Fair Isaac Corp (FICO) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Braun Consulting Second 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, please press the 1, followed by the 4 on your telephone.

As a reminder, this conference is being recorded on Wednesday, August 6th, 2003.

The safe harbor statement under the Private Securities Litigation Reform Act at 1995 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, which 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's service offerings, competition, overall general business and economic conditions.

The nature of Braun Consulting's client and product engagement, attracting and retaining highly skilled employees, the ability of Braun Consulting's clients to pay services, timely payment by clients for services rendered and Braun Consulting ability to effectively manage growth and client relationship.

As well as other risks identified in Braun Consulting's annual report on Form 10-K for 2002 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 confirm these statements to actual results or changes in its expectations.

I would now like to turn the conference over to Steve Braun, Chairman and CEO.

Please go ahead, sir.

Thank you Rachael (ph).

Good afternoon and thank you for joining us.

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

During today's call, we'll provide the following:

A review of our second quarter results; an update on our key priorities and strategic initiatives; guidance for the third 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 of our Q2 results and an update on the financial metrics.

Tom?

Thanks, Steve.

Good afternoon, everyone.

Thanks for joining us on the call today.

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

Ladies and gentlemen, please continue to stand by.

Your conference call will resume momentarily.

Once again, please continue to stand by and your conference will resume momentarily.

The live stream will begin momentarily.

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Rachael (ph), are we back on the line?

You are back on-line, please go ahead sir.

Terrific, thanks.

Sorry about that folks.

We had a little technical difficulty with the phone here.

This is Tom Schuler speaking and I'm going to give you an update on the financial review for the quarter.

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

Revenue before expense reimbursements for the second quarter of 2003 was $7.3 million a decrease of 44.6% from revenue of $13.3 million for the same period a year ago.

Total revenue for the second quarter of 2003, including reimbursable expenses, was $8.2 million, a decrease of 43.8% from total revenue of $14.7 million for the same period a year ago.

The net loss for the second quarter of 2003 was $3.2 million, or 19 cents per share compared to a net loss of $2.9 million or 14 cents per share for the same period a year ago.

Pro-forma net loss, excluding certain non-cash items of $1.2 million for the second quarter of 2003 was $2.0 million or 11 cents per share, compared with pro-forma net loss excluding special charges of $3 million for the same period a year ago of $2 million, or 5 cents per share.

Non-cash items for the second quarter of 2003 consisted of changes in valuation allowance for all deferred tax assets related to net operating losses incurred during the second quarter.

Special charges for the second quarter of 2002 include severance costs and expenses associated with consolidation of office space.

Revenue before project expense reimbursement for the six months ended June 30th, 2003, was $14.8 million, down 49.2% from revenue of $29.2 million for the same period a year ago.

Total revenue for the six months ended June 30th, 2003, was $16.5 million, a decrease of $48.6 million for the total revenue - 48.6% from total revenue of $32.1 million for the same period a year ago.

The net loss for the six months ended June 30th, '02 was $7.6 million or 44 cents per share compared with a loss of $3.3 million, or 16 cents per share for the same period a year ago.

Pro-forma net loss excluding certain non-cash items of $3 million for the six months ended June 30th, 2003, was $4.6 million, or 27 cents per share, compared with pro-forma net loss excluding certain non-cash items and special charges of $3.6 million for the same period a year ago of $1.1 million or 5 cents per share.

Non-cash items for the first half of 2003 consisted of changes in the valuation allowance for all deferred tax assets related to net operating losses, and non-cash items for the six months ended June 30th, 2002 consisted of stock compensation and special charges included severance costs and expenses associated with the consolidation of office space.

Net interest income was $74,000 for the second quarter.

Our client concentration, the top five clients was 58% in Q2 compared to 55% in Q1.

Our top 10 clients accounted for 79% in Q2 compared to 78% in Q1 and our top 25 accounted for 97% of our revenue in Q2, compared to 94% in Q1.

The average annualized revenue from our top 20 clients was $1.4 million and for our top 10 clients, it was $2.3 million.

This is in line with our Q1 results.

Revenue from integrated projects was 49% in Q2 compared to 48% in Q1 and in addition, our overall repeat business accounted for approximately 56% of total revenue in Q2 compared to 52% in Q1.

Healthcare and Pharmaceuticals continues to be our strongest vertical, with growth in media and telecom and continued activity in consumer packaged goods and retail.

