Fair Isaac Corp (FICO) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Fair Isaac Corporation Quarterly Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, April 26, 2018.

I will now turn the conference over to Steve Weber. Please go ahead.

Thank you. Good afternoon, and thank you for joining FICO's second 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 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 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 fico.com or on the SEC's website at sec.gov.

A replay of this webcast will be available through April 26, 2018.

Now I'll turn the call over to Will Lansing.

Thanks, Steve. I'm happy to say we delivered our highest revenue quarter ever, and our team is executing at a high level. We remain very bullish on our business. And because of the increased visibility into our growth, we are, today, raising our full year guidance, which Mike will explain shortly.

In our second quarter, we reported revenues of $258 million, an increase of 13% over the same period last year. We delivered $32 million of GAAP net income and GAAP earnings of $1.03 per share. We delivered $48 million of non-GAAP net income and non-GAAP EPS of $1.54.

Most importantly, we're delivering revenue growth, while we're successfully transitioning our business model from upfront license revenue to a recurring revenue base. This quarter, year-over-year revenue grew at 13%, even while license revenue declined by 36%. We were able to drive growth through increasing our recurring revenue, which is up 21% over last year. In fact, recurring revenues accounted for 76% of our total revenues this quarter compared with 71% last year.

In Applications, revenues were up 9% over the prior year. Our origination solutions and Customer Communication Services were particularly impressive, up 50% and 17%, respectively, from last year. We were able to grow total recurring revenue in Applications by 14%, giving us more visibility to predictable future revenues.

In our Decision Management Software, we continue to make progress, even as this segment sees the most impact of the revenue model transition. This quarter, for instance, upfront licenses were down 52% from last year, which caused total revenues to be down about 19%.

Historically, Blaze Advisor and Xpress Optimization were sold as perpetual or term licenses. More and more, we're selling these in the cloud, either our own FICO Analytic Cloud or on AWS. And as a result, the revenue is recorded as SaaS recurring revenue. We continue to have a healthy pipeline of opportunities as our technology drives sales in both our DMS and Applications segments.

In the Scores business, we had a great quarter, as we continue to look for new revenue opportunities. Total revenues were up 34% versus the prior year and are up 26% year-to-date. On the B2B side, revenues were up 47% over the same period of last year. This was driven partly by increased volumes, but much of it was due to targeted price increases. As we've been saying for the last several quarters, we are continually reviewing our pricing practices and have identified instances where the pricing was not commensurate with the value delivered. We implemented some adjustments in January with pricing increases, in this case, primarily in mortgage originations.

B2C revenues were up 13% this quarter and 19% year-to-date. We continue to roll out new programs with existing partners and are beginning to see revenues from recently implemented deals. We still have a large pipeline of potential deals and see many opportunities to serve this constantly evolving space.

As always, we remain focused on driving shareholder value. We've repurchased nearly $125 million in shares halfway through our fiscal year. At the same time, we're actively investing and exploiting the many opportunities that we're pursuing.

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 emphasize 3 points in my comments.

First, we delivered $258 million of revenue, an increase of $29 million or 13% year-over-year. Recurring revenue was $195 million, up 21% from last year. And bookings were $102 million, up 12% from last year.

Second, we delivered $32 million of GAAP net income, which is up 29% year-over-year.

And finally, we had $42 million of free cash flow this quarter, and we spent $75 million on repurchasing shares.

I'll begin by breaking that -- the revenue down into our 3 reported segments and start with Applications where revenues were $147 million, up 9% versus the same period last year. We had a particularly strong quarter in Originations and our Customer Communication Services product lines, which both had strong increases in transactional volumes. Our Applications bookings of $69 million is up 42% from last year. In the Decision Management Software segment, revenues were $23 million, down 19% versus the prior year due to the decreased license sales. Recurring revenue in DMS were up 3% from the previous year, and bookings were $20 million. While down 20 -- down 15% from last year, it was up 68% over last quarter.

Finally, in our Scores segment, revenues were $88 million, up 34% from the same period last year. On the B2B side, we're up 47% versus the same period a year ago due primarily to some targeted price increases in mortgage as well as overall volume increases. The B2C revenues were up 13% from the same quarter last year. We continue to expect to see continued growth from both B2B and B2C in the back half of our year.

Looking at revenues by region. This quarter, 75% of total revenues were derived in the Americas. Our EMEA region generated 17%. And the remaining 8% was from Asia Pacific. Recurring revenues derived from transactional and maintenance sources for the quarter represented 76% of total revenue, resulting in implementation revenues were 18% of total, and license revenues were just 6% of total revenue. Cloud revenue was $63 million this quarter, up 26% from last year. In fact, year-to-date, cloud revenues are $120 million, up 20% from the same period last year.

