Good afternoon, ladies and gentlemen, and welcome to Acxiom Fiscal 2018 Second Quarter Earnings Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Ms. Lauren Dillard, Head of Investor Relations. Lauren Dillard, please proceed.

Thank you, Operator. Good afternoon, and welcome. Thank you for joining us to discuss our fiscal 2018 second quarter results. With me today are Scott Howe, our CEO; and Warren Jenson, our CFO. Today's press release and this call may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. For a detailed description of these risks, please read the Risk Factors section of our public filings and the press release. Acxiom undertakes no obligation to release publicly any revisions to any of our forward-looking statements. A copy of our press release and financial schedules, including any reconciliation to non-GAAP financial measures, is available at acxiom.com. Also, during the call today, we will be referring to the slide deck posted on our website. At this time, I'll turn the call over to Scott.

Thank you, Lauren. Good afternoon, and thank you for joining us. I am pleased to report a solid second quarter, highlighted by top line growth, expanding margins and continued innovation across the portfolio. Excluding divestitures and the impact of foreign exchange, total revenue was up 8%, driven by accelerating revenue growth at LiveRamp, which grew 58% during the quarter. International revenue was also up double digits. Beneath the top line, we delivered meaningful margin improvement with total company gross margin up over 500 basis points, and operating income, up 27%. LiveRamp posted record double-digit segment margin, and Marketing Services improved its bottom line by more than 400 basis points. During my portion of the call today, I will update you on each of our businesses and, in that discussion, highlight some recent momentum that gives me confidence in the back half of the year. First, Marketing Services. I'd like to revisit the 4 main goals we outlined on our last call for Marketing Services and update you on our progress against each in Q2. Our #1 goal in Marketing Services is to maintain and delight our current clients. This is key to defending our cash flows and growing existing relationships. During Q2, we closed all material contracts up for renewal, including a multiyear contract with a large financial services client and an expanded global deal with Harley-Davidson. We are now working with Harley-Davidson geographies, representing over 75% of the world's population to enable its customer acquisition and retention strategy. In addition, we were recently recognized by Citibank with a Citi Supplier Award for our high levels of service and performance. Acxiom was only supplier to win this award two years in a row, underscoring our commitment to delivering tangible results for our clients. As I mentioned on the last call,…

Thanks, Scott, and good afternoon, everyone. In my portion of the call today, I'll highlight our results and then conclude with our guidance. Next, Lauren will lead to a question-and-answer session, in which Scott and I will address a few top-of-mind questions. Following this QA, we will open the call to your questions. Q2 highlights. Please turn to Slide 4. Our performance trend line is clear. Q2 is yet another positive prove point. Adjusted revenue was up 8%. Q2 was the eighth consecutive quarter in which revenue has increased by more than 5%. As a company, our gross margin again exceeded 50%. In fact, at 52%, it is up over 500 basis points. Our gross margin has been at or above 50% in each of the last 4 quarters. Operating income of $31 million was up 27%. On average, over the last 8 quarters, our operating income has increased 21%. Operating margin was 14%, up 250 basis points. On a trailing 12-month basis, our operating margin was 12%, up 160 basis points. Adjusted EBITDA improved 14% to $47 million. And our EBITDA margin was 21%, up 170 basis points. And free cash flow to equity on a trailing 12-month basis was $68 million, up from $39 million a year ago. In the quarter, Marketing Services again posted meaningful margin improvements. Gross margin improved 390 basis points to 36%. Segment margin expanded over 400 basis points to 23%. Most importantly, we're pleased that this segment margin has improved in 7 of the last 8 quarters. Next, please turn to Slide 5. Connectivity is a best-in-class Saas company. In Q2, our revenue run rate exceeded $200 million. Revenue growth accelerated to 58%. Gross margin surpassed 67%. And segment margin expanded to 11%. And lastly, our business is scaling beautifully. In the U.S.,…

Thanks, Warren. For those of you listening today, we thought we might change it up a bit and proactively address a few top-of-mind questions. So let's begin with Audience Solutions.

Warren, can you talk about the growth rate of Audience Solutions, exclusive of the large digital publisher of which you spoke this past quarter?

Lauren, I'd be happy to. Let me start off by saying that, as a matter of principle, we won't talk about the economics of any customer. That said, let me try to add some level of color. In the first half of this year, excluding this customer, our segment revenue was down as a result of timing, nonrecurring revenue and delayed bookings. In the second half of this year, meaning in Q3 and Q4, we expect our revenue growth rate exclusive of this customer to rebound. So net, for the year, we would expect our Audience Solutions revenue growth, again exclusive of this customer, to be up mid-single digits. By way of comparison, the comparable revenue growth metric in FY '17 was roughly flat.

