Description

Summary:

Acxiom Corp (NASDAQ: ACXM) is a company in transition, both from a fundamentals and a shareholder perspective.  It is in the later stages of a transition to a new management team, led by CEO Scott Howe, who has outlined a strategy to make Acxiom a central player in the data management space over the next decade.

Based on the actions of Howe and his new team over the past year, it is becoming clear that what will emerge over the next 12-24 months will be a predictable, cash flow generative business with sound economics, attractive risk/reward dynamics, and the added comfort of a high-caliber management team with the background necessary to lead the company in a new direction and with a proven commitment to increasing shareholder value.  At just over 6x FY2014 (ending March 2014) unlevered free cash flow and with very little debt, ACXM is a compelling investment, which will become obvious to the investment community over the next 6 to 12 months.

Business Description:

Originally founded in 1969, Acxiom is a global marketing and technology services firm whose primary line of business revolves around helping its clients make sense of customer information.  Marketers at Fortune 500 companies turn to Acxiom to manage customer data, provide consumer insights based on Acxiom’s enormous database and robust analytics products, and integrate that information into marketing systems/campaigns.  Acxiom’s products and services help clients manage their audiences more effectively, personalize consumer experiences, and optimize CRM efforts.  Acxiom’s secondary business segments provide clients with IT outsourcing solutions and e-mail fulfillment.

Business / Industry Dynamics:

A barely breathing direct mail marketing model and the rapid shift of marketing dollars to an ever-evolving digital ecosystem have forced traditional data brokers to innovate or die.  Media consumption is becoming more fragmented, taking place in a broader array of channels and on an increasing number of devices, making effective marketing a more complicated exercise.  While online advertising continues to occupy a larger portion of marketers’ budgets, different channels demand different strategies (what appeals to desktop users doesn’t necessarily appeal to mobile users, etc.).

The company with the broadest and deepest stockpile of consumer data and with the best tools to analyze these data will be of enormous value to marketers as we move deeper into the digital age, where marketing decisions will become more and more data-driven every year.

Acxiom has the stockpile of data…the question is whether it can develop new tools that enable it to connect its database to the digital ecosystem in a user friendly way that enables marketers to target their audiences more effectively.

Acxiom is at an inflection point in its evolution as a company, and Howe recognizes the need to secure Acxiom’s future by investing in R&D and creating new, innovative products.  The relevance and applicability of the new products Acxiom will roll out over the next two years will largely determine its fate.

Why is Acxiom mispriced?

What the Market Sees: Negative Optics Causing Depressed Investor Sentiment

1. High executive turnover – Over the past 5 years, Acxiom has been through 4 CEOs, 2 CFOs, and a transaction to take the company private that fell apart at the last minute.  During Mar/Apr 2011, both the former CEO and CFO both resigned and several law firms announced a class action suit against Acxiom for misleading investors about poor results.  The stock lost over 30% of its value during this time.
2. Poor capital allocators – Investors can point to a long list of recent, unsuccessful acquisitions that were either disposed of within 18 months or that required significant goodwill impairment charges.  In the past 5 years, Acxiom has completed 6 acquisitions.  In every case, a majority of the purchase price paid for each company was allocated to goodwill/intangibles.  This is a company with a history of buying bad businesses AND overpaying for them.
3. Lousy international business on the heels of wasteful acquisitions – The growth of Acxiom’s international business is largely a result of recent acquisitions, which have proved unwise.
4. Regulatory risk – There is currently no comprehensive federal regulation for data brokers, but last March the FTC recommended that Congress consider legislation that oversees data brokers.  In December, the FTC announced it was seeking information from several industry players to learn about industry practices.
5. Secular headwinds in Acxiom’s traditional marketing channels – The secular decline of direct mail, radio, magazine and newspaper advertising threatens to render Acxiom’s products obsolete to the extent that Acxiom doesn’t release new products that are of use to online marketers.
6. No dividend – Acxiom is the only one of its close publicly traded comps (Equifax, Experian, Fair Isaac) that does not pay a dividend.

