Fair Isaac Corp (FICO) 2002 Q2 法說會逐字稿

Good afternoon and welcome to your Braun Consulting second quarter 2002 investor conference call.

I would like to remind all participants that the statements made in this call that are not strictly historical are forward-looking statements 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 uncertainties include but are not limited to the nature of the market and demand for Braun Consulting service offerings, competition, overall general business and economic conditions, the nature of Braun Consulting's clients and project engagements, attracting and retaining highly skilled employees, the ability of Braun Consulting's clients to pay for services, timely payments by clients for services rendered and 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 and 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.

I would now like to introduce Mr. Steve Braun, President and CEO.

You may now go ahead, sir.

Thank you,

.

Good afternoon and thank you for joining us.

During today's call we'll cover the following: a review of the second quarter's financial results, which were announced at the close of markets today.

A more detailed discussion of the specific factors that impacted performance during the quarter, in particular I'll provide an update on our strategy as it relates to the recent

Pfizer acquisition announcement, guidance for the third quarter and then we'll open up the call for questions.

With us today is Tom Schuler and, at this time, I'd like to turn the call over to Tom for a discussion of Q2 results and an update on the financial metrics.

Tom?

Thanks, Dave.

Good afternoon, everybody, thanks for joining us on the call.

I'll begin with a review of our financial performance followed by an analysis of our client's personnel metrics and balance sheet items.

Our financial performance and operating metrics were negatively impacted during the quarter by a combination of factors, including a decline in revenue from our largest client

, delayed and deferred work from some of our other managed accounts and a continued lengthening of the sales cycle.

Revenue before reimbursements for the second quarter of 2002 was 13.3 million, a decrease of 39.9 percent from revenue of 22 million in the second quarter of 2001.

Total revenue for the second quarter of 2002, including reimbursable project expenses, was 14.7 million, a decrease of 39.3 percent from total revenue of 24.2 million for the same period a year ago.

Pro forma net loss, excluding certain non-cash items and special charges of $3 million, was a loss of 1.1 million for the quarter, or $0.05 per share, compared with pro forma net earnings, excluding certain non-cash items and special charges of 5.6 million, of 454 thousand, or $0.02 cash earnings per diluted share for the second quarter of 2001.

Non-cash items included amortization of intangible assets prior to January 1, 2002, and stock compensation.

Special charges includes severance costs associated with the previously announced management and personnel changes and the cost associated with office space consolidation.

On a GAAP basis, the net loss for the second quarter was 2.9 million, or a loss of $0.14 per share, compared to a net loss of 3.8 million, or a loss of $0.19 per share for the second quarter of 2001.

The revenues before project expense reimbursements for the six months ended June 30, 2002, was 29.2 million, down 33.2 percent from revenue of 43.7 million for the same period a year ago.

Total revenue for the six months ended June 30, 2002, was 32.1 million, a decrease of 32.7 percent from total revenue of 47.7 million for the same period a year ago.

Pro forma net loss, excluding certain non-cash items and special charges of 3.7 million, for the six months ended June 30, 2002, was 1.1 million, or $0.05 per share, compared with pro forma net income, excluding certain non-cash items and special charges of 8 million, for the six months ended June 30, 2001, was 570 thousand, or $0.03 per diluted share.

Non-cash items included amortization of intangible assets prior to January 1, 2002, and stock compensation.

On a GAAP basis, the net loss for the six months ended June 30, 2002, was 3.3 million, or $0.16 per share.

Compare that to the loss of 6.1 million, or $0.30 per share for the same period a year ago.

Net interest income was 210 thousand for the second quarter, an increase from the 204 thousand earned in Q1.

The increase was due to the growth in cash balances.

Our average yields on deposits decreased from 2.2 percent to 2.1 percent during the quarter.

With respect to client related metrics, our client concentration for our top five clients was 64 percent in Q2, compared to 62 percent in Q2.

For our top ten clients, it was 77 percent in Q2, compared to 76 percent in Q1.

