Fair Isaac Corp (FICO) 2016 Q4 法說會逐字稿

Good afternoon. My name is Amanda and I will be your conference operator today. At this time I'd like to welcome everyone to the Fair Isaac Corporation quarterly earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to Mr. Steve Weber. Please go ahead.

Thank you, Amanda. Good afternoon, and thank you for joining FICO's fourth-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 our 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 an 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 statement 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 the financial measures. Please refer to the Company's earnings release and the Regulation G schedule issued today for a reconciliation of each of these non-GAAP financial measures to the most comparable GAAP measures.

The earnings release and Regulation G schedule are available on the Investor Relations page of the Company's website at FICO.com, or on the SEC's website at SEC.gov. A replay of this webcast will be available through November 7 of 2017. And now I'll turn the call over to Will Lansing.

Thanks, Steve, and thank you, everyone, for joining us for our fourth-quarter earnings call. I will summarize our financial results for the quarter and full fiscal year, and then take a step back and talk about the progress we made this fiscal year on our growth initiatives. And finally, I'll discuss how these initiatives have us poised for growth in 2017 and beyond.

In our fourth quarter we reported revenues of $236 million, an increase of 1% over the same period last year. We delivered $32 million of GAAP net income and GAAP earnings of $1 per share, which included a favorable tax adjustment that Mike will walk through.

We delivered $41 million of non-GAAP net income and non-GAAP EPS of $1.28 per share. It is a great finish to an outstanding fiscal year.

Our full-year revenue growth of 5% beat our guidance, and even adjusting for the tax benefit, we still beat our guided net income and EPS. On the software side, our Applications business was up 1% for the full year over last year, and our Decision Management Software business, which we historically called Tools, was up 2%.

I'm pleased we were able show growth at a time when we are shifting to ratable cloud-based revenues. The real growth story in our software is our bookings, which grew 23% from last year for these segments, and cloud revenues, which increased 14% in FY16, an indication we are building more and more committed backlog for the coming periods.

Our Scores business was up 9% this quarter versus the prior-year quarter, and 16% for the full year versus the prior year. Consumer revenues were up 27% for the full year, and B2B was up 12%. It was a very good year for us and I am happy with the progress we're making in a number of areas.

In our Scores segment we continue to expand our industry-leading business-to-business FICO Scores into the larger, faster growing US consumer market. The FICO Score Open Access Program continued its expansion during the current year. Through this program we now have more than 180 million consumer accounts with access to their free FICO score.

The partnership agreement we launched in FY15 with Experian continued to accelerate during the current year and we are looking at ways to expand that partnership. We also announced a partnership with Progression and the non-bank Affinity deal, which we expect to ramp throughout 2017. And we are discussions with additional partners to further expand the FICO score sold directly to the consumer.

We also introduced a lead-generation program used by financial institutions and credit card lenders to identify new customers. On the software side we've made, and continue to make, significant investments in innovation. We've invested in growth initiatives that expand our addressable markets. We've taken our core IP, coupled with the QuadMetrics acquisition, to bring cyber-analytics solutions to market.

We expanded our traditional on-premise software into cloud-based solutions in our Applications and Decision Management segments to provide growth opportunities with customers that can benefit from the affordability and simplicity of these solutions. Our software solutions are now available through our private cloud, the FICO Analytic Cloud, and we are adding delivery of our solutions through large vendors, like AWS, in geographic locations across the world.

And this year we introduced the FICO Decision Management Suite 2.0, which provides an easy way for customers to evaluate, customize, deploy and scale state-of-the-art analytics. The Decision Management Suite allows customers to quickly integrate our Tools and components with their data, helping organizations of all sizes realize the promise of advanced analytics and decision management in a cost-effective, scalable, cloud or on-premise solution.

These have been important strategic investments, and we're now beginning to see the signs of the payoff. In fact, I believe the second half of 2016 was an inflection point for our Decision Management Suite, and for FICO as a whole. We're seeing signs of it in our revenues as we continue to build recurring cloud revenue streams and committed backlog.

And we're seeing it in our bookings, where our recurring revenue bookings increased 38% in FY16 versus the prior year. Most importantly, we are seeing it in the discussions we're having with our customers and prospective customers.

We're working closely with a broader group of industries than ever before. We continue to be a go-to vendor for financial services, but more and more we are talking with a wide variety of industries and governmental entities to help them use data to make their most difficult decisions.