What the Market is Missing: Key Points / Mitigants

1. High executive turnover – Acxiom now has in place a committed team of seasoned executives with years of experience operating in the digital landscape.  The majority of management’s compensation is in the form of unvested stock options.
2. Poor capital allocators – That was the old team, whose actions clearly destroyed shareholder value.  Contrast their actions with those of the Howe era, which in its 18 month history has made exactly zero acquisitions, divested a non-core business segment, and spent $115m repurchasing shares, reducing the amount of outstanding shares by over 11%.
3. Lousy international business on the heels of wasteful acquisitions – Howe’s team has taken action to ensure Acxiom’s international business would become profitable by reducing headcount and doing some other restructuring.  Acxiom operates in 8 of the 9 largest global markets.  These markets will drive a significant part of market growth in the next decade so they are too big to ignore, but Acxiom is doing what’s necessary to expand margins here.
4. Regulatory risk – Acxiom was the first data broker to employ a “Chief Privacy Officer,” and has a good reputation among its customers.  The stock did not move much on the news of the FTC’s request for information, which suggests the market is not concerned about it.
5. Secular headwinds in Acxiom’s traditional marketing channels – Acxiom is now led by a new management team that is committed to investing in new product development, and it has the talent to do it.  Since joining Acxiom in August 2011, Howe has consistently articulated his plan to shift Acxiom to an asset light, high growth, high margin DaaS business over the next two years.
6. No dividend – The new management team’s decision to continually expand the company’s share repurchasing program over the past year has proven that Acxiom is now led by a team that prefers to return capital to shareholders rather than engage in empire building via fruitless acquisitions.  Management’s concern for shareholders becomes even more evident when one considers that bonuses are determined not by EPS growth, but rather by revenue and EBIT growth.  Were bonuses determined by EPS growth, one could view the decision to continue repurchasing shares cynically, as it would artificially increase EPS.  Management has no incentive to play such games here.  Howe’s team spent over $15mm repurchasing shares last quarter at an average price of $18.39/share.  At the current price, management clearly believes the stock is undervalued.

Developing Corporate Events:

A number of things have taken place over the past 18 months that indicate that Acxiom could undergo an event that could unlock value or cause the stock to re-rate in the near term: 

Transition to entirely new management team – Acxiom now has a new CEO, CFO, CRO, and CP&EO.  All executives have deep backgrounds in the digital / online space.

New financial reporting policies – Howe and his new CFO, Warren Jenson, have realigned the company’s business segments in FY 2012 and Acxiom has begun reporting segment results separately.  Management has said it intends to take a “portfolio approach” and to “shine a spotlight” on the operating characteristics of each segment to make more effective improvements, but this move could also be an attempt to prepare one of the segments for a sale/spin.  Indeed, this move is what led to Howe’s decision to sell Acxiom’s background screening business in Q3 2012.  Other recent actions that suggest an event might on the horizon:

1)      The implementation of intercompany agreements in order to run each segment independently.

2)      The separation of corporate IT applications out of Acxiom’s IT infrastructure organization.

Changes to the number of board members – Acxiom increased the number of board members from 9 to 10 in August 2012 to include Richard Fox as the board’s Audit/Finance Committee chair.  Richard Fox has a background in finance/accounting in digital marketing firms, and would add value in any discussion about how best to monetize Acxiom’s assets.

Acxiom’s IT business is “for sale” – When asked about strategic options for the IT segment on Q3 2012’s earnings call, Howe responded: “I understand what your real question is, given our recent divestiture of our background business.  You’re really asking if it’s for sale.  And so I’ll tell you that the short answer is yes.”

Other Services segment – On the same call, Howe was asked to describe the “other services” segment.  After discussing the segment’s e-mail fulfillment, risk management business, and call center operations, Howe hastened to add that it is “difficult to compete in many different businesses effectively,” and that he wants to “focus on the core of managing complex databases.”  He indicated they will “continue to offer fulfillment, but won’t foist it on clients.”  In short, another divestiture sounds likely in the near term.

