Fair Isaac Corp (FICO) 2003 Q1 法說會逐字稿

Thank you for standing by.

Welcome to the Braun Consulting first quarter 2003 financial conference call.

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

Afterwards, we will conduct a question and answer session.

At that time if you have a question press the 1 followed by the four on your telephone.

As a reminder this conference is being recorded Thursday, May 8, 2003.

Safe harbor statements under a Private Securities Litigation Reform Act of 1995.

Statements made in this call that are not strictly historical are forward-looking statements that involve risks and 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 statements.

Such risks and uncertainties include but are not limited to the nature of markets and demand for Braun Consulting services, 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 clients to pay for services, timely payment by clients for services rendered by Braun Consulting 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 in 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 confirm these statements to actual results or changes in its expectations.

I would now like turn the conference over to Steve Braun, chairman and chief executive officer.

Thank you, Annie.

Good afternoon and thank you for joining us.

By now I hope you've had an opportunity to review the press release that was issued at close of markets.

During today's call, we'll provide the following: A review of our first quarter results, commentary on the current market environment, an update on our key priorities and strategic initiatives, guidance for the second 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 detailed discussion on Q1 results and update on key metrics.

Tom?

Thank you for joining us on the call.

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

Our financial performance and operating metrics were negatively impacted during the first quarter by the delay in recognizing approximately $850,000 of revenue associated with the particular milestone-based project we were involved in.

The milestones were achieved.

The client did sign off on acceptance of the work.

And the client has informed us of their intent to pay.

However, based on strict interpretation of our own revenue recognition policies, we've deferred recognizing revenue on these milestones due to some achievement issues with certain contractual delivery dates over the course of the first quarter.

We continue to deliver on additional milestones for this project, and additional projects for this client.

The revenue will be recognized at a future date.

The inclusion in this revenue would have allowed us to deliver sequential quarterly revenue growth further demonstrating stabilization in our business.

In addition, we continue to lower our cost structure and we purchased an additional 1.3m of stock through our stock repurchase program.

Revenue before reimbursements in the first quarter of 2003 was $7.5m.

A decrease of 53% of revenue of $15.9m from Q1 2002.

Total revenue for the first quarter of 2003 including reimbursable expenses was 8.3m a decrease of 52.6% for total revenue of $17.5m for the same period a year ago.

On a GAAP basis, the net loss for the first quarter of 2003 was $4.4m or a loss of 25 cents per share, compared to a net loss of $326,000, or two cents per share in Q1 of '02.

Before net loss was $2.6m per quarter or 15 cents per share including certain non-cash items compared with pro forma income of 29,000 or zero cents per share for the first quarter of 2002.

Excluding special charges totaling $591,000.

Non-cash items for the first quarter of '03 consisted of changes in the valuation allowance for all deferred tax assets, and special charges for the first quarter of '02 consistent of severance costs associated with management changes.

Net interest income was $95,000 in the first quarter decrease from $146,000 earned in Q4.

All the following client based statistics have been impacted by the deferment of revenue from the previously discussed milestone based contract.

Had we been able to include this revenue in the quarter, we would have experienced a $4.4% growth in continuing client revenue for approximately $8m in Q4 '02 and $8.35m in Q3.

Our client concentration for top line clients was 58% in Q1, compared to 55% in Q4.

For our top ten accounts, it was 78% if Q1 compared to 77% in Q4.

And for our top 20 accounts, that accounted for 94% of our revenue in Q1, which was in line with Q4 results.

The average annualized revenue from our top 20 clients was $1.4m in Q1, versus $1.5m in Q4.

And our average annualized revenue from our top ten clients was $2.3m in Q1, versus $2.5m in Q4.

Revenues from integrated projects was 48% in Q1 compared to 58% in Q4, in addition our overall repeat business accounted for approximately 52% of our total revenue in Q1, compared to 74% in Q4.

Healthcare and pharmaceuticals continues to be our strongest vertical with media and telecom and consumer packaged goods and retail demonstrating continued strength and improved industry diversification.

Our industry concentration was as follows: Healthcare and pharmaceuticals was 43% of our revenue in Q1 versus 42% in Q4.

Media and telecom was 23% in Q1, versus 32% in Q4.

Consumer packaged goods and retail accounted for 22% in Q1, versus 17% in Q4.

And manufacturing and other was 12% in Q1 versus 10% in Q4.

We developed four new clients in Q1 and serviced 38 total clients in the quarter.

