Good afternoon, ladies and gentlemen, and welcome to LiveRamp's Fiscal 2023 Second Quarter Earnings Call. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Drew Borst, Vice President of Investor Relations.

Thank you, operator. Good afternoon and welcome. Thank you for joining us to discuss our fiscal 2023 second quarter results. With me today are Scott Howe, our CEO; and Warren Jenson, President and 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 in our public filings and the press release. A copy of our press release and financial schedules, including any reconciliation to non-GAAP financial measures, is available at liveramp.com. Also, during the call today, we'll be referring to the slide deck posted on our website. With that, I'll turn the call over to Scott.

Thank you, Drew, and thanks to all of you for joining our call today. My comments today will focus on two areas. First, I will discuss our second quarter performance, providing additional insight into what is going well and where we see opportunities to improve. Second, I want to spend some time on what for many of us has been an ongoing source of frustration, our current share price valuation and what we are doing to unlock greater shareholder returns. While I am pleased with the team's determination and resilience in the face of the difficult macroeconomic conditions that are impacting our customers and, by extension, us, we aren't satisfied with our top line subscription trends and, obviously, our valuation. Let's start with the recent quarter, which was good on many dimensions, but fell short on others. Q2 exceeded our guidance across all financial metrics and particularly so on operating profit. Total revenue in the quarter grew 16% year-on-year. Subscription revenue grew by 14%, and Marketplace & Other grew by 25%, driven by our data marketplace business. We ended the quarter with $420 million in ARR, up 15% compared to the year-ago quarter. Our non-GAAP operating profit declined 3% year-on-year as we return to a more normal post-COVID operating model, but was ahead of plan. Importantly, in recent months, we have closely examined and implemented programs to drive greater efficiency across every single element of our cost structure. As a result of the initiatives we have already pursued, tightening discretionary spend, optimizing head count and rethinking our real estate footprint, we are increasing our FY '23 bottom line guidance considerably, and we're not done yet. We have a comprehensive plan underway to meaningfully improve our long-term cost structure. Our Q2 operating cash flow nearly doubled to $21 million. During the…

Thanks, Scott, and good afternoon, everyone, and thanks for joining us today. Q2 was another solid quarter and in line with our expectations. Today, I would like to focus my remarks on three areas. First, share a few highlights from the quarter. Next, spend a minute and talk about trends in our business and our long-term drive to increase profitability. And finally, provide updated guidance for Q3 and the full year. For the quarter, please turn to Slides 5 and 6. Total revenue was $147 million, up 16%, and subscription revenue was up 14%. International was up approximately 26% and adjusted for FX was up 39%. Marketplace & Other increased 25%. Data Marketplace, which represents roughly 80% of ongoing Marketplace & Other revenue, was up 23%. Subscription net retention was 106%, and platform net retention 108%. Usage was 14% of subscription revenue, driven by data providers and our platform partners. Subscription customer counts increased by 10 this quarter, while our $1 million customer count was 92%, up 15% versus the prior year. Current RPO, or our next 12-month contracted backlog, was $293 million, up 10% year-over-year. ARR ended the quarter at $420 million, up 15%. Bookings, as anticipated, were soft in Q2. Beneath the top line, our business model continues to deliver. Gross margin was 75%. Non-GAAP operating income was $17 million, our 10th consecutive quarter of profitability. And operating cash flow was $21 million. And finally, we continue to return capital to our shareowners. In the quarter, we repurchased 1.7 million shares for $40 million. And fiscal year-to-date, we have repurchased 3.8 million shares for $100 million. Trends in profitability. Before moving on to our guidance, I thought I might spend a few minutes and talk about two things. First, what we're seeing in our business. And next, our…

[Operator Instructions] Your first question comes from Elizabeth Porter of Morgan Stanley.

