LiveRamp Holdings, Inc.

Good afternoon and welcome. Thank you for joining our fiscal 2024 third quarter earnings call. With me today are Scott Howe, our CEO, and Lauren Dillard, our CFO. Today's press release and this call may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. For a detailed description of these risks, please read the risk factors section of our public filings and the press release. A copy of our press release and financial schedules, including any reconciliations to non-GAAP financial measures, is available at LiveRAMP.com. Also, during the call today, we'll be referring to the slide deck posted on our website. And with that, let me turn the call over to Scott.

Thank you, Drew. And thanks to everyone joining our call today. Q3 represented another quarter of improved momentum for LiveRAMP. So my initial remarks today are, we'll focus on our recent accomplishments in greater detail. As we look forward, however, we see a watershed year for the digital marketing industry and a significant opportunity for LiveRamp. So I'll also spend some time talking about our goals for FY25 so that we can revisit our progress against these ambitions in the coming quarters. Q3 revenue growth exceeded our expectations across the board. with total revenue up 10%, subscription revenue up 5%, and marketplace up 29%. Non-GAAP operating income was up 40% year-on-year and was $7 million, or 25%, ahead of our guidance. A year ago, you may recall we had a non-recurring contract settlement. Adjusting for this, our underlying subscription growth was 8%. which is a notable acceleration from the 5% rate we posted in the trailing three quarters. This acceleration reflects the turnaround in sales productivity that has been building over the past several quarters. As I often say, the gift and curse of a SaaS model is reported revenue growth is slow to decelerate and also slow to accelerate. The quarter seemingly demonstrates that we are now on the upswing, and encouragingly, the leading indicators of our revenue growth give us increased confidence about the fiscal year ahead. Our ARR, or annual recurring revenue, in Q3 was $447 million, increasing by $19 million quarter-on-quarter, which is the largest dollar increase in the last nine quarters. Building on the new logo booking strength of Q2, Q3 represented our best new logo quarter in over two years. We signed a major health insurance company to a seven-figure annual contract with a three-year term for our identity and clean room products. A US supermarket chain signed a two-year contract with a seven-figure ACV for identity and data onboarding. Finally, we signed a new financial services customer to a two-year, seven-figure annual contract for our identity, activation, and measurement products. We also continue to perform well, upselling existing clients, particularly large enterprise customers. In Q3, we upsold 42 Fortune 500 customers, spanning a wide range of sector verticals. We had a seven-figure ACV upsell with a premium credit card company for data onboarding and activation. We upsold a major CPG company to an incremental seven-figure annual contract for multiple products, including our data cleanroom, activation, and measurement. Finally, we had another seven-figure upsell with a global beauty and cosmetics company for our identity and cleanroom products. I am extremely proud of our recent sales performance and the turnaround our sales team has orchestrated over the past year plus. Our sales capacity and productivity have turned a corner, setting us up for continued gains. Capacity. Sales attrition this year after spiking in FY23 has normalized back to FY22 levels and our direct seller headcount is approximately 10% higher than it was in FY22. Our sales capacity is in a healthy position, and that means we can proactively optimize for sales performance. Sales productivity. Not only is our capacity at a level sufficient for faster revenue growth, we are also seeing improving productivity. Average bookings per rep were up over 20% year on year, in both Q3 as well as fiscal year to date. Our conversion of sales pipeline to contract signings has improved for four consecutive quarters now, and in Q3 was a 10-quarter high. Much of this improvement is coming from sellers we onboarded last year, a testament to both our revised hiring strategy that focuses on experienced enterprise sellers with vertical expertise as well as our revamped onboarding and enablement process that has accelerated the ramp time for our new reps. Cloud partnerships. We also continue to make progress with our cloud channel partnerships and bookings from this channel will double this fiscal year. In Q3, we were selected as a 2023 Amazon Web Services Global Industry Partner of the Year. for playing a key role helping customers drive innovation and build solutions on AWS. This accolade should sound familiar because last August, Google Cloud also selected us as Partner of the Year. We also continue to gain traction with our Snowflake sales partnership and our embedded identity and activation products. As for Azure and Databricks, We expect these partnerships to scale more meaningfully in the coming year, thanks in part to Habu's strong relationship. Let me turn to our major areas of focus for the year ahead, starting with Habu. We announced the acquisition of Habu on January 18th and closed on January 31st. We have had many conversations with customers, partners, employees, and shareholders. I'm pleased to share that the feedback has been overwhelmingly positive across the board. Our stakeholders and partners recognize the importance of first-party data collaboration for personalized marketing in a world