Fair Isaac Corp (FICO) 2016 Q3 法說會逐字稿

Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fair Isaac Corporation Quarterly Earnings Conference Call. (Operator Instructions) Steve Weber, you may begin your conference.

Thank you. Good afternoon, and thank you for joining FICO's third quarter earnings call. I'm Steve Weber, Vice President of Investor Relations, and I'm joined today by our CEO, Will Lansing, and our CFO, Mike Pung.

Today, we issued a press release that describes financial results compared to the prior year. On this call, management will also discuss results in comparison to the prior quarter in order to facilitate understanding of the run rate of our business.

Certain statements made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Those statements involve many uncertainties that could cause actual results to differ materially.

Information concerning these uncertainties is contained in the Company's filings with the SEC, in particular, in the "Risk Factors" and "Forward-Looking Statements" portions of such filings. Copies are available from the SEC, from the FICO website, or from our Investor Relations team.

This call will also include statements regarding certain non-GAAP financial measures. Please refer to the Company's earnings release and Regulation G schedule issued today for a reconciliation of each of these non-GAAP financial measures to the most comparable GAAP measure. The earnings release and Regulation G schedule are available on the Investor Relations page of the Company's website, at www.fico.com or on the SEC's website at www.sec.gov.

A replay of this webcast will be available through July 28, 2017.

With that, I'll turn the call over to Will Lansing.

Thanks, Steve, and thank you, everyone, for joining us for our third quarter earnings call. I'll briefly summarize our financial results for this quarter and then I'll discuss the progress we're making on our strategic initiatives.

In our third quarter, we reported revenues of $239 million, the highest single quarter in company history, up 14% from the same period last year. We delivered $35 million of GAAP net income or $1.08 per share, both up 76% from the prior year. We delivered $47 million of non-GAAP net income and non-GAAP EPS of $1.45 per share, both increasing 45% from the same period last year.

We continue our strong cash generation, with $78 million of free cash flow this quarter. Most importantly, we had strong quarter across the board with growth in each of our segments. Our Scores segment delivered $61 million of revenue this quarter, an increase of 10% over the same period last year. Our Applications segment revenue of $142 million was an increase of 11% over the same period last year. Finally, our Tools segment, which includes our Decision Management Suite, delivered a record $36 million, up 36% from last year.

Much of the growth this quarter came from an exceptionally large number of license deals, but we also continued to add to our recurring revenue base. We've made tremendous progress on our strategic initiatives and we're starting to see the results of our hard work. Our B2B Scores business continues its healthy growth. Volumes are up across all life cycles and revenues are up 11% year over year. FICO score used among lenders is as strong as ever and increased volumes prove that financial institutions rely on the score to find new customers as well as manage and monitor risk.

We are also continuing to make progress with our consumer business. We recently announced an agreement with Progression, a market leader in credit report repair services, to provide FICO scores to consumers. We also signed our first Affinity deal through a license with Experian. The non-bank deal is smaller in size but it is an important proof point for us. We expect both of these to ramp up by the end of the calendar year.

Earlier this month, we partnered with Discover to power their first-of-its-kind credit scorecard, which allows consumers, even those who are not Discover customers, to see their FICO score for free. With over 150 million accounts accessing their FICO scores through open access, it's now easier than ever for consumers to regularly see their FICO score. This is good for consumers, as they can understand and improve their credit worthiness. It's good for FICO as consumers understand that the FICO score is overwhelmingly the score that matters for lending decisions.

Because of this, we believe the FICO scores can be a key differentiator for businesses marketing various financial services. We are continuing to make progress with opportunities in this market, as evidenced by the deals we completed this quarter and we expect more to follow.

On the software side, our investments are continuing to pay off. We are winning deals and are building a nice pipeline. This quarter we closed a number of license deals with particularly strong sales in our banking fraud and Blaze product lines. Overall, we had a strong sales effort this quarter. Our bookings this quarter were $79 million, up 31% over the prior year. Fiscal year to date, our bookings are up 42% over last year.

Many of these bookings are enabling our recurring revenues growth. This quarter, our recurring revenue is up 6% from last year and year to date, recurring revenues are up 9%. This has been a key part of our strategy as we build out our cloud business and increase predictable recurring revenues.

