Fair Isaac Corp (FICO) 2002 Q3 法說會逐字稿

Welcome to the Braun Consulting investor relations conference call.

During the presentation, all participants will be in a listen-only mode.

Later we will have a question and answer session.

At that time, if you have a question, please press the one followed by the four on your touchtone telephone.

Today's call is being recorded Wednesday, November 6th, 2002.

Now I'd like to take a moment to read the safe harbor statement.

Statements made in the call that are not strictly historical or 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 of Braun Consulting service offerings, competition, overall general business and economic conditions, the nature of of Braun Consulting's client, and project engagements, attracting and retaining highly skilled employees, the ability of Braun Consulting's client 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 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 change in its expectations.

Now, I would like to turn the conference over to Mr. Steve Braun, Chairman, President and CEO of Braun Consulting.

Please go ahead, sir.

Thank you, Christopher.

This is Steve Braun.

Good afternoon and thank you for joining us.

During today's call, we'll cover the following.

A review of the third quarter's financial results, which were announced at the close of markets today, a more detailed discussion of the specific factors that impacted our performance during the quarter, and our plan for addressing these challenges, guidance for the fourth quarter, and then we'll open the call for questions.

At this time, I'd like to turn the call over to Tom Schuler for a discussion of Q3 results and an update on the financial metrics.

Tom?

Thank you, Steve.

Good afternoon, everyone.

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

Our financial performance and operating metrics were negatively impacted during the quarter by a combination of factors, including the continued decline in revenue from our largest client, Pharmacia, delayed contract signings and a continued prolonged sales cycle.

Revenue before reimbursements for the third quarter of 2002 was $8.8 million, a decrease of 51% from revenue of $17.8 million from Q3 of 2001.

Total revenue for the third quarter of 2002 including reimbursable project expenses was $9.6 million, a decrease of 51% from the total revenue of $19.8 million for the same period a year ago.

Pro forma net loss was $3.1 million for the quarter or 15 cents per share compared with pro forma net loss of $953,000 or 5 cents per share for the third quarter 2001, excluding certain non-cash items and special charges totaling $16.7 million.

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

Special charges included severance cost and costs associated with office space consolidation.

On a GAAP basis, the net loss for the third quarter of 2002 was also $3.1 million, or a loss of 15 cents per share.

Revenue before project expense reimbursements for the nine months ended September 30th, 2002 was $37.9 million, down 38% from revenue of $61.4 million for the same period a year ago.

Total revenue for the nine months ended September 30th, 2002 was $41.7 million, a decrease of 38% in total revenue of $67.5 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 nine months ended September 30th, 2002 was $4.1 million, or 21 cents per share, compared with pro forma net loss excluding certain non-cash items and special charges of $24.8 million for the nine months ended September 30th, 2001 of $383,000 or 2 cents per 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 nine months ended September 30th, 2002 was $6.3 million or 31 cents per share compared to a net loss of $22 million or $1.08 per share for the same period a year ago.

Net interest income was $192,000 in the third quarter, a decrease from $210,000 earned in Q2.

We worked diligently to manage our cost structure over this period.

We've done this without damaging our ability to deliver for our clients and in addition, we continue to invest in our solutions development and our sales and marketing efforts.

We've made significant reductions in total operating costs for the second quarter as compared to the -- from the second quarter to third quarter, and we anticipate additional cost savings over Q4.

All of the following client-based statistics have been significantly impacted by the decline in the pharmacy relationship.

As revenues from this client have declined from $4.2 million in Q2 to $1.8 million in Q3.

Client concentration for our top five clients decreased to 57% in Q3 compared to 64% in Q2.

Our top 10 clients accounted for 77% of our revenue in Q3 which was in line with Q2.

Our top 20 clients accounted for 95% of our revenue in Q3 compared with 92% in Q2.

The average annualized revenue from the top 20 clients decreased to $1.7 million in Q3 versus $2.4 million in Q2, and our average annualized revenue from our top 10 clients decreased to $2.7 million in Q3 versus $4.1 million in Q2.

Revenue from integrated projects decreased to 58% in Q3 versus 61% in Q2, and in addition, our overall repeat business accounted for approximately 56% of our total revenue in Q3 compared to 63% in Q2.

Health care and pharmaceuticals continue to be our strongest vertical.

With media and telecom manufacturing and consumer packaged goods and retail collectively providing improved industry diversification.

Our industry concentration was as follows.

