. Where do we see that on the P&L here?

Christopher Wolf

Sure. Roughly $74.5 million is in gains, losses, and other; $34 million is in cost of services; and $2.7 million in other net.

Todd Van Fleet - First Analysis

John, just so many balls in the air at this point, I guess. Where does the integration of all the pieces on the digital marketing side rank in priority for you at this stage?

John Meyer

Obviously I have changed the organization structure where we have centralized all of the digital functions to include relevance – mobile ad, banner, e-mail, IPTV – all underneath one gentleman name named Tim Suther. Tim has been the individual who had been driving the mixed business. I happened to believe that the marketplace is moving in a digital direction and that it continues to be a very important part of our growth. It’ll continue to be a place where we’ll invest, and I think there’s this strong linkage between that and what we do in the direct marketing side where managing those multiple channels, it will become a strength that Acxiom will be known for in the future. So if you had to ask where are my areas of focus, we’re going to talk to you about global, we’re going to talk to you about digital, we’re going to talk to you about consulting, and we’re going to talk to you about all the other industries outside credit cards, so that’s what you’ll hear in June.

Todd Van Fleet - First Analysis

In your meetings to this point, John, with your team and as you get your arms around the business, have you set an end-point in terms of financial benchmarks that you want to try to manage this business to in terms of recurring revenue growth and margin target – not that you need to disclose or tell us about what that target is – but have you set that out?

John Meyer

Let me tall you what we have done, Todd. Down to the individual account, we have revenue and profit targets that we’re measuring those individuals on achieving. Their compensation is tied to achieving those, and on a quarterly basis, we’re measuring their performance – the actual performance against it, and then 4 times a month, we’re spending hours going through their outlook to find out where they stand, where they think they have risks, how we can help them be successful, being a source of idea, maybe being a source of a kick in the pants to get out there and say that’s not good enough, and then there is accountability that ties with it, so if somebody carries in an outlook that is not representative of where we think the business should go, you can’t just throw the problem to us. If the revenue is down, what are you going to do about reducing the cost? And so I think it’s much tighter mentality around management and accountability than individuals have felt before, and we’ll continue to refine that as we get the systems and business processes put in place to manage them, and by the way, John Adams will be a big help in that because that’s a full-time job for him.

Todd Van Fleet - First Analysis

So, essentially you put it to the business owners, the business unit owners, the client relationship owners to king of come up with a strategy or 1- or 2- or 3-year plan to get to a certain profile on that relationship, and then it’s been kind of a back and forth or give and take between and senior management and those business unit owners in terms of what that profile is going to look like?

John Meyer

Yes, and I look at the business and say okay what do we have under contract? Say, that’s 100. I look and say what is the market growth rate that you’d expect out of that respective industry – what you would expect out of digital or that geographic area or whatever. So their target for next year starts at that 100 plus 5 percent, and that’s what the account has responsibility for. Then, put on top of that growth that comes from the sales organization. New logs, bigger opportunities in the same clients, and so I look on that as casting it where the whole organization focuses on having that profitable growth and utilizing the capital to make sure that we get the return we need for our shareholders.

Todd Van Fleet - First Analysis

Is it fair to say this is kind of a new world order for Acxiom relative to way things had been done previously, at least in my perception, and I’m wondering about your thoughts on whether the team and the folks you have in place today – are you optimistic that most all those folks are going to be able to make that transition or how do you think about that?

John Meyer

Well, you have to remember and put a little history into what this company has through over the past couple of year. They’ve had a lot of external distractions, and that’s taken, I’d say, leadership’s eye off the blocking and tackling necessary to run a business, and so the focus on growth, the focus on how you’re delivering on it, the focus on how you’re managing your account and blowing your customer relationship just hasn’t been as strong as at least it’s going to be underneath my watch, and so I look at people and say, some people are stepping up. The good news is people are looking at this and saying we’ve been waiting for this. Like in any evaluation and any leadership position, I think you have to look at people and say are they going to make it or not. In the first 90 days, we took out a lot of the previous senior leadership of this company and didn’t replace them, and so what we brought is the second tier and lifted them up a level, flattened out the organization, and said, guys let’s help you but you need to step up. You’re now in charge, and no more excuses. It’s you, and we’re finding that people are taking it to heart. So I have high aspirations. I’m optimistic. Will everybody make it? No. And we’ll make that call when it becomes evident that somebody is not getting there and we can’t help them get there.

Todd Van Fleet - First Analysis

Great! Thanks.

Operator

This does conclude the Q&A session for today’s call. We’ll turn it back to the speakers for any additional or closing remarks.

John Meyer

A couple of things—I want to reemphasize a number of a time and I hope to see you there on June 17. One of the criticisms that I heard from you is that there hasn’t been enough transparency in the information that we put forward, and my expectation is that the 17th will be the start of when we put that transparency on there so that hopefully you’ll see the good things that Acxiom can bring to the market, we’ll show you how we’re going to get there, and we’ll show you the results of that when it occurs, and so I look forward to seeing on the 17th. We will have most of our senior leadership team there. We’ll give most of you an opportunity to hear from us specifically and even to ask question and answer to a level of detail. I can’t tell you that I would expect to provide the level of detail on every quarterly call, so I’d say please come to the 17th June, because that’s when we’re going to show you where we’re going, and then you’ll see the results that come in quarter on quarter. Thank you everyone for taking this time. I appreciate it, and thanks for your optimism and your confidence in Acxiom.

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Source: Acxiom Corporation F4Q08 (Qtr End 03/31/08) Earnings Call Transcript
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