Fair Isaac Corp (FICO) 2002 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. And thank you for standing by. Welcome to the Braun Consulting first quarter earnings release conference call. At this time all participants are in a listen only mode. Following the formal presentations instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference please press the star followed by the zero. As a reminder this conference us being recorded today, Wednesday, May 8, 2002. Statements in this call are forward-looking statement that involve risks or uncertainties many of which are not under the control of Braun Consulting. The risks and uncertainties could cause actual results to differ materially from those described in the forward-looking statement. Such risks and uncertainty include but are not limited to the nature of the market and command for Braun Consulting service offerings, competition, overall general business and economic conditions, the nature of Braun Consulting's clients and the project engagements, attracting and retaining highly skilled employees, the ability of Braun Consulting's clients to pay for services, timely payment by clients for services rendered, and Braun Consulting's ability to effectively manage growth and client relationships as well as other risks identified in Braun Consulting's annual report on form 10-K for 2001. And other filings with the Securities & Exchange Commission. Braun Consulting is under no duty to update any of the forward-looking statements after the date of this report or to conform these statements to actual results or changes in its expectations.

Thank you, Eileen. Also with me on the call today is Tom Shuler, our CFO, and Jim Kaloosian our chief operating officer. Good afternoon, everyone and thank you for joining us for the first quarter earnings conference call. Today we will cover the following topics: Review of the first quarter financial results were which were announced at the close of markets today, our perspective on the current demand environments, and update on some of the strategic priorities, guidance for the second quarter and then we will open the call for questions. At this time I would like to turn the call over to Tom Shuler for discussion of Q-1 results and the update on the financial metrics. Tom?