Warren, do you continue to expect revenue from this customer to fall off considerably in Q3?

Yes. We expect revenue associated with this customer to decline materially this quarter.

But for the year, do you still believe Audience Solutions revenue will be at low to mid-single digits?

We do. We continue to believe this is the right estimate. While revenues from this large customer will decline significantly, our Audience Solutions management team has been hard at work, building new sources of revenue. Specifically, we're counting on growth from all other digital revenues, our global data initiative and initiatives associated with other services.

A question for you. When I look at the back half of the year, it seems that you've replaced highly certain revenue with expected revenue from largely improving initiative. Am I missing anything?

Well, Lauren, I think what you have to remember is the following: So first, we've been working with other digital publishers for years. So expanding and growing our digital footprint is a natural extension of what we are to do. Next, our other growth initiatives were kicked off well before this transition. These initiatives, like global data, also leverage our core capabilities. And finally, we have a highly skilled and experienced Audience Solutions management team that has consistently delivered. So that, I don't and we won't ever discount the risk. But at the same time, we believe our guidance is very balanced.

Just another question for you. What is the risk of other publishers transitioning to this new revenue model?

Well, I mean, there's always risk. But that said, we don't believe there's another shoe to drop here. We don't have any other publishers that operate at this scale or at this level of sophistication. Stated differently, most publishers don't have the capability nor interest to manufacture a high-quality data themselves. We believe there continues to be a large untapped opportunity for us to pursue.

So switching gears now to Marketing Services. Scott, what gives you confidence in your second-half outlook for Marketing Services? And when do we get back to flat or positive growth?

Yes. So Lauren, in short, it's our contracted and committed revenue. So in Q3, we see little risk in our forecast. And in Q4, what is not already contracted or committed is in line with historical norms. And also, remember that the comps get much easier in Q4.

Great. So a couple of questions on Connectivity then. Warren, connectivity had an exceptional quarter but your year-to-date performance implies a deceleration in the second half to get to your guidance. Anything we should be worried about here or simply the lob large numbers?

Well, first of all, there's no new news here. We do expect lower growth rates in the second half. That said, let me be clear. This business is performing extremely well, and we have lots of positive things going on. Let me just name a few: First, this is a huge category, and we are the industry leader; next, our bookings remain strong, and we have best-in-class net retention rates; and finally, we continue to innovate and grow the business through things like Data Store, new use cases and international expansion.

Well, then let me ask the question a little bit differently. On past calls, you indicated that revenue growth in Connectivity would reaccelerate in FY '18. Is this still the case?

Yes. We continue to expect revenue growth to accelerate for the year.

Great. A quick housekeeping item. One, how is your stock-based comp expense trending?

Let me ask everyone, for a moment, to turn to Slide 20. When you look at this chart, keep in mind a few things: First, we continue to expect stock comp expense for the year to be roughly $65 million; next, and importantly, stock awards are critical component of our acquisition strategy. Roughly 40% of the $65 million is directly tied to acquisitions. As a percentage of revenue, our ongoing stock-based comp is well within industry norms.

Switching gears to a top-of-mind topic: Your separation effort. You raised your full year estimates for separation spend. Why the increase? And what do you hope to have accomplished by the end of Q3?

First, why the increase? Well, we are sprinting to the finish. As for your second question, as we've stated before, we are giving ourselves optionality. In other words, for any of our divisions, should a situation arise such as a major partnership or combination, we are putting ourselves in a position where we can act on that opportunity in a reasonable time frame.

So you're saying, this is it?

Yes. This is it. Everyone should remember, though, should an event or a transaction occur, there will be additional spend.

Well, that's all I've got. We will now open the call to other questions. Operator?

[Operator Instructions]. Your first question comes from Brett Huff from Stephens.

Congrats on a really nice quarter on both legacy containing the pricing pressure as well as a really nice Connectivity quarter, so congrats on that.

Great. Thanks, Brett.

Two questions for me. One, can you talk about match rates and just give us an update on that? And maybe also in so doing, can you talk about the variety of match rates sort of data points that are out there? I think that is confusing the market. It certainly confuses us, number one. And then number two, can you talk a little bit about Google Customer Match as sort of potential "killer app" that really gets a lot of new customers in the door, it seems, like at a faster rate than maybe any other new launch that you've had. So just give us thoughts on both of those.