of diminishing third-party signals. They appreciate that no single company has enough data on their own to have a complete and comprehensive view of the customer journey, making data collaboration imperative. The combination of LiveRamp and Habu creates the software platform that makes this type of data sharing safe, simple, scalable, and smart. The LiveRamp data collaboration platform has long been a leader in the cleanroom space. In fact, we launched the first commercially scaled cleanroom more than four years ago. The acquisition of Habu helps us take our cleanroom offering to the next level by adding three critical capabilities. First, streamlined and simplified cross-cloud collaboration that will allow customers to seamlessly connect data across clouds, warehouses, and cleanrooms, while reducing complexity and IT infrastructure constraints. On this point, it is important to understand that Habu's cleanroom architecture is complementary to LiveRAMP's legacy cleanroom offering. Habu brings its software to the client's cloud environment, whereas our cleanroom is a fully managed and hosted environment. In effect, the customer sends their data to our environment and sits on our cloud. Some customers prefer a hosted environment because it requires no internal IT resources and or their data is not yet in the cloud. We have a significant number of current clients using our clean room, and we continue to add new customers every quarter, including Q3. Looking forward, as more data moves to the cloud, we expect the embedded cloud architecture to become more prominent, and our clean room product roadmap prior to the Habu acquisition included the conversion of our clean room to the cloud embed architecture. But with this acquisition, This conversion is no longer necessary. We are saving time and R&D dollars that will be redeployed to other product enhancements. And in the meantime, our combined clean room offering can meet any customer's technical requirements, whether it's cloud embedded or hosted. Second, a first-of-its-kind single view of measurement across any walled garden programmatic channel, or media partner, including media networks and all major CTV and TV platforms. Habu enhances our ability to measure walled gardens, which is critical given that walled gardens account for nearly three-quarters of non-search digital advertising. This single view of measurement is incredibly powerful for brands looking to compare audience measurement and return on ad spend across platforms. Third, and perhaps most importantly, Habu provides an exceptional user experience with an easy-to-use self-service interface. Habu's unique architecture allows customers to create a clean room with a click of the button, accelerating the time to value. This benefits all customers, but especially non-technical customers, SMBs, and international customers that often have less internal technology resources. Our customers care about scale and simplicity, and this combination delivers more of both to everyone in the ecosystem, allowing us to accelerate the scaling of our collaboration network for all customers. Their early feedback from customers supports our belief in the power of this combination. Last week, I attended the Internet Advertising Bureau's annual leadership meeting, where I received firsthand feedback. Our customers are especially excited to have a cloud-native identity, plus clean rooms, plus activation in a single unified platform, and the opportunity for a more scaled collaboration partner network. They are also excited about the improved ease of use. In fact, we had a large publisher re-engage with us about a clean room solution after initial discussions went dormant over the implementation time. Retail media network customers with managed service platforms are excited to have a platform that makes data collaboration more self-serve to collaborate with a wider set of partners. Our sales team has hit the ground running. We have already completed a full training on Habu's product and have been actively engaging with customers. In just the first two weeks since announcing the Habu acquisition, our sales team has conducted well over 100 customer calls and meetings to discuss the combination, and our sales pipeline has expanded already by several million dollars. Last week, as an example, at the IAB meeting, Habu's CEO, Matt Kilmartin, told me he felt like a rock star, given the dozens of meeting requests that he fielded from clients and prospects. He was absolutely the most popular man at the IAB. It's a tremendous start, and the momentum is building. We are thrilled to welcome Habu to the LiveRamp team and are very optimistic about what we will accomplish for our existing and new customers in the coming years. 2024 will also be the year the advertising industry embraces true people-based marketing that leverages authenticated identity as the third-party cookie is retired. Consequently, this will be a second major focus area for us in the coming year. We view cookie deprecation as a significant opportunity for LiveRamp. because we believe first-party data collaboration will be one of the primary solutions for marketers to sustain personalized advertising in the absence of third-party signals. On January 4th, Google deprecated third-party cookies for 1% of Chrome users globally, the next milestone in Google's announced plan to phase out third-party cookies for all Chrome users globally in the second half of 2024. given Chrome's 60% plus browser market share globally, and given past delays with its cookie deprecation timeline, this 1% deprecation of third-party cookies was a notable step forward in the industry's transition to