Fair Isaac Corp (FICO) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fair Isaac Corporation Quarterly Earnings Call.

(Operator Instructions) As a reminder, this conference call is being recorded Thursday, January 25, 2018.

And now I'd like to turn the conference over to Steve Weber.

Please go ahead.

Thank you.

Good afternoon, and thank you for joining FICO's First 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 also includes statements regarding certain non-GAAP 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 measure.

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 January 25, 2019.

And now I'll turn the call over to Will Lansing.

Thanks, Steve, and thank you, everyone, for joining us for our first quarter earnings call.

I'm pleased with the results, and I'm happy to say we have good momentum as we look at the year ahead.

In our first quarter, we reported revenues of $235 million, an increase of 7% over the same period of last year.

We delivered $27 million of GAAP net and GAAP earnings of $0.86 per share.

Our GAAP earnings and EPS included a charge of $12 million or $0.37 per share associated with the recent enactment of tax reform.

We delivered $41 million of non-GAAP net income and non-GAAP EPS of $1.30 per share, up 23% and 27%, respectively, from the same period last year.

Mike will talk more about the impact of tax reform, but it is certainly a net positive for us going forward.

We believe the reduced ongoing tax rate will have a positive impact in fiscal '18 of nearly $14 million and today are updating our guidance to reflect that.

In light of tax reform, we also announced to our employees today that we will be issuing a special grant of 10 restricted stock units to every FICO employee, making each employee an owner to share in our long-term success.

On the software side of our business, we continue to build to our recurring revenue base as we sell more cloud-based deals.

Our Applications segment was up 5% over last year, and recurring revenue was up 10%.

We had particularly good quarters with our compliance, Customer Communications Services, collections and recovery and originations solutions.

These products are innovative, relatively new cloud-based products, and they're now getting to a size where their growth can move the needle for the company.

In our Decision Management Software, revenues were down about $1.5 million or 6% due to less upfront license sales.

Our emphasis is on cloud deals and DMS, meaning more recurring revenue.

However, those revenues were up 13%.

Overall, our cloud-based revenues were up 13%, and our cloud-based bookings were up 34% over the same period last year.

In the Scores business, we continue to drive significant growth.

Revenues this quarter were $70 million, up 18% from the same period last year.

On the B2C side, revenues were up 27% over the previous year as we add new partners and see growth from our existing partners.

Today's consumers are more focused than ever on their personal financial information and their creditworthiness.

We've been focusing on educating consumers first through our Open Access program and then with partners to provide additional content around the scores with information like simulators, score ingredients, summary reports and monitoring.

We are constantly looking for ways to expand offerings to consumers and provide more value to our partners to work together to give consumers best possible view of how lenders assess them.

On the B2B side, revenues were up 13% over the previous year as we continue to see increases in both volume and price.

The current credit climate remains very strong, and we expect to drive growth on the B2B side throughout this fiscal year.

I'd like to take a minute to update you on our financial inclusion initiatives that we've been talking about over the last several quarters.

As you know, FICO is an independent data analytics company, not a credit bureau.

FICO's role in the lending system is to harness the credit bureaus' data to produce FICO Scores, which are predictive of consumers' credit risk.

In order to produce a credit score that is reliable and predictive, we rely on quality data standards that are refined over decades, and we know what's at stake.

The consumer's ability to get a car loan or a mortgage hinges on the lender's ability to accurately assess risk.

Our data standards play an important role in ensuring the robustness and accuracy over of our credit scoring system and by extension, the stability and soundness of millions of lending decisions every day.

We are responsibly using new and regulatory compliant alternative data sources that allow us to give reliable FICO Scores to people who cannot be scored using credit bureau data alone.

Our approach ensures that the integrity of our scoring standards as well as the expansion of credit scoring to a broader, more inclusive and more diverse group than ever before.

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

Thanks, Will.

Good afternoon, everyone.

Today, I'll emphasize 3 points in my prepared comments.

First, we delivered $235 million of revenue, an increase of $16 million or 7% year-over-year.

