Lauren Russi - Director, IR Scott Howe - CEO Warren Jenson - CFO.

Dan Salmon - BMO Capital Markets Todd Van Fleet - First Analysis Brett Huff - Stephens Bill Warmington - Wells Fargo.

Good afternoon ladies and gentlemen, and welcome to the Acxiom Fiscal 2015 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to your Mrs. Lauren Dillard, Director of Investor Relations. Please begin..

Thank you, operator. Good afternoon and welcome. Thank you for joining us to discuss our fiscal 2015 third 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 Web site.

At this time, I'll turn the call over to Scott Howe..

Thank you Lauren. Good afternoon and thanks for joining us. I would like to begin today by providing an update on the continued momentum of AOS and LiveRamp and discuss their integration in more detail.

Next I will dive into our core Marketing and Data Services businesses and outline what we believe is working and where we are focusing our efforts in the coming months and throughout the next fiscal year. Finally within that discussion, I will share how we are organizing for greater success before turning things over to Warren. First AOS and LiveRamp.

I am very pleased with the progress made in the third quarter, both with respect to product integration and our continued sales momentum. Over the past several months, we made tremendous strides integrating the best features of both AOS and LiveRamp to create a single, more effective, open and neutral connectivity platform.

We have always believed that the explosion of new data streams, proliferation of innovative marketing applications and overwhelming complexity of managing functions like recognition, connectivity, permission and security creates a new opportunity within the marketing world.

Well before our launch of AOS, and later acquisition of LiveRamp, we believed Acxiom could be the industry open standard that emerged to help the entire marketing ecosystem safely and responsibly connect data across the growing number of channels and marketing applications.

While Acxiom has established itself as a leader in connecting customer data to top premium publishers, LiveRamp had established a leadership position in connecting data to the programmatic advertising ecosystem. The difference in go-to-market has created the opportunity for an exceptional combined product.

In the coming months, we will be rolling out a combined connectivity product that marries the best features of both solutions, bringing marketers all of LiveRamp’s onboarding capabilities, including best in industry reach, access to over 130 partner integrations and a simple to use interface, all of AOS’ deep integration with top publishers such as Facebook, Twitter, Yahoo! and Microsoft, as well as leading addressable TV providers; a best-in-class approach to privacy and security, leveraging Acxiom's Safe Haven technology, improved matching using Acxiom’s AbiliTec technology, and initial support for expansion into international markets.

Migration will occur within the next 12 months for most of our clients and we intend to do this in such a way that every customer gets upgraded functionality as the time of their migration.

The combined product will be managed by our LiveRamp business unit, which will continue to run as a separate division to reinforce our continued commitment to neutrality. We are also evaluating branding of the combined LiveRamp, AOS offering.

Now please turn to Slide 3 and I will provide an update on the adoption metrics we introduced earlier this year. You will notice this quarter we added a revenue run rate metric. A few highlights from the quarter. First, we continue to increase -- we added 25 new customers during the quarter. The sale synergies have been remarkable.

For example LiveRamp continues to gain significant traction with direct advertisers. LiveRamp now has more than three times the number of direct advertisers it did just a year ago. In total we ended the quarter with 195 customers using our connectivity services, a sequential increase of 11%.

As we grow installed base, our revenue also continues to ramp. AOS and LiveRamp revenue was approximately $21 million in the quarter, up 40% from $15 million in Q2. We exited the third quarter with a revenue run rate just shy of $70 million and expect to exit the year with a run rate in excess of $80 million.

This measure represents our quarter ending subscription ARR plus our trailing 12 month royalties on gross media spend. We now expect to generate approximately 60 million in combined AOS and LiveRamp revenue in FY15, the high-end of our guidance range.

Next we continue to generate strong results for our customers as evidenced by the record gross media spend generated in the quarter. AOS powered approximately 73 million in GMS in Q3, up 265% from the same period last year and up almost 100% on a sequential basis.

Customers are increasing their use of first party data onboarding and an increasing percent of total media spend is being driven by customers using their first party customer data. In addition we are seeing customers expand their use cases as they experience early successes.

For example, a major Fortune 500 retailer who became a LiveRamp customer in 2013 for CRM retargeting is now utilizing our services for attribution; attribution for their various paid search initiatives and also laying the ground work for a large scale on site personalization project to target unknown shoppers.