people-based marketing, leveraging authenticated identity. We have been preparing for this signal-less future for some time now, and we are excited to continue helping our partners, customers, and stakeholders on the journey to a more privacy-friendly approach. Our Authenticated Traffic Solution, or ATS, is more than four years in the making and was purpose-built for the signal-less marketing environment we are about to enter. ATS safely and securely connects the first-party data from marketers and publishers to personalize and measure advertising on authenticated inventory. Additionally, we have partnered with Google's Display and Video 360, DV360, on its pair initiative. DV360 is Google's demand-side platform and is the market share leader. DV360 gives advertisers programmatic access to display and video ad inventory from Google's owned and operated sites. such as YouTube, as well as third-party publishers. PAIR, which stands for Publisher-Advertiser Identity Reconciliation, is DV360's answer to third-party cookie deprecation and allows advertisers and publishers to securely and privately reconcile their first-party data to enable personalized advertising. LiveRAMP's role in PAIR is twofold. First, Google has mandated the use of an independent cleanroom partner for Pear and announced three launch partners. LiveRamp and Haboo, now the same company, were two of those three partners. And our combined scale and readiness vastly exceeds the third partner. Second, Pear fuels adoption of LiveRamp's authenticated traffic solution since both advertiser and publisher audience must now be consented. For more than six months now, we have been testing PAIR with our publisher and advertiser partners. Last week, we published our first PAIR case study with Omni Hotels and Resorts. The results are truly outstanding. PAIR campaigns showed a 4X increase in conversion rate over traditional cookie-based first-party audience targeting in DV360, indicating pair delivered better performing impressions. Forex, this is a big deal. LiveRamp has long championed the idea that personalization and privacy is not an either or proposition. The results of this case study demonstrate that campaigns based on authenticated first party data are not just more effective than third party cookie campaigns, they are significantly more effective. We are excited to move into the post-cookie world, and based on these results, advertisers should be also. Before turning the call over to Lauren, let me touch on our bottom line results. Rule of 40, including bottom line performance, is a third major focus area for us in the coming year. we have certainly not lost sight of the bottom line while we've been delivering better top line performance. We started this fiscal year expecting to deliver margin expansion of 500 basis points, and now, based on our updated guidance, we expect to deliver 600 basis points. Candidly, we could have delivered even more margin upside this year, but we chose to reinvest some of this upside into our product and people. so we can return to sustainable double-digit top-line growth. We are also now steadily producing a meaningful amount of operating cash flow. Q3 was our sixth consecutive quarter of positive operating cash flow, and in the trailing four quarters, we produced nearly $110 million in operating cash flow. As proud as I am of this, there is more work to be done. As you know, our medium-term goal is to be a rule of 40 company with sustainable 10% to 15% revenue growth and a 25% to 30% non-gap operating margin. Given our guidance, we will end FY24 as a rule of 24 company. But our current momentum and ongoing operational focus gives me confidence that in FY25, we will continue to make progress toward our medium-term goal. In almost every area of our business, we see opportunities to further improve our efficiency and effectiveness. We'll continue to make pipeline and bookings a top priority, knowing these are the drivers of future SaaS revenue. Across our organization, we will continue to push for productivity gains through scale, automation, and improved performance. We'll continue to re-architect to improve product scalability. We'll push to make our technology even more simple, intuitive, and increasingly self-serve to broaden our available market and improve our cost to serve. And finally, we'll continue to make client satisfaction a top priority, always trying to reduce churn and create even more reference clients. In closing, let me reiterate what I believe to be the key themes from the quarter. First, I am really pleased with the organic momentum in our business, particularly with subscription revenue growth turning towards high single digits. As a result, we have again raised our FY24 guidance. The acquisition of Habu will further accelerate this organic momentum by establishing the industry-leading interoperable platform for data collaboration across all clouds, all walled gardens globally, strategically expanding our collaboration network and driving further adoption of our core identity and connectivity solutions. Third, industry trends, well, They're a wind at our back over the long term. This includes the deprecation of third party cookies, as well as the shift to cloud computing, retail and commerce media networks, and CTV. We are well positioned to benefit from all of these megatrends in the years ahead. Thank you again for joining us today, and a special thanks to our exceptional customers, partners, and all LiveRampers, including our new HABU colleagues, for their ongoing hard work and support. We look forward to updating you on our progress in the coming quarters. I will now turn the call over to Lauren.