And for our top 20 clients, it was 92 percent in Q2, compared to 89 percent in 1.The average annualized revenue from our top 20 clients decreased to 2.4 million in Q2, versus 2.8 million in Q1.

And our average annualized revenue from our top 10 clients decreased to 4.1 million in Q2, versus 4.8 million in Q1.

Revenue from integrative projects increased to 61 percent in Q2, versus 56 percent in Q1.

In addition, our overall repeat business accounted for approximately 63 percent of total revenue in Q2, compared to 74 percent in Q1.

Despite the difficult market conditions, our business develop efforts resulted in the addition of nine significant new clients in the quarter.

Healthcare and pharmaceuticals continue to be our strongest vertical, followed by media and telecom, then manufacturing.

Our industry concentration was as follows: healthcare and pharmaceuticals, 52 percent in Q2 versus 60 percent in Q1; media and telecom was 22 percent in Q2 versus 18 percent in Q1; manufacturing was at 17 percent in Q2 versus 14 percent in Q1; and financial services was six percent in Q2 versus four percent in Q1; and our other category accounted for approximately three percent in Q2 versus five percent in Q1.

Our percentage of fixed price versus time and material projects was 70 percent fixed price, and 30 percent time and materials, which compares to 74 percent fixed price and 26 percent time and materials in Q1.

Our international business was seven percent of revenues in Q2, above the five percent level achieved in Q1, and primarily driven by our work in pharmaceuticals.

We ended the second quarter with 264 consultants, and 359 total employees.

This was a decrease from the 324 consultants and 420 total employees at the end of Q1 --

of consultants in transition from consulting staff into the solutions development and marketing strategy roles, as part of our previously discussed investment in sales and market for the last quarter.

Our bill rate was $144 per hour in Q2, a decrease from 152 per hour in Q1.

Utilization was 61 percent in the second quarter, and that's down from 63 percent in Q1.

The annualized revenue per consultant was approximately 177,000, which is down from 194,000 last quarter.

Annual revenue per consultant was impacted by decrease in utilization and bill rate.

retention remains strong, with voluntary turnover in Q2 of 5.9 percent, compared to 7.6 percent in Q1.

We strengthened our balance sheet during the second quarter.

We increased our cash and marketable securities balances at the end of Q2 to 39.7 million, up from 38.7 million at the end of Q1.

We also subleased nearly 50 percent of our previously written-off excess office space during the quarter.

We incurred special charges in the second quarter of $3 million.

These charges included approximately 1.1 million in costs associated with a Q2 reduction in force, and 1.9 million for costs associated with further office space consolidation, including adjustments for previously written-off space.

We continue to be pleased with our credit collections process.

DSOs at the end of the second quarter were 87 days, versus 78 days at the end of Q1.

While DSOs increased from Q1 to Q2, we actually saw account receivables decrease at a faster rate, 17.4 percent, than our decline in total revenues of 16 percent.

An additional statistic we measure is weighted average DSOs.

We saw that number improve from 40 days in Q1 to 39 in Q2.

Company used its stock repurchase program to buy 160,300 shares at an average price of $1.95 per share, for a total cost of $312,889 in early July.

In total, the company has repurchased 324,400 shares at an average price of $2.93 per share, and a total cost of $950,720 since the program's inception.

The company's Board authorized the repurchase of one million shares in the fourth quarter of 2001.

On a weighted average basis, our basic share count for the quarter was 20,798,086, and our fully diluted share count was 21,310,434.

And finally, we'll be speaking at the Salomon Smith Barney Technology Industry Conference at the Sheraton New York Hotel in New York City, on Wednesday, September 4th, at 2:20 p.m.

And with that, I'll return you to Steve Braun.

Steve?

Thanks Tom.

Clearly, this was a challenging quarter, as Tom mentioned, our disappointing financial performance was the result of a combination of factors.

This includes a decline in revenue from Pharmacia, our top client, project delays and referrals from some of our managed accounts, and the effects of continued lengthening sales cycles.

First, let me briefly address the situation with Pharmacia.

