Acxiom 10-K 2006
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Commission file number 0-13163
(Exact name of registrant as specified in its charter)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of Class)
Preferred Stock Purchase Rights
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the registrants Common Stock, $.10 par value per share, as of September 30, 2005 as reported on the Nasdaq National Market, was approximately $1,216,605,918. (For purposes of determination of the above stated amount only, all directors, executive officers and 10% or more shareholders of the registrant are presumed to be affiliates.)
The number of shares of Common Stock, $.10 par value per share, outstanding as of June 14, 2006, was 88,052,429.
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Portions of Acxioms Proxy Statement for the 2006 Annual Meeting of Shareholders (2006 Proxy Statement) are incorporated by reference into Part III of this Form 10-K.
Our website address is www.acxiom.com, where copies may be obtained, free of charge, of documents which we have filed with the Securities and Exchange Commission. Included among those documents are our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Copies may also be obtained through the SECs EDGAR site, or by sending a written request for copies to Acxiom Investor Relations, 1 Information Way, Little Rock, AR 72202. Copies of all of our SEC filings were available on our website during the past fiscal year covered by this Form 10-K. In addition, at the Corporate Governance section of our website, we have posted copies of our Corporate Governance Principles, the charters for the Audit, Compensation, Corporate Governance, and Nominating Committees of the Board of Directors, the codes of ethics applicable to directors, financial personnel and all employees, and other information relating to the governance of the Company.
CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION
This document, the documents that we incorporate by reference, and other written reports and oral statements made from time to time by us and our representatives contain forward-looking statements. These statements, which are not statements of historical fact, may contain estimates, assumptions, projections and/or expectations regarding our financial position, results of operations, market position, product development, growth opportunities, economic conditions, and other similar forecasts and statements of expectation. We generally indicate these statements by words or phrases such as anticipate, estimate, plan, expect, believe, intend, foresee, and similar words or phrases. These forward-looking statements are not guarantees of future performance and are subject to a number of factors and uncertainties that could cause our actual results and experiences to differ materially from the anticipated results and expectations expressed in such forward-looking statements.
The forward-looking statements contained in this report include the items set forth on pages F-3 - F-25 in Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) attached hereto. In light of the risks, uncertainties and assumptions set forth in the MD&A, we caution readers not to place undue reliance on any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information or otherwise.
Acxiom Corporation (Acxiom or the Company) (Nasdaq: ACXM) integrates data, services and technology to create and deliver customer and information management solutions for many of the largest and most respected companies in the world. The core components of Acxioms innovative solutions are customer data integration (CDI) technology and services, data, database services, information technology (IT) outsourcing, consulting and analytics, and privacy leadership. Founded in 1969, Acxiom is headquartered in Little Rock, Arkansas, with locations throughout the United States (US) and Europe, and in Australia and China.
Acxiom provides the consultative thought leadership and visionary technology solutions that top corporate executives require to consolidate data across their companies to achieve accessible and actionable business intelligence. We are at the heart of our clients information management strategy and infrastructure, helping them transform information into insight to improve their marketing and business results. We help companies consolidate, store, manage and deliver information where its needed, when its needed. In addition, we offer data-driven,
technologically sophisticated solutions that help our clients make the right business decisions regarding how they market to consumers and how they manage risk.
Acxioms innovative offerings include our consumer and business data content; database management and marketing services; Customer Data Integration services; digital products and services; professional consulting services, including analytics and privacy expertise; risk mitigation; and grid-based information technology (IT) services and outsourcing.
Our client base in the U.S. consists primarily of Fortune 1000 companies in the financial services, insurance, information services, direct marketing, media, retail, consumer packaged goods, technology, automotive, healthcare, and telecommunications industries. Every day, Acxiom clients benefit from our three decades of serving the information, technology and marketing services needs of companies around the world. We believe that our commitment to innovation and delivery excellence, combined with our client-focused philosophy, is unrivalled.
We help our clients with:
Our solutions are designed to meet the specific needs of our clients and the industries in which they operate, and we target organizations that view data as a strategic competitive advantage and an integral component of their business decision-making process.
The Information Services Industry
In todays technologically advanced and competitive business environment, companies are using vast amounts of customer, prospect and marketplace information to manage their businesses. The information services industry provides a broad range of products and services designed to help companies manage customer relationships. Acxioms technology, services, and premier data content combine to enable our clients to efficiently access and manage information throughout the enterprise. Were doing this on an increasingly global scale as our clients ask us to provide the same services weve delivered in the U.S. to their global efforts.
We believe that the following current trends and dynamics of the information services industry provide us with multiple growth opportunities:
These trends are driven by the changing needs of our clients in an evolving marketplace. The combination of demographic shifts and lifestyle changes, the proliferation of new products and services, and the evolution of multiple marketing channels have made the information management process increasingly complex. Marketing channels now include cable and satellite television, telemarketing, direct mail, direct response, in-store point-of-sale, on-line services and the Internet. The multiplicity of these marketing channels creates ever-increasing volumes of data and has compounded the growth and complexity of managing data.
Advances in computer and software technology have also unlocked vast amounts of customer data which historically was inaccessible, further increasing the amount of existing data to manage and analyze. As these data resources expand and become more complex, it also becomes increasingly difficult to integrate all the fragmented, disparate and often outdated information. The challenge to obtaining accurate and complete customer data lies in obtaining, enhancing and integrating data from across an organization to form a single, comprehensive view of individual customers. Companies are increasingly looking outside of their own organizations for help in managing the complexities of their information needs. The reasons for doing so include:
Advances in information technology and fragmentation of the media, combined with the ever-increasing amounts of raw data and the changing household and population demographics, have spurred the transition from traditional mass media to targeted one-to-one marketing. One-to-one marketing enables the delivery of a customized message to a defined audience and the measurement of the response to that message. The Internet has rapidly emerged as an ideal one-to-one marketing channel. It allows marketing messages to be customized to specific consumers and allows marketers to make immediate modifications to their messages based on consumer behavior and response. In many cases, digital marketing can also accomplish these objectives far more cost effectively than existing marketing media. Acxioms enterprise information services are at the heart of these evolving business needs.
Enterprise Information Services for Customer Relationship Management (CRM)
Most businesses are aware that the various types of data they gather and maintain customer, product, financial, sales and marketing can be a competitive resource for acquiring and retaining customers, provided that the information is well-maintained and optimized throughout the organization. Today, companies understand that Customer Relationship Management (CRM) is a business strategy, not a piece of software, and that management of their information assets is one of the keys for turning the promises of CRM success into reality. Acxioms services help companies answer important business questions, such as:
Gartner, Inc., a leading international industry analytical, research and advisory firm, has reported that without adequate resources to focus on data quality, an organizations CRM efforts will not be successful. Gartner states that the key to enterprises being able to deal effectively with their customers is to know them who their customers are, what they want, and why they want it. It is also critical, says Gartner, to know how to use that information. The more businesses know about their customers, the more they can do with that information to improve the likelihood of sales and improve the levels of service. In a report entitled CRM Demands Data Cleansing by Ted Friedman, Scott Nelson, and John Radcliffe (December 3, 2004), Gartner cites a case study in which a manufacturing industry company incorrectly labeled a subset of its large customers, which caused them to be overlooked in a market segment analysis. The resulting lack of interaction with that customer segment cost the manufacturer $5 million in revenue in one year.
Gartner reports that CRM projects usually require various organizations within a company to work together around a shared single view of the customer, and that without the right customer information at the right time, its difficult to realize the goals a company has for its CRM efforts regardless of company size, market leadership, or merger and acquisition history. Therefore, creating and leveraging a single customer view for operational, marketing and analytical purposes is critical to successfully target, acquire, develop and retain customers the key goals for any customer-centric solution. That single customer view can only be obtained through customer data integration (CDI). Gartner goes on to state that CDI will remain a business imperative for most organizations, and that CEOs are demanding the single customer view that will make their customer-centric initiatives work.
In Forrester Researchs March 6, 2006 report entitled Trends 2006 Master Data Management, analyst R. Ray Wang says that trusted data sources increase the quality and timeliness of customer data and remain complementary to data hubs. Wang states that enterprises continue to leverage companies such as Acxiom to replace hundreds of thousands of data-cleansing rules. The report notes that continuous information refresh not only improves customer matching accuracy but also validates data in real time and can trigger actions based on external events. Wang also states that the CDI market shows tremendous growth, and that in the aggregate, CDI vendors are closing about 45 to 55 deals a year. According to the article, CDI installations average $1.05 million to $1.13 million for licenses and require implementation services in the $3.53 million - $4.05 million range.
Forrester Research forecasts CDI growth rates of 42% in 2006, 35% in 2007, and 30% in 2008 for software licenses and professional services. In a report entitled Five Predictions for the Future of Direct Marketing by Eric Schmitt (February 16, 2006), Forrester concludes that direct marketing is undergoing a transformation, noting that in many companies, the marketing database, formerly used only to select names for direct mail campaigns, has become the marketing departments system of record. Forrester states that these marketing organizations are looking for much more than just better response rates: They want to optimize marketing contacts across all channels and apply customer insight, derived from the database, broadly across the enterprise. Further, in a report called Interactive Marketing Channels to Watch in 2006, by Shar Van Boskirk (April 27, 2006), Forrester predicts that by 2010, firms will spend $26 billion on Internet marketing, and reports that one-third of firms have already increased online spending by more than 25% in 2005 relative to 2004. Forrester predicts that more than half of these firms will increase online spending further by shifting dollars from other channels.
CDI is the combination of the technology, processes and services needed to create and maintain an accurate, timely and complete view of the customer across multiple channels, business lines and, potentially, enterprises, where there are multiple sources of customer data in multiple application systems and databases. In different ways, both the real-time enterprise and business process fusion depend on having this single view of the customer. The ability to successfully target, acquire, develop and retain customers depends on the availability, at the time and place of need, of high quality, comprehensive, up-to-date customer information and insight.
CDIs critical role in CRM is reflected in one of Gartners Strategic Planning Assumptions, which says that, through 2008, the creation of an accurate, timely and rich single view of the customer across channels and lines of business will be a key enabler for reducing costs, managing risk, and increasing revenue and profitability in customer-centric organizations. How does a company know that the customer on the phone is the same one that was on its website
one hour ago? Is it the same person, or is it just someone using that customers computer? Gartner concludes that enterprises need to have an ID system that allows them to link all interactions with a customer quickly and accurately. Such a constant ID system will be necessary, says Gartner, to take advantage of an environment where technology is modified to that customers desires and, in the process, enabling the enterprises CRM system to have a chance to truly support them. If an enterprise cannot be sure of who the customer is, and how to link that customer to the database and profiles it has created, Gartner predicts that the enterprises investments in CRM will be seriously compromised.
Enterprise Information Services for Risk Management
In addition to helping companies improve marketing results, another application for Acxioms enterprise information management solutions is in a companys efforts to combat fraud and identity theft. As customer contact channels proliferate and data volumes continue to increase, the opportunity for fraudulent activity multiplies. Customer recognition capabilities are an important tool to verify that customers are who they say they are. As reports of instances of identity theft continue to increase, enterprise risk management has become a top concern for financial services as well as many other firms.
