Acxiom: A Renewed Focus And Share Buybacks Will Drive Shares Higher

Shares of Acxiom (ACXM) have been on steady move higher all year. Shares are up about 95% since the beginning of the year and they look set to continue on this path thanks to buybacks and the potential sale of its IT infrastructure operations. This will allow the company to focus on its SaaS business, which is its largest operating segment.

Analyzing data is what Acxiom does

Acxiom operates in three segments - marketing and data services, IT infrastructure management and provides other services to its clients. Marketing and data services is the largest segment. Every week, Acxiom processes more than a trillion transactions for its more than 7,000 global customers.

All in all, the company helps its clients connect and analyze online, offline, customer and partner data to help organizations better know their customers. The company's capabilities include data sourcing, data activation, and the building and managing of customer marketing databases.

The other services segment includes email fulfillment, which executes email campaigns; the risk business, which helps clients predict and manage their risk assessments; and the company's outsourced call center operations in the U.K.

Latest quarter was relatively positive

The IT infrastructure segment was a drag on results for 2Q. Revenue for the segment decreased 5% to $67 million, compared to $70 million in the prior year. The company expects full-year revenues to be flat due to weak sales in the IT infrastructure segment. That's why it's getting rid of it.

Overall, revenue came in at $276 million, down $1 million from the prior year's quarter. EPS of 20 cents was in-line with expectations. During 2Q, Acxiom also completed a $600 million refinancing. We see this as a great move as the company was able to refinance at a better rate and pay down its $215 million term loan. $300 million is in the form of an undrawn revolving credit facility. The company can tap this revolver for acquisitions, which we see as a definite possibility.

Potential sale of its datacenter business

According to sources, Acxiom is looking to sell its datacenter business. Acxiom's IT infrastructure services business accounts for about 25% of total revenues. This business includes mainframe, server hosting and cloud infrastructure services. This segment generated $271 million TTM. Revenues have been falling as the company has faced more competition in this segment. In FY12, revenues in this segment were $292 million. We see selling this division as a great move for the company as this segment is to blame for the lack of top-line growth we're seeing in the company's results.

The good news, and why we see the company not having any trouble finding a buyer, is that margins have been improving and the segment boasts strong cash flows. In the most recent quarter, operating profit came in at $12 million versus $9 million in the prior year. Operating margins also increased from 12% to 18%. Last year, EBITDA for the segment was $89 million.

We see this segment fetching anywhere from 6.8x EBITDA to 9.4x. The reason for this disparity is that if telecom companies are in the market, they have historically paid near the high-end of this range. However, they may not want Acxiom's mainframe business. PE firms, on the other hand, will be interested and they have been paying on the low-end for similar businesses. This puts the sale price anywhere between $605 million and $836 million. Compare this to Acxiom's current market cap of $2.55 billion and this is a nice chunk of change.

A renewed focus...

The focus over the last few quarters for Acxiom has been in streamlining its business and operations. The sale of the datacenter business fits right into this strategy. The company can also use the cash from the sale for share buybacks, which it is already doing. Since August 2011, Acxiom has repurchased $179 million of its stock. The company just raised its current repurchase authorization by $50 million to $250 million.

...leads to greater growth opportunities

The demand for 'big data' services continues to increase. For Acxiom, we see the company benefiting from three major drivers. For one, businesses and customers require a company like Acxiom to manage all of this data. Second, while the U.S remains the largest market for 'big data' services, growth rates in international markets are higher than in the U.S. And third, 'big data' needs to be privacy compliant. All of which will drive sales for Acxiom.

A leg up on its competition

For Acxiom, the key is innovation to stay ahead of its competition. Its 'big data' business requires that the quality and usability of data be improved. That the data can be transformed into insights. And finally, that all of the data can be connected among all parties.

The strength in Acxiom's business lies in its relationships with its customers. Acxiom counts 47 of the Fortune 100 companies as customers. The company maintains approximately 15,000 databases for its more than 7,000 clients. Acxiom has built its business and level of trust through is 40 years in business. Acxiom was one of the first companies to create the position of Chief Privacy Officer in 1991. This position is geared towards ensuring that all systems are compliant in the protection of consumer data.