Competition – Is There a Moat?

Rapid changes in how individuals consume media have led to a complex competitive landscape that is no longer limited to the traditional data brokers (Epsilon, Intelius, Peekyou, Rapleaf, etc.).  CRM agencies, analytics consultants, and in-house IT departments are all competing in this area, as well.

Barriers to Entry –

Acxiom has been amassing information on consumers for 40 years.  The ability to leverage this storehouse of data in the digital ecosystem leaves Acxiom better positioned to draw more meaningful conclusions about a client’s target audience.  Acxiom’s database cannot be replicated by a new entrant and effectively acts as a barrier to entry.

Network Effects / Economies of Scale –

As Acxiom continues to collect more data, its data becomes more valuable.  As Acxiom’s customer base grows, its insights become more valuable to potential new customers.  In this regard, Acxiom enjoys demand-side economies of scale as it scales its business.

Management / Insiders:

A closer look at Acxiom’s new management team inspires real confidence about the company’s future.  All team members have firmly planted roots in the digital marketing space and understand where this business is going.  CEO Scott Howe has put together a dream team.

Scott Howe – Chief Executive Officer:

- Former MSFT executive with an extensive digital marketing background.

- Shareholder friendly – started repurchasing shares and divesting non-core businesses in his first 3 months.

- This is his first role as CEO of a public company, but he strikes me as a capable manager and his actions thus far show he is serious about creating shareholder value.

Warren Jenson – Chief Financial Officer:

- Seasoned CFO (former CFO at Amazon, NBC, Electronic Arts).

- Significant M&A experience.

- Howe has commented on Jenson’s ability to “transform companies at important inflection points in their evolution.”

- It is unusual for such a seasoned executive to agree to join a company with such a small market cap.  Jenson must really believe in Acxiom’s potential.

Nada Stirratt – Chief Revenue Officer:

- Former MySpace CRO and president of digital advertising at MTV Networks.

- Deep rolodex of digital marketers.

- Based in NYC, which puts her closer to more potential customers.

Phil Mui – Chief Product & Engineering Officer:

- Former product manager of Google Analytics

A Note on Phil Mui –

Impressive Credentials –

He could not have been groomed for this job at a better place.  Phil spent the past 6.5 years building Google Analytics (capturing over 80% of the analytics market), which proves he is capable of building a technically sophisticated analytics tool that can be used by a non-technical audience (marketers, not webmasters).

Why did he leave Google?

At Acxiom, he has access to the 1^st-party data of Acxiom’s clients, which will enable him to help clients be more efficient in the digital world than they could be using Google Analytics.  I find his explanation believable.  He gives a bit more color in an interview here: http://www.adexchanger.com/data-exchanges/acxiom-phil-mui/.  He comes off as sincerely excited about Howe’s vision for what Acxiom can become over the next decade.

Respected among peers –

A quick glance through Phil’s Twitter feed (https://twitter.com/philmui) reveals two things:

1)      He is clearly passionate about what he does

2)      He is well-respected by his colleagues (lots of well-wishing after his announced departure from Google – see: http://www.cardinalpath.com/wishing-phil-mui-a-fond-farewell/)

That the stock did not react to this hiring announcement back in April suggests the market does not fully understand the significance of the role Phil will play going forward.  I believe one of Howe’s most important moves since taking over has been to poach Phil Mui from Google.

Valuation:

I attribute most of the risk in this thesis to the uncertainty surrounding the reception of Acxiom’s new products over the next 18 months.

Assume a pessimistic scenario in which:

1)      Phil Mui’s new products fail to impress Acxiom’s customers or attract new ones.

2)      Sales decline by 15% in FY 2014 to $1.04bn.

3)      Acxiom achieves a paltry 8% EBIT margin.

Catalyst

- Improved operating performance / expanding margins

- Continued share repurchase program