Health care and pharmaceuticals 53% in Q3 versus 52% in Q2, media and telecom was 15% in Q3 versus 22% in Q2.

Manufacturing was 16% Q3 versus 17% Q2, and our other category, which is principally composed of consumer packaged goods and retail accounted for 15% in Q3 versus 3% in Q2.

We've made significant inroads in this vertical with clients such as American Greetings, 7-11 and Kohl's.

Our percentage of fixed price versus time and materials projects was 64% fixed price, 36% time and materials, which compares to 70% fixed price and 30% time and materials in Q2.

International business was 5% of revenue in Q3 compared to 7% in Q2.

We ended the third quarter with 264 consultants and 354 total employees.

Consulting head count remained constant but total employees decreased from 359 at the end of Q2.

Our bill rate was $132 per hour in Q3, decreased from the $144 per hour in Q2, billable utilization was 54% in the third quarter down from 61% in Q2.

The annualized revenue per consultant was approximately $148,000, down from $177,000 last quarter.

Annualized revenues per consultant was impacted significantly by the decrease in utilization as well as the decline in bill rates.

Voluntary employee turnover was approximately 10% in Q3 compared to approximately 6% in Q2.

Our balance sheet remains stronger in the quarter.

Our cash and marketable securities balance at the end of Q3 was $35.4 million down from $39.7 million at the end of Q2.

Account receivables declined from $12.6 million in Q2 to $9.8 million in Q3.

Weighted average DSOs increased from 39 to 51 days.

The increase was impacted by the transition issues of Pharmacia with the merger preceding as well as some general slowness in the payment from a few of our larger Fortune 1000 clients.

While we've already seen significant improvement in collections in Q4, it's my belief that the fourth quarter will be challenging due to holiday and year-end influences.

The company used its stock repurchase program to buy 599,000 shares at an average price of $1.46 per share for a total cost of $873,000 in Q3.

In total, the company has repurchased 763,100 shares at an average price of $1.98 per share for a total cost of $1.5 million since the program's inception.

The remaining 236,900 shares available for repurchase under the company's 1 million share repurchase program.

Weighted average basis, our basic share count for the quarter was 20,451,802.

At our fully diluted share count was 20,465,247.

With that, I'll return to you Steve Braun.

Steve?

Thanks.

Obviously it was another difficult quarter.

In conjunction with the continued challenging marketplace, our performance was impacted by a handful of specific factors, several of which we discussed last quarter in which Tom briefly alluded to just now.

These include the continued decline in revenue from our largest client, Pharmacia, as a result of the pending transaction with Pfizer.

Delayed contract signings, continued project deferrals from new and existing clients and a sluggish sales cycle.

Let me begin by providing a specific perspective of where we stand today with respect to the challenges presented to us by the downward trending of Pharmacia and how we are addressing these challenges among other external factors in play.

As we outlined last quarter, revenue from our work with Pharmacia has steadily declined since Pfizer's proposed acquisition of the company in early July.

Revenue in the third quarter dropped to approximately $1.8 million from $4.2 million in the second quarter and $6 million in the first quarter of this year.

To further illustrate the impact of this situation, Pharmacia represented approximately 30% of our revenue in 2001, and the same in 2002 to date.

When we spoke to you last quarter, we were uncertain how the relationship would evolve and what capacity we would be working with Pharmacia on a go-forward basis.

In anticipation of the expected December close of the transaction, Pharmacia had severely curtailed spending on external vendors.

However, we continue to maintain close ties with client executives and will continue to nurture these longstanding relationships.

To support them during this time of transition, we are working on a few modest projects but expect to recognize little to no revenue in Q4 from Pharmacia.

On the Pfizer side of the equation, we continue to actively work with and grow this relationship.

Once again, Pfizer was among our top five clients during the quarter, and we are discussing significant new project opportunities with them for next year.

In addition, we have been leveraging our Pharmacia experience and previously dedicated resources to expand our relationship with other health care clients.

In particular, we made considerable progress with Wyeth, Sheer and Plough and Eli Lily during the quarter.

Although this does not offset the drop from Pharmacia, something that we anticipate will take a few quarters to fully recover from, we are very pleased with our progress to date.

We also made considerable progress in expanding our relationship with a large media client during the quarter.

Our efforts have positioned Braun to deliver our largest call center to date, and a sizable campaign management project.

Delays in completing the contracts associated with these initiatives prohibited us from recognizing significant potential revenue in the third quarter.