Our percentage of fixed price versus time and materials projects was 56% fixed price and 44% time and material, as compared with Q4.

Our international business was 6% of revenue in Q1, compared to 11% in Q4.

We ended the first quarter with 203 consultants and 266 total employees.

Consulting head count decreased from 205 consultants in Q4 and total employees decreased from 274 at the end of Q4.

Our bill rating was $131 per hour in Q1 increased from $121 per hour in Q4. billable legalization was 64% in Q1, an increase from 57% in Q4.

The annualized revenue for billable consultants approximately $175,000 compared to $143,000 last quarter.

Voluntary employee turnover was 14.9% in Q1 compared to 12.9% in Q4.

From a cost reduction perspective we lowered or project and personnel expenses by approximately $200,000.

If you adjust for seasonably low benefits in Q4 and higher benefit cost in Q1, the savings would have almost doubled.

In addition, these savings were incurred despite the allocation of additional resources, resource expenses from sales and marketing to the project and personnel category through a first quarter reorganization that we did.

Our SG&A expense was also lowered significantly from Q4 to Q1.

Cost cutting measures taken in Q4 were realized in personnel discretionary spending and lease obligations.

In total approximately $880,000 dollars.

This excluded a hold over charge from the restructuring in Q4 of $150,000.

So in total nearly $1m in savings below the line.

We anticipate additional savings to filter through Q2 and Q3 based upon the previously announced Q4 action.

And we'll have a continued focus on lowering typical costs.

Our balance sheet remains strong during the quarter.

Our cash and marketable securities balance at the end of Q1 was $25m, down from $32m at the end of Q4.

Uses of cash during the quarter included the planned financing of our operating losses, the repurchase of approximately 1.3 million company stock.

The financing of the growth in our accounts receivable, and cash used in conjunction with the previously announced restructuring actions.

The company had approximately $1.46 in cash per share at the end of the first quarter.

Accounts receivable increased from $6.5m in Q4 to $7.4m in Q1.

Our weighted average DSOs declined to 47 days in Q1 from 53 in Q4.

Company completed its second stock repurchase program for $2m in January.

The company purchased in that program a total of 2,055,848 shares at an average purchase price of 97 cents per share for a total of approximately $2m.

The company initiated a third repurchase program during Q1, 2003 with a $2m limit.

As of March 31, 2003, the company has purchased approximately 940,700 shares at an average price of $1.12 per share for a total amount of approximately $1.1m.

In combination, the company has repurchased a total of 3,996,548 shares at an average price of a $1.19 per share for a total amount of approximately 4.8m since our, since the inception of our first repurchase program in November of 2001.

As of March 31, 2003, the company had 17,082,522 shares outstanding.

And with that let me return this to Steve Braun.

Steve?

Thank you, Tom.

Exclusive of the revenue recognition issue that Tom just discussed we view our overall performance during the quarter as positive.

The sequential quarterly revenue growth over Q4 continues to drive us towards our stated goals of achieving cash flow neutrality and profitability later this year.

Even with the revenue at the reported $7.5m level, we're particularly encouraged by several metrics, specifically operational improvements in our utilization and bill rates.

Throughout the quarter we saw utilization begin to stabilize firm wide and in some areas improve.

While we have not seen any material improvement in overall demand, the combination of our cost actions at the end of last year and our ability to manage capacity effectively is driving an increase in utilization and an improvement in rates.

As it relates to rates specifically, particularly with the new opportunities, this upward trend is continued into the second quarter.

Clearly we continue to operate in a difficult environment.

This is prohibited demand from rebounding to the desired levels.

And this is a condition that we expect to continue at least through the end of 2003.

However, as we mentioned last quarter, as we maintained today, we're seeing gradual signs of stabilization in some areas of the business.

We're encouraged that demand for our services remain at and in some areas above the levels we expected both in the first quarter and coming into the second quarter.

In particular, our business intelligence and customer analytics capabilities are among those areas where we continue to see steady traction.

A lot of the things we discussed last quarter still apply.

Particularly as it relates to the demand environment and the types of investments clients are making.

We continue to operate in a period of rationalization, where clients are looking to make sense of the investments they have previously made.

Companies are hiring consultants to get greater value from their CRN and other technology investments.

The mantra continues to be ROI.

And the work is going to those firms that can show a clear track record of delivery of tangible business benefits.

In this environment, the critical importance of business intelligence and customer analytics has not subsided.

From our vantage point, companies are taking a much closer look at the customer economics that drive a business.

Companies are looking to get a much better handle on the real value of a customer relationship.