We continue to innovate. Last quarter, I gave an update on version 2.0 of the Decision Management Suite. We generated a lot of interest at FICO World in April and we're now meeting with potential customers to help them solve their toughest decisions. We also announced the introduction of our enterprise security score, which will help rank an organization's level of cyber security risk. To further this effort, we acquired QuadMetrics, an innovative cyber risk security scoring company. QuadMetrics leverages predictive analytics to monitor signals from open source and proprietary data sources, to provide an overall security score for an enterprise, helping security professionals address gaps, and enabling partners and insurers to understand a firm's security risk. QuadMetrics will complement our own FICO Falcon cyber security analytics for threat detection and will create an easy-to-understand metric that will facilitate board-level risk assessment, third-party vendor management, and cyber breech insurance underwriting. Along with the score, the product will provide current threat profile characteristics and granular insights into potential security issues.

As always, we remain focused on driving shareholder value. This quarter and year to date, we've increased our margin by 400 basis points. Our strong cash flow has enabled us to bring our leverage down this fiscal year, while still returning 118 through our share purchase program.

I'll share some summary thoughts later, but now I'd like to turn the call over to Mike for further financial details.

Thanks, Will, and good afternoon, everyone. Today, I'll emphasis three points in my prepared comments. First of all, we delivered $239 million of revenue, up 14% over the same period last year and $1.08 of GAAP EPS and a $1.45 of non-GAAP EPS, an increase of 76% and 45% year over year respectively. Second, we delivered $78 million of free cash flow this quarter and $147 million year to date, an increase of 122%. We completed our most recent share repurchase plan and today we announced that our board reauthorized a new $250 million plan. Finally, we are updating our bottom line guidance to reflect the higher margin revenues and resulting lower-than-expected expenses we are driving this year.

I'll begin by breaking the revenue down into our three reporting segments. Starting with applications, revenues were $142 million, up 11% versus the prior year. This was driven by increased license sales and fraud management solutions, increased transactional volumes and customer communication services, and increased license and services revenues and origination solutions compared to the last year. The quarter applications bookings were up 59% versus the same period last year.

In the Tools segment, revenues were $36 million, up 36% versus the prior year. This is the largest revenue quarter ever for Tools, led by increased license sales of Blaze Advisor and the FICO decision management platform.

Finally, our Scores segment was also strong with revenues of $61 million, up 10% from the same period last year. On the B2B side, we're up 11% and on the consumer scores revenue we're up 7% from the same quarter last year.

Looking at revenue by region, this quarter 72% of total revenues were derived from our America's region, our EMEA region generated 20%, and the remaining 8% was from Asia Pacific. Recurring revenues derived from transactional maintenance sources for the quarter represented 64% of total revenue. Consulting and implementation revenues were 19% of total and license revenues were 17% of total revenue.

We signed $79 million of bookings this quarter, up 31% from the prior year. We generated $22 million of current-period revenue on those bookings for a yield of 28%. The weighted average term for our bookings this quarter was 28 months. Year to date, we have signed $298 million of bookings, up 42% from last year.

Operating expenses totaled $183 million this quarter compared to $168 million in the prior quarter. The increase relates to variable costs associated with the increased revenue, wages and performance-based incentives, and the costs related to FICO World. As you can see in our Reg G schedule, our non-GAAP operating margin was 30% in the third quarter and 27% year to date. We expect that operating margin to be between 27% and 28% for the full year.

GAAP net income this quarter was $35 million, up 76% from the prior year. Non-GAAP net income was $47 million for the quarter, up 45% from the same quarter last year.

The effective tax rate was about 30% this quarter. We expect the effective tax rate to be about 28% to 29% for the full year.

Free cash flow for the quarter was $78 million compared to $34 million in the prior year. For the trailing 12 months, cash flow was $186 million, up 42% from the previous year.

Turning to the balance sheet, we had $118 million in cash at the end of the quarter. Our total debt is $601 million with a weighted average interest rate of 4.4%. The ratio of our total net debt to adjusted EBITDA is two times, which is below the covenant level of three times.

During the quarter, we returned $32 million in excess cash to our investors, repurchasing 289,000 shares at an average price of $111.06. We also repurchased an additional 154,000 shares in the month of July for a total of $18 million. Year to date, we have returned $118 million to shareholders through our repurchase plan.