Other highlights of Axciom's 'big data' capabilities include:

1. Insight into approximately 700 million consumers worldwide.


2. Acxiom possesses nearly 3,000 propensities for nearly every U.S. consumer.


3. The company can reach nearly 1 billion addresses across a wide range of media and properties.


4. Manages over 2.5 billion customer relationships and maintains over 3.7 billion prospect records for its clients.


5. Every year, the company performs nearly 11 trillion consumer record updates.


6. The ability to perform due diligence on nearly all external sources of data, which includes data from hundreds of offline sources and thousands of websites per year.

Growth drivers in place

One of the most talked about things going for Acxiom is its Audience Operating System (AOS). This system allows advertisers and publishers to market with precision and scale across all channels and devices. CEO Scott Howe discussed this launch on the company's earnings call and the attention the system is receiving.

"On September 26, a Gartner issued a report entitled Acxiom's Audience Operating System Could Reinvent Data-driven Marketing. In addition, Forrester said, Acxiom, a leading marketing services provider, is investing in the technology and publisher partnerships necessary to stitch together a massive pool of targetable consumers across platforms. The launch was covered in over 30 news outlets, including the front page of the Financial Times."

The company has already launched 6 AOS applications and has 3 more about to be launched. Acxiom has more than 20 customers that are utilizing one or more aspects of AOS. AOS already has a $35 million backlog.

One segment where AOS is being utilized is television. The company has partnerships with DIRECTV, Comcast, Cablevision, Charter and Tivo. Acxioms' research and analytics ensure that channels can be purchased with both precision and scale by viewers.

What AOS does is it allows marketers to have a comprehensive view of their customers. This allows marketers to implement a cross-channel marketing campaign across all devices in an efficient manner. Furthermore, this is all done on an open system architecture. This allows marketing applications to be built on top of the AOS platform. This will allow companies like IBM, Salesforce, Oracle and Adobe to become partners of Acxiom, rather than competitors. Neither of these companies have a system like AOS and that's what makes Acxiom unique. CEO Scott Howe said on the earnings call.

"We pull all of this together in an intuitive user interface and most importantly, in a privacy-compliant manner. So why does this all matter to advertisers, publishers, agencies and developers? What is so game changing about AOS? For starters, it's never been done before. Many ad tech companies provide a specific component of the marketing stack but no company has brought this all together on a single platform to provide this singular view of the customer."

The other growth driver for Acxiom is its consumer-focused portal called AboutTheData.com. This gives consumers a peak into what data marketers have on them. It allows consumers to directly update their data interact directly with marketers. For Acxiom and its 'big data' business, we see this is a great move as it can refine and ensure that the information in its databases is correct and it bridges the gap between consumers and businesses.

A look at the numbers

In looking at Acxiom's numbers, there are several factors we like. Acxiom trades at 39x next year's earnings, 2.3x sales and 3.9x book. Its current EV/EBITDA multiple is 13x. If we compare this to another 'big data' company and a short of ours, MicroStrategy (MSTR), its shares trade at 51x next year's earnings, 2.4x sales and 4.9x book. Where Acxiom is really undervalued compared to MicroStrategy is in terms of EV/EBITDA. MicroStrategy has an EV/EBITDA multiple of 31. Acxiom's multiple is even better than another favorite of ours, Actuate (BIRT), which has an EV/EBITDA multiple of 18.

If we assume Acxiom should trade closer to the industry average EV/EBITDA multiple of 18x, and using $200 million 2013E EBITDA, fair value is somewhere around $50. That's nearly 40% upside.

Bottom line

While shares are up 95% this year. We see the potential sale of the IT infrastructure business as the catalyst to take shares higher. Proceeds north of $600 million can be used for share repurchases and also to make key acquisitions.

The 'big data' space is highly fragmented and Acxiom as a market leader could use its position as a consolidator. This along with its AOS platform and consumer portal AboutTheData.com could really transform Acxiom. These two initiatives and the sale of the IT infrastructure business has the potential to gas pedal earnings going forward and keep shares on their current up and to the right trajectory. All in all, we believe this drives Acxiom to over $50 in the interim.

Source: Acxiom: A Renewed Focus And Share Buybacks Will Drive Shares Higher

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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