Our Competitive Strengths
The following competencies enable Acxiom to not only capitalize on the previously described market trends to drive growth, but also represent competitive differentiators that we believe uniquely position us to deliver high-value solutions for the information needs of our clients:
Ability to Transform Enterprise Information into Business Critical Insight
We believe that Acxiom is uniquely positioned to help our clients turn information into insight, to improve their marketing and business results. Our ability to deliver the right data to the right place at the right time to power marketing, risk management, and other critical business decisions is demonstrated by our 30+ years of experience delivering information management services, and is enabled by our core competencies:
Accurate and Comprehensive Data Content and Products
We believe that we have the most comprehensive and accurate collection of U.S. consumer, property and telephone marketing data available from a single supplier. We believe we process more mailing lists than any company in the U.S. Our InfoBase consumer database contains more than 32 billion data elements and covers almost all households in the U.S. Our real estate database, which includes most major U.S. metropolitan areas, covers approximately 85 million properties. We believe our InfoBase TeleSource product represents the most comprehensive repository of accurate telephone number information for listed business and consumer telephone numbers in the U.S. and Canada. Our clients use this data to manage existing customer relationships and to target prospective customers. We also have strong reference data assets information that clients use for non-marketing purposes, including data used in our employment screening and fraud and risk management solution offerings, an area of our business strengthened through the acquisition of InsightAmerica in the past fiscal year.
Acxioms offerings in Europe are closely aligned with those in the U.S. The acquisitions of Claritas Europe and Consodata S.A. have significantly enhanced Acxioms offerings in terms of data services and customer information throughout Europe. We are the leading provider of consumer data with industry-leading databases, with both household coverage and data depth across all major European countries with the exception of Italy. In the U.K. alone our InfoBase Lifestyle Universe product contains data on over 38 million adults residing at 21 million households covering over 95% of the U.K. population. In the U.K., Germany, France, Poland, Portugal, The Netherlands and Spain, we maintain consumer data collection programs in order to build proprietary data products. Acxiom provides leading customer information in these European countries in which it now has physical operations.
Our European customer information and segmentation offerings are similar to our InfoBase offerings in the U.S. and in the U.K. While there are some differences between InfoBase in the U.S. and the U.K. and differences country-to-country for InfoBase equivalents, the core value proposition to Acxiom clients remains the same regardless of location.
In Australia, Acxiom is a leading supplier of consumer, business, telephone and property information for marketing purposes. Under a range of brand names, Acxioms data products are used by major financial institutions, telecommunications companies and retailers to help them strengthen their customer relationships and grow their market share. Our clients use data from our databases to target prospective customers and strengthen relationships with their existing customers.
Through our acquisition of ChinaLOOP, we hope to become one of the premier data providers in China. Currently, Acxiom China is a business intelligence, customer relationship management, and data management company headquartered in Shanghai with additional operations in Beijing. It provides data, database management, and data services to a number of Asian and international clients.
Industry-Leading Customer Data Integration, Data Management and Data Delivery
We invented the term Customer Data Integration and remain unparalleled in our ability to transform and integrate massive amounts of data. Based on our knowledge of the industry, we believe that we have no peers when it comes to building and managing huge databases. Thats why so many of the largest companies across many industries have chosen Acxiom as their data management partner. And we have the ability to help our clients execute their enterprise-wide data management initiatives. We help deliver the right data to the right place at the right time to power all sorts of business decisions.
With our new data factory line of business we are creating a whole new market space for Acxiom with our ability to integrate and transform voluminous, raw data input from multiple sources into enriched customer-defined information products. And we now have industry-leading capabilities in e-mail marketing and Web-based services through our acquisition in the past fiscal year of Digital Impact (now called Acxiom Digital). These capabilities come with a serious responsibility for privacy and security. We are committed to securing the data we manage, and we work closely with our clients to ensure it is used only for proper purposes.
Data integration for enterprise data management - We believe that our Customer Data Integration capabilities, powered by AbiliTec, combined with related real-time customer recognition software and infrastructure, are the leading solution for companies seeking to better integrate their customer data and manage their customer relationships. CRM involves analyzing, identifying, acquiring and retaining customers. Knowledge delivered directly and immediately to a desktop or other customer point of contact in real time is critical to the CRM process. Acxioms Customer Data Integration products and services are designed to fully meet these challenges for its clients.
As the basic infrastructure for integrated CRM solutions, AbiliTec allows the linking of disparate databases across a clients business and makes possible personalized, real-time CRM at every customer touchpoint. AbiliTecs unprecedented scope, accuracy and speed contribute to Acxiom being established as the Customer Data Integration leader, using AbiliTec both as an internal processing tool and as the enabler of the single customer view that drives true, one-to-one marketing.
AbiliTec permits up-to-the-minute updating of consumer and business information with our data, thereby creating a new level of data accuracy within the industry. By applying this unique, patented technology, we are able to properly cleanse data and eliminate redundancies, update data to reflect real-time changes, and combine our external data with our clients internal data.
The financial benefits for our clients generated by faster processing times are multi-faceted. Our clients gain advantages from AbiliTec by:
Also, AbiliTec enables our clients to better serve the consumer privacy preferences of their customers. Just as AbiliTec allows businesses to create a single view of their customers in real time for marketing purposes, it makes it much easier for businesses to allow their customers to access, correct and selectively opt-out their information, provide better safeguards around their customers information, and facilitate the addition of information such as preference in time and manner of contact.
End-to-end data warehousing and business information solutions - Acxiom has extensive experience in designing, developing, managing and operating massively large-scale databases for some of the worlds largest, most successful companies, e.g., CitiGroup, GE Finance, Federated Department Stores, IBM and Sears.
Information Systems Technology and Management
We have extensive expertise and large-scale capacity in managing data centers our own and those we manage for our outsourcing clients. Some of the most tangible examples of our commitment to innovation can be found in our data centers. Our growing grid computing environment is evidence of the strides we have made with this scalable, configurable platform. It is our capability around information systems and management that enables our other core competencies, and is the foundation for all we do.
Our state-of-the-art data centers, computing capacity and operating scale enable us to access and process vast amounts of raw data and cost effectively transform the data into useful information. We currently manage 7.5 petabytes of storage, which includes over 2.7 petabytes of database solutions. A petabyte, the scale often used when measuring large computer storage, is the equivalent of 1000 terabytes, or one quadrillion bytes.
Our open system environment allows our clients to use a variety of tools, and provides the greatest flexibility in analyzing data relationships and optimizes our clients requirements for volume, speed, scalability and functional performance.
Leveraging grid technology - Intelligent, enterprise-wide decisions rely on timely, information-rich business processes to drive competitive differentiation. Analytics-based decisioning powered by customer, product, process and people information is the critical enabler of strategy. With the grid-powered Business Information Grid, Acxiom has successfully created a powerful infrastructure that can integrate the necessary data and computing resources and enable collaboration to optimize business processes and achieve strategic goals.
In this digital age, marketing and treatment personalization demands flexibility and throughput from the IT infrastructure. With predictive analytics techniques embedded in customer touchpoint strategy, computing horsepower is a prerequisite. And with identity management at the center of the customer relationship, the enterprise must have technologies that enable fraud prevention and risk mitigation. Competitors in this new era of information stewardship also must consider enhanced compliance with internally and externally driven security and privacy policies.
Over time, these business initiatives have created increasingly complex IT environments with heterogeneous hardware/operating systems and disparate data warehouse architectures, all posing significant challenges to the IT executives ability to meet the information demands of internal clients. These internal clients are typically organized in vertical business units requiring 360° views of the customer by integrating business-unit and third-party data.
To meet these business needs cost effectively on a common information processing platform that can be leveraged enterprise-wide, innovation is required innovation in fundamental interoperability with a vision of providing business insight to decision makers. By clearly defining organizational strategy and linking process management goals with this type of pioneering information technology, an organization can deploy this ground-breaking IT infrastructure enabling the information-rich enterprise to execute real-time decisions for differentiated customer experiences, products and processes and delivering sustainable competitive advantage.
The Business Information Grid is an integrated, grid computing solution based on a service-oriented architecture designed to unlock the potential of enterprise-level business information by incorporating the following:
During the past fiscal year, Acxiom entered into a technology and distribution agreement with EMC Corporation whereby we combined our grid technology platform with EMCs portfolio of data storage, information management and resource management solutions to help clients take advantage of the more scalable, flexible grid-based information infrastructure the Business Information Grid. As part of the agreement, EMC acquired our information grid software, and we retained the right to have access to the software as well as to further developments to the software for continued use in connection with our own business. Together with EMC, we plan to jointly develop and market a solution to customers, initially as a hosted offering from our facilities and, over time, to integrate relevant systems, software, services and data from both companies into a complete product-based information grid solution for clients to deploy within their own enterprises. As a key component of next-generation information infrastructure, grid technology enables clients to improve computer utilization, enhance information access and workflow, optimize distributed information access, and deliver faster time-to-results.
Acxiom has been an industry leader in developing grid-based technology, which works by breaking down large jobs into smaller, separate tasks, then assigning them to computers linked together in the grid. Large mainframe computers process jobs linearly, i.e., they must first complete one task before going on to the next. Grids, on the other hand, can process separate tasks simultaneously, thereby providing much faster results. Additional servers connected through the grid can be called into service as needed to assist during peak workload periods, thereby making the most of their combined available power. Utilization of the grid enables clients to avoid multi-million dollar up-front investments in servers, resulting in significant cost savings. In addition, the grid enables us to offer our services to a broader range of clients, including companies whose processing needs are on a much smaller scale than that of our historical clientele. Benefits of a grid platform include:
Performance - The grid-based architecture uses commodity-based servers to replicate the performance of a supercomputer that would cost many times more. When clients need to increase their processing capability, we simply allocate an additional node or personal computer processor to the grid, rather than having to invest in another large, expensive computer. Jobs that could take up to eight hours on a mainframe can be completed in 20 minutes in the grid.
Scalability - The grid-based architecture allows us to add additional storage as clients need it, thereby providing on-demand capacity. This enables our clients to store historical data for use in trending, modeling and analytics, creating more sophisticated and accurate models than ever before. The scalability works both ways: if less storage space is needed, we can scale back the amount of grid dedicated to a particular client.
Adaptability - The solution is comprised of a standard set of components and tools. Using these plug and play components, it is easier and faster to set up new, repeatable and powerful processes. The standard framework can be easily configured for a specific client or industry as needed.
Security - Our security objective within the grid operation is that no intellectual property (i.e., data, software, or algorithms) stored in or in transit to/from the grid can be copied or moved outside in a usable format without appropriate authentication and authorization.
We provide both traditional batch marketing solutions as well as real-time solutions, both via our acquisition and customer marketing database framework. We believe that through this framework which leverages large-scale databases, grid technology, InfoBase and AbiliTec Acxiom is leading the industry in a fundamental shift from traditional linear campaigns to continuous campaign management. We offer our clients weekly, daily and even real-time updates, thereby dramatically increasing the frequency with which they can execute marketing campaigns. The competitive advantage that may be gained by clients using the grid is improved marketing offers that drive a greater response, in addition to increasing the timeliness of campaigns and the revenues generated. Through our real-time marketing solutions, clients are able to get a consistent and immediately available customer view and decision engine that help them make effective, instantaneous marketing offers, based on comprehensive business rules, across all of their front-office applications.