Pharmacia has been a top client of Braun's for quite some time now.

Revenue from the Pharmacia account declined to 4.2 million in the second quarter from 6 million in Q1 of this year.

In early July, Pfizer announced that it was acquiring Pharmacia.

The acquisition presents a number of potential scenarios for our long-term relationship with both companies, as Pfizer is also a client of Braun's.

In the near term, we continue to work on specific projects, but expect the existing Pharmacia work to come to completion by the latter half of Q3, with total Q3 revenues to be approximately 1.5 million.

As we look forward, there may be opportunities to assist Pharmacia with organizational transition issues prior to the close of the transaction, which is expected to occur before year-end.

Our experience with Pharmacia and our investments in the

, have enabled us to grow our relationships with companies such as Pfizer,

,

,

, and

.

We have scaled these relationships over the past few quarters, but not to the magnitude of the Pharmacia relationship.

As it relates to Pfizer, we expanded this relationship during the second quarter into our third largest client relationship, and have continued to grow this account in the third quarter.

We believe that our in-depth knowledge of both the business units and the IT infrastructure of Pharmacia will benefit us as we look to continue to build on our relationship with the combined companies.

With the exception of Pharmacia, the revenue from our managed accounts increased during the quarter; however, there were certain accounts that did not meet forecasted revenue expectations.

Beginning in early June, we experienced a fall off of approximately $800,000 of additional expected revenue in the quarter for managed accounts, as some projects were temporarily paused in mid-stream and new projects and work streams were put on hold.

Some of these projects slid between four to eight weeks.

Despite the impact of these events on our Q2 financials, the good news is that none of these projects were lost, and all of these projects were restarted in either late Q2 or Q3.

As it relates to the pipeline, at the end of April, our late-stage pipeline and feedback from our sales force continued to give us confidence in our new business opportunities.

However, by late May, several of the opportunities that were in the late-stage pipeline still had not moved forward.

We saw a slowdown in the velocity of pipeline, particularly with late-stage deals.

Clients who initiated potential project discussions were placing even greater scrutiny on their budgets, waiting for improvement in their own operating results.

While the pipeline of opportunities continues to remain at historically high levels, we expect lengthened sales cycles to continue until there are more definitive signs of stabilization in our current clients and future prospects businesses.

To manage the volatility created by the potential loss of a large client, it is imperative that we continue to expand our managed account base.

We faced a similar situation at the end of second quarter of last year, with the loss of two of our largest accounts, AT&T Broadband, and Qwest, and other telecom clients.

Over the course of the past year, we have been able to successfully redeploy resources to expand the number of our pharmaceutical and media clients as well as our clients in other vertical.

We have expanded relationships with companies such as Eli Lilly,

, and Biogen and added significant new relationships with New York Times, Pfizer, and

partially filling the gap created by loss of a substantial portion of our telecom business.

Although we experienced a decline in revenue from Pharmacia, the revenue from our other managed accounts expanded in Q2 and we expect this trend to continue in Q3.

With our experience over the past year in expanding and developing new accounts, we're confident in our long-term ability to grow our client base to fill the void created by the changes at Pharmacia.

In addition, we added nine significant new clients during the quarter including American Greetings, Life Pharmaceuticals and

.

The outlook for the third quarter remains challenging.

Despite the expected expansion of our managed accounts, we will not be able to replace the declining revenue from Pharmacia in the near term.

We expect revenue prior to expense reimbursement for the quarter to be 10 to 11 million, resulting in a loss of nine to 12 cents per share.

We expect cash balances to decline from approximately 39.7 million to 37.7 million during the period.

Before we open up the call for questions I want to reiterate the importance of viewing our second quarter results and our guidance within the context of the macro trends that continue to impact the overall economy.

What we are experiencing now -- the exaggerated effects of the economic slowdown -- is very similar in many respects to the trends of the late 90's marked by unprecedented levels of investment in technology and subsequent growth.

Erratic fluctuations in the market place -- either up or down -- are going to have a dramatic effect on our revenue and earnings because of the size of our company and the scale of our project opportunities.