Recurring revenue grew 14% over last year, double-digit growth in all 3 segments and at $175 million accounted for nearly 3/4 of the quarter's revenue.

Second, we delivered $27 million of GAAP net income, which included some charges associated with the Tax Reform Act.

Our ongoing recurring tax rate will decline over the remainder of the year, resulting in an estimated savings of $14 million or $0.44 per share.

Finally, we generated $25 million of free cash flow this quarter, and we used $50 million to repurchase shares in quarter 1 and an additional $50 million for repurchases in January.

I'll begin by breaking the revenue down into our 3 reporting segments.

Starting with Applications, revenues were $141 million, up 5% versus the same period last year.

Recurring revenue grew 10% over last year, partially offset by a decline in license revenue.

We had a very strong quarter in our Customer Communications Services product where volumes pushed revenues up 18% from last year.

We also had a strong quarter in collections and recovery, up 14% and in originations, up 13%.

Our Applications bookings of $62 million were flat with the prior year.

In the Decision Management Software segment, revenues were $24 million, down 6% versus last year due to fewer upfront license sales.

That was partially offset by an increase of 13% in recurring revenue.

Bookings of $12 million were also down following last quarter's record bookings.

As we continue to transition to more SaaS-based deals, we will likely see less upfront revenue but more recurring.

And finally in our Scores segment, revenues were $70 million, up 18% from last year.

On the B2B side, we're up 13% versus last year and are continuing to see positive trends.

The B2C revenues were up 27% from the same quarter last year.

As Will noted, we expect Scores growth to continue to accelerate throughout the year.

Looking at revenues by region.

This quarter's 74% of total revenues were derived from the Americas.

Our EMEA region generated 18%, and the remaining 8% was from Asia Pacific.

Recurring revenues derived from transactional and maintenance sources continued to trend up this quarter representing 74% of total revenue.

Consulting and implementation revenue were 18%, and license revenues were 8% of total.

Bookings this quarter were $82 million, down 15% from the prior year quarter.

Total bookings for the trailing 4 quarters is $450 million.

We generated $50 million of current period revenues on those bookings for a yield of 19%.

The weighted average term for our bookings was 27 months this quarter.

In this quarter, we had 9 deals over $1 million, including 4 deals over $3 million.

Operating expenses totaled $195 million this quarter compared to $192 million in the fourth quarter.

The increase was primarily related to our annual salary increase.

And as you can see on our Reg G schedule, our non-GAAP operating margin was 25% for the first quarter.

We expect that operating margin to be between 26.5% and 28% for the full year.

GAAP net income this quarter was $27 million and included a charge, income tax expense of $12 million or $0.37 per share associated with the Tax Cuts and Job Act.

The charge encompasses several elements, including a tax on accumulated overseas earnings and profits and the remeasurement of deferred income taxes.

We also had a reduction to income tax expense of $11.5 million or $0.36 per share associated with the excess tax benefits from shareholders.

Including all these items, the effective tax rate was about 20% this quarter.

We anticipate a reduction in our tax rate will result in a savings in our fiscal 2018 of about $14 million.

We are still evaluating the long-term impact of the tax reform but expect our cash rate to be in the low to mid-20s over the remainder of 2018.

Free cash flow for the quarter was $25 million versus $28 million in the prior year.

Turning to the balance sheet.

We had $94 million of cash on hand at the end of the quarter.

Our total debt is $664 million with a weighted average interest rate of 4%.

The ratio of net debt to adjusted EBITDA this quarter is 2.2x, below the covenant level of 3x.

During the quarter, we returned $50 million in excess cash to our investors, repurchasing 335,000 shares at an average price of around $148.

We repurchased another 313,000 shares in January at an average price of about $160.

We have about $187 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 technologies and products that advance our strategy, our strength in our portfolio and competitive position.

And finally, we're updating our previously provided guidance to adjust for the impact of the tax reform legislation and a reduction in our share count.

We are now guiding to full fiscal year as follows.