Thanks, Scott, and thank you all for joining us. Today I will cover two topics. First, a review of our Q3 financial results, and second, our updated outlook for FY24 and Q4. Unless otherwise indicated, my remarks pertain to non-GAAP results and growth is relative to the year-ago period. Starting with Q3 results, revenue and operating income were consistent with the preliminary results we reported on January 18th. Revenue came in at $174 million, $9 million above our guidance, and operating income was $36 million, $7 million above our guide. operating margin expanded by five percentage points to a record high of 21% and we generated 17 million in operating cash flow, our sixth consecutive quarter of positive OCF. Let me now provide some additional details. Please turn to slide five. Total revenue is 174 million, up 10%, with subscription revenue and marketplace and other significantly ahead of expectations driven primarily by continued sales execution and a stronger than expected digital advertising market. Subscription revenue was $132 million, up 5%. Recall that the year-ago quarter benefited from a $4 million non-recurring contract settlement with a large customer. Fixed subscription growth accelerated from our most recent quarter by approximately 150 basis points to 5%. Usage as a percentage of total subscription revenue was 16%, a tick above our historical 10 to 15% range. ARR was $447 million, up 6%. ARR improved quarter-on-quarter by 5%, or $19 million. This sequential dollar increase was the largest increase in the last nine quarters. The improvement was primarily driven by continued good growth in customer upsell and new logo, as well as lower customer churn and downsell. Subscription net retention was 101%, stable sequentially and in line with our expectation. Current RPO, or our next 12-month contracted backlog, was $382 million, up 18%. Total RPO, including contracted backlog beyond the next 12 months, was up 35% to $546 million. Like with recent quarters, there is a large difference between CRPO and ARR growth. As we've discussed previously, CRPO is very sensitive to the timing of renewals and to contract durations. And given our enterprise focus and shift to more multi-year deals, both of these factors again benefited CRPO growth in the quarter. Overall, the Q3 selling environment was fairly healthy. We continued to see an improvement in the conversion of pipeline to sign deals, and our U.S. conversion rate was a 10-quarter high. On a dollar basis, our new logo signings were also a 10-quarter high, as our strategy of prioritizing larger customers continues to bear fruit. Also, our quarterly contraction, or the combination of downsell and customer churn, was a two-year low. Our average deal cycle continued to run at eight to nine months, consistent with the trailing five quarters. One area of continued softness to call out is with small, low ACV customers, both brands as well as tech platforms, including ad tech, that is experiencing structural change. Marketplace and other revenue of $42 million increased 29%. driven by data marketplace, which grew 24% and accounted for 79% of marketplace and other revenue. Data marketplace growth was fueled by the strong digital advertising environment, and in particular, CTV, as well as enhancements we've made to our data marketplace to make the buying and selling of data more seamless. We also continue to see strong growth in professional services. which accounted for nearly one-third of the revenue growth in Marketplace and other. Moving beyond revenue, gross margin was 75%, down one point year-on-year, and 100 basis points higher than our guidance, driven primarily by the timing of planned investments and services growth. Operating expenses were flat at $95 million, with savings from last year's restructuring offset by the normalization of sales commissions and incentive comps. Operating income was $36 million, up from $26 million a year ago, and our operating margin expanded by 500 basis points to a record high of 21%. GAAP operating income was $15 million, representing a GAAP operating margin of 9%. We incurred $3 million in restructuring charges, primarily due to our APAC restructuring and HABU acquisition-related expenses. Stock-based compensation was $17 million, down from $30 million a year ago due to the accelerated vesting of certain non-NEO RSUs in Q4 of FY23 for tax planning purposes. Operating cash flow was $17 million, up from $16 million a year ago. The year-on-year comparison was negatively impacted by the timing of current year tax payments. Fiscal year-to-date operating cash flow is $78 million, up from $4 million last year. We repurchased 347,000 shares for $10 million in Q3, bringing the year-to-date total to $45 million. We have approximately $173 million remaining under