We have always taken an active approach with respect to consumer privacy. The growth of e-commerce and companies needs for consumer information mean that we must work even harder to guarantee that our policies offer individuals the protection to which they are entitled. Consequently, we actively promote a set of effective privacy guidelines for the direct marketing, e-commerce, and information industries as a whole. Industry-wide compliance helps address privacy concerns across the globe. Furthermore, we are certified under the European Union Safe Harbor and contractually comply with other international data protection requirements to ensure the continued free flow of information across borders.
We have a dedicated team in place to oversee our compliance with the privacy regulations that govern our business activities in the various countries in which we operate. We are committed to the protection of consumer information by promoting policies within the industry that offer individuals the choices and protection to which they are entitled, while preserving the flow of information that provides the many conveniences consumers have come to expect. Our Global Privacy Officer has extensive knowledge of U.S. federal and state laws governing the use of information, and is sought by both policy makers and regulators for her views of effective use of personal information. She is a frequent speaker on privacy and customer relationship management, and she has published numerous articles and has participated in writing books on these subjects.
Our Fair Information Practices Policy outlines the variety of measures we take to protect consumers privacy. A copy of this policy is posted on our website at www.acxiom.com. We educate our clients and associates regarding consumer privacy issues, guidelines and laws. Our policy also explains the steps that consumers may take to have their names removed from our marketing products and to obtain a copy of the information we maintain about them in our reference products.
Companies are assessing their privacy policies and beginning to recognize that newly-developed customer data integration technology can help them honor an individuals preferences and address consumers concerns. We believe that technologies such as AbiliTec will enable businesses to move beyond mere privacy protection and toward aggressive consumer advocacy. Just as AbiliTec allows businesses to create a single view of their customers in real time for marketing purposes, it makes it much easier for businesses to honor their customers preferences and selectively opt out of certain practices, and provide better safeguards around their customers information.
Privacy legislation is pending in Congress and in most of the 50 states, and we anticipate that additional legislation will continue to be introduced in the future, both in the U.S. and abroad. While there has been a significant amount of proposed legislation, we believe that as legislators come to better understand the importance of information as a fundamental building block of a robust economy, reasonable legislative approaches to information use will prevail. We are supportive of legislation that codifies the current industry guidelines of notice and opt-out regarding whether or not a consumers personal information is shared with independent third parties for marketing purposes. We recognize that different types of personal information should be afforded varying safeguards, so with regard to certain types of sensitive personal information, we support choice on an opt-in basis for third-party marketing use. Acxiom also supports legislation requiring all custodians of sensitive information to deploy reasonable information security safeguards to protect that information.
Service Culture and Ability to Deliver
Service has been at the heart of who we are for decades. In fact, it is one of Acxioms five core values:
At Acxiom we have always been very client-focused, willing to adapt our approaches to suit our clients needs. Our commitment to service is demonstrated at Acxiom in many ways. Its the willingness to go to extraordinary lengths to help, no matter what the situation. Its equally applied to serving external clients and internal stakeholders. Our clients consistently report that their Acxiom teams get the job done regardless of any obstacles. We believe that our client-focused philosophy and ability to deliver represent a unique competitive differentiator in our market space. In a January 2006 report on database marketing services providers, Forrester Research reported that Acxiom received the highest customer feedback of any company in this evaluation - a nearly perfect score - for reliability of execution and operations. Acxiom was described by clients as ultra-reliable.
We have consistently been recognized for our leadership in a number of areas, including technical innovation and marketplace excellence. In 2006, Acxiom:
These awards follow similar recognition in previous years, such as when Acxioms innovation in the use of grid-computing applications received the Data Warehousing Institutes 2004 Best Practices Award for Radical Data Warehousing/Business Intelligence. We were also named as a finalist in the Most Innovative Company category by the 2004 American Business Awards for our continued development of grid computing systems for large commercial applications, as well as for our long-term contributions to protection of consumer privacy. Acxiom leaders have been invited to speak at a number of prestigious events, including the Grid Today 04 conference in Philadelphia, regarding our grid technology. Publications as diverse as Fortune, Database Trends & Applications,
and Internet Retailer have recognized our leadership role in the new grid-based technology. Acxiom was named to the 2004 CIO 100 ranking of top companies that best demonstrate organizational agility, and we were recognized by CRM magazine as a Data Quality Market Leader.
Our Growth Strategy
Our growth strategy is built upon our fundamental competencies, is aligned with market growth drivers, and includes the following strategic components:
For each component of our growth strategy, we have defined strategic objectives and assigned senior leadership accountability for execution.
The introduction of Acxioms risk mitigation suite of offerings is one example of execution on our strategy to expand into new, related businesses. Our acquisition of InsightAmerica (now called Acxiom Insight) in the last fiscal year brought a powerful combination of deep data resources and technology with the kinds of analytics and scoring that are necessary for businesses to fight fraud and mitigate risk. Combined with Acxioms fraud management platform and the Acxiom Information Security Services business, this new line of business delivers a broader suite of offerings that address the complete risk mitigation spectrum.
The acquisition in the past fiscal year of Digital Impact (now called Acxiom Digital), a leading provider of integrated on-line marketing solutions for global 2000 companies, expanded our capabilities in the growing digital technology marketplace and provides us with the ability to provide clients with a full suite of direct marketing services designed to meet the challenges of todays marketing environment. Acxiom Digital uses a proprietary technology platform to deliver on-line marketing campaigns, and it offers an end-to-end solution that includes designing, sending and analyzing the results of each campaign. Campaigns are executed across multiple media channels, including personalized e-mail, targeted websites, Web advertisements, search engines and direct mail. The acquisition of this Silicon Valley-based company complements our acquisition in the prior fiscal year of mid-tier marketing services provider SmartDM (now called Acxiom Direct), thereby positioning us to better meet the large-scale needs of our traditional customers (the nations top-tier marketers), while expanding the markets we can serve by enabling us to meet the smaller-scale needs of mid-tier marketers.
Additionally, Acxiom has a defined People Strategy that is aligned with our growth strategy. Key components include:
We report segment information consistent with the way we internally manage our operations to assess performance and to allocate resources. During fiscal year 2006, in order to better reflect the way we operate and review the business, we changed our business segments to consist of U.S. Services and Data and International Services and Data. The previously reported IT Management segment has been consolidated with the U.S. Services and Data segment.
Both of the segments include consulting, database and data warehousing, list processing services, data content and software products. U.S. Services and Data also includes information technology outsourcing and facilities management for data center management, network management, client/server management and other complementary IT services. We evaluate the performance of the segments based on segment operating income, which excludes certain gains, losses and nonrecurring items.
Information concerning the financial results of our business segments and the total assets of each business segment is included in Note 21 of the Notes to Consolidated Financial Statements and in Managements Discussion and Analysis of Financial Condition and Results of Operations which are attached to this Annual Report as part of the Financial Supplement.
U.S. Services and Data Segment
Our U.S. Services and Data segment provides solutions that integrate and manage customer, consumer and business data using our information management skills and technology, as well as our InfoBase data products. We believe that AbiliTec, which provides Customer Data Integration capabilities, together with our acquisition and customer marketing database solutions, positions us for a greater share of the growing demand for integrated customer management solutions. Our grid technology, AbiliTec linking technology, acquisition and customer marketing database solutions, InfoBase data, and intellectual property for building and managing large-scale database environments give our clients the ability to reach their customers more rapidly, efficiently and accurately and to target their sales efforts accordingly. We build customer and information management solutions for our clients in the following service areas:
Our AbiliTec-enabled solutions allow us to more effectively integrate and manage data. We believe that AbiliTec is the leading software solution for companies seeking to integrate and manage their customer data and customer relationships. It allows the linking of separate, disparate databases across a clients business, provides unprecedented speed and accuracy and permits real-time updating of consumer and business information. AbiliTec is a software product that is licensed to our clients and sold through the following channels: enterprise, database, channel partner, service bureaus and direct marketing. Our AbiliTec-enabled solutions deliver more accurate, accelerated data solutions that help businesses reduce costs, gain a better understanding of their customer base, and build loyal, trust-based customer relationships.
Based upon our knowledge of the industry and our competitors products, we believe our InfoBase and Personicx® products, as well as our Fraud Management Platform products, represent the industrys most comprehensive and accurate relationship management, risk management, and operational efficiency data product offerings. They are available either on a stand-alone basis or integrated into our customized service offerings.
With recent acquisitions, we have added e-mail marketing capabilities as well as hosted Web applications and messaging technology infrastructures to our range of services, which will allow us to better deliver integrated campaign management, analytics, and e-messaging services focused on strategic data-driven marketing results.
The data that we use is obtained from publicly available information, public record information, summarized customer information, customer contact information, and self-reported information. We utilize multiple data sources from each category of data including, but not limited to, published telephone directories, directory service information, voter registrations, county assessor and recorder information, questionnaires, warranty cards, inferred preference information, catalog buyer behavior information, and product registration. Accuracy is one of our primary concerns, and we have processes in place to maintain a high level of quality in our products.
Our information technology outsourcing services enable our clients to focus on their core businesses while we manage their technical infrastructure needs. We provide the IT services for large systems, midrange and client/server platforms and networks. Acxiom delivers value by leveraging our unique products and services, such as our grid platform, data, technology and marketing services. This in turn enables companies to maximize the value of their customer relationships.
Our data center outsourcing services give our customers a secure, high-performance network and computing environment, supported by experienced IT professionals. The benefits include:
Our IT solutions cover the computing needs of our clients, ranging from full mainframe and midrange information processing centers to desktop applications. Acxiom currently operates several large, high-availability data centers around the globe, manages high-speed networks, and hosts Internet e-commerce applications. Acxioms IT services have the added specialty of supporting the very large databases needed by companies who sell to consumers. We have developed a storage-centric IT infrastructure to manage the massive amounts of data these companies require. Our leadership in grid technology provides our clients with a flexible and scalable approach to on-demand access, management and updating of customer data for advanced analytics and database marketing. We provide the infrastructure and managed services that power our customer and information management solutions.
We offer technology services in the following areas:
International Services and Data Segment
Our International Services and Data segment provides customer data, data management, risk management and business process outsourcing solutions to clients across the globe. With the acquisition of Claritas Europe, Consodata and ChinaLOOP, we believe that we are positioned to meet businesses needs in Europe and beyond. We are currently helping clients solve business problems in the following locations: Canada, Mexico, Puerto Rico, Brazil, United Kingdom, France, Germany, Poland, Portugal, The Netherlands, Spain, China, Australia and New Zealand. International offerings include:
Our global vision is to provide market-leading customer data and data management solutions locally, while also helping our clients solve the challenges of multi-country customer information management and data integration. We intend to meet this challenge by cleansing, integrating, hosting and enhancing client customer data from a single architecture. Using postal standards from the postal authorities of over 235 countries, we anticipate that these services will fully leverage our grid technology and superior AbiliTec-driven data integration capabilities. Also incorporated are our InfoBase content, our Personicx segmentation solutions, and the expansive data assets of new international markets.
Our client base consists primarily of Fortune 1000 companies in the financial services, insurance, information services, direct marketing, publishing, retail and telecommunications industries. Some of our major clients include American Express, Bank of America Technology & Operations, Baxter International, Capital One, CitiGroup, City of Chicago, DeLuxe, Discover Card, eFunds, Federated Department Stores, GE Finance, General Motors, Guideposts, HSBC Bank USA, HSBC Technology & Services (USA), IBM, Information Resources, Inc., JP Morgan Chase, MBNA America Bank, Philip Morris, Primedia, R.L. Polk, RR Donnelley, Sears, Sprint, TransUnion and Washington Mutual.