As we look ahead to 2017, we will continue to invest in areas of our business where we see the greatest growth potential. Last year I said we would concentrate on sales and distribution in 2016, and we've done that. We have increased our sales force by about 50 people and we grew our bookings in 2016 by 20% from the prior year.

Our current year cloud bookings doubled from last year, representing just over one-fourth of our total bookings. In addition, our cloud pipeline is healthy and going fast. As a result of this growing demand, we are accelerating investments in our delivery, support and infrastructure operations during 2017 to ensure a successful deployment and improved customer experience with our solutions.

We remain focused on balancing prudent investment with the returns our shareholders expect from us, and we are very thoughtful in how we deploy our strong cash flow. In 2016 we paid down some debt as some of our fixed notes matured, and, of course, we remained committed to our stock repurchase program buying back 1.3 million shares in 2016. We are strong believers in our own prospects and view investing in repurchases as an excellent use for the cash we generate.

We are increasingly confident about our future. We still see occasional lumpiness due to uneven license sales, but that volatility gets muted as licenses become a smaller percentage of the overall revenue.

It is also difficult to predict timing of many of our larger go-live dates or new partnerships, but we have more opportunities in more areas than we've ever had. I will talk more about our outlook for 2017, but first I'll turn the call over to Mike for further financial details.

Thanks, Will, and good afternoon, everyone. Today I'll emphasize three points in my prepared comments.

First, we delivered $236 million of revenue this quarter, up 1% over this same period last year, and a total of $881 million for the year, up 5% from the prior year. Full-year revenue derived from our cloud products were $192 million, up 14% from the prior year.

Second, we delivered $32 million in net income this quarter, which included a reduction to income tax expense of $3.3 million. Net income for the full year was $109 million.

Finally, we delivered $14 million of free cash flow in the quarter, and $161 million for the fiscal year. We repurchased 1.3 million shares during the year, or 4% of our outstanding shares.

I'll begin by reviewing the results in each of our three reporting segments. Our Applications revenue were $149 million, up 5% from last quarter and flat versus the same period last year. Full-year revenues for Applications were $533 million, up 1% from last year. The increase in revenue was driven from our recurring businesses, primarily, our originations management and cloud solutions, customer communication services and compliance solutions, partially offset by a higher term license revenue last year in our fraud solution.

In our Decision Management Software segment, which we formerly called Tools segment, revenues were $24 million, down 34% from last quarter and down 8% from the same period last year, in both cases due to fewer up-front license deals. Full-year DMS revenues were $108 million, up 2% from last year. DMS bookings were $15 million this quarter and $70 million for the year.

And finally, in our Scores segment revenues were $63 million, up 3% from last quarter and 9% from the same period last year. B2B was up 13% over the same period last year, driven by strong consumer lending, and B2C revenues were up 4% from the same period last year. For the full year, Scores revenues were $241 million, up 16% from last year.

Looking at our revenue by region, this quarter 70% of total revenues were derived from our Americas region, our EMEA region generated 20% and the remaining 10% was from Asia Pacific. Recurring revenues, which are derived from transactional and maintenance sources, for the quarter represented 65% of total revenues.

Consulting and implementation revenues were 22% of total, and license revenues were 13% of total revenue. For the full-year 69% of our revenues were recurring compared to 67% last year.

We generated $16 million of current period revenue on bookings of $80 million, a 20% yield. The weighted average term for our bookings was 37 months this quarter. For the full year, bookings were $378 million, up 20% from the prior year, giving us good visibility into our revenue as we head into FY17.

Also let me provide some additional details around our cloud products, which include our CCS solutions; our cloud-enabled franchises, such as Origination Manager; the decision management platform; debt manager and our legacy custom hosting products. Cloud revenue totaled $192 million for the year versus $168 million last year, an increase of 14%. Bookings related to these products were $99 million compared to $45 million last year.

We have customers in a variety of industries, with the largest concentration in financial services, telco and insurance. We've been pacing our investments as the business grows, and plan to increase our infrastructure costs modestly in 2017 to stay ahead of the growing demand.

Our operating expenses totaled $191 million this quarter, up $7 million from the prior quarter. The increase relates to performance-based incentives and some additional software development and professional services head count.

As you can see in our Reg G schedule, non-GAAP operating margin was 26% for the quarter and 27% for the year. We expect that our operating margins will be between 26% to 28% in 2017.