Thanks, Steve. Thank you everyone for joining us on the call. I will begin with review of our financial performance followed by analysis of our clients, personnel metrics and balance sheet items. We are pleased with the progress of our business here in the first quarter as we have experienced a number of improving metrics from the first quarter, including increases in revenue, EBITDA, earnings, utilization, bill rates and a decrease in DSOs. Revenue before reimbursements for the first quarter of 2002 was 15.9 million, an increase of 44 percent over revenue of 15.3 million for the fourth quarter 2001. And a decrease of 26.4 percent from revenue of 21.6 million from Q-1 2001. Total revenue for the first quarter of 2002 including reimbursable project expenses was 17.5 million, an increase of 3.3 percent from the 16.9 million recorded in the first quarter of 2001 and a decrease of 26 percent from total revenue of 23.6 million for the same period a year ago. In accordance with financial accounting standard boards topic D-103, effective January 1, 2002, Braun Consulting includes reimbursable project expenses as a component of total revenue. Net income excluding non-cash items and special charges of 609,000 was a profit of 47,000 for the quarter or break even on a cash earnings per share basis compared with a loss of 1.7 million for Q-4 2001 or loss of 8 cents per share prior to special charges of 2.1 million, and a cash earnings of 116,000 or 1 cent cash earnings better diluted share for the first quarter of 2001. Non-cash items included good will amortization prior to January 1, 2002 and stock compensation. Special charges include severance costs associated with the previously announced management changes at Braun. On a gap basis the net loss for the first quarter was 326,000 or a loss of 2 cents per share compared to a net loss of 2.3 million or a loss of 11 cents per share for the first quarter of 2001. EBITDA prior to special charges improved to a gain of 686,000 from a loss of 1.4 million in Q-4. This was driven by an increase in revenue and decrease in GNA cost. Net interest income was 204,000 in the first quarter, a decrease from the 246,000 earned in Q-4. The decrease was due to the decline in interest rates as our average yield on deposits increased from 3 percent to 2.1 percent. With respect to client metrics, our client concentration for the top five clients was 62 percent Q-1, compared to 57 percent in Q-4. For our top ten clients, 76 percent in Q-1 compared to 68 percent in Q-4. And for our top 20 clients it was 89 percent Q-1 compared to 82 percent in Q-4. The average annualized revenue from the top 20 clients increased to 2.8 million Q-1 versus 2.5 million in Q-4 and the average annualized revenue from the top ten clients increased to 4.8 million Q-1 versus 4.2 million Q-4. Revenue from integrated projects increased to 56 percent in Q-a, versus 50 percent in Q-4. And in addition, our overall repeat business accounted for 74 percent of our total revenue in Q-1, compared to 79 percent in Q-4. Despite difficult market conditions our business development events resulted in the addition of eight new significant client relationships in the first quarter. Health care and pharmaceuticals continues to be our strongest vertical followed by media and telecom and manufacturing. Our industry concentration was as follows: Health care and pharmaceuticals was 60 percent in Q-1 versus 53 percent in Q-4. Media and telecom was 18 percent in Q-1 versus 22 percent in Q-4. Manufacturing was 14 percent in Q-1 versus 16 percent in Q-4. And financial services was 4 percent in Q-1 versus 5 percent in Q-4. And the other category was 5 percent in Q-1 versus 4 percent in Q-4. And the other includes high-tech, energy and consumer goods. Our percentage of fixed price versus time and material projects was 74 percent fixed prices versus 26 percent time and materials in Q-1, which compares to 70 percent fixed price and 30 percent time and materials in Q-4. Our international business was 5 percent of revenues in Q-1 compared to 10 percent in Q-4. Decline was due to a couple of reasons. We successfully completed client projects overseas during the second quarter and now we are maintaining a domestic focus where the business environment is more stable. We ended the quarter with 324 consultants and 420 total employees, a decrease from the 335 consultants and 435 total employees at the end of Q-4. Our bill rate was $152 an hour in Q-1, an increase from 148 per hour in Q-4. Annualized revenue for consultants was approximately 194,000, up from 172,000 last quarter. Annualized revenue for consultants was positively impacted by increased utilization and billing rates. Employee retention remained strong with voluntarily turnover of 7.6 percent in Q-1 compared to 8.8 percent in Q-4. Strength of our balance sheet continues to position us well for future growth. Cash and marketable securities balance at the end of the quarter was 38.7 million, down from 40.8 million at the end of Q-4. Majority of the cash used during the quarter was associated with Q-1 restructuring charges and Q-4 changes in management. In February we announced changes to the management team. In conjunction with the changes the firm incurred $591,000 in severance costs, charges. The changes in our organization should result in lower project and personnel expenses and increase in sales and marketing expense as we reallocated internal resources to this area based on the early success of our solutions sales efforts. We expect to incur additional of 1.5 to 2.5 million in charges. These charges will include 500,000 to 1 million in costs associated with Q-2 reduction in force and one to 1.5 million of costs associated with office space consolidation including entering into a sub lease agreement for approximately 50 percent of the previously written off space. We anticipate that collectively these actions will provide an annual savings of approximately 3.5 million. We continue to be pleased with the improvements we have made in the credit collection process. DSO at the end of the first quarter was 86 days versus 107 days at the end of Q-4. Based on historical calculation using revenue before reimbursement. A comparable analysis including revenue reimbursement had our DOS's increasing from 97 days in Q-4 to 78 days in Q-1. Accounts receivable increased 1.3 percent to 15.3 million in Q-1 from 15.1 million in Q-4 which compares favorably to the 3.3 percent increase in total revenue, in Q-1 versus Q-4. We expect to continue to see improvement in DOSs and cash position. We received nearly 2 million in pavements two days after the first quarter and the April cash balances were in excess of 41 million. The company repurchased 25,000 shares at an average price of $4.45 a share for a total of $111,250 in the first quarter. In total, the company has repurchased 164,100 shares at an average price of $3.89 per share for a total cost of $637,831. The company's board authorized the repurchase of up to 1 million shares in Q-4, 2001. On a weighted average basis our basic share count for the quarter was 20,619,396. The fully diluted share count was 20.950,308. And finally we will be speaking at the Robert W. Baird and company growth stock conference at the Four Seasons hotel in Chicago tomorrow, May 9 at 4:15 p.m. With that I'll rush you to Steve Braun. Steve?