With over 130 different partner applications from which to choose, customers can now deploy their data in all kinds of new ways. And as they do, our relationships grow even stickier and our network effect grows even larger. And finally the combined AOS and LiveRamp pipeline continues to hold strong with over 90 million in qualified pipeline.

This is a level at which we are very comfortable. As importantly, we found that our recent decision to deemphasize AOS applications wherever partners could provide these services more effectively was a smart choice. In fact many of these partners have become our most valuable client referral channels.

To summarize, AOS and LiveRamp experienced strong momentum in Q3 and I am very pleased with the integration progress made. While we are off to a great start, there is still much work to be done to expend our early lead in this new category.

We must continue to improve our product stability and quality, expand our network of connectivity partners and acquire new clients in both the U.S. and abroad. We are very bullish on the opportunity ahead of us and with continued execution we believe we are well positioned to capture it.

Next, let's turn to the core Marketing and Data Services business. I'd like to frame this discussion by first revisiting the components of the core Marketing and Data Services segment, and then talk specifically about the initiatives underway to strengthen our database and data businesses.

A fundamental marketing problem any business must solve is how to manage and enhance relevant data that when appropriately analyzed would form better subsequent decisions. Most of Acxiom's historical success has come from our strong presence in this area.

We have established solid professional services businesses in both database and email in which we serve over 40% of the Fortune 100, supplemented by our data and decision sciences business. Let me acknowledge the obvious. Acxiom's performance in our pro-serve and data business has been disappointing over the past year.

Spectacular growth in AOS and LiveRamp has been mirrored by disappointing declines in our core business. Q3 bookings were okay for the two. While we are not ready to give guidance for fiscal 2016, we need to improve our performance in order to regain our historical core M&DS growth rates. And that is our focus.

To both our clients and associates, know that we are committed to continued leadership in this space, but also recognize we must adjust our approach to provide even better service and value. Specifically in our database and email businesses, we are making two important improvements.

First, we're increasing our level of industry and product expertise within our sales and service organization. Over the past two years Acxiom had reoriented its traditional industry focused enterprise sales approach to be more generic and standardized across geographic regions.

In hindsight, this has been a mistake, but one that we have already moved to correct. Enterprise clients expect Acxiom to be experts in their industries, problem solve their most difficult challenges and unique packages and solutions from our menu of offerings.

In addition recognizing that specialized product selling works we intend to increase our focus on resources against this effort in the coming year. Second, we will continue to innovate across all of our businesses.

In the coming months these innovations will include new products and solutions, UI and reporting improvements, greater connectivity and flexibility and increased automation. Within the data business, our highest priority will be on expanding the accessibility and distribution of our data.

Historically much of Acxiom's third-party data sales has been hand sold to existing database customers. As the world around us begins to recognize the value of data, we believe that new sources of demand have emerged, including major advertising agencies, publishers and application providers.

Acxiom data is now available at over 20 such partners, including a number of the leading DSPs. In the quarter we also announced a partnership with Salesforce.com to power its analytics cloud with our recognition capabilities, data assets and insights.

We are only in the early stages, but our goal is to power all of major marketing applications and enterprise software companies with our data. In summary I don’t think we are hitting on all cylinders in M&DS, but we understand the issues and are making necessary course corrections.

Above all, know that we are absolutely committed, committed to both strengthen and grow our core Marketing and Data Services businesses. Finally, before I turn the call over to Warren, I would like to discuss some recent organizational changes.

In January, we announced that Nada Stirratt our Chief Revenue Officer across Marketing and Data Services will be stepping down at the end of this fiscal year to pursue other opportunities.

Nada has been instrumental in leading Acxiom through a period of digital transformation, and we thank her for many contributions and wish her the best of luck in her future endeavors. We have already initiated a search for Nada’s successor.

Our priority is to be methodical and thoughtful in our search, looking for someone who has strong reputation for consultative selling, problem solving and enterprise marketing leadership. In the interim, I have stepped in to lead the global client sales and services team, which is something I find really energizing and fun.

I haven’t been pleased with our trend lines in recent months. So this gives me a chance to really dive in and make any required course correction. The good news, our clients want us to succeed and continue to give me great advice.