In addition, the near term impact of the Pharmacia acquisition is significant with an expected 2.7 million incremental decline in Q3 revenue compared to the second quarter from this one client.

Despite these challenges, we still believe there is a significant long-term market opportunity to help our organizations with their customer initiatives.

Several indicators support this including the start up of delayed projects, the continued growth of our managed accounts -- with the exception of Pharmacia -- the number and size and initiatives under consideration by our clients and prospects, and our continued success in competitive situations against larger firms.

Moving forward, we remain very focused on our core strategy of delivering integrated ROI driven solutions that both optimize our client's use of business and customer information and offer a comprehensive solution to fundamental business challenges.

We will continue to invest in deepening our solutions focus accounts oriented approach.

It is an approach that continues to provide Braun with a competitive advantage against the undifferentiated strategy offerings and commodities technology solutions of some of our more established competitors.

Clients and prospects continue to look for partners with Braun's focused expertise and intellectual capital in specific industry to markets and a proven approach to tackling critical business issues.

, with that I'd like to open up the call to questions.

Thank you, sir.

Ladies and gentlemen, your Q&A session is about to begin.

If you wish to ask a question, please key star one on a touch-tone phone.

If you wish to withdraw that question, please key star two.

All questions will be taken in the order in which they are received.

First question from

of Salomon Smith Barney.

Pleasae go ahead.

Hi, Steve, hi, Tom.

Question is, on the cost structure, I mean, revenue going down in seven of the metrics such as utilization moving in the opposite direction in which they should be moving.

What steps do you intend to take to manage your cost structure?

Thanks,

, that's a good question.

Obviously, I think -- as you know, in the past we have been very vigilant around managing the cost side of our equation and we've been very proactive on that side.

The

situation, which, obviously, had a significant impact on both our current and go-forward perspectives, is a fairly recent development.

While that is a significant unknown for us, and long-term we think it will have actually some positive aspects to it as it relates to continuing opportunities on a larger basis with the combined company of Pfizer and

and the opportunity that may present itself as it relates to contacts that continue to move outside of that specific situation and into the industry, we think that there could be some long-term positive opportunities.

In the near term, we really are looking at it very closely to try to understand what we need to do from the standpoint of a cost management perspective.

Part of the difficulty here, again, is that this is certainly a recent development and we are seeing some strength in other areas of our business that we think are positive, including the growth in our -- the balance of our managed accounts.

So, we will monitor this very closely over the course of Q3 and, on a go-forward basis, we'll make our decisions based upon what we see into the future.

So would it be, then, safe to assume, or at least from a modeling perspective, to say that in Q4 you are hoping for a reasonably significant rebound from Q3 levels that you forecast?

Well, certainly, as we look at our own specific business situation and we look at what we can most clearly see as it relates to opportunities within our existing accounts, we're positive on that front.

Where we're cautious is related to the continued general difficulty in the marketplace and what is still very slow conversion rates out of our pipeline.

We very firmly believe that as we do see that perspective change and as the market conditions do improve in our client's businesses, that we're in an outstanding position to take advantage of that.

And we do have a historical high pipeline right now that we feel pretty confident about that will convert, at some point in time.

We continue to see our win rates stay at historical high levels so that's not our issue.

So the answer is whether that materializes in Q4 or whether it materializes early next year I think is largely dependent upon economic conditions outside of our control.

But we certainly will stay very close to that and monitor that.

OK.

If I could squeeze in one more question.

In terms of nine wins that you did have in the quarter, what is the level of competitive activity that you saw on those, you know, was it more competitive than in the past, less, did you see different players, if you could comment on that?

You know, it certainly is as competitive a marketplace today as I've ever seen it.

There is still what I'd consider an excess in demand chasing the opportunities that are out there.

Certainly we have experienced some of that as it relates to price competition, and it's a reflection of a decline in rates from 152 to 144 per hour.

We have seen that stabilize from that side of the equation -- from a rates perspective -- but it still remains very competitive.