Our 10 largest clients represented approximately 39% of our revenues in fiscal 2006. No single client accounted for more than 10% of our revenue during the last fiscal year. We seek to maintain long-term relationships with our clients. Many of our clients typically operate under long-term contracts with initial terms of at least two years in length. We have historically experienced high retention rates among our clients.
Sales and Marketing
We take a solution-selling approach that combines the full scope of our strengths to deliver solutions for clients that enhance their profitability, reduce risk, and lower costs. Our core branded offerings include:
We maintain a strong focus on industry expertise to ensure that we understand our clients unique business opportunities and challenges. This was achieved to a greater degree than ever in the past two fiscal years as Acxiom has introduced and standardized a required and intensive training and accreditation process for sales associates. We continue to promote a sales and marketing-driven culture that encourages each associate to understand how he or she can better promote the sale of Acxiom solutions and the satisfaction of our clients. It complements the strong product/service delivery culture that has helped Acxiom succeed in the past. The sales and marketing-driven attitude extends across the enterprise, and sales activities with major clients involve a high level of collaboration and cooperation across all levels of leadership in sales, marketing and operations.
We partner with many of the worlds leading systems integrators, as well as hardware and software companies, to create and distribute superior customer and information management solutions for the market. Our partners include such companies as Accenture, D&B, EMC, Equitec, HP, IBM, Moore Wallace Response Marketing Services, SAS Institute, SUN, TransUnion and USADATA. We will continue to seek alliance opportunities with companies that can complement or expand our business by offering unique data content, strategic services, or market presence in a new industry.
Pricing for Lines of Business
Pricing for all of Acxioms line of business offerings must yield adequate returns on invested capital and overall margins that exceed pre-defined targets.
Market-based pricing guidelines are followed for Customer Data Integration (CDI) services such as data cleansing/postal hygiene, merge/purge processing, and customer recognition. When AbiliTec is licensed to our clients, it is priced under a subscription model. AbiliTec may be sold as part of an AbiliTec-enabled service and priced as a bundled offering such as a customer recognition solution.
(a) Marketing Database Services
Data warehousing and database management solutions for Acxioms top tier clients are typically custom engagements and prices are developed after examining the scope of effort and degree of complexity required to develop and maintain the solutions.. Changes in scope or on-going change management may result in additional fees to our clients. In its mid-tier and below markets, Acxiom offers pre-packaged or standard database solutions and components to clients seeking more economical options than pursuing a highly customized solution. Any customization of these standard solutions will result in additional fees.
(b) Digital Services
Digital e-mail marketing services are typically priced in multi-year arrangements using market-based pricing guidelines. Prices may be adjusted due to the degree of customization or complexity. Search and strategic marketing services are priced on both a retainer and project basis using standard pricing guidelines adjusted for specific program complexity and volume.
(c) Direct Services
Direct marketing services are typically priced on either a defined program retainer basis for one year or on a project-by-project basis. For annual or multi-year arrangements the prices are based on the program complexity and volume.
Market-based prices are published for most of our data products. Licenses for our entire consumer or business databases for one or more years are priced individually. Data pricing typically follows a subscription model, a transaction model or a combination of the two.
Market-based pricing guidelines are followed for all of the offerings within the Acxiom Insight line of business. Pricing within each offering varies substantially due to variables such as optional components, transaction volumes and delivery channels utilized. Identity verification solution pricing, employment screening, and data pricing follow a transactional model. Collection solution pricing and investigative solution pricing both follow a software license model.
Analytics and consulting services are typically priced under a professional services model (time and materials). Certain types of analytical models may be priced on a fixed fee, per model basis.
IT management services are custom solutions and prices are negotiated with each client individually. Pricing is highly dependent on service levels, transfer of assets, transfer of human resources and other infrastructure issues. Agreements are multi-year and additional fees happen through contracted growth rates and additional out-of-scope requests.
Although the information services industry in which we operate is highly competitive, we believe that we are the U.S. leader in our field of expertise. Within the industry, there are data content providers, database marketing service providers, analytical data application vendors, enterprise software providers, systems integrators, consulting firms, list brokerage/list management firms and teleservices companies that compete with us. Many firms offer a limited number of services within a particular geographic area, and several are national or international companies and offer a broad array of information services. However, we do not know of any single competitor that offers our entire range of products and services.
In the U.S. services arena, we compete primarily with in-house information technology departments of current and prospective clients, as well as firms that provide data warehousing and database services, mailing list processing and consulting services. Competition is based on the quality and reliability of products and services, technological expertise, historical experience, ability to develop customized solutions for clients, processing capabilities and price. We have three primary competitors in the data warehousing and database services and mailing list processing sectors.
In the U.S. data sector, we compete with two types of firms: data providers and list providers. Competition is based on the quality and comprehensiveness of the information provided, the ability to deliver the information in products and formats that the client needs and, to a lesser extent, the pricing of information products and services. We have four principal competitors in this market. We also compete with hundreds of smaller firms that provide list brokerage and list management services. An emerging market is the Internet-driven data market. This market consists of two primary areas of emphasis: the use of the Internet to collect and deliver data, and the use of e-mail addresses for reaching consumers for marketing. The addition of the Internet into the traditional compilation and distribution channels has made the market more diverse with potentially lower barriers to entry.
In the IT management market, competition is based on technical expertise and innovation, financial stability, past experience with the provider, marketplace reputation, cultural fit, quality and reliability of services, project management capabilities, processing environments and price. In this arena, we have four primary competitors and three lesser competitors, as well the in-house IT departments of current and prospective clients.
In Europe, we face similar competition as in the U.S. in terms of the scope and type of competition. While there is a broader range of competitors across Europe, particularly for customer data, the major competitors in both the services and the data markets are very similar to those that we have in the U.S.
In Australia and New Zealand, our competitors in the services arena are predominantly well-established local businesses or the in-house IT departments of current and prospective clients. However, some large global competitors have recently begun to offer their services in these countries. Our competitors in the data arena are generally local Australian and New Zealand companies, with the exception of one global business-to-business data provider.
In 2004, Acxiom established a presence in China by purchasing an existing business which was one of the first providers of data services in that country. The competition in China is fragmented, with only a few local firms providing similar services. Well-known global providers, however, have recently been attracted by the potential of the Chinese market and appear to be investing heavily. We have three major international competitors in China, one in the data management area, and two in the data providing sector.
Acxiom currently employs approximately 6,765 employees (associates) worldwide. None of Acxioms U.S. associates are currently represented by a labor union or are the subject of a collective bargaining agreement. To the best of managements knowledge, approximately 21 associates are elected members of work councils representing Acxiom associates in France, Germany and the Netherlands. Acxiom has never experienced a work stoppage and believes that its employee relations are good.
The risks described below could materially and adversely affect our business, financial condition and results of future operations. These risks are not the only ones we face. Our business operations could also be impaired by additional risks and uncertainties that are not presently known to us, or that we currently consider immaterial.
We must continue to improve and gain market acceptance of our technology in order to remain competitive and grow.
The complexity and uncertainty regarding the development of new technologies affect our business greatly, as does the loss of market share through competition, or the extent and timing of market acceptance of innovative products and technology. We are also potentially affected by:
Maintaining technological competitiveness in our data products, processing functionality, software systems and services is key to our continued success. Our ability to continually improve our current processes and to develop and introduce new products and services is essential in order to maintain our competitive position and meet the increasingly sophisticated requirements of our clients. If we fail to do so, we could lose clients to current or future competitors, which could result in decreased revenues, net income and earnings per share.
Changes in legislative, judicial, regulatory, cultural or consumer environments relating to consumer privacy or information collection and use may affect our ability to collect and use data.
There could be a material adverse impact on our business due to the enactment of legislation or industry regulations, the issuance of judicial interpretations, or simply a change in customs, arising from the increasing public concern over consumer privacy issues. In the U.S., both the Congress and the legislatures of various states have recently focused their attention on matters concerning the collection and use of consumer data. In most of the non-U.S. locations in which we do business, legislation restricting the collection and use of personal data already exists. Restrictions could be placed upon the collection, management, aggregation and use of information, which could result in a material increase in the cost of collecting some kinds of data. It is also possible that we could be prohibited from collecting or disseminating certain types of data, which could in turn materially adversely affect our ability to meet our clients requirements, potentially resulting in decreased revenues, net income, and earnings per share.
We could experience a breach of the confidentiality of the information we hold or of the security of our computer systems.
We operate extremely large, powerful and complex computer systems that contain personally identifiable data. Unauthorized third parties could attempt to gain entry to such systems for the purpose of stealing data or disrupting the systems. We believe that we have taken adequate measures to protect them from intrusion, but in the event that our efforts are unsuccessful we could suffer significant harm. Further, we handle large quantities of personally identifiable information that must be maintained on a confidential basis. In the event the confidentiality of such information was compromised, we could suffer significant harm.
General economic conditions and world events could result in a reduced demand for our products and services.
As a result of the economic recession which began in 2001, we experienced a reduction in the demand for our products and services as our clients looked for ways to reduce their expenses. Although the economy has improved significantly, how our clients procure our products and services has changed in some instances. Many clients are negotiating their contracts through a contracts procurement representative rather than through their business leaders. In the face of increasing demands by clients for price reductions and discounts, we are challenged with pricing our products and services so as to be able to make reasonable profits. We likewise continue to be challenged with controlling our expenses, given that a significant portion of our costs is fixed. If we are not successful in meeting these challenges, we could suffer lower net income and earnings per share. In addition, world events such as the conflict in Iraq and the continuing threats of terrorism may have a negative impact upon the economy in general and upon our business as well, if our clients become hesitant to embark on discretionary spending programs.
Data suppliers might withdraw data from us, leading to our inability to provide products and services.
Much of the data that we use is either purchased or licensed from third parties. We compile the remainder of the data that we use from public record sources. We could suffer a material adverse effect if owners of the data we use were to withdraw the data from us. Data providers could withdraw their data from us if there is a competitive reason to do so, or if legislation is passed restricting the use of the data, or if judicial interpretations are issued restricting use of data. If a substantial number of data providers were to withdraw their data, our ability to provide products and services to our clients could be materially adversely impacted, which could result in decreased revenues, net income and earnings per share.
Failure to attract and retain qualified associates could adversely affect our business.
Competition for qualified technical, sales and other personnel is often intense, and we periodically are required to pay premium wages to attract and retain qualified associates. There can be no assurance that we will be able to continue to hire and retain sufficient qualified management, technical, sales and other associates necessary to conduct our operations successfully.
The nature and volume of our customer contracts may affect the predictability of our revenues.
While approximately 71% of our total revenue is currently derived from clients who have long-term contracts (defined as contracts with initial terms of two years or more), these contracts have been entered into at various times and therefore some of them are in the latter part of their terms and are approaching their originally scheduled expiration dates. Further, if renewed by the customer, the terms of the renewal contract may not have a term as long as, or may otherwise be on terms less favorable than, the original contract. Revenue from customers with long-term contracts is not necessarily fixed or guaranteed, however, as portions of the revenue from these customers is volume-driven or project-related. With respect to the portion of our business that is not under long-term contract, revenues are less predictable and are almost completely volume-driven or project-related. Therefore, we must engage in continual sales efforts to maintain revenue stability and future growth with these customers. In addition, if a significant customer fails to renew a contract, our business could be negatively impacted if additional business were not obtained to replace the business which was lost.