Additionally we have many strong leaders throughout the Acxiom sales and service organization, all of whom I will be counting on to exert even greater leadership and impact in the weeks ahead. To conclude, we feel really good about our progress with AOS and LiveRamp, and as we look ahead to next year we expect strong continued growth.

On the traditional Marketing and Data Services side of our business, it is still way too early to say we have turned a corner. That said, we are making positive and necessary changes and that work will continue until we have overcome our challenges. With that I will now turn the call over to Warren. .

Thanks Scott, and good afternoon everyone. In my portion of the call today, I'd like to first run through the quarter, then talk about cash flow and EBITDA performance and finally confirm our guidance for fiscal ’15. Now let me turn to our third quarter results. A few highlights, total revenue was down approximately 3% year-over-year.

Excluding the impact of lost ITO customers and our European restructuring, revenue was up roughly 4%. U.S. Marketing and Data Service revenue was up 5% compared to the same period, given the strength of AOS and LiveRamp. If you'd please turn to Chart 4, I would like to talk about AOS and LiveRamp for a moment.

In addition to the steps that Scott discussed, we have led out a few additional performance metrics to help you evaluate our progress. Specifically I would like to call out the following. Given both the LiveRamp acquisition and our integration progress, we now have close to 200 customers.

For FY ’15 we should generate approximately $60 million in revenue, which will be at the high-end of our guidance range of $50 million to $60 million. Q3 revenue for AOS and LiveRamp grew approximately 40% sequentially to $21 million. GMS was $73 million in the quarter, nearly a double sequentially and up more than 250% year-over-year.

Looking ahead, based on our staffs bookings and our transactional GMS rev share, we expect to exit fiscal '15 with a top-line run rate for AOS and LiveRamp in excess of $80 million. Again, included in revenue run rate is our recurring subscription revenue and high margin GMS rev share. Next turn to Page 5. Our offering is resonating with our customers.

While we won’t get into specific names, there are a few steps that speak to the quality of our offering. Our customers already include 22 Fortune 100 customers, three global advertising agencies, 17 major financial institutions, 11 media companies, 28 large retailers and 101 technology providers. We are obviously pleased.

I'm pleased with how our teams are integrating, but the best part; we are just getting started. Now I’ll discuss our quarterly results in more detail, starting with Slide 6, our summary financial results. Total revenue was $260 million, down 3% compared to the same period a year ago. Excluding items revenue was up 4%.

Marketing and Data Service revenue was up 1% for the quarter. IT infrastructure management revenue was down as expected approximately 16%. OpEx for the quarter was $255 million, compared to $249 million in the prior period.

Excluding unusual items of approximately $25 million, OpEx was down 2% year-over-year, primarily due to savings associated with our cost reduction programs, offset by the addition of LiveRamp. We ended the quarter with total headcount of approximately 4,600, down over 500 from a year ago.

Unusual items in the quarter included, stock-based compensation of $9 million, restructuring charges of $4 million split between U.S. and Europe, intangible asset amortization of $4 million. And lastly we incurred $8 million in transformation related third-party expenses.

These expenses were associated with our work day implementation and M&DS next generation IT and delivery initiatives. As we have mentioned in the past these projects are all focused on efficiency, scalability and long-term margin improvement. We have included a project summary in the appendix to our Slide.

Please note the business separation and transformation costs are included in SG&A. Excluding unusual items SG&A was down approximately 3%. GAAP diluted earnings per share were $0.06 in the quarter. Excluding unusual items, diluted earnings per share were $0.23, compared to $0.27.

As a reminder, last year we recorded a one-time tax benefit that improved EPS by $0.04. Slide 7 highlights our results as recorded. Now Slide 8. U.S. Marketing and Data Services revenue increased $9 million or 5% in the quarter. Excluding the impact of AOS and LiveRamp revenue was down 4% year-over-year.

International Marketing and Data Service revenue was down 22%, as a result of our exiting the paper survey business and to a lesser extent FX. Excluding these items, revenue was roughly flat year-over-year. Slide 9, for the quarter our operating margin excluding unusual items was 11.5%, down slightly compared to last year. U.S.

Marketing and Data Services margin was however up 80 basis points year-over-year. International operating income declined approximately $2 million to breakeven mostly due to decline in Australia and Brazil. ITO margins decreased from 11.4% to 8.4% driven by lost revenue from terminated contract. Now on to Slide 10.