Bookings this quarter were $102 million, up 12% from the prior year. We generated $13 million of current-period revenue on those bookings for a yield of only 13%. The weighted average term for our bookings was 30 months this quarter. In this quarter, we had 13 deals over $1 million. And we booked 6 deals in excess of $3 million. In addition, our cloud bookings were $32 million this quarter and are $51 million year-to-date, which is almost double from the same period last year.

Operating expenses totaled $210 million this quarter compared to $195 million in the first quarter. This increase primarily relates to variable expenses associated with our increased revenue and employee incentive costs, including the special all-employee restricted stock grant we announced last quarter. We expect to maintain our current cost run rate over the back half of the year, while we actively invest our resources in our highest strategic priorities.

As you can see in our Reg G schedule, our non-GAAP operating margin was 27% in the second quarter. We expect some margin expansion in the back half of the year and that the full year operating margin will be between 26.5% to 28.5%.

GAAP net income this quarter was $32 million, and non-GAAP net income was $48 million or $1.54 per share. The effective tax rate was about 21% this quarter, and we expect our tax rate to be in the low to mid-20s over the remainder of 2018.

Free cash flow for the quarter was $42 million versus $61 million in the prior year. And for the trailing 12 months, our free cash flow was $183 million.

Now turning to the balance sheet. We had $108 million of cash on the balance sheet at the end of the quarter. Our total debt is $704 million with a weighted average interest rate of 4.2%. And the ratio of our total net debt to adjusted EBITDA this quarter is 2.24x, well below our covenant level of 3x. Depending upon market conditions, we may be refinancing some of our debt over the next 2 quarters.

During the quarter, we returned $75 million in excess cash to our investors, repurchasing 461,000 shares at an average price of $162.71. And through the first 2 quarters of our fiscal year, we repurchased almost 800,000 shares at an average price of just over $156. We have about $162 million remaining on our 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 or strengthen our portfolio and competitive position.

Finally, as Will mentioned, we're raising our previously provided guidance. We're now guiding the full fiscal year as follows. We expect revenues to be about $1.02 billion, up from the previously guided $990 million. GAAP net income, which we previously guided at $136 million, is now expected to be approximately $140 million. GAAP earnings per share, previously guided at $4.34, is now approximately $4.47. And non-GAAP net income, previously $191 million, is now expected to be $200 million, which equates to $6.38 per share on a non-GAAP basis.

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

Thanks, Mike. We are halfway through our fiscal year, and I'm very happy with where we stand. Last year, we hosted our FICO World Conference where we brought together more than 1,000 of our customers to showcase the latest in our decisioning solutions. I had the opportunity to sit with many customers and those discussions confirm, for me, that we are uniquely positioned to help a wide range of companies solve their most difficult decisioning problems. Our development teams have done a magnificent job of cloud-enabling our IP and tailoring it to be delivered in an efficient, cost-effective manner. And our sales team is successfully signing deals to build the backlog of recurring transactional revenue. At the same time, our FICO Scores continues to prove the value they bring to the entire financial ecosystem. We believe we're poised to do great things in the remainder of fiscal '18 and beyond.

I'll now turn the call back to Steve for Q&A.

Thanks, Will. This concludes our prepared remarks, and we're ready now to take your questions. Operator, please open the lines.

(Operator Instructions) Our first question is from the line of Manav Patnaik with Barclays.

Just my first question is just, is the guidance raised entirely due to the B2B Scores' performance?

It's pretty much all around our Scores business, yes, both B2B and B2C.

So I mean, those price increases that you implemented, my guess is you, I guess, sort of knew that was happening. So was there a hesitation that it wasn't going to take hold that you didn't include it in guidance in the beginning? Or maybe just some more color there.

No. I think it's a matter of certainty versus uncertainty. So we had our views about the way things would likely evolve. But until it's done, it's not done. And so as you know, we tend to be conservative on guidance.

Got it. And then maybe just on that specifically. Obviously, in the context of the news around what Fannie wants to do and so forth in the mortgage market and the debate around the Scores, I guess, just some thoughts around your timing to put that price increase with that debate going on.

Yes, I think that's a fair question, and we did talk about it. And I think our view is that who knows how the -- how this is going to shake out from a regulatory standpoint, from a statutory standpoint. But in the event that we wind up being a sole-source score provider, we didn't want it said that we were leveraging that position to push through price increases. I mean, I think that we're really trying to just have the pricing reflect the value being provided to the end user.

Okay. And then the last one just on this. I guess, what I'm trying to understand is on the B2B Scores side, like, what was just the market-driven growth, so ex your price increases and, I guess, just trying to make sure we don't take this 47% and add that to your numbers for the rest of the year, basically.