Yes. So first off, in terms of match rates, and these are ballpark, kind of top of mind, Brett, as opposed to exact. I'd say, our web match rates are now north of 60%, and our mobile match rates, call it, 45% or above. And remember, these are deterministic match rates. And I think that's the important thing to remember in all the confusion. And so there are folks that out there who claim to have higher match rates, but they're typically, what they're talking about is a probabilistic or sampled match rate. And we could do that, too. But we like to quote the numbers in the context of 100% statistical significant and accurate. Meaning, you're not going to get any false positives. And I should also note that the match rates that we experienced, very significantly by client. So if someone's using Smart Reach, for example, which is the co-op of pulling different clients PII together for only used in match rates, the number could be much higher, in excess of 90%. Or if a client is sizable and they have relationships with a vast majority of consumers, they're going to have a much higher match rate. And so the numbers we quote are typical match rates. But then when we pull that with specific clients or the co-op data, it often can be much greater. And I think - the second question you asked was about Google Customer Match. And yes, I mean, we do think it is a killer app. Clients embrace what works. And we publish some case studies that show that the a lift from this, high double-digit percentage kind of lift, and given how big search spend is for most advertisers, it's not surprisingly something that they've been quick to adopt. We've now been in market with this for a little over a year, and I want to say we have north of 120 Customer Match clients. And then also now launching it internationally as well. So I think that'll be a driver for us internationally. That said, I think we've got one more come in. And that is when we launch people-based programmatic, I think it's going to be another one of these killer apps. It's something we've been talking about for a couple of quarters now. Form where we sit today, it looks like that'll be a commercial launch in calendar Q1. And if we know that search is the largest element of most digital spends, we know that programmatic is right on par with it. And so together, those 2 applications comprise 70% on average of digital spend. And so the good news is coming soon. Advertisers will be able to personalize against both of those killer apps.

Your next question comes from Bill Warmington from Wells Fargo.

It's Bill DiJohnson for Bill Warmington. I've got to questions for you. Connectivity obviously had a very strong quarter with 58% year-over-year growth. Could you rate the drivers of its performance by new customer contributions versus upselling existing customers?

Yes, I could take that. Scott. It's still the majority of new clients. So we probably saw like a low double-digit percent increase in kind of what we call same store. But as we've said before, that really hasn't been a huge focus for us. And when we go talk to our customers, which we do regularly, that, quite frankly, the single biggest pain point that they express, that they'd like us to see - see us do more evangelization, more education around how do they expand their use cases. So that's something that, going forward, over the next few years, we'll start to prioritize and will be an increased growth driver for us.

Bill, one thing I could add on to that question to what Scott said is the net retention that we spoke about during the call is over 110% year-over-year. And that actually has been at that level for each of the last 8 quarters at LiveRamp. We went and we looked at best-in-class Saas. And what you kind of find is that if you're over 100%, it's awfully good. If you're north of 110%, you're in some pretty darn good company. So we're extremely pleased also with our customer net retention.

Got you. And do have an update for the Smart Reach participant count?

Smart Reach participants today are right a little bit over 100, right in that neighborhood.

90 to 100.

90 to 100, with a few or less than half having implemented so far.

Okay. And then Europe has been a strategic focus for you on Connectivity, in particular, particularly the U.K. and France. I was wondering what your thoughts are on the potential impact from the general data protection regulation, which is slated for May of next year?

I'll give you my take from talking with a lot of customers throughout Europe. First of all, one of the things that we've made a point of is that we welcome GDPR. So what GDPR does is it represents harmonization. Secondly, from Axiom's standpoint, recognize that we've been dealing with privacy and the complexities of privacy for many, many years. So we believe that this plays right into our sweet spot. So at the end of the day, we know that our customers are looking for trusted partners to help them navigate the complexities of privacy, the complexities of GDPR. We believe we are exactly that partner. We also feel that whether it's in Europe or anywhere else for that matter, when people are thinking about how to utilize their data, how to monetize it, better use it for their customers, there's no better partner than Acxiom. And this is just another example of why.

Your next question comes from Dan Salmon from BMO Capital Markets.

This is Willie Lowden for Dan. Two quick questions. I know on your fiscal 4Q '17 call, you talked about potential expansion beyond just marketing. So obviously, extremely early, but I was wondering if you could provide any updates there? And there's obviously the question on GDPR. A question on the rollout of iOS 11 and Apple's IPP. It's obviously impacting a bunch of other companies in the ecosystem. To what extent does that provide an opportunity for you guys to sort of sell data to those guys to help them track users across the web?