For the quarter, operating cash flow was $43 million, compared to $64 million for the prior period. The decrease was largely due to working capital changes. In the prior period, working capital was a significant source of cash. In this period it was not. DSOs were essentially flat year-over-year.

Free cash flow to equity declined in the quarter for the same reason and to a lesser extent higher CapEx and increased debt repayment. CapEx was $18 million, or $1 million higher than year ago. We capitalized roughly $4 million of internally developed software in the quarter. If you would now turn to Page 11.

Given the significant decline in free cash flow to equity for the quarter and trailing 12 months, we wanted to spend a few minutes and walk you through the changes. In this analysis we have tried to highlight the major year-over-year changes that impacted free cash flow to equity.

For the quarter, before unusual items and working capital changes cash flow from operations increased $10 million year-over-year. Next as compared to year ago, working capital was a significant use of cash, whereas last year it was a significant source. The $29 million swing in working capital was the most significant driver of the quarterly decline.

On a trailing 12-month basis, the same holds true. Before unusual items and working capital changes, cash flow from operations was down slightly, despite heavy spending on AOS, particularly in early FY15. Next as compared to a year ago, again working capital was a significant use of cash, whereas last year it was a source.

The $59 million swing in working capital was the most significant driver of the decline. Business transformation expense and to a lesser extent, higher CapEx also negatively impacted this comparison. To further make this point turn to Page 12. We have added an analysis that looks at adjusted EBITDA for our segments over the past two years.

A few observations. Adjusted EBITDA for the M&DS segment is up year-over-year in five of the last eight quarters and 14% on a trailing 12 month basis. For ITO, the declines are as a result of lost contracts. Please remember that losses associated with AOS and LiveRamp are included in the M&DS segment.

In addition corporate overhead has been allocated to both ITO and M&DS, consistent with our historical financial. In summary, while there was a material decline in free cash flow to equity in both the quarter and on a trailing 12 month, we feel that our underlying ability to generate cash has not changed. Now on the guidance.

Our guidance excludes items including one-time separation and transformation expenses, acquisition related charges, restructuring and severance costs, acquired intangible asset amortization and stock based compensation. Please turn to Pages 13 and 14. These charts are the same we used last quarter, and provided base line for our adjusted growth rate.

CapEx, we are reducing our CapEx guidance for the year to $95 million. LiveRamp and tangible asset amortization, we expect $3.7 million in amortization per quarter on a go forward basis. While you will hear in a moment that our FY15 guidance remains unchanged, there are a few things you should note relative to Q4.

First, one-time expenditures and restructuring. In the fourth quarter we expect one-time expenditures and restructuring charges to be approximately 18 million, of which $9 million relates to expected restructuring. At year-end we expect to complete our ERP implementation and go live with a new reporting model and financial planning system.

These estimates are consistent with our previous guidance. Next, while we are obviously pleased with our AOS and LiveRamp momentum, our core M&DS business remains pressured and our Q4 year-over-year comps will be down significantly. In Q4 of FY14 we had a large client implementation and a large data sale, both of which will not be repeated.

In other words, when you look at this comp, we don't believe it will be indicative of our growth rate heading into FY16. Finally you should expect a decline in operating margin for both M&DS and ITO. With that, for fiscal '15.

We continue to expect revenue growth of between 3.5% and 4.5% as compared to our adjusted revenue base of $981 million, and on the bottom line we continue to expect EPS to be in the range of $0.73 to $0.78. To conclude, on behalf of all my colleagues we thank you for joining us today.

We look forward to updating you on our continued progress on our year-end call. Operator, we will now open the call to questions..

Thank you sir. (Operator Instructions). Our first question comes from Dan Salmon of BMO Capital Markets. Your line is now opened..

Scott you mentioned -- you highlighted the Salesforce partnership in your prepared remarks. And when I saw that news release, it looks like it's more largely a data partnership around their analytics cloud.

I was just curious if there is a possibility of extending your work with them to better incorporate AOS and some of the technology tools that you're developing. And then just a quick second one. You've had a lot of changes in the international business over the last year, and some reorganization work that continues to work through.

My question is if you look out six months, 12 months, 18 months, where do you see your international business as they -- based off the offering and are there certain regions that you're focused on, and basically where once all of this work is done, you expect that business to sit?.