Today we announced our board has approved a new authorization for $250 million as our previous authorization was exhausted this last month. We continue to do share repurchases as an attractive use of cash. We also continue to actively evaluate opportunities to acquire relevant technologies and products that advance our strategy or strengthen our portfolio and competitive position.

Finally, we are updating our previously-provided guidance for the fiscal year. We're not changing our revenue guidance, which we expect to be $860 million to $870 million. To achieve the top end of this guidance, we will need to sign about $28 million of license revenue in the fourth quarter. We now believe GAAP net income will be between $98 million to $102 million, up from the previously-guided $94 million to $98 million. We expect GAAP earnings per share of $3.03 to $3.15, up from $2.89 to $3.02. Non-GAAP net income we expect to be $145 million to $149 million, up from $144 million to $148 million, non-GAAP earnings per share of $4.50 to $4.62, up from $4.43 to $4.55.

With that I'll turn back to Will for some final comments.

Thanks, Mike. Next quarter, we'll talk about our expectations for 2017. But for now, I'd like to step back and summarize our strategy. In Scores, we're looking to extend our B2B leadership and brand value into the consumer market. At the same time, we're pursuing innovations, such as FICO score XD, to open new markets with financial services institutions. In Applications, we've developed cloud-enabled versions of our products while expanding sales coverage and productivity to reach new markets. In our Tools business, we've invested in our Decision Management Suite to provide a simple, cost effective method for customers of any size to develop and deploy analytics.

At the same time, we're very focused on making appropriate investments throughout the portfolio and using excess cash for share repurchases and M&A. So far we've been happy with the results and I firmly believe that we have the management team in place to succeed in the months and the years ahead.

I'll now turn the call back to Steve, so that we can do questions and answers.

Thanks, Will. This concludes our prepared remarks and we're ready now to take any questions you may have. Operator, please open the line.

(Operator Instructions) Brett Huff, Stephens.

Good afternoon, guys. Congrats on a nice quarter.

Thank you.

Just wanted to ask you if you could characterize a little bit more some of the big license wins. It looks like it came in both in Tools and in Applications. Then maybe more specifically, were any of those continuation of the DMS win from last quarter or was there a new DMS win in there?

So Brett, this is Mike. So you're right, we had two large renewals on the Applications section for our Falcon fraud product. One of the two new renewals had additional services, additional licenses associated with it and the other was a straight renewal. In the Tools business, we actually had a large Blaze renewal that drove a lot of that increase. That one also came along with an up sale.

Okay and then just given that the guidance didn't go up on revenue, for some reason -- did some of these just happen earlier maybe than we on the street had modeled them or was this incremental in any way? Is there just some conservatism in the rev guidance?

No, I think your first point is right. I mean as we all know it's hard to determine what period a license occurs, including renewals. Sometimes they happen a little earlier. Sometimes they happen a little later. What we saw this quarter is some nice big renewals, some of which earlier than what we had expected. So, I think what people were modeling in the fourth quarter likely happened in the third quarter and probably the reverse is true.

Okay. Then last question, I'll get back in the queue. Could you just comment on DMS progress, how the win from last quarter is going? Then if any, if you did have a chance to close additional ones of those or how the pipeline is looking?

Yes, so the deal we closed last quarter, we're in the implementation cycle right now for a large customer. That will happen as we described last quarter through the fall and into the end of the calendar year, when the expected go-live will happen. The project is going great. It's on track. Things are moving along very well. In terms of the rest of the DMS in the cloud business, we're also seeing continued progress being made very positively. The revenue year to date in cloud is up 12% year to date, bookings about 30% of our year-to-date bookings are related to the cloud, much of which is DMS. So, the progress is coming along nicely, probably never fast enough but very nice at that.

Great. That's what I need. I'll jump back in the queue.

Bill Warmington, Wells Fargo.

Good afternoon, everyone.

Hi, Bill.

So congratulations on a strong quarter I'll say.

Thank you. Thanks.

So a couple questions for you. One is just to ask about how things are going in the Affinity market. You had mentioned the Progression deal, whether -- and to ask whether there's revenue being generated from that. Then also if you could talk about how the pipeline of opportunities looks in that space now.