And really great to see the improvement on operating costs and controlling what you can in just a given environment. I wanted to ask on the improvement in net customer adds. Could you provide some color on just the improvement you're seeing with either better retention or the ability to get deals through? How those two have balanced? Because I believe last quarter, you referenced some churn in the smaller customer segment. So wanted to get some color on if that's improved or deteriorated and just if that has remained relatively isolated to the smaller customer segment as well.

Yes. I wish I had better news for you on this front, but I would tell you that last quarter, we were probably out a little bit early in front of other companies talking about the possibility of a looming recession. We started to see a slowdown in our deal cycles. I think we forecast higher churn. And although this past quarter, those things didn't necessarily materialize, I don't think our outlook for the risk ahead has changed. What has changed is what we're doing about it in terms of really getting close to our enterprise customers where we -- larger customers where we've always had more success building channel partnerships because we think that's going to be, in the future, a very attractive, economically beneficial way to win clients and increasingly talking to all of our clients and prospects about what to do in light of a recession, how to bend their spend to be even more accountable and addressable. But all that said, Elizabeth, I think it's a little bit too early to put a flag in the ground and proclaim victory. I would be cautious -- continue to be cautious about the economic environment in front of us.

Got it. And then I was surprised to see that the usage as a percent of revenue increase quarter over quarter and also ahead of guide. And I believe you mentioned that platform partners were also a benefit there. So just wanted to get a sense of how sustainable that usage base could be moving forward and the benefits that you have from expanding this partnership platform.

Elizabeth, let me jump in on this one. And I'll probably start off with exactly what Scott said is that we're taking a cautious approach as we go into the next couple of quarters. And I'd say, in particular, going into the fourth quarter given nobody knows what's really going to happen post-holiday period and everything else that's going on. Now with that said, we have seen consistent strength in two areas, which make up the bulk of utilization, one with our data partners and then secondly, with our platform providers. Q3 -- excuse me, Q2 is no exception to that. The only place where I would say we saw a little bit of weakness is in utilization from our brand customers, which is exactly what you would expect to see. But overall, continued strong. Would encourage everybody to be cautious also looking at Q3. But that said, we continue to expect a relatively strong performance in the quarter ahead.

Next question comes from Riya Shaw of Wells Fargo. For now, we will move over to Kirk Materne of Evercore ISI.

Yes. I appreciate the additional color on the cost and margin measures. I guess, Scott, when you look at sort of the pipeline for you all right now, it seems that a lot of the other software enterprise companies, expanding with customers is a little easier than landing net new customers, they understand your technology. Can you just talk about the interplay on that front with you all right now and where you're seeing your work in terms of expansion, where you might be having some -- can you just talk about that first? And then I have a follow-up.

Yes, Kirk. I'll even go back in time. When I think about the very start of the pandemic and how we built our budget, at that time, we had modeled kind of 50-50 new logo versus upsell to existing customers. And what we found is, over the past 2.5 years, we got that completely wrong. Now we got it wrong in the right way in so much as we've really taken care of our existing customers. And like if you look at our bookings from the last quarter, just a hair under 80% of those were to existing customers. So we feel really good about that. And I've been literally dozens of client meetings over the last quarter, sat in all of our account planning sessions. I've had just a lot of conversations, a lot of insight into how our largest customers are thinking about us. And they really view us as knit into the fabric of what they're doing. And as an investor, that gives me confidence, I would think, that we're pretty durable. That said, I don't want to gloss over anything. I mean we got to improve our new logos. We've got to expand the number of customers that are working with us. And so how do we intend to do that? Well, it's really going to be reliant on expanding our channel partnerships. For the past decade, we've had a lot of success with DMPs. Well, those DMPs are giving way to CDPs and public clouds, and we got to forge the same kind of partnerships with those providers. Educate them on why utilizing LiveRamp makes their products even more effective. Also with system integrators and increasingly with agencies, where we've always had good relationships, but we feel like they could be much stronger and much larger for us. So we think that there's a lot of TAM expansion to be done there. And then the other thing that I talked about in my prepared remarks isn't just expanding to these new clients, but it's also ensuring that our sales force, particularly in the U.S., is operating on all cylinders. And there, like I feel like we're back to the head count we want, but we have a different mix. Whereas a couple of years ago, with really experienced sellers, we could kind of sell through objections, we could evangelize and educate. Now we've got to really focus on training the people that we've hired such that they get good even more quickly than would otherwise be the norm. So a lot of things going on there. But I would tell you, where I sit today, I'm probably a little bit more optimistic than I was a quarter ago about where we're going. But we got to get the new logo engine moving to really feel good about our long-term growth.