So great questions. I'll start with the first, which is around the Salesforce partnership. And let me just step back and talk about our approach to partnerships overall. The value of AOS and LiveRamp is largely in the network of connections.

And with over 130 of those connections now enabled, a marketer can do almost anything that they want to do online, whether it's site personalization, or power their call center, or do interesting things with search or connecting with data and analytics cloud providers.

So the way we approach these things with any of these partners, first it's about let's get a relationship going, and from that base we can hopefully expand into even more interesting things. With this Salesforce partnership I think we're scratching the surface.

I'd love to see it expand into something far larger and far broader, but that’s going to depend on our ability to execute and drive great results for Salesforce. You know, for all of our partners we need to catalyze their success.

On the international front, boy I am thrilled that you are even asking the question, because it gives us a chance to pause and say wow, what a difference a couple of years makes. If you think back to where we were internationally several years ago, we were bleeding money.

And we talked about first, we wanted to get those on a path to breakeven, and we've made strides to do that. We have increasingly taken steps to standardize our offering worldwide and shutdown unprofitable businesses worldwide like we did with the paper survey business in Europe. So we made some hard decisions.

Going forward, it's largely around how do we go from breakeven to in a few years' time a place where International starts to be a real positive for us. That won’t happen overnight. Our major focus in Europe for the coming year is to start to expand our connectivity business, LiveRamp and AOS to Europe and then also to China and APAC.

So you'll see some investment in there next year, but hopefully you will see the same kind of growth that follows that. And we feel that International is going to be important for us. Our clients want us to be there and we think that it’s an area of future growth for us as well. .

So Scott, you mentioned Europe and China, APAC as areas for focus for AOS and LiveRamp next year. Warren mentioned in his comments some weakness in your businesses in Australia and Brazil.

Do you see those as essential places where Acxiom needs to be still?.

We're happy with the offices that we're in. I will tell you Brazil has been frustrating at times for us. We're are not where we'd like to be there. In Australia we just brought on a new country manager, someone that I used to work with years ago at Microsoft. Got to know him then but it will be great to work side-by-side with him.

We think he will inject some much needed leadership for us in the Australian market, but in both we have work to do. .

Thank you. Our next question comes from Todd Van Fleet from First Analysis. Your line is now open. .

Just some specific questions here I guess, maybe we do a little rapid fire.

Just the 25 clients that you'd signed in the quarter, can you tell us how many, if any were recognizing your recognizing revenue in the quarter?.

For the 25 new customers I don’t have the exact stat in front of me, but we're no more than typically Todd, 30 days away from recognizing revenue. When we looked at our ARR, they sit on billings, not on bookings. So in the run rate numbers we've given you that’s all based on revenue where we have already starting billing..

Right, that makes sense. So maybe another question along those lines then.

And so, of the 195 or so Connectivity customers, and I guess I'll use Connectivity to mean the combination of AOS and LiveRamp at this point, if that’s fair? How many of those 195 are paying you more on a SaaS basis, or kind of a recurring basis as opposed to just kind of a media -- based on the media spend, if you have an idea of that..

The way we're approaching our customers and virtually everyone that is involved in onboarding is paying on a SaaS basis.

And some of the early on AOS customers -- as you can expect when you go into the negotiation, they'll want to be on variable and the way we approached those customers was to say, okay you know what, we want a minimum commitment for GMS to go to the platform and then we're going to convert you to SaaS plus the GMS.

So for example we had three of our launch customers this past quarter that all converted from contingent to pay. So for the vast -- virtually all of our LiveRamp customers, they are all on a SaaS basis. For AOS there maybe some lingering clients that are still paying on a guaranteed GMS basis but we're working to convert them SaaS plus GMS..

Okay.

So Warren, maybe I don’t know 12 months from now, I guess in theory every Connectivity customer would be paying on a SaaS basis in some way?.

And you can never say never to an exception here and there as we rollout, but by and large that will be true..

Let me ask two more quick ones. Then I'll jump off. So there was $6 million sequential increase in Connectivity revenue from the prior -- a sequential increase in Connectivity revenue, yet we saw a doubling of the media spend. So I'm trying to get a feel for why that dynamic might exist.

So last quarter I guess we -- I think you had said it of the ’15 about half was AOS and half was LiveRamp, and within that AOS revenue there would have been some SaaS rev. Maybe correct me if I'm wrong, maybe some but the majority it would have been media spend.