Our operations outside the U.S. subject us to risks normally associated with international operations.
We conduct business outside of the United States. During the last fiscal year, we received approximately 14% of our revenues from business outside the United States. In fiscal year 2004 we completed the European acquisitions of Claritas Europe and Consodata S.A., and in fiscal year 2005 we acquired ChinaLOOP in Shanghai, China. We continue to evaluate possible acquisitions and alliances outside the U.S. Accordingly, our future operating results could be negatively affected by a variety of factors, some of which are beyond our control. These factors include legislative, judicial, accounting, regulatory, political or economic conditions in a specific country or region, trade protection measures, and other regulatory requirements. In order to successfully expand non-U.S. revenues in future periods, we must continue to strengthen our foreign operations, hire additional personnel, and continue to identify
and execute beneficial strategic alliances. To the extent that we are unable to do these things in a timely manner, our growth, if any, in non-U.S. revenues will be limited, and our operating results could be materially adversely affected. In general, each of our foreign locations is expected to fund its own operations and cash flows, although periodically funds may be loaned or invested from the U.S. to the foreign subsidiaries. Therefore, exchange rate movements of foreign currencies may have an impact on our future costs or on future cash flows from foreign investments. We have not entered into any foreign currency forward exchange contracts or other derivative instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. Additional risks inherent in our non-U.S. business activities generally include, among others, potentially longer accounts receivable payment cycles, the costs and difficulties of managing international operations, potentially adverse tax consequences, and greater difficulty enforcing intellectual property rights. The various risks which are inherent in doing business in the United States are also generally applicable to doing business outside of the United States, and may be exaggerated by the difficulty of doing business in numerous sovereign jurisdictions due to differences in culture, laws and regulations.
Loss of data center capacity or interruption of telecommunication links could adversely affect our business.
Our ability to protect our data centers against damage from fire, power loss, telecommunications failure or other disasters is critical to our future. The on-line services we provide are dependent on links to telecommunication providers. We believe we have taken reasonable precautions to protect our data centers and telecommunication links from events that could interrupt our operations. Any damage to our data centers or any failure of our telecommunications links that causes interruptions in our operations could materially adversely affect our ability to meet our clients requirements, which could result in decreased revenues, net income, and earnings per share.
Failure to favorably negotiate or effectively integrate acquisitions or alliances could adversely affect our business.
Recently our growth strategy has included growth through acquisitions and strategic alliances. While we believe we will be able to successfully integrate recently acquired businesses into our existing operations, there is no certainty that future acquisitions or alliances will be consummated on acceptable terms or that any acquired assets, data or businesses will be successfully integrated into our operations. Our failure to identify appropriate candidates, to negotiate favorable terms, or to successfully integrate future acquisitions and alliances into our existing operations could result in decreased revenues, net income and earnings per share.
Decline in value of investments could negatively impact us.
Due to the general recession in the market that took place over the past few years, several of our investments in other ventures have declined and could continue to decline in value. While several of the investments have been written down accordingly, others could also be subject to future write-down in the event their values become impaired.
Postal rate increases and disruptions in postal services could lead to reduced volume of business.
The direct marketing industry has been negatively impacted from time to time during past years by postal rate increases. The last increase in the U.S. became effective in January 2006, the first increase since 2002. Due to the recent increase in fuel costs, however, the United States Postal Service has requested another increase to be effective in May 2007, if approved by the Postal Rate Commission. Postal rate increases could force direct mailers to mail fewer pieces and to target their prospects more carefully. Additionally, the amount of direct mailings could be reduced in response to disruptions in and concerns over the security of the U.S. mail system, its global counterparts, and other delivery systems. Such responses by direct mailers could negatively affect us by decreasing the amount of processing services purchased from us, which could result in lower revenues, net income and earnings per share.
Industry consolidations could result in increased competition for our products and services.
The possibility of the consolidation or merger of companies who might combine forces to create a single-source provider of multiple services to the marketplace in which we compete could result in increased competition for us. We currently compete against numerous providers of a single service or product in several separate market spaces. (See the discussion above under Competition.) Since we offer a larger variety of services than many of our current
competitors, we have been able to successfully compete against them in most instances. However, the dynamics of the marketplace could be significantly altered if some of the single-service providers were to combine with each other to provide a wider variety of services.
Processing errors or delays in completing service level requirements could result in negative financial consequences.
Processing errors could result in the issuance of credits to clients, the re-performance of work, and/or the payment of damages. Likewise, the failure to meet contractual service level requirements or to meet specified goals with contractual timeframes could result in monetary penalties or lost revenue.
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Acxiom is headquartered in Little Rock, Arkansas with additional locations around the United States. We also have operations in Europe, Australia and China. In general, our facilities are in good condition, and we believe that they are adequate to meet our current needs. Construction on a new 30,000 sq. ft. data center in Little Rock has recently been completed, and the facility is expected to be occupied in the first half of fiscal 2007. Other than the possible consolidation of some of our European facilities, we do not anticipate that any substantial additional properties will be required for our existing business during fiscal year 2007. The table below sets forth the location, ownership and general use of our principal properties currently being used by each business segment.
The Company is involved in various claims and litigation matters that arise in the ordinary course of the business. None of these, however, are believed to be material in their nature or scope except as follows:
April Bell v. Acxiom Corporation (U.S. District Court, E.D. Arkansas, 4-06-CV-0485). This putative class action lawsuit case was filed April 17, 2006. It alleges that Acxiom had a duty to notify consumers of security breach incidents that occurred in 2003. Among other things, the complaint seeks an order requiring Acxiom to notify all class members in writing of the times their private information was breached, how it was breached, by whom, and what action Acxiom has taken to prevent further breaches of security. The plaintiff also seeks an order requiring Acxiom to remove the class members private information from its computer systems and enjoining Acxiom from obtaining such private information from the class in the future. The complaint also seeks compensatory and punitive damages, and attorneys fees. To date, a class has not been certified. We believe the case is without merit and we intend to defend the case vigorously. A motion to dismiss the complaint for failure to state a claim for which relief can be granted has been filed and is currently pending.
Indiana State District Council of Laborers and HOD Carriers Pension Fund v. Charles Morgan, et al. (Pulaski County, Arkansas, Circuit Court, CV-05-8498). This case was filed June 23, 2005 against Charles Morgan and members of the Acxiom Board of Directors alleging that the board breached its fiduciary duty to the Company and its shareholders by failing to consider in good faith two acquisition proposals made by ValueAct Capital, in an attempt to entrench themselves as managers and directors of Acxiom. Among other things, the plaintiff seeks an order compelling the board to consider ValueActs offer in good faith and an award of attorneys fees. The defendants believe the case is without merit and have moved to dismiss the case.
Linda Brooks and Richard Fresco v. Auto Data Direct, Inc., et al., (U.S. District Court, S.D. Florida, 03-61063). This putative class action lawsuit, removed to federal court in May 2003, was filed against Acxiom and several other information providers. The plaintiffs allege that the defendants obtained and used drivers license data in violation of the federal Drivers Privacy Protection Act. Among other things, the plaintiffs seek injunctive relief, statutory damages, and attorneys fees. To date, a class has not been certified. No significant judicial action has been taken on the case until recently, when the court ordered the parties to submit to mediation, which has been in progress. If a settlement in an amount acceptable to Acxiom cannot be reached, we will continue to defend the case vigorously. We believe that we have acted in conformity with all applicable laws.
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Acxioms corporate officers, their current positions, ages and business experience are listed below. Officers are elected by the board of directors annually or as necessary to fill vacancies or fill new positions. There are no family relationships among any of the individuals listed below:
Office of the Company Leader
* Subject to Section 16(b) of the Securities Exchange Act of 1934
Mr. Morgan joined Acxiom as an officer in 1972. He has been chairman of the Acxiom Board of Directors since 1975 and serves as Acxioms Company Leader. He has served on the board and in various leadership roles with the Direct Marketing Association throughout his career, serving in 2001 as chairman of the DMA board. He is a founding member of the Mailing Industry CEO Council, a non-profit organization with a goal of unifying the mailing industry and promoting the critical role that mail plays in business and commerce. He is a member of the Enterprise Software CEO Roundtable, a group of approximately 30 chief executives and other high-ranking officials of the worlds largest software companies who meet to share ideas and review industry trends. Mr. Morgan also serves as a member and is the past chairman of the board of trustees of Hendrix College. He was employed by IBM as a systems engineer for six years prior to joining Acxiom. Mr. Morgan holds a mechanical engineering degree from the University of Arkansas.
Mr. Kline joined Acxiom in 1973 and has served as an officer and director of the Company since 1975. Since January 2005, Mr. Kline has served as Acxioms Chief Finance & Administration Leader, filling the role of acting chief financial officer while the Company conducted a search for a permanent CFO. In this position he has been responsible for Acxioms financial management and administrative functions, including capital expenditure processes and cash flow execution. Following a period of transition during which his financial management duties will be assumed by Mr. Cotroneo, Acxioms recently-hired CFO, Mr. Kline will continue to be responsible for the above-referenced administrative areas as well as for hardware and software procurement, purchasing, facilities and data center support, travel and flight operations, risk management, internal audit, internal IT audits, Sarbanes Oxley Section 404 compliance matters, and physical and information security. Prior to joining Acxiom, Mr. Kline spent seven years with IBM and two years as an officer in the U.S. Army. Mr. Kline holds a degree in electrical engineering from the University of Arkansas at Fayetteville, where he has served since 1990 as chairman of the College of Engineering Advisory Council.
Mr. Hodges joined Acxiom in 1998 as its Outsourcing and IT Services Organization Leader and has served since January 2005 as Chief Operations Leader for the Company. In this role, he is responsible for all of Acxioms operations worldwide, overseeing the sales, client relationship management and client services delivery organizations. Prior to that, he served for six years as the head of Acxioms Outsourcing and Information Technology Services Organization. Before joining Acxiom, Mr. Hodges was employed for six years with Tascor, the outsourcing subsidiary of Norrell Corporation, most recently serving as a senior vice president. Prior to that time, he served in a number of engineering, sales, marketing and executive positions with IBM for 24 years. Mr. Hodges holds a degree in industrial engineering from Pennsylvania State University and has done post-graduate studies in operations research at Union College.
Mr. Cotroneo joined Acxiom as Chief Financial Officer on May 15, 2006. In this role, after a period of transition, he will be responsible for all aspects of Acxioms financial management. Previously, Mr. Cotroneo served as CEO of Core Business Consulting LLC from April 2004 May 2006; as Senior Vice President/CFO of H & R Block from February 2000 October 2003; and as Senior Vice President/CFO of MasterCard International from 1996 2000. He first joined MasterCard International in 1988, holding the positions of Regional Financial Officer based in Singapore, and Director of Business Planning and Financial Analysis. Prior to that, he held senior financial analyst positions with AT&T Corporation, Continental Insurance Company, and Western Union Telegraph Company. Mr. Cotroneo holds a bachelors degree in accounting from Rider University, Lawrenceville, New Jersey, and an MBA in finance from Monmouth University, West Long Beach, New Jersey. In addition, he completed the Corporate Financial Strategy in Global Markets Programme (a post graduate course sponsored by INSEAD / The European Institute of Business Administration) in France. He has also completed the Executive Program at the Darden School of Business, University of Virginia.