the current authorization that expires on December 31st In summary, Q3 was a strong quarter. Revenue growth improved to 10% with both subscription and marketplace exceeding our expectations. ARR grew by $19 million quarter on quarter, the largest quarterly increase in over two years. Our non-GAAP operating margin expanded by approximately 500 basis points. We generated $17 million in operating cash flow in the quarter, and $109 million in the trailing four quarters. Finally, fiscal year to date, we have returned $45 million to shareholders through our share repurchase program. Next, let me now turn to our financial outlook for FY24 and for Q4. Please turn to slides 12 and 13. Please keep in mind our non-GAAP guidance excludes intangible amortization, stock-based compensation, and restructuring and related charges. Starting with Q4, we expect total revenue of between $158 and $162 million, up 6% to 9% year-on-year. Non-GAAP operating income of $13 to $14 million, and an operating margin of 8% to 9%. A few other call-outs for Q4. We expect subscription net retention in Q4 to be 100%, a roughly stable quarter-on-quarter. We expect customer count to be flat to down, reflecting ongoing changes and consolidation in the digital advertising market that may impact smaller tech platform customers, including ad tech. While this would impact customer count, we don't expect the revenue impact to be material. We expect subscription revenue to be up mid-single digits, with fixed also up mid-single digits, similar to Q3, and usage flat in the name of conservatism. We expect Marketplace and other to be up mid to high teens based on current trends quarter to date and assuming the current digital advertising market remains stable throughout the course of the quarter. We expect gross margin to be approximately 75%. We expect operating expenses to be up roughly 10% year on year. Let me spend a moment here. First, Habu is going to add roughly three points of OPEX in the quarter. Next, in Q4, we will start lapping the savings from last year's cost restructuring, which provided a meaningful benefit to our expense growth fiscal year to date. And finally, with respect to the sequential dollar increase, recall that Q4 is seasonally our highest operating expense quarter of the year due to our ramp-up conference, payroll taxes, and incentive comps. The quarter-over-quarter increase in Q4 is consistent with historical seasonality, including the impact of one-time cost restructurings like we had last year. We expect GAAP operating loss to be between $18 and $17 million, inclusive of $5 to $6 million of additional expense associated with HABU stock-based compensation, intangible amortization, and acquisition-related expenses. Now, for the full year. We are increasing our total revenue guidance by approximately $13.5 million at the midpoint compared to our $9 million beat in the quarter. We now expect revenue to be between $646 and $650 million, up 8% to 9% year-on-year. Non-GAAP operating income is increased by $4 million at the midpoint and is expected to be between $103 and $104 million. At the midpoint of our guidance range, the operating margin is approximately 16%, up 600 basis points year-on-year. We expect stock-based compensation to be approximately $71 million, which benefits from the $23 million in accelerated vesting in FY23. We expect $12 million in restructuring charges, $1 million higher than our prior guide due to acquisition-related expenses. We expect GAAP operating income to be between $8 and $9 million. Before opening the call to questions, I'll conclude with a few final thoughts. First, Q3 was strong on both the top and bottom lines. Our growth in subscription revenue in ARR is trending higher, and we are positioned for further acceleration exiting this year. Next, as we look ahead, there are a couple of initiatives that we believe will help our top and bottom line both next year and beyond. First and foremost is efficiently and effectively integrating HABU. Additionally, we will make incremental progress with our India Offshoring Initiative, and we intend to roll out back-end product improvements that will allow us to more efficiently process our customers' data. And finally, our financial North Star remains Rule of 40. On the top line, we're encouraged by the positive trends in sales productivity, and the HABU opportunity, and ultimately what that implies for subscription growth next year. On the margin front, the leverage in our model, combined with the expansion of our new India office, gives us a path for steady margin expansion in the coming years while continuing to appropriately invest to support healthy top-line growth. With that, on behalf of all LiveRampers, thank you for joining us today. Operator, we will now open the call to questions.