So I'm just kind of thinking out loud here, if we saw a $6 million sequential increase in revenue, but we saw a doubling of the media spend and then maybe in theory last quarter half of the ’15 was media spend, shouldn’t we have seen maybe a little bit better performance sequentially from revenue, just given the way the media performed in the quarter?.

By our way of thinking, we were very pleased with our increase in ARR and I think one of the things, as you go through the math you may not immediately be picking up is how much revenue you actually recognize in a quarter.

So for example if you have a yearlong contract that converts obviously into ARR, but you only have one-month of revenue, you might have media spend, you might have less subscription revenue particularly in a quarter where you do have a sequential jump in -- a sequential jump in media.

But I can flat out tell you, given the new contracts that have signed what we now have in terms of bookings where we hadn’t yet started billing and how that translates to an $80 million run rate at year-end, even using a trailing 12 month media spend, there is zero disappointment here in our increase in bookings during the quarter..

And just on -- on maybe last one then on that $80 million Scott and Warren, if I guess if you want to comment as well. So as I think about the 80 million exiting the year -- great performance as you mentioned.

As we think about the next 12 months or the fiscal 2016, you haven’t given guidance, but just kind of subjectively and given the tailwind that you see for the business and so forth and the rate at which you bring on new clients, maybe if you could answer just this question.

So you would be disappointed if that 80 million couldn’t grow better than X percent next year.

What would that X percent be in your view?.

Warren, I'll let you take that. Because that feels like a guidance question..

Yes, we’re going to hold off on guidance on this call Todd, but I think we are obviously communicating that we’re pleased with several things relative to the acquisition of LiveRamp and our integration.

And I'd say one, we’re pleased with the integration, although we’re a little bit behind on the cost side, still think we have some opportunity in both Q4 and heading into next year. We’re very pleased overall with what I'm going to call our leverage and margin improvement.

As we have looked over the course of the year, our results on a bottom-line basis just continue to get better. We are pleased with how our customers are accepting this offering and hopefully we’ll see as we move into FY16 how we can advance and really I'd use FY16 as a year to begin globalization.

So overall very pleased, but no guidance for FY16 on this call..

Thank you. Our next question comes from Brett Huff of Stephens. Your line is now open..

Two questions from. One, I need to dig in a little bit on the legacy MDS. And Warren and Scott, you both mentioned sort of proactively that not pleased, and it sounds like 4Q gets better. So -- or it gets worse before it gets better. And then Scott, I think you said that the bookings were not as good this quarter as they were last quarter.

Can you just give us some more color there? I understand you guys are making some of the hard choices and Scott, you've taken the reins of the sales force, seem to focus a bit on that. But by my math it was down 8.7% ex the AOS, LiveRamp stuff year-over-year.

What’s -- can you just give us some more comfort? Did that get back to stable?.

Yes, let me start. It's taken as longer than I would have expected here and that’s been disappointed. That’s prompted some additional course corrections and I’ll talk about those in a second. We should probably compare notes on the math. Just to kind of walk you through what happened in the quarter, we show U.S.

MD&S down roughly 4%, excluding LiveRamp and AOS. We lost some contracts, not clients, but just work that went away. Call that $8 million out of the top-line. Some volume, declines people doing typically less direct mail or less data models caused another $5 million of top-line leakage.

And then to offset that we generated about $6 million of new business. So net down $7 million. In terms of the major things that we’re doing to turn it around, let me just give you a little bit more color. First off industry expertise. If you look at the last few years, there are just major sectors in the U.S.

economy that have grown rapidly where Acxiom quite frankly hasn’t participated. We haven’t gotten our fair share. Think about government or healthcare but there are many.

Likewise there are probably opportunities within sectors where we have a strong position where we left money on the table by not better identifying up sell opportunities, and to me that's a matter of leading our clients, being the experts in their industry and solving their problems. And I feel like we've strayed from that.

And our clients have told us that, our own team has told us that. They have really pushed to go re-embrace an industry expertise model. The second thing is on specialized sales. Over the last year you've heard me talk a lot about our trials with sales specialization. We did it on the heels of our AOS launch, with great success.