Yes. 2 points to that, Manav. So we're not going to get real granular in terms of how much of this came from price versus how much came from volume. But I can tell you that we saw volume increases across the board, across all the life cycles that we talked about, the B2B. And in certain cases, some of the life cycles were in the high single digits. But that being said, obviously, a significant amount did come from some of the very targeted pricing that we did do. As it relates to what we see in this guidance that we just provided, we see a run rate in Scores similar to what we delivered in the second quarter. And certainly, the rest of the year will be dependent upon increases or decreases in volume and any other pricing schedules that begin to become applicable. Again, the bureaus roll these out to their end customers over a period of time. And so the uncertainty Will was referring to is because we're not party to those agreements, it's uncertain when exactly the bureaus pass on some of these increases. So that's one of the reasons why this wasn't included back in November when we gave our guidance.

Our next question is from the line of Brett Huff with Stephens.

Can we -- thanks for the detail on the B2B Scores.

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given some things like that given that you guys use channels to distribute those. Wanted to follow-up on any new developments on the B2C relationships that you have, the channel solutions that you're working with Experian and then maybe some of the other credit card providers. It's one of the things that, at least to us, seems like a really big opportunity. And it seems like those lead generation efforts on the part of more customized issuers seem to be doing well. Any new developments there?

Nothing new in terms of new clients that we're announcing today. I would say, though, that we've signed a number of deals in the past quarters. They're starting to ramp. Not all of them are fully ramped yet. In this quarter, our consumer revenue coming through those channels are almost as large each quarter as our myFICO business. So both are growing at a very nice rate. I'd like to call out our myFICO business is growing better than 5%, 6%, 7%. So we're -- what you're seeing in our numbers on the B2C side has just continued to roll out of what we have. And we're continuing to work deals as they arise, but nothing new to announce this quarter.

And then just to dig in a little bit on Scores, any commentary -- I think you mentioned different life cycle of the Scores, some were high single digits, some are lower. Where did prescreen fall into that? I don't know if you want to get that granular, but sometimes you'll give us the data on prescreen.

Yes, our prescreen or acquisition scores actually was the highest. It was very high single digit this quarter. There was some very strong marketing from what we saw this quarter and in the numbers we're reporting.

And then last question for me just a general kind of loan origination environment. Anything you guys are seeing change, either accelerate or decelerate, particular verticals that have changed since the last time we all talked?

No, not really. Things are pretty solid in the same areas that it has been. We're not seeing any significant shift from, certainly, last quarter or even the last couple.

Our next question is from the line of Adam Klauber with William Blair.

Couple on Applications. The -- clearly, it's some good volumes, but how much of the growth or just general sense came from more products from new -- from existing clients? Or how much came from new clients? In other words, what was not volume-related?

Yes. So a lot of it came -- a lot of the growth on the recurring line, in particular, came from deals that we signed or booked in our fourth quarter, third quarter last year, and they're starting to come online. So we had a lot of growth that came from deals at that point in time. I would say the mix of new client logos versus existing client logos still is primarily existing client logos. It's more than half easily are coming from existing customers who are adopting some of the new products, though we do have a couple of new marquee customers and new logos that we signed to the latter part of last year, where you're starting to see the recurring revenue. So it's a nice blend, but mainly coming from our existing customer base.

Okay, okay. And then I know sometimes on renewals, they can be lumpy. As we think about the next quarter or 2, have there been any renewals that have been moved up or down that we should think about that could cause some lumpiness?

No. We have some scheduled renewals coming in quarter 3 and in quarter 4. We've kind of baked in the effect of that into our new guidance, but nothing sizable, I would say.

Okay, okay. And then in DMS, clearly, you have the shift going on towards cloud away from license. Could you have just some sense when you think revenue will still stabilize?

Yes, I think that's happening right now as we speak. We're seeing the revenue starting to climb, in spite of the transition.

Yes. I think, Adam, the -- I would say the one kind of disappointment we maybe have this quarter was the timing of some deals. Coming into the very end of the quarter, we had, I don't know, roughly $10 million, maybe a little bit more in deals that we expected to sign. They would be booked deals, not upfront revenue, but booked deals with recurring revenue. And they ended up either signing after the quarter or we're still closing them and pursuing them. So there's the lumpiness that will occur in this business, probably less than license revenue and more in bookings, as we go forward. But there's a lot of pipeline there in DMS. And we're really happy with the market acceptance and demand around this product.

(Operator Instructions) Our next question is from the line of Bill Warmington with Wells Fargo.

So I don't know, in some ways, I'm speechless to your -- the -- when was the last time you guys raised guidance within the year?

I think around 14 years, Bill. It's been a little while, but we've done it. We've done it.