Thanks, Tom. We are pleased with the overall results for the first quarter. Given the continued difficult economic conditions we managed to make strong progress against many of our goals, including expanding the focus on accounts management, enhancement of our solution selling process and, finally, a return to profitability. Although corporate and I C spending continues to be solved with more sectors impacted than others. We see signs of stabilization and we think that the market is slowly turning. During the quarter we continued to see positive trending as it relates to pipeline developments new client close and client expansion. We were able to make solid operational improvements, utilization, bill rates and collections. These factors combined with the actions taken over the past two quarters to actualize our cost structure and skill set composition, give us caution optimism and further strengthens our operating leverage to capitalize on an economic recovery. During today's call I would like to provide a brief update and allow some of the key strategic objectives we outlined earlier this year. Specifically our focus on and investment in two initiatives that serve to deepen our client relationships and help us further hone our model. These initiatives well position Braun to capitalize on what we feel will be a long term promising market when the economy recovers first, let's discuss our the account management focus. That is the cornerstone of our business and prime generator of ongoing revenue. Our ability to cultivate strong client relationships continues to result in the delivery of large complex projects and winning of new opportunities with existing clients. These projects typically arise out of long standing executive level relationships. To date we have had a track record of success in developing strong client relationships that have resulted in both high satisfaction and an ability to generate extensive all over business as evidenced by 74 percent repeat business. During the quarter, we continue to build our account management platform. Focusing a group of very senior people on extending and strengthening both major existing relationships as well as new strategic ones with significant growth potential. We already are seeing several benefits including enhanced focus on delivery compensation, improved pipeline of new high level projects from historic clients notably during the quarter we expanded the scope of our work with pharmacia, biogen and Eli Lilly and the expansion of project opportunities for more recent clients as evidenced by the increasing size and scope of engagements with the New York Times, Fizer and home shopping network, among others. What we are finding with both historic and recent clients is that our integrated business model enabled us to take a more comprehensive view of the business challenges facing our clients and bring more value to the relationship. Subsequently, we are in a better position to develop a deeper knowledge of business strategy, organizational environment and core systems. While the clients benefit from our ability to drive value across the business, we are able to scale projects and are in a strong incumbent position versus other competitors for future work. From a solutions standpoint we continue to leverage the core capabilities to create integrated solutions that target specific industry challenges and deliver immediate client impact. In previous calls we have talked about our E farm solution. Specifically how we capture the best elements of a solution we deployed for biogen and applied this knowledge and experience to help other clients including Fizer and Shearing Plow tackle similar issues in how to connect with constituents on line. Similar to this focused targeted approach over the past few years Braun had the unique opportunity to work on some of the toughest CRM projects with or business, tribe you know company and home shopping network. There has been a deepening of our knowledge around specific challenges and a sharpening of our CRM expertise. Building on these experiences during the first quarter, we formal lied two new solutions capabilities. One targeting the media industry and the other focused around integrated marketing solutions. As we mentioned previously our strength resides in situations where we have been able to define a problem, bring together the right set of business ideas and service capabilities to drive the solution, eliminate integration issues and create an integrated solution that includes change management and marketing support. Our ongoing work with a large print based media client is a perfect example of the verticalized approach we are taking with the media experience. By virtue of our experience with Direct TV and Onstar and others, we have a good perspective on how to acquire and retain customers in a subscription based model. For this particular client, we were able to quickly draw upon these experiences to facilitate and direct the multi year CRM transformation effort. Initially the scene of the project was centered around data warehousing. However, upon learning the breadth of our capabilities, the client engaged both Braun strategy and architectural resources to help lay out the overall plan and approach for the entire project. We are now engaged in a multi year multi million dollars development effort that includes strategy, data warehousing, campaign management, call center, and web services. Because of our expanded role, we have been able to bring a strategic technical and business process experts in at key points during the engagement. Resulting from interaction with other aspects of the business we have been able to identify other areas where we can assist our client. We recently gun five new initiatives over the last month in areas outside of the CRM program. These are projects around customerless management, market segmentation, demand forecasting, advertising and reporting. With some of these specific initiatives we have been able to generate significant cost savings in a short period of time. In particular with the customerless management project we help the client find a better way to buy and use information services. The resulting savings in this effort was approximately two to $3 million annual cost savings going forward. Briefly, let me provide an overview of our secondary focus around integrated marketing. This is the complete solution for the marketing department that focuses on three key areas. Enterprise customer strategy which includes segmentation, contact strategies, and pricing. Marketing operations which deals with the day-to-day operations of a marketing department such as data base marketing. Marketing and sales collaboration and information sharing, campaigning management, and pre and post campaign analytics, and finally our core blueprint product to assess the situation, and produce and drive a plan of action for implementing clients related technology investments. In short our integrated marketing capability addresses a strategic and analytical side of CRM. To drive the solution efforts we focused key senior executives from our delivery organization to hone and refine this function and build a strong targeted capability, all the way from service offering to from inception through marketing and sales Moving forward, a key driver for creating enhanced business value and return on investment for customers will be our continued emphasis on these types of solution offerings coupled with increased investment in sales and marketing. We also believe this approach provides Braun a competitive advantage against the undifferentiated strategy and comooditizing approach of some of our more established competitors. Moving forward, our pragmatic approach and continued investment and deepening our solutions focus account oriented approach will strengthen both Braun's market positions and operating leverage to capitalize on economic recovery. It is a model validated by clients and the results we achieve together in trans lighting their investment into bottom line crawl and one that continues to prove its relevance and resilience in a difficult market as evidenced by our performance during the first quarter. For the second quarter our guidance will continue to be conservative. We expect revenue prior to reimbursable project expenses to be approximately 15 million pro-forma cash earnings per share to be break even to slightly positive. Before estimated special charges of 1.5 million to 2.5 million. As Tom outlined, these charges are a continuance of our previously announced year end restructuring and primarily due to severance costs associated with the reduction in work force and office space consolidation In closing, the first quarter was an important quarter for us marked by strong results and positive trending in the business. Specifically, we are encouraged by our capability to complete the quarter with our costs in line, demonstrated improvements in operational and financial metrics, including EBITDA collections, bill rates and utilization which point to a stabilization of the business. Leverage in the model, even though we have initiated some cost actions over the past two quarters we still have significant leverage in our structure and are well equipped to drive profits from the current model. We are seeing positive trending in the pipeline. We are witnessing an increase in total volume of opportunities but more importantly we are seeing a near doubling of qualified opportunities where contracts are pending and or we are in the lead. The second point particularly encourages us as we expect this to positively impact us in the near term. Before I open the call for questions I would like to acknowledge our employees for their continued support, hard work and dedication. It is clearly their efforts and contributions that enabled our solid performance and ability to deliver clients and shareholders value.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the star followed by the one on your push button phone. If you would like to decline from the polling process, press the star followed by the two. You will hear a three-tone prompt acknowledging your selections. Your calls will be acknowledged in the order in which they are received. If you are using a speaker phone you will first have to lift the handset before pressing the numbers. One moment please for the first question. First question comes from Patrick Berman with Salomon Smith Barney. Sir, go ahead with your question.