Revenues remain unchanged at $990 million; GAAP net income previously guided at $139 million (sic) [$119 million] is now adjusted by the tax charges and the ongoing rate benefit to $136 million; GAAP earnings per share is now approximately $4.34; Non-GAAP net income previously guided at $171 million is now revised to $191 million, making non-GAAP earnings per share an increase from $5.32 to $6.09 per share.

With that, I'll turn it over to Will for some final comments.

Thanks, Mike.

As I said in my opening remarks, I believe we have remarkable momentum and are just beginning to reap the benefits for our strategic initiatives.

Our Scores business continues to lead the way.

It's really a unique franchise business at the heart of the U.S. credit markets, and we continue to find opportunities to make the most of that valuable IP.

On the software side, the product innovation we've invested in over the last several years is opening new markets and allowing us to serve entirely new sets of customers.

At the same time, we're making a gradual but steady transition to a recurring SaaS revenue model that will deliver predictable, profitable revenue.

It's truly an exciting time to be at FICO.

I'll now turn the question -- over to Steve for Q&A.

Thanks, Will.

This concludes our prepared remarks, and we're ready now to take any questions you may have.

Operator, please open the lines.

(Operator Instructions) And we have a question from the line of Manav Patnaik with Barclays.

We also have a question from the line of Brett Huff with Stephens Inc.

Couple of quick questions.

Definitely want to hear a little bit more about the B2C growth.

I know that's one of the big focuses that we hear from investors.

Sounds like it was driven kind of across the board by your current partners continuing to kind of penetrate some of their programs, and they are pushing it and then also some new partners.

Are those new partners -- do they look like the old one, like with Experian or like maybe with Discover?

Or are they new and different?

And any detail on that would be helpful.

Yes.

Brett, I mean, a great deal of it was driven from our expanded relationship with Experian, which we announced last year in January along with the Discover deal.

Recently, we booked some new transactions for an affinity deal and several other educational programs, and those deals are starting to go live.

And we're starting to see revenue flow from that.

And I should also add that our myFICO business had a very nice quarter as well, growing in the mid-single digits.

So it's a combination of a lot of small things beginning to add up.

And can you talk a little bit about kind of the relative economics on any of those?

I don't know how much you guys have talked about, how much more beneficial maybe selling for a consumer application, FICO Score for consumer application versus a B2B.

But have you dimensionalized that for folks at all?

No.

I mean, we have, I guess, to some degree.

We've talked certainly about the broader relationship with Experian.

And the way the pricing dynamic works there is they grow, we grow, and as they decline, we decline.

So we're very much tied on a percent of success or failure.

For each of the other deals, they're very independently negotiated, and they tend to be based upon the amount of technology or the amount of IP scoring technology they're using in the systems that they're implementing and also based upon the size of the market they're addressing.

And so we would literally have to go into each deal individually, which, of course, we can't do for confidentiality reasons.

Okay.

And then one last question.

On the 13% B2B growth, that's also really nice acceleration.

I think you mentioned just kind of generally good place where we are in the credit cycle and consumer -- and economic activity and things like that.

Anything from a share shift point of view vis-à-vis the Equifax breach that you saw between potentially different distribution partners?

No, Brett.

We don't see any share shift.

It's just strength in the market, and we don't see any of that.

Okay.

And one last one if I can, an update on which products we have SaaS-ified.

I know the communications, the Origination Manager, collections, I think are all pure SaaS at this point.

Where are we kind of innings wise on getting the Falcon and the TRIAD products more that way?

I believe last quarter, you sold maybe your first of 1 of those 2 in a SaaS version.

Yes.

Great question.

And it's actually easier to ask the question which ones haven't made the full transition yet, and you mentioned Falcon and TRIAD.

And what I would say is, with respect to TRIAD, we actually have the TRIAD successor product called Strategy Director, which is available in the cloud.

And we also can offer Falcon in the cloud, although it doesn't -- it's not as fully featured as we intend for it to be in the long run.