Ms. Barrett joined Acxiom in 1974 and serves as Global Privacy Officer. She initially was named a corporate officer in 1981. In her current role, Ms. Barrett is responsible for the oversight of Acxioms global public policy and fair information practices. Since 1991, she has led Acxioms initiatives relating to internal compliance with applicable privacy guidelines, consumer affairs and government affairs. She is a frequent speaker on privacy and customer relationship management and has also published numerous articles and participated in writing books on these subjects. She also is a regular speaker on best practices regarding personal information in a variety of industries, including financial services, retail, insurance, publishing and travel and entertainment, both domestically and abroad. During her career with Acxiom, Ms. Barrett has worked in a variety of areas of the business, including systems development, operations, marketing and business development. Ms. Barrett holds a degree in mathematics and computer science from the University of Texas at Austin.
Ms. Childers joined Acxiom in 1985 and serves as Organizational Development Leader. She was first named an officer in 1996. In her current role, Ms. Childers leads strategic planning and execution in the areas of business culture, organizational effectiveness, associate development, recruiting, human resources and corporate communications. Previously, she served as leader of the financial services business unit and oversaw all of the financial and accounting functions of the Company. Before joining Acxiom, she was a certified public accountant in audit and tax for KPMG Peat Marwick. Ms. Childers holds a degree in business administration from the University of Central Arkansas.
Mr. Gaskill joined Acxiom in 1999 and currently serves as its Corporate Finance Leader and Treasurer. In this role he oversees Acxioms investment banking and commercial banking relationships, is responsible for the companys capital structure, leads the companys investor relations team, and co-leads the companys mergers and acquisitions team. He became an officer in 2005. Prior to joining Acxiom, Mr. Gaskill spent 13 years in the securities industry as a senior analyst and director of research focusing on the information technology and telecommunications industries. Mr. Gaskill holds a degree in computer science and an MBA, both from the University of Arkansas at Little Rock.
Mr. Howe joined Acxiom in 2004 as its Marketing Organization Leader. From 2001 - 2004 he was employed by Fair Isaac & Company as business unit vice president, Global Marketing Services. For two years prior to that, Mr. Howe was the CEO and chairman of the board of ieWild Inc., a technology company offering software solutions to leading financial institutions, which was acquired by HNC Software, Inc. in 2001. For the previous nine years, Mr. Howe held positions in product marketing, project management, sales management, software development and construction engineering. Mr. Howe holds a bachelors degree in structural engineering from Concordia University, Canada, and a masters degree in engineering from McGill University, Canada.
Ms. Hughes joined Acxiom in 1988 as General Counsel and Secretary and currently serves as Corporate Governance Officer and Secretary. She is responsible for the companys compliance with the Securities & Exchange Commissions and Nasdaqs rules and regulations, and for the operations of the Companys board of directors. Prior to joining Acxiom, Ms. Hughes was employed as a corporate securities attorney with the Rose Law Firm in Little Rock, Arkansas where she represented a number of public companies, including Acxiom. Prior to joining the Rose Law Firm, she served as the senior law clerk to Federal District Court Judge Elsijane Roy, Eastern District of Arkansas, and as an assistant attorney general for the State of Arkansas. Ms. Hughes holds a degree in political science and philosophy from the University of Arkansas at Little Rock and a juris doctorate degree from the UALR School of Law.
Mr. Jones joined Acxiom in 1999 and currently serves as Business Development/Legal Leader & Assistant Secretary. In this position, he is responsible for the legal team, leads the strategy and execution of mergers and alliances, and assists in other strategic initiatives. Prior to joining Acxiom, he was employed for 19 years as an attorney with the Rose Law Firm in Little Rock, Arkansas, representing a broad range of business interests. He is a member of the board of directors of Entrust, Inc. and the Arkansas Virtual Academy. Mr. Jones holds a degree in public administration and a juris doctorate degree from the University of Arkansas.
Mr. Womble joined Acxiom in 1974 and serves as the Companys Global Development Leader where he oversees global strategy development, including partnerships and merger and acquisition activity outside of the United States. He previously served for 13 years as a Client Services Leader overseeing relationships with Acxiom clients in major industries, including financial services, health and government. During his career at Acxiom, Mr. Womble has worked in several capacities, including application programming design and implementation, sales, and client services. He served on the Acxiom board of directors from 1975 to 2005 and has been an officer since 1975. Prior to joining Acxiom, he was employed by IBM as a systems engineer and marketing representative. Mr. Womble is a member of the board of trustees of the Arkansas Arts Center. He holds a degree in civil engineering from the University of Arkansas.
Mr. Zaffaroni joined Acxiom in 1997 as Business Development Leader for financial services and currently serves as Strategic Initiatives Leader, where he helps lead Acxioms development of integrated solutions for global clients. For two years he served as the Client Services Organization Leader for Europe. Prior to that, he served as a group leader responsible for one of Acxioms largest global financial accounts as well as for health care and government clients. He was first named an officer in 1999. Before joining Acxiom, he was employed for 22 years with IBM, where he held several management positions. He also served as director of systems integration and outsourcing services for ISSC, the predecessor to IBM Global Services. He holds a bachelor of science degree from Pennsylvania State University and has completed numerous business courses, including IBMs Advanced Management School.
Mr. Allen joined Acxiom in 1997 and currently serves as Client Services Organization Leader for Europe, a position he assumed in April 2006. As such, he is responsible for Acxioms operations in the U.K., France, Germany, Poland, The Netherlands, Spain and Portugal. He also provides direction on a broad range of strategic initiatives impacting Acxiom clients, associates and shareholders. Previously, he served as the Client Services Leader for the Multi-Industry Organization in the U.S., which included such verticals as automotive, insurance, telecommunications and retail. Prior to that, he led global development initiatives across the Company, including leadership of Acxioms operations in the UK, France and Australia. He was first named an officer in 2000. Prior to joining Acxiom, he was employed by IBM and EDS in the U.K. Mr. Allen, a British citizen, holds a bachelors degree in biological sciences from the University of East Anglia (U.K.).
Mr. Dietz joined Acxiom as an officer in 1970 and has served in a variety of senior-level management positions since that time. He currently is Acxioms Products and Infrastructure Technology Organization Leader, setting the strategy and direction for the development of the overall technology framework for the delivery of Acxioms products and solutions. In this role, Mr. Dietz manages the deployment of Acxioms grid technology and the Companys internal information systems and business intelligence processes. He was also involved in the development and rollout of Acxioms Customer Data Integration software, AbiliTec, and the growth and expansion of the InfoBase line of data products. Prior to joining Acxiom, Mr. Dietz was a systems engineer with IBM. He holds a degree in electrical engineering from Tulane University.
Mr. Fournet joined Acxiom in 2005 following the acquisition of InsightAmerica, Inc. and serves as the Line of Business Organization Leader for Acxiom Insight. From 2003 2005 Mr. Fournet served as CEO of InsightAmerica. Prior to that he served as CEO of DBT Online, a publicly-traded public records risk-mitigation company based in Florida, and as chief information and technology officer of Equifax. Prior to joining Equifax Mr. Fournet was employed by GTE and US West, where he held various senior technology management positions. He also served in the U.S. Army as an intelligence and special operations officer. Mr. Fournet holds a bachelors degree in architecture from Louisiana State University, a masters degree in psychology from the University of Illinois, and an MBA in operations research from the University of Southern California.
Mr. Hambuchen joined Acxiom in 1992 and currently serves as its Products & Solutions Management Organization Leader, in which role he is responsible for ensuring consistency and standardization in Acxioms production-based capabilities, including Customer Data Integration, product manufacturing and support. He was first named an officer in 2001 and has served in a number of roles, including the Universal Services & Support Organization Leader, industry solutions group leader for Acxioms Multi-Industry Client Services Organization, and software engineer. He also previously led Acxioms operations in the United Kingdom, France and Spain. Mr. Hambuchen holds a degree in industrial engineering from the University of Arkansas, where he sits on the universitys board of directors for the Information Technology Resource Center. He also serves on the board of directors of Arvest Bank.
Mr. Lloyd joined Acxiom in 1989 and currently serves as Delivery Management Organization Leader where he is focused on providing overall delivery leadership for accounts across all Acxiom industries. He is also responsible for Acxioms program management office and opportunity engagement process. Mr. Lloyd has held a variety of leadership positions within Acxiom, most recently serving as client services group leader focused on client management for several large financial services accounts. He was first named an officer in 2001. He holds a degree in finance from the University of Central Arkansas.
Ms. Marr joined Acxiom in 1986 and currently serves as Acxioms Business Planning Leader, in which role she helps formulate the Companys overall direction. She was first named an officer in 2000, and has held a number of leadership roles at Acxiom in organizational development, operational effectiveness and client relationship management. Most recently, she served as an operational effectiveness leader focused on development of process and quality management initiatives. Her industry experience includes the insurance, investment/brokerage, automotive, telecommunications and financial services industries. She holds a bachelors degree in music from Hendrix College in Conway, Arkansas.
Mr. Park joined Acxiom as an officer in 2005 following the acquisition of Digital Impact, Inc. and currently serves as Acxioms Line of Business Organization Leader for Data, Digital and Direct. Prior to joining Acxiom, he served as CEO and chairman of the board of Digital Impact, an integrated digital marketing solutions company that he co-founded in 1997. During 1996, Mr. Park worked as a director of customer profile marketing at Net Angels, an Internet company focused on Web personalization technologies. Prior to that he was the vice president of marketing for ZAI*NET Software, Inc., an enterprise software company for foreign currency trading. He holds a bachelors degree from the University of Pennsylvania and an M.B.A. from Stanford University.
Mr. Stalnaker currently serves as Acxioms Client Services Organization Leader for Financial Services. He joined Acxiom in 1995 and was first named an officer in 2001. During his tenure he has served in a number of roles in the financial organization, most recently as financial operations leader. Prior to joining Acxiom, Mr. Stalnaker was employed by the Arkansas Public Service Commission as a senior financial analyst. Prior to that, Mr. Stalnaker worked for several years at a regional public accounting firm located in Little Rock, Arkansas. He holds a degree in business administration with a major in accounting from the University of Central Arkansas.
Mr. Sunde joined Acxiom in 2005 and serves as the Client Services Organization Leader for Multi-Industry. Previously Mr. Sunde was vice president and general manager of Siebel Systems, Inc., where he led Siebels alliances organization and was responsible for external alliance partners that acted as joint marketing, sales, development, and services channels. Prior to his three years at Siebel, Mr. Sunde worked in several capacities at Enron Energy Services, Inc., a division of Enron, serving as a director of sales and marketing, product management and most recently as president over North America. Prior to that, he worked for IBM in various management positions for over 18 years. He holds a degree in economics from Carleton College in Northfield, Minnesota.
Mr. Walker joined Acxiom in 1990 and currently serves as Acxioms IT Services Organization Leader, where he oversees all internal information technology operations in addition to the IT infrastructure for Acxioms outsourcing customers. This infrastructure includes open systems, mainframe, network services and print operations. Since joining Acxiom, Mr. Walker has held several senior leadership positions in all aspects of Acxioms internal and external outsourcing and IT services business. He was one of the original group leaders when Acxiom formed its outsourcing division in 1998, and has since played a key role in guiding the business, from managing internal data centers to developing some of the Companys most strategic client relationships. He was first named an officer in 1993. Prior to joining Acxiom, Mr. Walker was employed with IBM, where he served as a systems engineer, on the regional support staff and as an S.E. manager in St. Louis, as a member of the headquarters staff support in Dallas, and as a branch marketing support manager in Washington, D.C. He holds a degree in industrial engineering from the University of Arkansas.
