Tracking and making effective use of consumer data can be the difference between a successful marketing campaign and one that falls flat. Aggregating and scaling such data, however, can be costly and time consuming and data providers must differentiate themselves in order to stay relevant. Unfortunately for this firm, profits are falling, competition is rising, and the stock’s valuation is priced for perfection. These issues land Acxiom (ACXM: $27/share) on November’s Most Dangerous Stocks list and in the Danger Zone this week.

ACXM’s Profits Headed In the Wrong Direction

Acxiom’s after-tax profit (NOPAT) has declined from $96 million in 2006 to $6 million in 2016, or -24% compounded annually, per Figure 1. The company’s NOPAT margin has fallen from 7% in 2006 to 2% TTM.

Figure 1: Acxiom’s Shrinking Profits

newconstructs_acxm_nopatdecline_2016-11-21

Sources: New Constructs, LLC and company filings

Profit is not the only fundamental measure in decline either. Acxiom’s return on invested capital (ROIC) has fallen from 7% in 2006 to a bottom-quintile 1% TTM. Across many key metrics, Acxiom’s business is showing significant signs of weakness.

Compensation Plan Misaligns Executive Interests

Acxiom’s executive compensation plan is heavily weighted towards long-term incentive pay (75% for CEO, 58% for other executives), with a smaller focus on annual cash bonuses. However, in each case, the metrics used to award bonuses and incentive pay do not align executive interests with those of shareholders.

Annual cash bonuses are paid out upon the achievement of two metrics, adjusted revenue and adjusted EPS, both non-GAAP metrics. While adjusted revenue removes the impact of acquisitions or divestitures, adjusted EPS removes stock based compensation expense and restructuring and impairment charges, among others.

Long-term incentive pay is awarded through stock options, restricted stock units, and performance stock units. Stock options and RSU’s are awarded based on a competitive market analysis while the PSU’s are awarded for achieving three year adjusted EPS growth, a non-GAAP metric.

In both forms of compensation, executives are incentivized by non-GAAP metrics that do little to create shareholder value and the adjustments in each allow significant leeway in meeting target goals. We would much

rather see executive compensation tied to ROIC, as there is a clear correlation between ROIC and shareholder value. In its current state, ACXM’s executive compensation plan has done little to create shareholder value, as its economic earnings, the true cash flows of the business, have declined from -$44 million in 2006 to -$85 million TTM.

Non-GAAP Metrics Mask Economic Reality

Discretion over the calculation of non-GAAP metrics not only makes them non-comparable across the market, but unreliable measures of the economics of a business. See the dangers of non-GAAP metrics for more details on how companies can abuse non-GAAP. Acxiom’s use of non-GAAP EPS, non-GAAP operating income, and adjusted EBITDA distorts the economic reality of the business and gives investors an overly optimistic view of the firm. Below are some of the expenses ACXM removes to calculate its non-GAAP metrics:

  1. Restructuring charges
  2. Separation and transformation costs
  3. Amortization of intangible assets
  4. Impairment of goodwill

These adjustments have a significant impact on the disparity between economic earnings and ACXM’s non-GAAP metrics. In 2016, ACXM removed over $31 million in stock compensation expense (4% of 2016 revenue). Through the removal of this expense, $12 million in restructuring charges, and other adjustments, Acxiom reported non-GAAP net earnings from continuing operations of $47 million compared to GAAP net earnings from continuing operations of -$9 million and economic earnings of -$101 million. Per Figure 2, since 2012, non-GAAP earnings have fallen from $60 million to $47 million in 2016 while economic earnings have fallen from -$32 million to -$101 million over the same time. While both metrics are in decline, non-GAAP earnings create the illusion of profitability, while the economics of the business only grow more negative.

Figure 2: Discrepancy Between Non-GAAP & Economic Earnings

newconstructs_acxm_econearningsvsnongaap_2016-11-21

Sources: New Constructs, LLC and company filings

Diminished Profitability In a Competitive Market

Acxiom’s business, combining third party data with customer data and packaging it into useful information, places it in the highly competitive and broad industry of data analytics. Firms across the globe are attempting to find ways to best maximize customer data in order to drive engagement, awareness, and ultimately, profits. Acxiom’s goal to aggregate such data, provide infrastructure behind the data, and package it as useful information to clients however has not lead to a winning business strategy. While many of Acxiom’s competition is either private, part of a larger firm, or even a partner in some aspects of business, it’s clear the company has profitability issues within its industry, per Figure 3.

Firms such as Alliance Data Systems (ADS), which owns Epsilon, Neustar (NSR), CoreLogic (CLGX) and even Oracle (ORCL), which owns Datalogix and BlueKai, earn a higher ROIC and NOPAT margin than Acxiom. With lagging profitability, ACXM’s ability to compete on price alone is diminished and in a highly competitive market, pricing power can be key to success. At the same time, with lowered profitability, differentiation can become more difficult as the resources to continually expand the business must instead go towards standard daily operating expenses.

Figure 3: Acxiom’s Lagging Profitability

newconstructs_acxm_profitabilitycomparison_2016-11-21

Sources: New Constructs, LLC and company filings 

Bull Hopes Ignore Rising Costs In Competitive Landscape

Operating since 1969, scale is not an issue at Acxiom, unlike many other analytics/software/cloud companies that often get lumped together. The company currently serves over 3,000 clients directly and manages data for more than half the Fortune 100. However, despite serving some of the largest and most profitable firms in the United States, ACXM has only seen its profitability collapse, as shown in Figure 1 above. Part of the problem, and a direct contradiction to any bull case, is the spending required to continually grow its customer base, while also maintaining/growing its database and existing services. Over the past three years (2014-2016), Acxiom’s operating costs have been growing faster than revenues (3% CAGR), a trend which drives NOPAT margins from 6% to 1%. More details:

  • Sales & marketing costs grew 25% compounded annually from 2014-2016.
  • General & administrative costs grew 17% compounded annually from 2014-2016.
  • Research & development costs grew 9% compounded annually from 2014-2016.

Spending to “grow” the business in this manner is not a recipe for success unless one does not care about profits.

Further weakening profit potential, the consolidation within the data marketing industry has diminished the value of its add-on services. As firms such as Oracle or Alliance Data acquire analytics and marketing platforms, they’re able to integrate into their much larger customer relationship management platforms. While these platforms still require data, and may need data from Acxiom, the customer tools and marketing services offered by Acxiom are no longer in demand. The more larger competitors like Oracle build a “one-stop-shop”, the weaker is Acxiom’s overall value proposition as more potential customers gravitate towards the “one-stop-shop” offerings that tie together more than marketing insights. Ultimately, Acxiom, as a neutral data platform, while valuable, is not worth what its current valuation would imply (more details below).

ACXM Is Priced For Perfection

Despite the clear deterioration in business fundamentals, ACXM is up 42% over the past

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