It was like 2013, I think, right?

You got a better calendar than I do on these things.

Anyway, so I think that probably says something right there. The -- as I look at the 47% growth in the B2B side, it's definitely above anything that I was modeling. So is the thought that we roll that 47% growth in that piece of the business forward, assuming volumes remain the same as they have been remaining, does the price increase continue to flow through for the rest of the year? I'm assuming that's the way it is. I just want to make sure.

Yes, I think the run rate that we delivered this quarter, the overall run rate of $88 million, which includes this piece of the B2B, is a fairly good run rate to be using right now, if all things remain the same on the quantity side. And again, as I mentioned, there's a little bit of uncertainty as to how the rate card gets applied through each of the 3 bureaus. And so there could be a little bit of volatility along the way. But we're assuming in our numbers, at least, that the run rate is stable.

How are things going on the lead gen side? You -- you'd signed up deals with -- you've been working with Experian and with Discover, and it was a different revenue model. Are you starting to see some meaningful volumes coming through those channels?

I think the meaningful volumes are still on our future, but we don't really control it. It's more in the hands of our partners. And so when they ramp, we'll be in good shape. But they're not really -- they're in the process of some ramping now.

Yes. It wasn't a big needle mover this quarter. But it was definitely some incremental revenue from what we've seen in the past, but it wasn't a needle mover.

Okay. And then maybe you can talk a little bit about what's driving the strengths in originations and also on the Customer Communications side? Those numbers seem pretty strong within Applications.

Yes. I would say that the answer is the same in both situations. We have the best product in the market. So our originations product is just a -- it's a really high-feature, high-function, elegant code kind of an offering. And so it's not surprising that the marketplace has really embraced it, and so we're really busy selling it. Customer Communication Services, same thing. I think that we're best-in-class. And we continue to refine what it could do and improve the analytics and the feedback, so that they can -- so that our customers can maximize the return as they're -- and optimize their interactions with their customers. So it's really having great product is what's -- what it is. I mean, it sounds kind of like a throwaway, but it's a -- I mean, it's truly because we have great products.

Bill, I'd add to that, over the last couple of years, maybe over the last 6, 7 quarters, but roughly, call it, 2 years, we've taken what was an originations product that was not growing much at all, in fact, in some cases, stepping backwards. And over that 2 year -- the last 2-year period, we've signed 25 or more cloud customers, some pretty meaty ones in the banking industry. And what you're starting to see in the revenue is you're starting to see the go-lives and you're starting to see the recurring revenue coming on that. That -- that's what accounts for the 50% growth in originations. They -- these have been deals that we've talked about being booked in the past that are now starting to go live. And we've got a lot of people working on originations business because, as Will said, it's been winning a lot of deals on the market.

However, last year, the challenge had been that you had been booking a lot of business. And the expense side, you were being -- you had to invest in order to implement the business and also to build out the technology infrastructure to support the business. Now are you getting to the point where the incremental investment in implementations and infrastructure is starting to slow?

I wish I could say we're getting to that point, but it's not really slowing. The opportunity set is so strong that we are -- we're investing for the future, and cloud, security, managed services, professional services to support all that. And we are -- we're making the investments that show up on the cost side, so that the business can be as strong as we think it can be.

Yes, I would add one more thing, Bill, where last year, we talked a lot about originations pipeline and deals that we were signing. We believe we're at the front end and have seen a lot of that on the collections and recovery side. And in fact, this quarter, our largest deal that we booked, which was just north of $10 million in the aggregate, was very solid collections and recovery in the cloud deal, probably one of the largest that will be implemented on the planet by us. And so we're seeing a very good pipeline on that side as well. And the hope, of course, is to see a repeat of what we've done on the origination side with that product line.

Okay. Now it also sounded like you guys have been working on a combination fraud and compliance product, 2 areas that typically, within banks, had been handled very separately, but would seem like they would fit together closely. Is that the case? And then what is that space?

Bill, that is the case. We're very much focused on a broad fraud footprint in the way KYC and AML and Fraud are all -- and Fraud. They're all coming together, and so we're looking at it more holistically. And our customers are asking for it that way, too.

Yes. The product hasn't been released yet, Bill. But what we're seeing in terms of deals that underpin some of these bookings, as we're seeing a lot of Falcon/CCS deals happening together. Those are already, of course, fairly well integrated. And while we're integrating the AML solution that we bought from TONBELLER, we're actually seeing a ton of standalone AML deals, some quite large ones. And we expect a few more before the end of the year. Falcon X, as Stuart calls it, will be hopefully available by the end of the calendar.

There are no further questions at this time.

Thank you. That concludes today's call. We would like to thank you all for joining us. Have a good day.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.