This is Swen Schwimwacker for Pat Berman. My question was on, given the depth of your knowledge on CRM, wondering if you could provide some perspective on where, how you see the CRM market evolving. In other words, some of the CRM software consults, some of the companies services companies see evolution into employee management, management, ERM. Where could you see Braun Consulting's role if that takes place. Thanks.

Thanks for the question. Yes, absolutely. As you know, we have been very deep into the CRM side of the equation for many years now and we have always viewed CRM as a comprehensive perspective not just around customers but all constituents including employees, partners and as the market place evolves, and as we have stressed over the years, we truly believe that the key to being able to drive market share and competitiveness comes from understanding your market place. Not just your customers across all channels, but other the constituents completely as well. I still think there is a ways to go from the standpoint of the maturity of some of the software that is out there. In the meantime, there are certainly viable approaches, viable understanding and we work very significantly in this area. To not only help customers, our clients drive solutions around the ERM and PRM, but more importantly to build the enterprise infrastructure that is required to be able to support those types of applications.

Okay. Thanks for the in sight. A couple of more questions on housekeeping type stuff. Give update on project cancellations, what do you see during the quarter?

This is Jim [Kaloosian.] We have not seen by project cancellations during the quarter.

How about deferrals of existing client contracts and so on? Signed contracts?

I think consistent with what we are seeing in the markets there have been some project probably extended over the span of their original project scope. But we have not seen project cancellations. More extension and stretching of projects in some cases.

Okay. Are you materially seeing in the, maybe in the New York Times as being smaller in size in terms of the project? Is that something you are seeing?