Mr. Watts joined Acxiom in 1987 and serves as account executive for one of Acxioms largest financial services clients, where he is responsible for leading the teams responsible for account management and service delivery and the expansion of the clients business results across geographies and lines of business. Prior to his current role, Mr. Watts led Acxioms Custom Delivery Organization which was focused on design, implementation and enhancement of industry solutions for Acxioms largest clients. In previous leadership roles at Acxiom, Mr. Watts was responsible for relationships with clients in the financial, high-tech, insurance, investment/brokerage, media and telecommunications industries. He was first named an officer in 2001. Prior to joining Acxiom, Mr. Watts was employed for five years with United Parcel Service in Dayton, Ohio. He attended the University of Cincinnati and Wright State University in Dayton, Ohio.
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The outstanding shares of Acxioms common stock are listed and traded on Nasdaq and trade under the symbol ACXM. The following table reflects the range of high and low closing prices of Acxioms Common Stock as reported by Dow Jones & Company, Inc. for each quarter in fiscal 2006 and 2005.
We currently have approximately 2,500 stockholders of record.
The Acxiom board of directors has declared quarterly dividend payments since the quarter ending December 31, 2003. The initial payment rate of $.04 per share on our common stock was increased to $.05 per share in the quarter ending December 31, 2004. Prior to 2004, we had never paid cash dividends on our stock. While we expect to continue to pay quarterly dividends for the foreseeable future, all subsequent dividends will be reviewed quarterly and declared by the board in its discretion.
In addition, if certain financial ratios and other conditions are not satisfied, our revolving credit facility imposes limitations on our ability to pay dividends, including a restriction that we may not pay dividends in excess of $30 million in any fiscal year (plus dividends in an additional amount up to $50 million in any fiscal year, depending on the amount of other restricted payments made during the year). We are not currently under any dividend limitation.
The table below provides information regarding purchases by Acxiom of its Common Stock during the periods indicated.
The repurchases listed above were made pursuant to a repurchase program initially adopted by the Board of Directors on October 30, 2002. The maximum dollar amount which had been approved and is reflected in the table above as of March 31, 2006 was $550 million. As of June 8, 2006, the maximum approximate dollar value of shares that may yet be purchased under the repurchase program was approximately $149.4 million. The repurchase program has no designated expiration date.
For information pertaining to Selected Financial Data of Acxiom, refer to page F-2 of the Financial Supplement, which is attached hereto.
The information required by this Item appears in the Financial Supplement at pp. F-3 F-25, which is attached hereto.
The Companys earnings are affected by changes in short-term interest rates primarily as a result of its revolving credit agreement, which bears interest at a floating rate. The Company does not use derivative or other financial instruments to mitigate the interest rate risk. Risk can be estimated by measuring the impact of a near-term adverse movement of 10% in short-term market interest rates. If short-term market interest rates average 10% more during the next four quarters than during the previous four quarters, there would be no material adverse impact on the Companys results of operations. The Company has no material future earnings or cash flow expenses from changes in interest rates related to its other long-term debt obligations, as substantially all of the Companys remaining long-term debt instruments have fixed rates. At both March 31, 2006 and 2005, the fair value of the Companys fixed rate long-term obligations approximated carrying value.
As noted in Note 3 to the consolidated financial statements, during the fiscal years ended March 31, 2004 and 2005 the Company completed international acquisitions of the Claritas Europe group of companies, the Consodata companies including the German operation formerly known as pan-adress, and ChinaLOOP. As a result of these international acquisitions, the Company now has a larger presence in the United Kingdom and a new presence in France, The Netherlands, Germany, Spain, Portugal, Poland and China. In general, each of the foreign locations is expected to fund its own operations and cash flows, although funds may be loaned or invested from the U.S. to the foreign subsidiaries. Therefore, exchange rate movements of foreign currencies may have an impact on the Companys future costs or on future cash flows from foreign investments. The Company has not entered into any foreign currency forward exchange contracts or other derivative instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
The Financial Statements required by this Item appear in the Financial Supplement at pp. F-29 F-67, which is attached hereto.
As of the end of the period covered by this Form 10-K, Acxiom carried out an evaluation, under the supervision and with the participation of its principal executive officer and person performing the functions of its principal financial and accounting officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based on this evaluation, Acxioms principal executive officer and person performing the functions of its principal financial and accounting officer concluded that Acxioms disclosure controls and procedures are effective.
The person performing the functions of Acxioms principal financial and accounting officer is Rodger S. Kline. Mr. Kline has served as Acxioms acting chief financial officer for the past 17 months and will continue to perform the functions of principal financial and accounting officer in all respects through the date Acxiom files its first quarter 10-Q, as Acxioms newly-hired chief financial officer, Frank J. Cotroneo, transitions into the position of principal financial and accounting officer.
Internal Control over Financial Reporting
Managements report on Acxioms internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), and the related report of Acxioms independent public accounting firm, are included in the Financial Supplement on pages F-26 F-28 and are incorporated by reference.
Changes in Internal Controls
During Acxioms most recent fiscal quarter, there has not occurred any change in its internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, Acxioms internal control over financial reporting.
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Pursuant to general instruction G(3) of the instructions to Form 10-K, information concerning Acxioms executive officers is included under the caption Executive Officers at the end of Part I of this Report. The remaining information required by this Item appears under the captions Election of Directors, and Section 16(a) Beneficial Ownership Reporting Compliance in Acxioms 2006 Proxy Statement, which information is incorporated herein by reference. The Acxiom board of directors has adopted a code of ethics applicable to our principal executive, financial and accounting officers and all other persons performing similar functions. A copy of this code of ethics is posted on Acxioms website at www.acxiom.com under the Corporate Governance section of the site.
The information required by this Item appears under the heading Executive Compensation in Acxioms 2006 Proxy Statement, which information is incorporated herein by reference.
The information required by this Item appears under the heading Stock Ownership in Acxioms 2006 Proxy Statement, which information is incorporated herein by reference. The equity plan compensation information required by this Item appears under the subheading Equity Compensation Plan Information in Acxioms 2006 Proxy Statement, which information is incorporated herein by reference.
The information required by this Item appears under the heading Related-Party Transactions in Acxioms 2006 Proxy Statement, which information is incorporated herein by reference.
The information required by this Item appears under the heading Fees Billed for Services Rendered by Independent Auditor in Acxioms 2006 Proxy Statement, which information is incorporated herein by reference.
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The following consolidated financial statements of the registrant and its subsidiaries included in the Financial Supplement and the Independent Auditors Reports thereof are attached hereto. Page references are to page numbers in the Financial Supplement.
All schedules are omitted because they are not applicable or not required or because the required information is included in the consolidated financial statements or notes thereto.
The following exhibits are filed with this report or are incorporated by reference to previously filed material.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the dates indicated.
INDEX TO FINANCIAL SUPPLEMENT
TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2006
SELECTED FINANCIAL DATA
(In thousands, except per share data)
Introduction and Overview
Acxiom Corporation (Acxiom or the Company) integrates data, services and technology to create and deliver customer and information management solutions for many of the largest and most respected companies in the world. The core components of Acxioms innovative solutions are customer data integration (CDI) technology and services, data, database services, information technology (IT) outsourcing, consulting and analytics, and privacy leadership. Founded in 1969, Acxiom is headquartered in Little Rock, Arkansas, with locations throughout the United States (US) and Europe, and in Australia and China.
Highlights of the most recently completed fiscal year are identified below.
The highlights above are intended to identify to the reader some of the more significant events and transactions of the Company during the fiscal year ended March 31, 2006. However, these highlights are not intended to be a full discussion of the Companys 2006 fiscal year. These highlights should be read in conjunction with the following discussion of Results of Operations and Capital Resources and Liquidity and with the Companys consolidated financial statements and footnotes accompanying this report.
Results of Operations
A summary of selected financial information for each of the years in the three-year period ended March 31, 2006 is presented below (dollars in millions, except per share amounts):
For the fiscal year ended March 31, 2006, the Companys revenue was $1,332.6 million, compared to revenue of $1,223.0 million in fiscal 2005, reflecting an increase of $109.5 million. Services revenue increased $122.9 million, or 14% while data revenue decreased $13.3 million, or 4%. The increase in services revenue is primarily attributable to an increase of $61.1 million in IT Management revenue, an increase of $65.0 million related to the acquisitions of Digital Impact, Inc. (DI), InsightAmerica, Inc. (IA), and Smart DM Holdings, Inc. (SmartDM) and increases in revenue of $19.6 million from clients in the retail, background screening, automotive, and media and publishing industries. These increases were partially offset by a decrease of $12.3 million in our International business, which was mostly due to the sale of the German Lettershop business. All other revenue combined resulted in a net $10.5 million decrease. The industry revenue figures do not include revenue from the European acquisitions, as these revenues are not broken out by industry. The decrease in data revenue is primarily attributable to a decrease in International data revenue of $15.3 million. Partially offsetting the decreases in International data revenue were revenues from Acxioms InfoBase suite of products, which were up 4%.
For the fiscal year ended March 31, 2005, the Companys revenue was $1,223.0 million, compared to revenue of $1,010.8 million in fiscal 2004, reflecting an increase of $212.2 million. Services revenue increased $111.5 million, or 14%, while data revenue increased $100.7 million, or 43%. The increase in services revenue is primarily attributable to an increase of $40.8 million in IT Management revenue, an increase of $17.1 million related to the Claritas Europe and Consodata acquisitions, and increases in revenue of $33.5 million from clients in the financial services, background screening, automotive, telecommunications, healthcare and technology industries. All other revenue combined resulted in a net $20.1 million increase. The industry revenue figures do not include revenue from the European acquisitions, as these revenues are not broken out by industry. The increase in data revenue is primarily attributable to the acquisitions of Claritas Europe and Consodata, which together accounted for $97.8 million of the increase in data revenue during fiscal 2005. There were additional increases in InfoBase analytics, enhancement and list products, which were largely offset by a decrease in the sale of real estate data.
The Companys business segments consist of US Services and Data, and International Services and Data. Both segments include consulting, database and data warehousing, list processing services, the Companys data content and software products. The US segment also includes information technology outsourcing and facilities management for data center management, network management, client/server management and other complementary IT services.
The following table shows the Companys revenue by business segment for each of the years in the three-year period ended March 31, 2006 (dollars in millions):
US Services and Data segment revenue for fiscal 2006 increased $137.2 million over fiscal 2005 and reflects increases of $61.1 million in IT Management revenue, an increase of $66.2 million related to the acquisitions of DI, IA, and SmartDM, and an increase of $23.5 million from clients in the retail, background screening, automotive, and media and publishing industries. All other revenue combined resulted in a net $13.6 million decrease. US Services and Data segment revenue for fiscal 2005 increased $83.7 million over fiscal 2004 and reflects increases of $29.4 million from clients in the financial services, background screening, automotive, government, technology, healthcare, and media and publishing industries, and an increase of $42.0 million in IT Management revenue. All other revenue combined resulted in a net $12.3 million increase.