Our industry concentration was as follows -- Healthcare and Pharmaceuticals was 48% in Q2 versus 43% in Q1, Media and Telecom was 28% in Q2 versus 23% in Q1, consumer package goods and retail accounted for 18% in Q2 versus 22% in Q1, and manufacturing and other was 7% in Q2 versus 12% in Q1.

We developed five significant clients in Q2 and serviced 35 total clients in the quarter.

Our percentage of fixed-price versus time and material projects was 50% fixed price and 50% time and materials this quarter compared to 56% fixed price and 44% in time and materials in Q1.

We ended the second quarter with 186 consultants and 239 total employees.

Consulting head count decreased from 204 consultants in Q1 and total employees decreased from 206 -- 266 at the end of Q1.

Billable legalization was 66% in Q2, an increase from 64% in Q1, and annualized voluntary employee turnover was 18.9% in Q2 compared to 14.9% in Q1.

From a cost reduction perspective, we lowered our total expenses by $1.2 million during the quarter as compared to Q1.

We anticipate additional savings to filter through in Q3 and Q4, based on previously announced actions and a continued focus on lowering internal cost structure.

The company entered into a sublease for a portion of its office space during the quarter, and anticipates further reduction in lease obligations during the third quarter.

Our balance sheet remains strong during the quarter, with $21.7 million in cash and marketable securities and no debt.

Uses of cash during the quarter included the planned financing of operating losses, severance costs and cash -- and cash used in conjunction with previously announced restructuring action.

The company had approximately at $1.27 in cash per share at the end of the second quarter.

Accounts receivable decreased from $7.4 million in Q1 to $6.1 million in Q2.

Our weighted average DSOs declined to 30 days in Q2 from 47 days in Q1.

The company has approximately $950,000 available for use in its stock repurchase program.

The company did not repurchase any shares during the second quarter.

As of June 30th, 2003, the company had 17,082,522 shares outstanding.

With that I'll turn the call to Steve.

Thank you, Tom.

On the whole, our results were clearly not what we had hoped for.

Specifically, we did not generate the revenue we had anticipated, something that we largely attribute to the continued challenging market environment.

However, on several levels we are encouraged by the progress we continue to make against our strategic plan.

This includes maintaining the tight focus on costs and driving continued improvements in operational metrics.

Once again this quarter, we witnessed an uptick in both the utilization and bill rates of new projects.

We also saw improvement in collections.

In our view, these operational improvements in conjunction with other important client facing and organizational initiatives represent measured progress towards future cash flow neutrality and profitability.

Clearly, the uncertain demand environment continues to create challenges from a revenue standpoint, but as we mentioned last quarter and still maintain today, we are seeing major signs of stabilization and coming into the third quarter, we have begun to see gradual signs of improvement in select areas of the business.

It is important to frame this reference carefully as we do not believe these signs of improvement merit an adjustment to our current forecast.

Rather, our pipeline in conjunction with some of our recent client wins and extensions does suggest a slight improvement in the outlook and/or willingness among clients to begin or increase their investments in specific strategic customer-related initiatives.

From a client development standpoint, the second quarter was important on a number of levels.

Notably, we witnessed an important positive shift in the mix and type of work we are delivering for our clients.

As Tom indicated, we secured five significant new clients and expanded our relationship with several others during the quarter, but it is the nature of these relationships and the scope of these projects that we are excited about.

I'll comment briefly on a few of them.

As these initiatives really underscore and bring to light the things we have consistently discussed around customer value or customer equity.

First, during the quarter we launched a significant call center optimization effort for a leading multimedia communications provider.

This initiative involved a multifaceted approach to improve the client's contact center operations and ultimately drive increased revenues, customer satisfaction, and operating efficiencies.

This effort is being driven at the highest level of the organization.

In addition, we recently secured a separate but related contract to design a technical architecture road map.

Specifically, we are helping the client to determine an overall CRM architecture to facilitate optimal customer contact management across all customer-facing business functions such as marketing, billing, order management, customer service, and sales.

We expect this to be the foundation for one of our largest client projects on a go-forward basis.

We also secured and commenced work on a multi-year, multiphase CRM business and technology initiative for a global media and information services provider.

The first phase of this engagement has been underway since the end of May, and is focused on customer strategy definition and outlining the data requirements to build an enterprise-wide backbone for future CRM applications.

This project and others like it is a clear demonstration of how our deep vertical focus, in this case, media is paying dividends.