And identify the best opportunities for increasing the value of each relationship.

With this knowledge, companies can manage and justify investments and avoid non-strategic ad hoc expenditures.

This concept of customer equity is not new.

But it is growing in importance.

As few companies have been able to implement, track and measure the return of their customer investments on the bottom line.

And this is an integral part of what we deliver.

From both a functional and industry perspective, we're working with our clients to help them better understand the very ways customers drive economic value for their organizations.

And convert this customer knowledgeable into tangible business results.

This is where our business intelligence heritage and deep customer analytics expertise is coming to bear.

And this is where we believe the investment will be in the foreseeable future by our clients.

Consistently we have talked about business intelligence as a core differentiated offering for Braun.

Even today BIA continues to be the underpinning of the majority of our engagements.

This is an where we are continuing to make significant investments to further shape our competitive position in the marketplace.

We're recruiting aggressively to bring on board high impact talent.

Notably, last week, Todd Nash is from a key competitor in this space where he was responsible for running a large global BI practice.

This extensive experience in managing a practice and build consulting teams to deliver integrated business intelligence solutions well-positions him to be a continued catalyst for growth and expansion in this area.

We're very excited to have him aboard.

General market trends around the core competencies and business intelligence and customer analytics also points to stabilization or in some cases increased demand in these areas.

Industry data continues to label this space among one of the few bright spots for 2003.

Forester recently completed a study which 44% of the firms surveyed reported that they are planning business intelligence investments this year.

This is also supported by strong financial results recently posted by several of our vendor partners who specialize in this area.

As critical as our BI capability is to our overall solutions portfolio, the real value for our clients, and for Braun, lies in our continued ability to deliver differentiated and integrated solutions which combine both deep technical and strategic expertise.

In addition to strength in our core disciplines, our vertically focused industry segment approach is also producing results.

As clients become more selective about choosing a consultant, deep industry knowledge is a prerequisite.

We continue to demonstrate strength in the pharmaceutical and life sciences sector, which represents 43% of our business.

Demand in this sector remains strong, with many companies seeking to hone the sales and marketing effectiveness, tailor their marketing of products to different customer segments and improve the R&D effectiveness.

We're also amazing both a reputation and strong resume in the media and entertainment sector.

And we're building packets of strength in the CPG, retail, and insurance industry sectors.

Our sales effort to showing renewed momentum.

There have been several organizational and process improvements aimed at improving our sales engine.

Primarily, as part of our organizational realignment at the beginning of the year, our business developers are now working in tandem with our business segments and our competencies.

We're seeing a better yield from sales effort due to the increased collaboration with the consulting organization.

And overall a much more focused, precise sales strategy around deep industry expertise.

We continue to see encouraging proposal and booking trends during the quarter, as strength in our pipeline business development opportunities.

However, bidding for projects remains competitive and convergence rate of leads into revenue continues to be slow.

Quite simply, getting to a contract is a difficult and lengthy process.

In terms of new business, we secured contract extensions with several top accounts, including Eli Lilly, Minnesota Mutual Life, Hillenbrand and Pfizer.

We also added four significant new clients during the quarter including Endo [ph] Pharmaceuticals and Life Cells.

So far during the second quarter we've already entered into several new agreements with clients such as Roche Diagnostics and others.

We also have many strong pursuits under way with several new and existing clients.

The reasonable start which we start the year has continued into the second quarter.

Overall, we view this quarter as a success.

We are making progress against our strategic plan with positive movement towards our stated goal of achieving cash flow neutrality and profitability later this year.

The combined favorable impact of both the series of strategic actions taken in the fourth quarter, and continued investments made in the business during the first quarter, have placed us back on a growth trajectory.

Part of this strategy, and this is something we've talked about previously, includes protecting our core assets and investing in high impact outside talent.

The operating loss and use of cash associated with continued investments in people and capital, were planned.

But looking forward, we expect stable and growing revenue combined with a continued tight focus on costs to drive us towards our goal of cash flow neutrality and profitability.

We expect revenue for the second quarter, prior to project expense reimbursements, to be at or above our first quarter results.

While we continued to improve our top line performance, this conservative outlook is reflective of both the current economic outlook and the importance of executing against our strategic plan for improving bottom line performance.

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

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First question will come from Tim Burn with Robert W. Baird.

Your line is open.

Please proceed with your question

Good afternoon.

Thank you for taking my question.

I guess just Steve quickly on your last point in the guidance there.