International Services and Data segment revenue for fiscal 2006 decreased $27.6 million over fiscal 2005. The decrease is attributable in part to the sale of the German Lettershop business, which resulted in a decrease of $12.8 million, and the impact of exchange rates, which resulted in a decrease of approximately $7.2 million. International Services and Data segment revenue for fiscal 2005 increased $128.5 million over fiscal 2004. The increase is primarily attributable to the acquisitions of Claritas Europe and Consodata.
For the fiscal year ended March 31, 2006, approximately 71% of the Companys consolidated revenue was from clients who have long-term contracts (defined as contracts with initial terms of two years or more) with the Company. These revenues include all revenue from clients for which there is a long-term contract that covers some portion of that clients revenue. However, this does not mean that revenue from such contracts is necessarily fixed or guaranteed, as portions of revenue from clients who have long-term contracts, as well as substantially all of the revenue from clients which are not under long-term contract, is variable or project-related.
During the fiscal year ended March 31, 2006 the Company entered into new contracts that are expected to deliver $128 million in annual revenue and renewals totaling $149 million in annual revenue. Total contract value over these contracts entire terms is $458 million for new contracts and $410 million for renewals.
Operating Costs and Expenses
The following table presents the Companys operating costs and expenses for each of the years in the three-year period ended March 31, 2006 (dollars in millions):
The following table presents the Companys operating costs and expenses in categories for each of the years in the three-year period ended March 31, 2006 (dollars in millions):
The cost of services for fiscal 2006 of $778.5 million increased $81.2 million or 12% from fiscal 2005. The cost of services for fiscal 2005 of $697.3 million increased $61.9 million or 10% from fiscal 2004. Cost of services as a percent of services revenue was 77% in fiscal 2006 compared to 78% in fiscal 2005 and 82% in fiscal 2004. Cost of services in fiscal 2006 was up related to the increase in IT Management revenue and to other new contracts in the US Services and Data segment. Additionally, cost of services was up by $44.6 million due to the acquisitions completed since the third quarter of last year, and up by $4.2 million due to expenses incurred in the first quarter for additional resources assigned to a major client installation that has now gone into production. Cost of services in fiscal 2005 was up related to the increase in IT Management revenue and to the acquisitions of Claritas Europe and Consodata.
Cost of data includes acquired data, data royalties, compilation costs and the costs of building the Companys various data products. The cost of data for fiscal 2006 of $202.0 million decreased $6.4 million or 3% from fiscal 2005. The cost of data for fiscal 2005 of $208.4 million increased $45.7 million or 28% from fiscal 2004. The decrease in these costs for fiscal 2006 was primarily attributable to a decrease in International data revenue as well as the divestiture of the Companys real property data compilation business. The increase in fiscal 2005 was primarily related to the acquisitions of Claritas Europe and Consodata.
Selling, general and administrative expenses for fiscal 2006 of $211.5 million increased $15.4 million or 8% from fiscal 2005. Selling, general and administrative expenses for fiscal 2005 of $196.1 million increased $77.5 million or 65% from fiscal 2004. Selling, general and administrative expense as a percent of total revenue was 16% in fiscal 2006 and 2005 as compared to 12% in fiscal 2004. The increase in fiscal 2006 was primarily attributable to acquisitions which accounted for $18.1 million of the increase. Additionally, the Companys bonus expense was higher by $3.2 million. These increases were partially offset by decreases resulting from the cost reduction program implemented by the Company beginning in the second quarter of this fiscal year. The increase in fiscal 2005 was primarily attributable to the acquisitions of Claritas Europe and Consodata, which accounted for $54.7 million of the increase. In addition, the Company incurred expense related to the vesting of employee stock options of $3.6 million, higher than historical accounting expenses related to Sarbanes-Oxley compliance costs, and an investment in the Companys sales force.
Gains, losses and other items for each of the years presented are as follows (dollars in thousands):
On June 27, 2003, the Company sold its Los Angeles outsourcing data center operation for $6.7 million in cash. In connection with the sale, the Company accrued $1.3 million in other accrued expenses for its estimated liability on a building lease that was not assumed by the buyer and wrote off $1.2 million of goodwill. The Company recorded a gain on the disposal of $1.0 million, net of the lease accrual and goodwill write-off, which is included in gains, losses and other items, net for the year ended March 31, 2004.
In fiscal 2004, due to the decline in the business prospects of the buyer of one of the businesses disposed of in fiscal 2002, the Company recorded an allowance for uncollectible notes of $0.9 million. This was charged to gains, losses and other items, since it represents an adjustment of the loss on the sale of the business recorded in fiscal 2002. The $0.9 million loss is netted against the $1.0 million gain on the disposal of the Los Angeles outsourcing data center operation in the table above. In fiscal 2005, there was a small adjustment to the disposal of the Los Angeles outsourcing data center mentioned above, resulting in an additional loss recorded in gains, losses and other items of $0.1 million.
In fiscal 2006 the Company sold its lettershop operations in Melville, New York and its real property data compilation business recording net losses on these sales of $0.3 million and $1.9 million, respectively. In fiscal 2006 the Company also sold a subsidiary in Spain that had no remaining operations but had available tax loss carryforwards which could be used by the buyer. The sale generated proceeds of $1.2 million and a gain on disposal included in gains, losses and other items of $0.8 million.
In fiscal 2006, the Company terminated the lease on an airplane which was then sold by the lessor. Under the terms of the lease, the Company was entitled to the proceeds of the airplane sale, net of the payoff value of the lease. As a result of this lease termination, the Company received proceeds of $1.5 million. In addition, the Company sold an unused facility for cash proceeds of $3.6 million and recorded a gain of $2.8 million.
During the fourth quarter of fiscal 2004 the Company recorded a charge of $4.0 million for restructuring. The charge included $3.7 million related to severance and other associate-related charges due to the termination of approximately 230 associates on or prior to March 31, 2004. The remainder of the charge was $0.3 million related to termination of a lease at one of the Companys locations. During fiscal 2005, the remaining accrued items were completely paid, and the accrual balance was increased through gains, losses and other items (see note 2 to the consolidated financial statements).
In fiscal 2006 the Company recorded a total of $13.0 million in restructuring and other impairment charges (see note 2 to the consolidated financial statements). The charges included $6.8 million in severance and other associate-related reserves for payments to be made to involuntarily terminated associates; $3.7 million in lease termination costs or costs to be incurred after exiting certain leased facilities; and $2.5 million in other costs including the write-off of certain non-productive assets and other contract termination costs. The bulk of the severance and associate-related costs were paid by the end of the fiscal year. The remaining accrued costs are expected to be paid out over the terms of the related leases or contracts, of which the longest runs through fiscal 2012.
During the periods reported, the Company has received additional payments from the Wards bankruptcy trustee. Bankruptcy trustee payments were recorded through gains, losses and other items where the Wards bankruptcy expense was originally recorded.
The following table shows the balances that were accrued for the 2006 restructuring plan, the 2004 restructuring plan, and a previous restructuring plan as well as the changes in those balances during the years ended March 31, 2004, 2005 and 2006 (dollars in thousands):
Gross profit margins for services were 23.1% in fiscal 2006 which compares with 21.6% in fiscal 2005 and with 18.3% in fiscal 2004. The improvement in gross profit margin is primarily attributable to revenue growth coupled with the Companys expense reduction program implemented in the second quarter of fiscal 2006.
The gross profit margins for data were 36.9% in fiscal 2006 which compares to 37.5% for fiscal 2005 and 30.1% for fiscal 2004. The increase in 2005 was due to the full-year impact of the European acquisitions.
The consolidated gross profit margins for fiscal 2006 were 26.4% which compares to 25.9% for fiscal 2005 and 21.0% for fiscal 2004.
Fiscal 2006 operating margins were 9.8% compared to 10.0% for fiscal 2005 and 9.2% for fiscal 2004. The 2006 operating margins were negatively impacted by the restructuring charges noted above.
Other Income (Expense), Income Taxes and Other Items
Interest expense for fiscal 2006 increased $9.6 million or 50% due to increased levels of long-term debt primarily due to the Companys stock buy-back program and acquisitions (see note 10 to the consolidated financial statements). Interest expense for fiscal 2005 decreased $0.1 million compared to fiscal 2004 reflecting lower average debt levels offset by higher interest rates. The Companys weighted-average interest rate on long-term debt was 5.7% at both March 31, 2006 and March 31, 2005.
Other net decreased $1.2 million in fiscal 2006 compared to fiscal 2005 after increasing $9.9 million in fiscal 2005 compared to fiscal 2004. Other net includes interest income on notes receivable of $1.5 million, $3.0 million and $2.4 million in fiscal 2006, 2005 and 2004 respectively. The interest income in fiscal 2005 includes interest income of $1.1 million from the Internal Revenue Service due to the filing of amended returns from prior years. Other, net also includes losses of $1.1 million in 2004 related to an investment. Other, net for fiscal 2004 includes a write-down on marketable and non-marketable investments of $7.2 million. These write-downs are the result of the determination by management that certain of the Companys investments are other than temporarily impaired. In making the assessment as to whether a decline in value of an investment is other than temporary, the Company looks for a decline in value below its cost basis for a sustained period of time, generally six to nine months. In addition, management looks at all other available information, including the business plan and current financial condition of each investee.
The Companys effective tax rate was 38.5% in fiscal 2006, 34.4% in fiscal 2005 and 13.3% in fiscal 2004. The effective rate for the current year reflects certain costs incurred related to the Companys defense against ValueActs attempted takeover, which may not be deductible for federal income tax purposes and have therefore been accounted for as nondeductible expense. The fiscal 2005 rate was impacted by a $2.0 million contingency reserve reversal. This reversal was the result of a settlement with the IRS regarding the timing of deductions for warrants issued to a customer on terms more favorable than previously expected. The 2005 rate also included a $1.0 million benefit from research credits claimed in the 2004 tax return in excess of the amount calculated in the 2004 accrual. The rate in fiscal 2004 was impacted by the reversal of tax liabilities that had previously been provided for tax years 1999 through 2002, which were subject to audit by the Internal Revenue Service. During fiscal 2004 these tax audits were completed, resulting in the reversal of these contingency reserves, which were primarily related to the tax effects of restructuring costs, warrants issued to a customer, and claimed research and development credits.
Capital Resources and Liquidity
Working Capital and Cash Flow
Working capital at March 31, 2006 totaled a negative $41.1 million compared to a negative $30.6 million at March 31, 2005. Total current assets increased $5.2 million, including an $11.0 million increase in accounts receivable, but current liabilities increased $15.7 million. Cash provided by operating activities was $275.8 million in fiscal 2006 compared to $247.0 million in fiscal 2005 and $259.9 million in fiscal 2004. The increase in operating cash flow for 2006 was consistent with the increase in depreciation and amortization of $36.0 million, partially offset by other operating cash flow items. Depreciation and amortization increased by $44.9 million in 2005, but the resulting increase in operating cash flow was more than offset by a $64.2 million net change in operating assets and liabilities, primarily due to the impact of increases in accounts receivable as compared to a decrease in fiscal 2004. Net changes in operating assets and liabilities increased fiscal 2004 operating cash flow by $30.2 million, primarily as a result of decreases in accounts receivable due to strong collections at the end of the fiscal year. Depreciation and amortization of $150.2 million in fiscal 2004 includes $2.8 million of charges related to the impairment of software.
Accounts receivable days sales outstanding (DSO) was 68 days at March 31, 2006 and was 70 days at March 31, 2005, and is calculated as follows (dollars in thousands):