You can see how the Connectivity business has grown. We intentionally ring fenced LiveRamp when it came in as well to protect that specialization. Likewise more recently we've experimented with data specialization, where products require a high degree of specific product expertise.

By having some dedicated people on those we believe we will uncover more opportunities. And then finally, I think quite frankly we've left money on the table with new channels. Let's take for example our data business, which has not grown but by companies in the space, one of them was recently acquired, that have shown strong growth.

But what are they doing differently than us? And in part it is due to the fact that our data sales are largely driven through our marketing database clients. And that is terrific but we may be losing out on other opportunities, the agencies, publishers, resellers and the like that have grown explosively with their use of data.

And so I think somewhere in the call today you heard me talk about embedding our data within almost 20 DSPs now. We think that will enable us to do some things differently and grow out of this problem. But again it's taken us longer than I would have expected. I think we're doing the right things but we have not yet turned the corner..

And then Warren for you, the tax rate was pretty funky based on what it was versus our model. Can you call out anything there? Did you guys expect that originally in your guidance? I think it was a negative tax rate.

Just kind of go through that to give us sense about, just trying to figure out whether you actually met or missed pro forma EPS expectations vis-à-vis the tax rate..

The way we look at it, and I'll start on the non-GAAP number because that's the easiest to reconcile to our guidance range is our tax rate was a point better than a year ago. So we were at 33% versus 34%. And that was principally driven Brett by the reinstatement of the R&D credit which we had both in this year and last year.

And there's always going to be a little bit of movement. That was the primary driver of having an overall lower tax rate. And for your modeling purposes, we would expect the year rate to be roughly 36%, even though our go forward rate we would still peg at 38% 39%..

Thank you. Our next question comes from Bill Warmington of Wells Fargo. Your line is now opened..

I was hoping you could give a little additional color on the surge in the gross media spend and what was driving that, just to better understand that?.

I think above all Bill, if you think about what happened last quarter, it was calendar Q4. And it was also an election season. So those two seasonal factors certainly contributed to the surge. And then also our ability to win and grow share with existing clients as well.

One of the things that I found most pleasing about the quarter is that if you look at our average spend, no matter how you cut it, clients increased their share of wallet with us, which suggests that they're experiencing success deploying targeted data in their campaigns. And so that was certainly a good thing for us as well..

Bill, the only thing that I would add to that, which is just in terms of expectation is, we do expect a decline in Q1 -- calendar Q1, or our Q4 sequentially, just given the strength in holiday period how it is always strong. So we just ask you to be conservative as you think about that going into our fourth quarter of calendar Q1..

A sequential decline but I would assume still strong year-over-year?.

Strong year-on-year growth, off a very small base..

And then I did want to ask about the ITO business and see the improving characteristics if you adjust for the client loss.

Just wanted to ask if you feel you've turned a corner on that business and what we should think of there for the next couple of quarters?.

How I would think about that is we're pretty much now at base level. So if you were thinking about a run rate going forward, unpeg that. On a quarterly basis that's give-or-take $50 million. So it's a little bit of higher. We had little higher -- the net revenue in the quarter but that’s probably the right number to be thinking about going forward.

So we're really almost through the client loss. So for us from here, we run a very healthy business, take great care of our customers and work to rebuild our margin. .

Got it. And then on the M&DS business, you had mentioned that you don’t feel like you've completely turned the corner yet.

I wanted to ask when you thought we would start to see a pickup again in pipeline and bookings as leading indicators for that? Do you think it’s a couple of quarters out?.

Well, on some of those measures we actually have seen some improvement. So I believe year-over-year our pipeline is up. Our bookings last quarter was behind. I called it okay, but it was okay relative to a historic high the quarter before. So those measures have trended in a good way. What I said last quarter continues to be true.

Those are very forward measures and we need several consistent quarters of high performance there to get us back to a level that I'm comfortable with. And so we have taken steps. We got to take more. .

Thank you. Our next question comes from Todd Van Fleet of First Analysis..

Just wanted to ask how active the M&A pipeline is? Is it active, passive, very active? How would you describe it at this point?.

Are you talking about from the industry or from our perspective?.

From your perspective..

Yes. We're really comfortable with the assets that we have. We obviously a year-ago made a bold move when we acquired LiveRamp. We thought that was a unique set of circumstances. It was predicated on our early launch success with AOS and what we envision to be an even stronger product in combination through the acquisition of LiveRamp.