GAAP net income this quarter was $32 million, down 4% from the prior year. We had a reduction to income tax expense of $3.3 million, or about $0.10 a share, associated with one-time foreign tax credits.

Our non-GAAP net income was $41 million for the quarter, down 19% from the same quarter last year. For the full year, net income was $109 million, up 27% from the prior year, and non-GAAP net income was $155 million, up 15% compared to the prior year.

The effective tax rate for the full year was 24%, below our previous guidance, due to the foreign tax credit and other benefits derived from foreign entity restructuring. We expect the effective tax rate to be 29% to 30% for our full-year FY17.

It is important to note, we are early adopting FASB Accounting Standards Update Number 2016 -09 in the first quarter of FY17. This standard changes the accounting for share-based payments, and our expected tax rate excludes the impact related to these changes.

Under this pronouncement, excess tax benefits or deficiencies which were previously recorded as an adjustment to paid-in capital will now be reflected as reductions or increases to income tax expense. In FY16, we reflected an excess tax benefit of $25 million as a credit to paid-in capital, whereas under the new accounting, this amount would have been reflected as a reduction to income tax expense.

The free cash flow for the quarter was $14 million compared to $39 million in the same period last year. For the full year, free cash flow was $161 million compared to $105 million in the prior year.

Turning to the balance sheet, we had $76 million in cash at the end of the quarter, down $42 million from last quarter due to debt reduction and share repurchases, partially offset by cash generated from operations. Our total debt is now $571 million, with a weighted average interest rate of 4.1%. The ratio of our total net debt to adjusted EBITDA is 2.2 times below the covenant level of 3 times.

We bought back 308,000 shares in the fourth quarter at an average price of $123.19. In FY16 we repurchased a total of 1.3 million shares at an average price of $103.65, for a total of $138 million.

At the end quarter we still had $230 million remaining on the latest Board authorization and continue to view 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, our strength in our portfolio and competitive position. With that, I'll turn it back over to Will for his thoughts on 2017.

Thanks, Mike. As I said in my opening remarks, I believe we are well positioned for success as we move into 2017 and beyond. We continue to find new ways to leverage our Scores assets, and have significant opportunities to further expand usage of the industry-standard FICO score among consumers.

Our investment in software innovation, our Decision Management Suite, is showing signs of market acceptance and early signs of corresponding revenue growth. In our Applications, for years available as on-premise solutions, have been refreshed and are expanding into new markets as cloud-based solutions.

We have focused and invested in innovation, and as I've said in the past, I'm confident that we have multiple paths to growth in our future. As we sign larger deals, it is difficult to know the exact timing of the launch, but we are committed to putting resources behind the implementations to get them live and producing recurring revenue.

With all this in mind, we are providing the following guidance for FY17. We are guiding revenues of approximately $925 million, an increase of about 5% versus FY16. We are guiding GAAP net income of approximately $109 million, flat with 2016 due to the impact of the lower tax expense in 2016.

GAAP earnings per share of approximately $3.39, net GAAP net income of $158 million and non-GAAP earnings per share of $4.92. The EPS guidance excludes the impact of ASU 2016-09, and assumes current share counts, although as Mike said, we continue to view repurchases as an attractive use of our cash.

Now, I'll turn the call back to Steve to handle the Q&A.

Thanks, Will. This concludes our prepared remarks and we will now take your questions. Amanda, please open the lines.

(Operator Instructions)

Manav Patnaik, Barclays.

Thank you. Good evening, gentlemen.

First question is just on the Tools or now DMS business. The first -- just to clarify, you guys called out high single-digit growth for the end of the year. That sounded like you said a lot of the stuff might've got pushed out. Was it -- was the underperformance this quarter just purely because of timing around there? Just some color if you can add there?

And then just to clarify the renaming of Tools to DMS, is that just a rename, are you going to move some numbers out of Tools into apps or something, and this is purely a DMS sale number now?

Hi, Manav, it is Mike. The DMS is just purely a renaming, there's no change in any of the way any of our products are being rolled up between our DMS and in our Applications business.

As it relates to the revenue for DMS, you are right, we were calling high single-digit. We came in low single-digit for the year, and it is a combination of deals that we signed that are ratable, and a combination of the timing, the license -- upfront license revenues. The amount of bookings, the amount of backlog, continues to be really strong, and the health of the business is strong, as well.

Okay and just some -- maybe just some logic again just on the Tools to DMS, because isn't there more than just DMS in there, or are you guys selling it differently now?