You know, actually I think it's just the opposite in that front. What we have seen in a lot of our client situations is because of our ability to really lay down the business strategic perspective, to broaden the scope of some of our client engagements. In fact, if you look at our client concentration you will see that the numbers ticked up. We actually view that as a positive from our perspective. It truly is representative of the larger more complex initiatives that we are undertaking for these clients. That really is across the board. If you look at our top five, if you look at the top ten or even the top 20. In addition, an interesting point related to your previous question. We are seeing -- we fortunately have not seen a significant amount of deferrals or cancellations. I think one of the reasons is because we have very strong relationships and strategically position the projects we work on. On the open side, we have seen some positive movement. To the extent there are clients like Minnesota mutual life which we won a substantive project a year ago. It was postponed. And now it came back and actually started on May 1. So, you know, it still is a difficult market place. We are still seeing companies take a significant time to make decisions. But what we are doing better I think is creating a better perspective around return on investment as it relates to the projects. That helps to push some of these over the humps.

Thanks. Nice quarter given the circumstances.

Thank you.

Thank you. Our next question comes from Mosha Cateri from S.T. Cowan. Go ahead.

A couple of questions. Inaudible quarter, that's number one. And number two, can you talk a little bit about your Alpine conversion rates, the ability to convert into bookings an into revenues? And last question, can you talk about some of the activity that you are seeing in each of the verticals you are competing at.

Tom Shuler, was your first question about utilization?

Yes.

It's about 63 percent for the first quarter, up from 67 the last quo.

Mosha? Jim. The second question had to do with pipeline?

Conversion rates.

I think that there's two factors there. One is again, as Steve mentioned earlier, the expansion of some of our existing relationships, quality deliver ry over the second quarter that resulted in continued expansion of existing relationships. Then on new business pipeline, we are still seeing a fairly deliberate trend of velocity through the pipeline. One thing we have seen over the last 90 days is a nearly close to doubling of the volume in late stage. Steve mentioned that means either 75 percent completion on the delivery to 90 percent where we are in final negotiations. We see the near doubling of that amount. While velocity continues to be deliberate, we are seeing a dramatic increase in Braun's late stage pipeline, which is a positive sign we think looking forward.

Finally, Mosha, on the question on the vertical activities, that's a great question. It is important to understand where we are at today versus a year ago. A year ago we had a very heavy investment in the telecommunications sector. In addition to that, manufacturing and financial services across those three represented nearly 50 percent of our business. If you look at where we are at today, health care and pharmaceuticals, primarily pharmaceuticals and bio tech represent close to 60 percent of our business. We really believe the portfolio of clients has improved from the standpoint of the strength of the industry represented by the health care and pharmaceutical side. In addition to that, even though telecommunications continued to be a significant piece of our business we combined it with the media side. Right now we have a strong concentration with some very significant clients on the media that is holding up that component. So we are seeing a fair amount of continued strength in activity in those specific industries. And we are just beginning to see some recovery in financial services, manufacturing. We have not seen that recovery on the telecommunications side.

Thanks.

Our next question comes from Gary Dean with Robert W. Baird. Please go ahead with your question.

This is Alan Jackson in for Gary Dean.

How are you doing, Alan?

Good. My question is, where are you in the restructuring phase? Have you finished all the cuts you are going to do? Where do you expect the head count to trend over the next couple of quarters?

Yeah, to answer that question, we do anticipate that based upon our current perspectives our strategic restructuring as it relates to the size of the organization and composition of skill sets, we are completed with that. With that said, we have identified some areas where we think we have a great opportunity to enhance our experience sets and skill sets and based upon how the business is trending right now, we expect to take advantage of being able to hire some talented people in a market place where there are a lot of talented people.

If I could add to what Steve said, Alan, we are positioned right now for some flexibility. Just like you'll see some variability in industry concentrations depending on where demand is based on trends in those particular industries, I think we are also now in a cost position to be a little more flexible, to be able to invest in those areas where we see growth in the near and median terms.

Then kind of as a corollary to that, can you give us some kind of sense how your utilization trended during the quarter? Even in the month of April?

You know, we don't provide that on a public basis, but it did trend up over the quarter.

Okay. I believe Tom mentioned something about sales and marketing expenses expected to increase. What are you investing then.