The Progression deal with unfold in the course of the year. So it's started but it's, you know, the full impact won't be felt until later on. But that's going very smoothly. Our efforts in the Affinity space continue and we're in discussions. I would say that in general the whole Affinity business, as you know, has gone more slowly than we expected. We thought that it would have a much more steep ramp in 2016 than it's had. Some of that I think is related to just kind of slow adoption. But some of it's also that the market is evolving in different kinds of ways. I think that our Scores people are coming up with some innovative programs that complement some of the things that are in place now that I hate to call them a substitute for Affinity, but they're different kinds of programs and they represent different directions that the Affinity business has gone. So I think you're still going to see FICO scores in the center of all this. It may not all wind up in the Affinity business as we originally envisioned it.

Yes, these transactions, you know there's been speculation that they -- a large deal would be somewhere in the $40 million in revenue arena, maybe netting out $8 million in EBITDA. Is that about the level to think about for these types of deals or is it just--?

I think it depends on whether we're the general contractor or whether we're just supplying FICO scores to someone else who does it. I think that the economics that you just described would represent a large deal if we were the GC. I do think that we favor working through partners and where there's others, for example Experian who can do a good job on offering the service, we're happy to partner with them, provide our scores and the value add that way. Obviously at that point, it's much smaller revenue but much higher margin.

In fact --

Sorry, sorry, go ahead.

I'm sorry, Bill. In fact, today in Will's prepared comments, he made reference to the fact that we did sign our first Affinity partner today through Experian. So we did sign an Affinity deal. We're a provider of the FICO score to Experian and they're servicing that deal. It's rather small for us but it was the first and a good proof point.

Excellent. Then there's been a lot of talk about trended data and I was hoping you could talk a little bit about the new product that you guys are coming out with on the trended data side in the auto space with TransUnion.

Yes, we're making progress with TransUnion. We announced that deal last quarter. We're working with them to bring it into the marketplace and beyond that I really don't have anything new to discuss around that. We've been involved with or are in discussions with each of the bureaus in a variety of ways on their trended data initiatives. But for us it, frankly, isn't as big of a driver as some of the other activities we have going on.

Got it. Thank you very much. I'll get back in the queue.

Great.

Robert Mattson, Dougherty Markets.

Thank you and congrats on the quarter as well. I wanted to circle up in a couple things. One is kind of an admin thing. I missed that number you said that the high end of the guidance would require on license?

It would require about $28 million of license revenue to hit our high end in the guidance range.

Okay and then I wanted to circle with the decision management. You know you got 2.0 out now. You know a lot of -- historically a lot of enterprise is a little hesitant to do a 1.0 until 2.0 comes out. Have you seen a change in the discussion, a willingness of people now to engage around decision or has this not really changed and things are cruising along?

Things are going very smoothly with a lot of customer interest in decision Management Suite. Actually we're at work on 3.0 and the move from 2.0 to 3.0 is very fluid and easy. So, although you're right that customers are reluctant to be the guinea pigs on a 1.0, we're well past that. We have DMS deployed in a lot of places now. It's working really well. We have happy customers. So we're kind of through all the early pains.

Okay, and outside if you could talk a little bit about additional traction outside of your core markets on the Decision Management Suite? Any, I don't know whether you want to talk about in terms of pilots or whatever color you can give on how you're getting traction outside there?

Well we, you know last quarter we did this big telecom deal, which would be outside of kind of our core markets. But frankly, telecom's becoming a core market because we have a lot of telecom customers. So we continue to be heavily focused on financial services. I think that's the reality. But it is the case that our stuff works elsewhere. We're getting interest from other verticals. I think there's more rapid adoption outside of financial services of cloud-based solutions. So what we're seeing is a disproportionate cloud mix when you go outside of financial services. That would be one difference.

Okay and I guess the last question more of a at-heart question. Any update on the progress in terms of continuing to hire sales people?

Yes, well we're continuing to pound away at it and we're happy with our efforts. I would say that never enough. So we still have open headcount. We're still hiring and we'll hire every talented sales person that we can find. But it's -- you know we hold -- we obviously hold these candidates to a very high standard and so it never goes fast enough. But yes, continued progress.

Awesome, thank you, and congrats again.

Thank you.