No, there's no change. We are rebranding the segment to be called Decision Management Software.

The decision management software includes what was previously called our Component Tools, but it also includes a lot of the products that we've been talking about that we've added to the stable of products in the segment. So we felt it was just a better way to describe the work in process of building out the product suite into something much more broader than just a simple tool set.

Then just on the -- again on the margin commentary or the guidance of 26% to 28%, you ended this year 27%. It's a wide range, and I think at least the assumption was -- Will, I think you talked about 2017 being the inflection point and we thought, obviously, margins would be higher. So what are the variables that have you at such a high range in that margin guidance?

Great question. It really has everything to do with the amount of investment we've put against cloud infrastructure to support more and more cloud deals. You can see that the ramp in our cloud deals is climbing, and frankly, climbing even a little faster than we expected. As a result, we find we find ourselves in a situation where we want to really get ahead of the curve in terms of having cloud infrastructure to support these new cloud customers as they come on.

Frankly, it is a bottleneck and a constraint for us today. We could do more than we are doing because we have some capacity constraints. We are making the investments to make sure that we have all the infrastructure we need to support these new deals.

And the range has to do with how fast we have to do it. We have what we think is a pretty realistic estimate of the investment we need to make for next year, and it could go up or down from the estimate based on really how quickly the business comes in.

Okay And how about just comment around the investments you were making in the sales force, and maybe R&D? Are those going to step up as well this year?

R&D remains roughly the same. We remain committed to refreshing and continuing to expand the innovation in our product, so that's not going to stop. But, I don't think you will see as the percentage is not going to grow, either.

On the sales side, we did step up in sales last year and we did spend more there. We wound up with more coverage than we've had in the past.

I mentioned that we'd added 50 heads. Not that we're going to stop. That's a work in progress and we continue to add and lose people, as is natural. But I think that in terms of where is the most investment going on a relative basis, the most investment is going into delivery and into cloud infrastructure.

Okay. I appreciate that. I will get back in the queue.

Bill Warmington, Wells Fargo.

Good evening, everyone, and congratulations on a strong quarter.

Thanks, Bill.

I wanted to ask about the Discovery deal. Just in watching some of the World Series, noticed some ads for the Discover product, the scorecard, and wanted to ask how that relationship was going. I figured if Discover was out there aggressively promoting it on a major sporting event, that they -- that you guys had reached an agreement in terms of the revenue model and just wanted to get some further thoughts there.

I would say we're delighted with our partnership with Discover. The fact that they are doing the promotion that they are doing ought to give you some sense for how satisfied they are with the initiative. Clearly, this notion of using FICO Scores with non-customers -- with potential customers, prospects -- the idea of using FICO Scores to win fresh business for the banks is a big idea.

Traditionally, historically we've had FICO Scores using the credit decisions on the B2B side. We have FICO Scores in the paid business, as in our Experian partnership. We just started to toe in the water with the Affinity business -- Affinity-paid business. We have FICO Scores and Open Access, which is not a big revenue item, but it really cements our positioning with the consumer.

The one big gap really has been using FICO Scores with prospects. The idea of doing that is a big idea. Discover is first in this. They are a partner in it, and it is going really well.

As you mentioned, Discover is an early adopter. They were an early adopter of Open Access, as well. Are you talking with other banks?

We are talking with other banks, yes. I think you can expect that this program will expand through 2017 and beyond. The alternative that the banks have is to get leads from other lead providers who don't use FICO scores.

As a result, there's breakage in the model where they get in a score that turns out not to be the score that the bank uses for making its credit decision. Obviously, there's a big benefit to using the same score in the customer acquisition that you use for making the credit decision. It enables you to make an offer of credit with a lot more confidence.

Beyond that, the FICO score has such a strong brand identity that's actually a nice -- it is a nice tool for customer acquisition. It brings in the traffic, brings in the volume in a way that a non-FICO score does not. We anticipate tremendous interest from other banks as we go forward.

One of your wins last year had been a large telecom client for Decision Management Suite. You had been doing implementation for that. Has that DMS client gone live now? Is that actually generating the main piece of the revenue, the $10 million to $12 million per year?

Yes, I'm happy to report that it has gone live. It's gone live smoothly. We have a happy customer and we have a lot of people who are working around the clock to make sure that it continues to run smoothly.

But it is -- the early returns are really excellent. We are really excited about the way it is gone. In terms of the revenue, that builds over time. Most of it is transaction-based.