This is Jim again, Alan. I think a good deal of that increase is related to some reallocation of resources. But as Steve mentioned earlier, we have had some very good success with the solutions approach where we are trying to integrate our industry and functional experience with some of our technical capabilities around a business problem that exists within specific industries of functional areas. We are targeting those solutions against market demand that we see. Last year we had a very successful campaign around the E-pharma space. We are invests those resources into developing similar campaigns in the integrated marketing area that Steve mentioned in his example, wells in the media industry where we see a lot of consolidation and reinvestment around customer development.

Thanks, guys.

Thank you, Alan.

Our next question comes from Wes Gilchrist with Salomon Smith Barney. Please go ahead with your question.

Thank you. I had a question about you mentioned your skill sets and I wanted to see what skill sets you have in high demand. And also specifically you had mentioned web services. I wanted to find out if there are any interesting projects that you have at this time.

In terms of skill sets, I think we are seeing it in a number of areas. I think one of the things that I don't think you are going to see a lot of in the near term is a dramatic increase in any specific technology area. But because of any new introduction of technology. But you will see a lot of industries and large companies trying to integrate and consolidate their investment. So I think what we will be seeing a lot more of is cross disciplinary teams where clients are trying to increase the return they are getting on the investments they made and filling some gaps. In the area of web services, we are seeing more integration of disparate technology that we have seen over the last years. And you will see more integration of the Internet with the platform to integrate call center, field forth, data base, analytics, portal information systems around the customer. We are seeing a lot more integration of disparate technologies, which will put a demand on business skills and architectural skills as well as continued demand for those specific technology disciplines that are being integrated.

Great, thanks.

Thank you. Our next question comes from Jay Weigel with Lakefront Partners. Go ahead with your question.

I'm late. I apologize if this was asked. But you talked about the doubling of the late stage pipeline. And one, I guess, what assumptions of this late stage pipeline do you have in your second quarter numbers? And two, typically what is the time frame it takes to convert from late stage opportunities to revenue generating business?

Thanks, Jay, I wondered when someone was going to ask that question. First of all, we decided to be conservative with our guidance. We truly have a 90 percent plus visibility on the guidance number that we have given. So we feel like we are in a real strong position for the quarter. Secondarily, as Jim indicated, and as I spoke about, if you look at what is in our 75 percent plus category of our pipeline, which is situations where we are in the lead, let me add that in those situations we call in the lead, situations that we fully expect to win. In the 90 percent category, which are situations that we have already won, and we are waiting for contract, in many cases these projects have actually started. It is really a positive movement for us from the standpoint of that number is nearly doubled from 5 million to 10 million, 90 days ago. Now the issue is that we still do continue to see people deferring start dates. Not to the extent, as I talked about with the Minnesota Mutual situation, but by weeks or months, which clearly impact where those revenues are going to fall. We are confident with the revenues historically. The bulk of those if not all typically come in for us. It is a question right now as it relates to making certain that the companies identify start dates, get mobilized to support us in these projects an we move forward with those. That's where we are conservative at this point in time. We feel that taking into consideration the difficulty that is still continuing in the market place, we want to be conservative with our approach.

Thank you. Then just in terms of things that you might not qualify in this late stage pipeline, this renewed activity, I mean, can you pinpoint just in terms of the, just the general amount of feedback you are getting from your sales force? Have we definitely seen a turn at this point?

This is Jim, Jay. I think the only thing I would say, I think we feel like we are seeing the bottom. But again I would qualify, this is about the combination of existing client relationships as well as new business opportunities. So I think what you are seeing is things moving from early stage where many of the, either the clients or potential clients were kind of scoping out what they might want to do. What we are seeing is those projects move to a later stage in decision making where now they are down to a select few and defined more specifically the projects they want, the timing of them and are starting to negotiate terms. What you are seeing is a bulk of things going from early or middle stage of the pipeline into the later stage.

Thank you.

Thank you. This concludes our question and answer session. Mr. Braun, please continue with any additional comments.

I would just like to thank everybody for joining us today. We look forward to seeing you on our Q-2 call. Thank you.

Ladies and gentlemen, this concludes the Braun Consulting first quarter earnings release conference call. Thank you for participating. You may now disconnect.