Our focus is on running our existing assets more effectively and continuing to scale our connectivity business as opposed to making some -- any kind of acquisition. I'd never-say-never but -- we look at a lot of things but we rarely if ever do anything more than [indiscernible]..

But I think you mentioned that there were -- in your prepared remarks that there were a couple of situations where you guys decided to deemphasize the AOS applications, where if memory serves, where the applications for your partners could provide some sort of other solution and maybe the client was taking advantage of.

Could you just elaborate on that a little bit? I'm just trying to think about the situation that would exist..

Talk about bad mistakes on my part, Todd. When I look back over the last few years, this is the one I really regret.

If you recall, when we launched AOS, we stood on stage and I at the time used the metaphor of you can’t tell people that you've invented electricity because no one a couple of hundred years ago understood what electricity was unless, you also invent a light bulb, right? And so when we started talking about Connectivity, people gave us blank looks.

We felt we had to develop some initial applications to demonstrate the power of what we built. And so if you recall, when we launched we had seven or eight what we call freebie applications that were included with the subscription price. And everybody in the space could look at those applications and see something that they didn’t like.

So we had a segment builder that any D&P would say, they are a full scale D&P, they are competing with me. We had things that DSPs could say, it looks like our business. We had things that site personalization companies, algorithmic logic that they found threatening.

And instead of empowering partners, and instead of -- what I should have done is stood up on stage with eight partners and said they have built stuff to run off our Connectivity.

And so a whole bunch of people that we wanted as partners upon launch viewed us as a little bit of a threat, and over the last six months I think we have completely extinguished those fears or largely extinguished those fears, in part because our actions matched our words.

As we enabled more and more of these partners, we retired our own application suite. And so now some of those partners tend to be really good referral sources for us and we’re growing our Connectivity and depth of relationship with many of those partners. So, great companies. They're going to make mistakes. It's how you respond to the mistakes.

This is one where we made a mistake and I believe we have successfully course corrected it..

Well then let me ask Scott, because you guys can accomplish a lot it seems with the -- with information and the analytical tools, and now the Connectivity ability that you have, it seems like you guys are in a good position to accomplish actually quite a bit and so I can understand how those conflicts would have arisen with your prospective partners.

But I'm -- maybe I should just ask what do you view as kind of the core capability for the Connectivity offering that is the combined AOS and LiveRamp offering now? What is that core capability going to look like, and such that it is inoffensive to the DMPs and the DSPs and the others in the ecosystem? Because I would think that, at its core, a lot of it is audience segmenting; how to reach certain types of audiences? Where to reach them? And so, I'm just trying to understand how you view the core capability that is Connectivity, such that you won't be offensive to other players that are in existence..

Yes. Let me throw out probably four or five terms that we talk about a lot. So number one is recognition, the ability to ingest data from multiple sources and resolve it to a person or household. Number two is the ability to create a match network i.e.

marry together structured and unstructured data, online and offline such that our partners can communicate with channel -- with customers across all channels. Number three is what I would call data governance, i.e. security and privacy and permissions management at scale.

Those things are hugely important and they are important in a world where there are a thousand different data suppliers and a thousand different connection partners.

They become even more important to manage centrally in a world where there a 100,000 data suppliers, the Internet of Things world, or tens of thousands of different potential application partners.

And then finally Connectivity, the ability to do the integrations and bring that network in a turnkey way at scale to any partner, because ultimately this acts, much as the telephone grid or the railroad system, the value that you get from participating, the value you get from owning a telephone is your ability to connect with anybody else who also owns a telephone.

Likewise the benefit from using Acxiom for connectivity is the ability to connect with any partner for any used case, because we’ve already done the integration. No single client wants to do a hundred or a thousand integrations on their own..

Okay. One more financial related then. Working capital, you talked a little bit about that.

Does the working capital use the incremental use related to media spend it all?.

No, not at all. And fundamentally we just had -- it's one of those quarters or trailing 12 month periods where everything just went the other way. So none of it has to do with media..

Thank you. At this time I'm not showing any further questions. I’d like to turn the call back to Mr. Warren Jenson for any closing comments..

Great. Thank you, operator and thanks to all of you for joining us today. We look forward to chatting and reporting in the quarter ahead. Thank you..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a wonderful day..