So there's more work to be done on Falcon, but virtually all of our major franchise offerings are available in the cloud now.

We have a question from Manav Patnaik with Barclays.

Can you hear me guys?

Yes, we can hear you.

Okay, there we go.

All right.

So the first question was just, obviously, with the nice tax benefit, it looks like you're giving employees that -- those RSUs.

But broadly, should we expect any change to capital allocation here, pick up buybacks or maybe do some more M&A?

Just some thoughts there.

No.

I think the answer to that is no.

I think our business continues to go along the direction it's been on.

The level of buyback is a function of our free cash flow and also kind of what we consider to be optimal leverage.

And so you'll see our buybacks drift upward and downward to maintain the level of leverage that we think is efficient for our balance sheet.

So we're at a -- as we mentioned, we're at 2.2x, which is a little bit low for us, and so there's room for us to potentially increase the buyback a little bit.

But I think the way to think about it is business as usual.

Okay.

And then I was just wondering in the -- on the mortgage side of things, a 2-part question.

One, what are the trends you're seeing there within that 13% B2B?

Like, is that all mainly credit card?

And then, I guess, obviously, there's the whole debate on the FICO Score within the mortgage market.

Do you have any thoughts there?

I can take the trends part.

This is Mike.

The quantities of B2B FICO Scores pull this quarter were up across the board, across all of the life cycles that we service: marketing, originations and account management.

As it relates to specific areas, we saw a tremendous amount of strength in credit cards and have for the last number of quarters, but credit cards was a very big driver this quarter.

We also saw a lot of strength in our marketing of auto loans, in origination of auto loans, and mortgage was a little bit up from last year, flat to up slightly.

And just I guess, thoughts just on the scoring debate out there in the market?

Well, yes, as you know, there's some pressure on the GSEs to reconsider the scores that they use to -- they put on the paper.

And today, FICO is very much the standard there.

And we continue to believe that, that makes sense for FICO to remain the standard there.

There is an RFI out, and we're responding to that with our innovative and up-to-date offerings.

And we think that the system that we have today works well.

And there's -- from a policy standpoint, it's really wrapped around safety and soundness, and so we'd anticipate -- we hope that, that system won't change.

Okay.

And then just last one for me on the DMS side of things, good to obviously see the recurring piece be up and -- but the license down.

I mean, is that a trend we should continue to see?

I was just hoping you could go small color there on maybe where we are in that transition, like what the mix looks like.

Well, I think what we saw this quarter is a continuation of what we've seen the last couple of quarters, and that is upfront license revenue was starting to trend downwards on DMS as we're growing our recurring revenue business.

It will continue to be lumpy depending upon the timing of when a deal is booked and revenue was claimed.

Obviously, this quarter, we had very light bookings not only in DMS but frankly, across the whole company, which isn't too surprising to us coming off of the record we had in the fourth quarter.

The decline in the license revenue is more than offset, in general, in the business by the recurring revenue.

So it's just a continued advancement of the business model to more recurring revenue coming from the cloud products.

We have a question from Katelyn Young with William Blair.

I was wondering if you could spend some time talking about the bookings in the quarter.

Obviously, understand you're coming off some really strong quarters over the last year.

So I was wondering if you could please just kind of compare and contrast the bookings this quarter with perhaps a year ago in terms of product mix or client mix and if there's anything that was noticeably weaker in the quarter, any trends you're seeing there.

Yes.

I wouldn't call it a trend.

I can explain a little bit about this quarter versus maybe prior quarters.

Last year, as you know, in total, we reported over $90 million each quarter of bookings with the last quarter of the year being a very large record high.

And we fell below that $90 million this quarter, which internally was a disappointment to us, fortunately was just due to some timing of some deals that we have in the pipeline.

And being we're in the first quarter, we're not too concerned that there's any underlying trend there.

It's just simply the timing of when deals get signed and done.

I would say that in the mix of the deals we have this quarter, many of them relate to our new cloud business, including from a previous question, we had another TRIAD cloud deal that we signed that was in 1 of our top 10 deals this quarter.