There's still a lot of companies, including the large companies that are doing whatever they need to do to protect existing accounts and win new business, including making investments.

The good news from that is that we do think we have a differentiated offerings.

We have one very significant engagement, like American Greetings, against some very large competitors, like IBM and Accenture.

Even in situations like that where we were the high-cost provider, we won that because of our experience on the CRM front, and our differentiated approach of combining our strategy and our technology capabilities.

We continue to see that as a real cornerstone in terms of why we're growing in our managed accounts, and we think it's also gonna be the cornerstone, as we look forward to a recovery in this economy in general.

OK.

Thank you for taking my question.

Thank you.

Next question from

of SG Cowen.

Please go ahead.

Hey, guys.

How are ya?

Hey,

.

How are you doing?

All right.

Thanks.

Just a few quick questions.

What was the number of clients that you added last quarter?

I believe that was

.

I'm sorry?

I think that was nine as well.

OK.

And, can you tell us what Pfizer was in whole dollar amount over the course of the last few quarters?

We got that it was the third largest in this past quarter, but can you give a dollar amount on that, and where that's been tracking on?

It's a less than 10 percent client, but it would probably be above a 10 percent for the quarter.

We don't break out the individual dollars on the clients unless they're above 10 percent.

OK, but, do you know ...

My guess is it will be above -- I know it will be above 10 percent this coming ...

In Q3.

And it was close to 10 percent in the previous quarter.

OK.

And do you think you've been seeing proposals, there?

Or, are they pretty much at a standstill as the merger is starting to proceed?

You know, it's interesting.

This is one of the reasons why we're certainly intrigued by this overall combination.

We've been steadily building our presence at Pfizer outside of, obviously, the

announcement, to the extent that we have been successful in winning some fairly large projects, including a couple of recent significant wins.

So, Pfizer continues to spend, and we strongly believe that as they move further down the path of their integration discussions and plans, that our knowledge around that

base will only enhance that relationship with Pfizer.

OK.

Great.

And, on the bill rate front and the utilization, do you think that you've seen bottom at this point with those two metrics?

Or, are there indications that there's further pressure to come?

We're modeling the bottom right now.

OK.

And the last thing -- I don't know if you can give me this -- but do you have an estimate for where you think you'll be as far as cash position at the end of the year?

You know, a lot of that depends upon what we do as it relates to focusing on our cost components over the course of this quarter and beyond.

Right.

But, there will be some cash usage, based upon the anticipation of financing some of receivable decline.

Yeah.

It also -- obviously, it's gonna be impacted significantly by the revenue side.

Right.

We haven't given it any Q4 guidance on revenue, yet.

And, could you just give a feeling as to how things look in some of the other verticals -- manufacturing, financial services.

I know we had metrics, and actually those two ticked up a little bit, as well as media and telecom.

Is there a little bit more activity, or is this just a reflection of the decreased revenue, and them standing still, or more activity going forward, what do you think?

I think what you're seeing in

pharmaceuticals is a real focused concerted effort on our part over the last year, of really investing and building solutions and marketing them into those two verticals.

We have a tremendous number of leads that exist in both those industries.

Ironically, even as the pharmaceuticals industry recently has come under some pressure, we still have a lot of opportunities there, and

is a real strong growth opportunity for us.

As it relates to the manufacturing and financial services, manufacturing for us, to some degree, is a continued strength with certain existing new relationships like Raytheon, that have developed over the last six months or so, and a re-emerging of certain relationships like Motorola.

Financial services, largely remains status quo there, you know, we're seeing opportunities, it's primarily in the insurance side of the equation, there are some fairly large proposals out there on that front.

We have a couple of existing mid-stream big projects that we expect to move forward over the course of the end of the year, but again, it's primarily on the insurance side.

Very well, thanks a lot guys.

Thanks

.

And no other questions in queue currently, Sir.

I'll turn the call back over to you for any closing comments.

Again, I'd like to thank everybody for joining us on this call.

We look forward to seeing you next quarter.

Thanks

.