Okay. A couple housekeeping questions on the Scores business, very strong growth there. On the B2C side, in the past you've talked about how the myFICO piece has done versus the rest of the B2C business. I was hoping we could get that detail?

We will give you detail in a second. I would say that the thing to keep in mind with myFICO -- myFICO is doing great, so let me start with that. We are really proud of what we have there. We have it positioned as the -- really as the premium offering in the marketplace.

That said, we will never be able to put the marketing muscle behind myFICO that our partners can put behind leveraging FICO for their brands. We wind up living with a certain amount of cannibalization of the myFICO business because we work so closely with partners like Experian.

Obviously, that would be -- the headwind is the cannibalization that we've created for ourselves. Notwithstanding that, we continue to be very successful with it. And it winds up being the industry-leading offering, and also a little bit of a lab for testing out new ideas which we then share with our partners and encourage them to adopt.

That's the broad picture. Let me give you a little bit of detail here, do you have that handy?

For the quarter, Bill, year over year, the myFICO part grew about mid single-digit, and the rest of it was low single-digit growth year over year.

Got it. Excellent. Thank you very much. I will get back in the queue.

(Operator Instructions)

Matthew Galinko, Sidoti.

Good afternoon, guys. You talked about hitting an inflection point in the DMS business in the second half of this year. I was hoping you could maybe drill a little bit more into that of what do you think has changed? Is it just the product readiness, or just a combination of that and the reps you're putting in place, or just market acceptance in general? What has changed?

I think it is all of the above. It is not one single thing, but what we have is we are on Release 2 now, the product is more mature, it is very usable.

The product is not a product as such. It is a set of capabilities that underlies a lot of our applications and solutions. What we're seeing is that it gives us the ability to get up and running faster with a customer.

It used to be that to install a big application on premise could take 14 months, could take 16 months, multi-year deal, big, expensive, complex. And while, of course, we still have some deals that are structured that way because of their complexity, being able to do things with DMS has definitely sped up our implementation process such that we are now doing very big deals in eight and nine months, and smaller deals we can get up in two, three, four months. It's I would say speed to market, speed to go live, overall cost of implementation, market acceptance, all those kinds of things are what's in play here.

Got it. Then you mentioned the 50 sales reps. I assume quota carrying that you added this year, and can you just qualify if that was in line with what you were targeting?

Are you satisfied with their performance as a whole? And is there anything that you are tweaking along the way in terms of the structure of comp, or how you incentivize them, that you aim to get -- to optimize what you get out of your sales force?

Yes. Good question. If you ask the CEO of a software company, how is the sales force doing, he will answer, they can always do better. That's the case today, too.

I would say that we are happier and happier with the performance of our sales force. The number of heads at 50 is right in line with what we were looking for. Would I be delighted to hire another 50 or 100 or 200? I would. The challenge is that until we get them productive, it winds up being a cost item. We do it on a measured basis as we bring them in.

We continue to refresh the sales force. There's a lot of focus on productivity these days and bringing people up to speed and getting them the right training.

Ours is not a simple sale. This is not software that comes in a suitcase. It is a technical sale. It requires domain expertise.

Our sales people are really, really high quality domain and technical product experts. Those people are hard to come by, and when we grow them our own, which is a very successful strategy, it takes long time, but that's working very well for us.

The long answer to your question is, we're happy with the progress we've made. We are not satisfied that we are done. We will continue to work at it, and I expect that the sales force will just get stronger, both in terms of coverage and in terms of technical depth and quality.

Got it. Maybe just one more on that. What is the time to get a new sales rep productive, that has experience or demand expertise?

The sales cycle takes the better part of half the year, almost three-quarters of a year, a 270-day sales cycle. Then if you figure that it takes months, several months, three to six months to get a salesperson sufficiently familiar with our products to be effective, we're talking about really a year when we onboard them and turn them into highly productive salespeople.

Occasionally, we do better than that when we bring in people with deep experience. As I said, a very successful strategy for us has been to grow them internally. So, if we can bring in people and we have them as business development reps, or inside sales, or in marketing and they learn our products and become familiar with what we have. Then we move them into the field, we find that that is a really nice transition and we have them productive a little quicker when we do it that way.

Got it. Thank you.

There are no further questions.

Thank you, Amanda. This concludes today's call. Thank you all for joining. We will talk to you next quarter.

That does conclude today's call. You may now disconnect.