So there's some very strong business that's out there.

Unfortunately, we didn't get it all done by the end of December, but we anticipate that'll catch itself up before the end of the fiscal year.

So beyond that, I wouldn't say there's any other important trends to think of.

All right, great.

And then on the B2B growth side, is -- are the XD relationships are in -- from the international work you guys are doing, is that a material contributor to revenue growth year-over-year yet?

Or is that still kind of building out?

Not yet.

It is very much in build mode.

And we also have a question from the line of Bill Warmington with Wells Fargo.

So first question for you on the pipeline in the B2C Scores business.

So it sounds like you've got the 2 education clients ramping.

The affinity client, it looked like American Express under Experian went live in early January, so congratulations on that.

And then on the lead gen side, you mentioned Experian and their group of banks and as well as Discover.

I wanted to ask if there had been any new players added to those 3 buckets and then also if there was a pipeline of potential new deals in each of those 3 buckets.

Bill, there is a pipeline of potential opportunities in those buckets, and we added no new players in terms of new deals of any size that I can think of in quarter 1. So hopefully, we'll have more to speak about in the next quarter or 2 on that.

Okay.

And then a very strong performance on the B2B side.

The question I had there, is your guidance still assuming 0% growth for that for the year?

Well, inherently, it's the same as what we guided at the end of last year, right, because we have not updated our revenue guidance.

So from that regard, yes, that is true.

We obviously had a stronger first quarter than we anticipated.

We have a lot of license revenue to sign to hit the $990 million.

And based upon a lighter first quarter and that, it made sense to just let the guidance ride as is.

But I would say it's safe to say we feel better and better as we continue to see strength in all aspects of our Scores business.

Okay.

And then on the DMS side, just wanted to ask, you had mentioned that it sounded like there were some deals that were close to closing that may have closed after the end of December.

How are bookings trending so far in the March quarter?

Yes.

Well, we're not into March yet, Bill.

Remember, we're in January.

I know out in Boston, you kind of wish it was the March time frame.

I'll let you know.

No, so I would say most of our deals, frankly, are loaded to the back end of any given quarter, usually comes in the third month of the quarter.

And so giving you much more guidance on January really probably won't do a whole lot.

Okay.

And then the -- another question on the tax reform.

You'd given us some guidance in terms of the actual rate impact, the EPS impact.

What's the tax flow -- sorry, the cash flow benefit you expect on an annualized basis?

Well, our -- if our cash expense is going down $14 million, which is what we stated, that's dollar-for-dollar cash.

So we should say see that -- this claim for the timing of when the cash payments go out or estimated cash payments go out.

But over the course of time, we're -- we should see at least $14 million starting to come back through our cash flow statement at least based on the way we see it today.

Got it.

And then the only other question I had for you was on the housekeeping question, the impact of the grants that you're giving out on the share count going forward.

How do you think about that?

Yes.

That'll just be several million dollars this quarter and -- I'm sorry, this year, for the remainder of this fiscal year, and there'll probably be a couple million that'll spill into next year.

But it's a pretty inconsequential amount compared to our overall numbers.

Got it.

Oh, one final one.

You had mentioned the strength in the B2B volumes, which, again, given the consumer credit tailwinds is not a surprise, but you also mentioned better price there.

Maybe you could talk a little bit about what's going on there to drive better pricing.

Well, we adjust our prices for Scores, all of our Scores typically annually.

And so every year, we evaluate kind of where we are and we make modest adjustments.

And this year is no different.

And so yes, there's a little bit of pricing impact, but every year, we have a little bit of pricing impact.

Yes.

What you're seeing in this quarter is the pricing impact that took effect basically January 1 of last year, just as an FYI.

And there are no further questions registered at this time.

All right.

Thank you.

Thank you all for joining today's call.

This concludes our call, and we will be back to update you next quarter.

Thank you.

Ladies and gentlemen, that concludes the call for today.

We thank you for your participation and ask that you please disconnect your line.