When you say revenue at or above 1 Q, you mean the $7.5m not inclusive of the 850 that went to the balance sheet?

Yes, that is correct, Tim.

As it relates to the revenue recognition around the Q1 issue, that project does continue through Q2 and Q3.

But our anticipation, as Tom indicated, is that that revenue will be recognized over that time frame.

But we don't know exactly how and where over that time frame it will be recognized.

Okay.

But likely over the course of the next two quarters, as opposed to all in the second quarter?

That's correct.

Okay.

Can you remind us what the unearned revenue liability count on the balance sheet is?

Is that deferred revenue?

Is that unbilled revenue?

And is that where the -- did the $850,000 end up in that spot on the balance sheet?

It's unearned revenue and that's where it ended up.

In essence we billed for the work ahead of schedule

So the $850,000 --

Is part of the $1.3m that you see there.

Right.

But you've not yet billed for that, therefore you've not recognized the revenue?

We actually have billed for it, but we've not recognized it

Is that the case for all of the account there?

Yes.

Then if I could just take a step back on the external environment, Steve.

Who do you see these days on the competitive front?

And I guess that relates a little bit to the pricing and bill rate trends, which are terrific.

But is that an apples-to-apples improvement in pricing?

Or is that a mix shift towards a higher, richer mix of service that your you're offering

It's a good question.

I think it's actually a combination of the two.

The nature of the project that we are primarily bidding on are integrated projects that have a very complex aspect to them, from both the standpoint of applying a strategic up front component and a technology back end.

There are very few competitors in my opinion out there that bring to the table the skill sets that are necessary to bring deep strategic thinking on customer growth strategies.

And combine that with the leverage technology of business intelligence and customer analytics to really drive those strategies.

And there's very few companies that have that capability.

The ones that we are competing against are primarily the large guys, where they can piece together semblances of that capability across the very large organization.

But we're not seeing anybody else either on the strategy front or on the technology front that truly brings this as a well-defined and focused integrated solution.

In most of our competes, we'll see Accenture.

We'll see IBM in several.

And often times, depending upon how we're bidding those projects, there could be specialists either on the strategy side or on the technology side.

But I think the consistent theme is we're competing against the big competitors.

Okay.

And then on your point there, Steve, on the business intelligence and customer analytics.

Could you give us some sense as to the magnitude of that practice for you?

What percent of revenues and/or you know what percent of your client engagements have that as a component of it, two different views.

What way can you quantity that for us?

I'll come at it a couple ways.

We have what we consider three major competencies.

Strategy, what we call enterprise technology group, which comprises of things that we do around business intelligence, and a lot of our E-related work, which are very much interrelated.

Our third area is our applications practice.

The business intelligence enterprise technology group represents about 63% of our overall revenues.

So it is very significant.

It is involved in most of our projects.

It is a key differentiator as it relates to how we propose upon projects.

Again, our customer strategy approaches are very much leveraged by driving analytics against those strategic models.

And being able to underpin those analytics with very significant data capabilities.

So that's why the business intelligence piece is so critical to us.

Okay.

And then I guess the last question and I'll get off and let somebody else take a crack at this.

But your comment about being kind of cash flow break-even towards the latter part of this year.

Can you give us some sense, because it sounds like you're going to have additional cost savings over the next couple of quarters, at what level you become cash flow break even in terms of either revenue?

Or where you expect say in the third quarter you expect your total cost structure to be at?

Can you help us to quantify that, please?

Yes, generally what we are targeting as we move into third quarter an EBITDA break-even of around $8.5m.

We are having -- we're in a position where we understand that there's some flexibility off that number based upon the trending of revenue.

But we're taking a pretty conservative approach on revenue at this point in time.

And as Tom talked about, a lot of the cost-cutting we did in Q4 of last year, in our tight focus of managing internal costs and spending on certain programs and initiatives, allows us to get there very readily.

When you get to that point, are you talking about -- are you going to be back up at a gross margin level closer to 15?

It was down quite a bit, obviously because of the drop in revenues in this period?

Yeah, I think we see the gross margin level at that area.

It's going to get closer to the mid-30s.

Gross margin, mid-30s?

Yes, that's -- we'll have to get back to that

Versus in this period an 8%?

Right

OK.

Thank you.

Thanks Tim.

Gentlemen, I am showing no further questions at this time.

Please continue with your presentation.

I'd like to take this opportunity to thank everybody for joining us on the call and we'll see you next quarter.

Thank you.

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

We thank you for your participation and please ask you to disconnect your lines.