However, with the subsequent completion of these contracts, we will see growth in revenue from this client in the fourth quarter and beyond.

So while the delay presented a short-term setback, this process enabled us to solidify our future with this client and set the stage for a very large and productive relationship going forward.

On a broader scale, to manage volatility created by the significant fall-off in spending from Pharmacia, as well as other client delays and deferrals, we continue to execute against the strategy we laid out at the end of last quarter.

This involves the redeployment of our consulting assets to focus on expanding our managed accounts and developing new client relationships.

This also includes a significant emphasis on the continued development of targeted industry solutions around which we have built a successful client resumé.

Through the strategic marketing of these solutions at industry events and via publishing channels and through the collaboration with our vendor partners, we have been successful in generating more qualified leads.

This approach is very much in accord with the fundamentals we put in place at the beginning of the year around the adoption of a more rigorous solution-oriented, account-focused approach to running the business.

While there's obviously a cost associated with this decision, the long-term benefits outweigh the short-term impact.

We have seen some initial returns from these initiatives.

This is most obvious from the strengthening of our relationships with some of our may major accounts such at Wyeth, Sheer and Plough, Eli Lily, Hillenbrand and 7-11.

In addition, these resources have enhanced our ability to enhance significant engagements with American greetings, R.R.

Donnely and Kohl's in the third quarter.

From a solutions perspective, the additional resources have enabled us to amplify the development and refinement of our solutions portfolio.

As we outlined earlier this year, our solutions focus spans the pharmaceutical and media verticals and from a functional perspective, integrated marketing.

Our solution groups are the primary platform for driving thought leadership and integrated business pursuits and serve as a central focal point for all sales and marketing initiatives.

Because these areas are both closely aligned with market demand and represent a strong intersection between our functional and industry strengths, we have seen solid traction from this investment, with more effective sales and marketing initiatives yielding higher quality leads.

Continued redeployment of our consulting assets will only serve to strengthen existing solutions and enhance the development of future ones.

As we near the end of the year, we have made substantive improvements in our competitiveness through the continued investment in our solutions focus and account oriented approach.

In this environment, the natural tendency is to employ an aggressive cost-cutting strategy that does more to strip away the firm's intellectual assets than cut costs.

Obviously, we have taken some definitive actions in the past to adjust our costs and capacity, and we continue to monitor our cost structure very closely to see if additional actions are needed.

For now, though, future growth requires the appropriate level of investment to prepare our business for the long term.

That includes ensuring we have the necessary leverage in our model to maintain a strong delivery capability, a focus on client satisfaction, and an ability to continue to develop solutions that are relevant to an evolving marketplace.

This time last year, we found ourselves in a similar situation due to the loss of several important clients in the third quarter.

We reacted to the situation by enacting a thorough evaluation of the business, determining both the appropriate investments and necessary cost actions that would position the business to achieve profitability in the first quarter of this year.

We achieved success with this approach.

We are committed to this process once again, and fully expect this process will yield the desired results in the first half of 2003.

Based upon our decision to not overreact to the loss of Pharmacia but instead to invest aggressively in the pipeline, we expect revenue for the fourth quarter to be between $7 million and $7.5 million with a loss of 16 to 18 cents per share.

Based upon continuing investments in the business, we expect cash balances to be approximately $31 to $32 million, or $1.52 to $1.57 per share at the end of the fourth quarter including share repurchases.

Before we open the call for questions, I want to reinforce the importance of viewing our third quarter results and fourth quarter expectations within the context of some specific factors that impacted our business.

The issues that affected us are largely market-driven issues or isolated occurrences.

The loss of Pharmacia in particular and the delay of specific client contracts had a significant impact on the third quarter.

The good news is that given our guidance, we expect to stabilize our client base and are in the process of replacing the third quarter Pharmacia revenue through the growth of other existing clients in Q4.

This is a positive sign towards the expansion of our base business, and we expect to do this in a marketplace where there continues to be a great deal of uncertainty and our clients and prospects are continuing to experience budget issues.

While this represents some short-term challenges, it suggests that the fundamentals of our business model are sound.

This combined with the strength of our balance sheet positions the company well for future profitable growth.

Christopher, at this time, we'll open up the call for questions.

Thank you.

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One moment, please, for the first question.

The first question will come from the line of Ashwin Shrivikar with Salomon Smith Barney.

Please proceed with your question.