Yes. So on the first one, William. This is Scott. Expansion beyond marketing, boy, if I could turn back the clock and take back those comments, quite frankly, I wish I could. And the reason being is that I think when I talked about that, I laid these out as initiatives that we were going to pursue that we thought would be important to lock in the next 10 years of growth. And I got a lot of comments from investors worried that we were going to go do some crazy acquisition and overextend ourselves into new markets, which was not my intent at all. Rather, as we go investigate these new markets, our plan is to expand into areas that are adjacent and build on capabilities that we already have. And these things will be fairly immaterial to our growth over the next 12 months, but potentially quite meaningful over the next 3 to 5 years. Over the last 6 months, we have explored some adjacent spaces. We've prioritized them and we've started to make some traction in some additional areas of government, health care, risk authentication, but still so early that it's not all that useful to talk about them in the call. Fairly minor in terms of investment that we're putting against it, and certainly minor in terms of revenue contribution. But the important thing is we're planting several seed streams, and we believe that some of them will hit and be fruitful for us over time. Your second question, remind me.

On ITP?

Yes. So I mean, typically, we don't have the same kind of exposure to, say, Safari that others out there do. We don't use of them as a match partner and we don't build our match network. We build it off personal identifiers as opposed to solely cookie. In addition, we work with so many clients that are collecting first-party permissions. And in many cases like Smart Reach, they're giving us permission to federate those permissions. So all this said, as we think about the impact of that, we think that we're largely insulated from it. And in fact, the discussion around that, the industry attention on those issues and privacy, we feel, is good for us because it makes everybody in the space realize how important identity resolution is. And that's obviously something that we pride ourselves as being the market leader at.

[Operator Instructions]. Your next question comes from Kip Paulson from Cantor Fitzgerald.

Just a couple for me. First, gross margins in the Connectivity business are impressive. And then I believe you guys mentioned 71% in the U.S. Do you think there's still room to move higher from here? Or do you think that's kind of capped out, and you'll keep reinvesting in the business there? And then second, I believe you mentioned average use cases between 10 and 11. Is this a case of new customers dragging down the average? How many use cases do your heaviest customers have?

So Kip, let me talk about gross margin. There will always be instances where we will invest. So I'm not going to predict at every quarter we're going to be in the U.S. over 71% or 67% in total. But obviously, a very, very strong performance. I'd highlight a couple of things: First of all, it does demonstrate the leverage of this business because the business is scaling beautifully. The other 2 metrics that I'd ask everybody to really think about is an upper or a contribution margin of 11% in the quarter in total coupled with a contribution margin in the U.S. of 18%. One of the things that's going on right now is we are moving into a period of rapid potential cash flow generation. So if you look at EBITDA for this segment and you were to calculate an EBITDA run rate as of Q2, you'd see that it's about $35 million, which means you factor in some growth and would anticipate that in the forward periods, throwing off some really pretty interesting cash flow. So now coming back specifically to your question, yes, over time, our target gross margin is over 75% in Connectivity. We're not predicting a timeframe by which we will be there. But the trend line is very clear and very positive for this business.

And I can handle the second question, which was about the use cases. So if we look at our very heaviest, I mean, we probably have a couple that are activating, call it, 30 roughly. And that's not an exact number, but 30 roughly, use cases. So those are our users. We think that gives us a lot of headroom. Our belief is that the average Fortune 500 marketer could activate between 300 to 500 different use cases. And so it tells us that we're still very early stage here. And when I talk about use cases, I'm talking about every single digital publisher on the media plan, including both search and display. Addressable television, addressable radio, call centers, site personalization, point-of-sale advertising. Essentially, any customer action that can be improved with the injection of data, our belief and our strategy is to provide the connections that allow that data to be used - utilized in that interaction. But again, on average, we are somewhere between 10 and 11. And so that suggest that there's a lot of room for usage increase there.

Kip, one other thing that I would add that we're all referring to that we're extremely proud of right now is that we are accelerating growth rate for the year. One thing that we would clarify, for everyone's models, though, is we would not expect our growth rate year-over-year in Connectivity to be closer to 45% than to 50%, and that's just our looking at our estimates, looking at the revenue estimates for both Q3 and Q4. So extremely strong growth, a lot of positive momentum heading into the back half of the year would put our overall Connectivity growth rate for the year at about 45%.

And at this point, I'd like to turn the call back to Warren Jenson for closing remarks.

Again, thanks to all of you for joining us today. I'd end with three quick summary remarks. First of all, we believe that Q2 is really yet another proof point in demonstrating, really, a very positive trend of continuous improvement at Acxiom and continuous value-creation. Next today, an awesome also quarter for Connectivity and LiveRamp. Connectivity is performing beautifully. And as asset, this compares very favorably to best-in-class Saas. And then finally, we'd note that we continue to walk the talk when it comes to balancing growth and reinvestment with a return on capital to our shareowners. Thanks again for joining us. We look forward to speaking to all of you over the course of the next couple of days.

This concludes today's conference call. Thank you for your participation. You may now disconnect.