Kirk, I might just add a couple of things on upsell. If you look at the numbers, what you'd see is any weakness was really being driven by SMBs. And in fact, on a relative basis, looking at our larger customers, again, relatively we're much stronger.

That's helpful. And then just a quick follow-up. Scott, you talked about the relationship with Snowflake and the construct of a couple of other partnerships with Google, Meta. Can the Snowflake partnership actually start to generate real revenue for you all in the next six months? Or is there anything on the partnership front, I guess, more of a fiscal '24 opportunity at this point in time?

Well, I don't know if we've disclosed this. Warren will hate that I'm going to probably. But this year, we expect those channel partnerships, the cloud partnerships, to do almost $10 million in revenue. So it's starting to become real money. And we would expect that going into next year that, that would be one of the more rapidly growing parts of our business. So we're pretty optimistic on it. And it's not just Snowflake and GCP, but it's AWS and it's Azure and it's also the CDPs, like the Salesforce Genie opportunity that I talked about and the system integrators. So we think there's a lot there. And quite frankly, historically, that's not an area that we've been particularly great at. But it is a capability that other SaaS companies have been good at and comprise a bigger mix of their revenue than for us. So we see that as a nice opportunity for us.

For your next question, we will return to Riya Shah of Wells Fargo.

Hello, do you hear me?

We do.

This is Brian Fitzgerald from Wells Fargo. Hey, guys, wanted to ask about the enhanced Facebook relationship. Could you talk about what's new there and specifically about the advantage of using ATS versus some other method of server-to-server communication or reconciliation? Is that more a secure or proxy preserving way for marketers to tie into the Facebook CAPI? Or does that perhaps kind of future-proof CAPI in relation to anything Apple may choose to do in the future or in relation to limiting access to IP addresses?

Well, I'd tell you, I'm really glad you asked that question because we feel really strongly about this. And every chance we have to educate clients and investors on this, we're going to take it. We think that the world is moving towards dual consent, bifurcated consent. That is the law of the land in GDPR, and it is where the U.S. is moving as well. It is what LiveRamp has been built on. We want to ensure that we have consent on the business side, the marketer side, and also consent on the destination side. And so everything that we've done is predicated on that bifurcated consent. Now there are other ways that some companies have chosen to go after this. Some of them have talked about fingerprinting. And we just don't think that's an enduring technology. We think long term, it's not going to be a legal technology. Others have talked about things like hashed e-mails. And quite frankly, we don't think that those are necessarily secure nor do we think they are very robust. I think the average American has something like seven different e-mails. So if you just do a hashed e-mail to hashed e-mail authentication, it's probably not a very good match, a very robust match. We use everything doing RampID. We have the most robust identity graph. And then we're matching those to really the largest network of partners. It's pretty amazing. So if you want to work with Facebook, great, then we can help you do that. If you also want to work with Google and DV360, we're pretty unique because we're the only ones who work with both. Then you throw Trade Desk into the mix and you have the two biggest walled gardens plus the open web. And then you throw the ComScore 100 publishers, many of whom have adopted ATS or LiveRamp as their exclusive technology provider, and our network of destinations is unparalleled. So for an advertiser, you could do hashed e-mail unique one-offs with hundreds of different destinations, which would be operationally a nightmare, or you can work with LiveRamp because we have all of those turnkey destinations already prewired with the appropriate security and the right consents in place. We just think that we're a better partner for the future that we're sailing into.