Hi.

Thanks for taking my question.

The question is about the combination of Pharmacia and Pfizer, if you could -- I may have missed this, but, you know, Pharmacia went from $4.2 million to $1.8.

Was it an offset from Pfizer, and how much was it?

Thanks, good question.

Pharmacia and Pfizer to date really have been two separate and independent accounts for us.

As we mentioned, Pharmacia's revenue went from $4.2 million down to $1.8 million.

Pfizer's revenue stayed approximately in the same place it was before, which is approximately $7 to $800,000 in revenue for the quarter.

These projects and initiatives and these accounts to date have really been developed independently.

We are finding now, though, as we get closer to the transaction date that we are having some success in terms of taking our experience that we have with the Pharmacia situation and leveraging that over into Pfizer, in addition to seeing an already strong relationship with Pfizer that was totally independent of Pharmacia growing in and of itself.

So we really believe this is going to be a great Client opportunity for us on a go-forward basis.

Okay.

And just one follow-up question about -- given your current size, seems to me that, you know, even small clients can have a material impact if they do something like maybe one month of revenue late in the quarter or something like that.

How do you manage to manage your costs through a situation like this?

What's the process that you use?

Well, you know, obviously as you've seen with the impact that the loss of Quest and AT&T Broadband had on us last year and Pharmacia this year, which were far and away our largest accounts, it is very difficult to plan around losing a client of that size and magnitude.

Part of the good news is, is that our concentration is much more spread out, and we do not have one client that represents much over 10% of our business at this point in time, as you remove Pharmacia from the equation.

In addition to that, what we expect to see on a go-forward basis is a proportional growth in a variety of clients in our top 5 and top 10 such that we will not get ourselves into a position where we have a top 1 client concentration like we had with Pharmacia.

In addition to that, we have to stay extremely focused on managing the pipeline, managing the forecast, and being in a condition or situation where we can anticipate when there are risks in our clients' markets that may impact their relationships that we have with them.

Other than that, it's the nature of the business, although on a go-forward basis, we certainly feel like our portfolio of clients is much more stable from the standpoint of not having the level of investment that we had in one client like Pharmacia.

Okay.

And a final question is, you know, with regards to the utilization rate, getting it up from 54% to -- I don't know -- maybe a 65, 70% level or, you know, are you planning on taking any specific steps for that or really just be counting on getting more business?

Yeah, you know, I think it's a combination of things.

First of all, let me say we will be extremely vigilant like we were last year to make certain that we position ourselves for early next year to be in a cash flow positive and profitable position.

The thing as we look at it today is that the fourth quarter is always difficult from the standpoint of just pure seasonal factors and year-end budgets running dry, and this year specifically, we think that that is going to have a significant impact, hence the guidance that we gave.

However, with that said, we have initiated some very significant projects in the third quarter that will have multi-quarter growth to them, and we believe as we sit here today, when you factor out the seasonality and the significant fewer number of business days in Q4 versus Q1, that we have an opportunity to see Q4 revenues return to a more significant level and a growth level for us.

As we get closer to understanding that, again, we will be vigilant and we'll make certain that we position the business to be cash flow positive and profitable early next year.

Thank you.

Thank you.

The next question will come from the line of Gary Dean with Robert W. Baird.

Please proceed with your question.

Good afternoon.

Hey, Gary.

I don't know if I missed it, but I'm curious where you think your tax balance is going to end in the year

We think it’s going to come in around 31 to $32 million, obviously assuming that we have kind of standard collection processes at our accounts across the board and that also includes any share repurchases we'll do during the quarter.

So your comment about the DSO, you don't expect that to go up any more?

I don't expect it to go up from where it is.

It's one of those things that you'd like to have more control over than you really do sometimes, particularly when you come into the end of the year with holidays, particularly with the midweek holidays for Christmas and New Year's, so the good news is as I sit here at the end of October, we're actually running significantly ahead on a percentage basis from what our forecasted colections were.

Things look very positive now, but I always worry about December.

Thank you.

Gentlemen, I'm currently show nothing additional questions at this time.

Please proceed with your presentation or any closing remarks you may have.

Thank you, Christopher.

I'd just like to thank everybody for joining us on the call today.

I'd like to also put out a special thanks to all Braun employees who continue to work very diligently and continue to show a commitment in a very difficult marketplace.

Thank you, everyone.

Ladies and gentlemen, that does conclude the conference call for today.

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