(Operator Instructions) Adam Klauber, William Blair.

Well, thanks. Good afternoon. Just a couple, couple follow-up. In Applications at some -- you mentioned that Falcon had a pretty good renewal and then an upgrade. Could you just give us a flavor or what's the nature of the upgrade?

Yes, the nature of the upgrade is we have a variety of fraud-related products that go along with the Falcon product. There are additional analytic models and additional analytic technologies. We had a client, a very large non-US client renew their Falcon platform. In the process of doing the renewal, they purchased some additional technology that complemented Falcon.

Okay and is that -- I guess that up sale is that newer technology or that just core product that they haven't been using before?

It's a newer version of core product that they hadn't been using before.

Okay, okay that's helpful. Then you mentioned cyber, your cyber security offering and I realize that's new but can you give us an idea of what we could look for next year to see if that effort is ramping up?

Sure, so we're quite serious about our cyber security initiative. What we have is an opportunity to take our really fabulous Falcon fraud IP and apply it in the cyber security space. So where we had little missing pieces, we went out and bought QuadMetrics. But I would say that it's a pretty nascent effort. The product is coming along very rapidly. We announced the enterprise security score and we ought to be in a position to be selling it by the end of the year.

But I think that realistically, it's going to be small dollars in the greater scheme of things in 2017, only because it takes a while to ramp a specialized sales force and to get traction. But the products will be ready and will be in the marketplace and it's just going to take awhile to get recognition.

Okay, okay, that's helpful. Then finally on capital, use of cash, capitalization utilization, as the stock price has clearly done well in the last six months or so, does that change your view on buying back stock?

No, not at all. I mean you could have made that comment every quarter for the last 20 quarters and it would have been true that the stock price had done well and you could be questioning whether it would make sense for us to keep buying back our stock at these levels. So far it's been a winning bet for us and we remain as optimistic about our future as ever. Every time we think about alternate uses of cash, when we measure them against investing in our own business, we really love our own prospects. So we wind up coming down over and over and over in favor of stock purchase over M&A. That's not to say we never would do it, but so far the stock repurchase really looks great.

I guess a corollary to that embedded in your question is a little bit of a question around market timing. We're not market timers. You know we can't really speak to whether the overall market is frothy and will continue or will it get the correction. You guys are in that business. We're not. But we feel strongly that our business is strong today and it's going to be better in the future. So we think it's a good use of cash to keep buying back our own stock.

Okay and then actually one final follow-up, you obviously had a strong quarter all around, but particularly your net -- your free cash really jumped up. Should, I mean it's much, much higher level. Is that just reflecting a lot of the momentum in the quarter or is that continual --

It's a couple things. You know I wouldn't multiply it by four, put it that way.

Right, yes.

But the contributing factors are one, yes the strong license revenue had an effect, and two, we had improvement in DSO. So those two things were the things that gave us the outstanding result this quarter. So I wouldn't expect that that would be that kind of strong in the future.

Okay, okay, thanks a lot.

Bill Warmington, Wells Fargo.

So one follow-up for you. I just wanted to make sure to ask about the Discover opportunity that you announced last quarter. Just to ask how that's ramping? When -- have you started to generate revenue from it? If not, what do you think the timeline's likely to be?

We're super excited about this. So the program, just to be clear what it is, Discover scorecard is a Discover-driven website where consumers, both Discover customers and non-customers, can come and get their FICO score. Then Discover obviously works through that, making credit offers. So it's a prospecting kind of an opportunity. That's kind of a new space for us. We haven't really used our FICO scores for any kind of lead gen or prospecting in the past, not this directly. So this is a new opportunity. We're very excited about doing it with Discover. They leaned into it with radio advertising and with television advertising. We're very happy about the messaging in the program, because they're focused on among other things pointing out the differences between a genuine FICO score and the other scores that lenders don't actually use for making lending decisions. So Discover has some uniqueness in their offering.

It's too early to speak about the results and I wouldn't be in a position to do it. It would be for Discover to discuss that. But early returns are good and we're happy.

Got it. All right. Thank you very much.

There are no further questions at this time. I will turn the call back over to the presenters.

Thank you. This concludes our call for today. Thank you all for your interest and for joining and we'll see you next quarter.

This concludes today's conference call. You may now disconnect.