Your next question comes from Shyam Patil of Susquehanna.

This is Jared on for Shyam. I've got a couple, if you don't mind. Starting off, I know that you've touched on Google PAIR and the rollout there in your prepared remarks. Do you mind just digging in a bit further on that? How do you think that this impacts the trajectory of other alternative IDs? And any impact that you would see on the industry more broadly? And then also just on the Carrefour relationship, I was wondering if there was anything that you could call out along how that's been progressing and maybe any of your other flagship deals in this type of macro environment.

Sure. Maybe, Warren, I'll talk about PAIR and then you can jump in on Carrefour. But the PAIR announcement, when did that happen, three weeks ago. And boy, I'm really pleased that Google has eliminated a lot of uncertainty about their direction because for the first time, I mean, they announced how they were going to handle a post-cookie world. And quite frankly, it's very similar to what LiveRamp has been espousing for the past few years. In a nutshell, in the future, if you want to use addressable advertising on DV360, you got to set up a clean room between the advertiser and the publisher and do a secure, anonymized connection. That's exactly how we've been working for the last few years. And so we were pleased that they announced us as one of their launch partners. I've talked to a lot of both advertisers and publishers about it. And there's just a recognition in the industry that DV360 is such a large entity. They have no choice but to embrace the clean room approach that they are espousing. Now as soon as you do that, then the opportunities to expand that with other LiveRamp destinations are pretty significant. Because the same kind of clean room that you can set up for PAIR, you can use to traffic to Trade Desk, you can use for Facebook, you can use for any of our CTV providers or you could use for any of our 100 -- 10,000 different publisher URLs. And so I think it really -- we've been kind of looking for the tipping point that will drive us to the post-cookie world. I think this is it. Now it will take some time. I mean it doesn't launch until Q2, calendar Q2 of next year. But we're out there talking to clients and publishers about it now and encouraging them to embrace clean rooms well before that PAIR launch.

And then I'd be happy to jump in and talk about Carrefour and then also just some other things that we're seeing. Our relationship with Carrefour remains very, very strong. We're making progress across all the European territories, whether that's France, whether it's Belgium or Spain or even beyond, and then also making progress in terms of our progression in Brazil. One of the great things here is really the addressability map that we're building. And when Scott talks about really where ATS is and our overall reach, I think it's important to note that it's not just about Facebook's Conversion API or Google PAIRs, it's also about our global reach, whether that's in Europe, whether it's in Latin America and/or Asia. On other progress, it's really interesting. I was incredibly pleased this quarter that Ahold Delhaize signed up as our latest retail customer using Safe Haven. So I think you can see that LiveRamp -- I think we're working now with 8 of the top 10 largest retailers in the U.S., and this is also expanding internationally as well. Further [indiscernible] that I talked about in the prepared remarks is when you think about collaboration and brands sharing, we now have over 275 partner tenants set up across this network. So while still early days, the network effect is beginning. We see this as a major trend, not only in retail media but also in other industries. And then finally, it's really interesting. In my prepared remarks, I talked about pilots underway and probably the most interesting thing about that statement was the modifier, and it was 13 pilots underway across TV, across social, across brands and data. So that is the direct expansion, I would say, of our TAM and the applicability of Safe Haven. So more to come, but we feel great about the progress we've made.

Great. And then just one more, if I may. Obviously, it's still a couple of quarters away, and there's a lot of macro uncertainty at the moment, but how are you thinking about top line momentum as we roll into fiscal '24? Do you think that roughly mid-teens top line growth could still be a good base case? Or might we see a bit more weakness there?

Why don't I jump in? And we're not going to give long-term guidance today. But as Scott and I approached this call, we really wanted to leave you all with three very clear messages. The first is that we understand the drivers. We understand our issues, and we understand our challenges. Whether it's looking at macro, whether it's looking at the sales force maturity or any market-related pressures we may be feeling or market confusion. Two, we want to be absolutely clear that when you think about durability, LiveRamp plays with real competitive advantage. In fact, no one can do what we can do. Whether it's our approach to foundational identity that we are integrated across the ad and martech ecosystem, that a brand can use data in every customer interaction through LiveRamp. Scott talked about our reach and the scale of our partnerships. It is truly unparalleled. And then finally, I'd add a third. It's our approach to privacy and security, which is obviously paramount not only to LiveRamp, but every single one of our customers. Those are competitive advantages of LiveRamp and really stress and point out our durability. And then finally, what we want to highlight for everybody is there's a lot that we can't control, but there are some things that we can control, and we are doing things to take action. Whether it's training or ramping our sales force, whether it's building out our channel partners and partnerships and cloud relationships, the investments we're making in customer support to drive higher satisfaction and lower churn. And then finally, I'd point out that we're also investing, again, where we have competitive advantage, in identity, in collaboration, in marketplace. We're advancing our geographical footprint and also the number of destinations. So again, too early to give guidance for next year, but we want to be super clear. We understand our challenges in the short term. But overall, we believe in the durability and long-term opportunity for LiveRamp.

We have time for one more question. Your final question comes from Mark Zgutowicz of The Benchmark Company.

Scott, just maybe connecting a couple of points you made. The first one earlier about the disconnect with your stock price and then if we sort of talk about the scalability of your network of destinations. You mentioned about Google with Meta, ComScore 100, Trade Desk. I think what you're doing with EUID in Europe right now is pretty interesting. But I guess that if you connect those two in terms of where the disconnect is, is there a limitation to scaling those partnerships today in still a predominantly cookie-based world? And does that scalability really come and you shine in that sort of post-cookie world that we're headed to?

Well, if I -- let me kind of circle around that before I answer. I think a lot about -- talk to a lot of investors, and I hear three things. I mean, number one, we view ourselves as a Rule of 40 company. And so what do Rule of 40 companies get valued on? Number one, revenue growth; number two, margin expansion; and number three, predictability, so the removal of risk. And so I think we've talked a lot in this call about margin expansion. That's not a new story. I mean look at the numbers on the board in front of me. If I go back a few years ago to FY '20 to what we expect this year, I mean, we have generated an additional $120 million in operating profit. And we're not done. I mean we're not nearly done. Look at the things that we did this past quarter as just another step in a journey because we think that there's a lot of cost levers. We can manage our technology better to lower our cost of goods sold. There are things that -- every element of our cost structure, we intend to continue to scrutinize. So there are all kinds of things that we can do to get -- improve our operating profit. Revenue. We recognize that's where we've had some softness in bookings over the last couple of quarters. But as Warren just said, we think we understand what's going on there. We like the things that we've been doing. And as I look at our pipeline right now, I mean, we have a double-digit number of $1 million deals sitting right at the finish line. But we got to get them through the finish line before we can claim victory. But I like…

This concludes the question-and-answer portion of today's conference. I will now turn the floor back over to Warren Jenson for any additional or closing remarks.

Terrific. Well, thank you, operator. Before concluding, I probably have the most important announcement of our call. And that is on September 28, Lauren, her husband and beautiful family welcomed Emily Louise, a beautiful little girl, into the world. So I know you, like all of us here at LiveRamp, are incredibly happy for Lauren and her family. So welcome, Emily Louise. In concluding, I guess I'd wrap up with really three summary thoughts from today. First of all, we want to be clear to all of you that we understand our issues and challenges. The second is that we are taking action today to improve both our top line performance and materially increase our bottom line performance. And just as Scott said, the announced actions are just the beginning. This is part of a much larger initiative at LiveRamp. And then finally, walk away today understanding that our business is, in fact, durable and that we do play with considerable competitive advantage. Thanks to all of you for joining us today, and we look forward to speaking with you in the follow-ups.

Thank you. This concludes today's call. You may now disconnect.