Because we have been able to build a strong resume of client success in our core verticals, we expect to see continued momentum, laying the foundation for the future growth of the business.

And finally, during the quarter, we launched a large-scale effort with a leading wholesale distributor of business products actively developing their customer management strategy and the road map for a technical architecture to facilitate their future CRM application implementation efforts.

Building on the results of a customer value assessment Braun conducted earlier this year, we now have a team on the ground refining the client's customer management strategies but with an initial focus on optimizing their sales force, aligning their call center strategy and operations with differential investment opportunities within their customer base, and developing the business and system requirements for an enterprise-wide CRM system.

We recently delivered the requirements for the customer data warehouse component and are slated to begin the logical design phase shortly.

In addition, we are also leading a comprehensive change management initiative to facilitate organizational transition and adjustment.

This engagement is the essence of our customer-focused approach to the marketplace.

It is what we have been building towards and crystallizes what we have been talking about from the standpoint of the critical interplay between strategy and implementation and the importance of organizational and change management in customer-focused initiative.

Building on past successes, we've been able to evolve our service offerings, bringing together our strategic capabilities, deep knowledge of business intelligence and data warehousing, and other CRM related technologies in a truly holistic, integrated manner to support our clients' customer initiatives and deliver tangible, impactful results.

These recent wins and, more broadly, this trend being towards more integrated, customer-focused engagements serve to confirm that our strategy is on target and our approach is relevant.

Particularly in today's constrained spending environment where companies are only investing in those initiatives that have a true bottom-line impact.

Some of these projects I've just described have already begun to yield significant follow-on work, as well as separate projects of a related nature.

In addition, as it relates to contract extensions, we also expanded relationships with several key existing clients during the quarter, including Pfizer, Oxford Healthcare, Schering-Plough, and Helen Brand Industries.

From both functional and industry perspective, we continue to work with our clients to help them better understand the varied ways customers drive economic value for their organizations.

Specifically, we are helping them to understand and identify the actual laborers for increasing customer value.

Only then can they effectively design, develop, and execute the appropriate customer, technical and organizational strategies for capturing and realizing that value.

That is why the ability to amass and act on customer insight or customer understanding is so critical to our clients' success in the marketplace.

By zeroing in on customer profitability and growth potential, one customer at a time and creating treatment strategies based on a customer's value, companies are able to manage their customer base as a true financial asset and yield substantial ROI.

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

And this is where we believe the investment priority will be for the foreseeable future.

As we continue to go in our strategic direction and drive it through our industry verticals, we are equally focused on ensuring that we have the right mix of skills in place to meet client demand and further shape our competitive position.

To this end, we are recruiting aggressively to bring on board high-impact industry expertise and functional talent.

In conclusion, we believe we are doing the right things to manage through this continued uncertain economic environment, as evidenced by the progress we made during the quarter along several dimensions, including continued improvement in utilization, bill rates of new projects and collections, strong execution of our client development strategy, as I mentioned earlier, we are excited about some of the new wins in the quarter, several of these relationships have strong long-term growth potential, and our continued ability to manage our costs relative to our revenue base.

As we have previously discussed, we expect stable and growing revenue combined with a continued tight focus on cost to drive us towards our goal of cash flow neutrality and profitability.

Central to our strategy is continued to investment in both our delivery personnel and in our sales and marketing efforts.

On a go-forward basis, we expect revenue for the third quarter prior to project expense reimbursements to be in line with our second-quarter results.

This conservative outlook is reflective of both the current economic outlook and the importance of executing against our strategic plan.

With that, April, I'll open 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 Tim Byrne with Robert W. Baird.

Please proceed with your question.

Thank you for taking my call, guys.

I guess the first question relates to little bit to a comment you made in your press release.

Can you talk a little bit about the linearity in the period, either in terms of revenues or maybe more importantly bookings?

And then the press release related to that made it sound as if things improved in June and into July.

Yeah.

That's a good question, Tim.

Yeah, in fact, that is the linearity that we saw was a slow start to the quarter and a stronger finish to the quarter.

Some of that has -- has to do with revenue recognition and some of the fixed bid projects and how some of that revenue came in June, but across the entire quarter, utilization increased over the course of that, so that is correct.

And related to the revenue recognition, the project that had -- I don't know how to refer to it other than to say -- slipped or it wasn't recognized in the first quarter, the $850,000, it looks as if it was all recognized in 2Q.

Is that correct?

Because I thought it was going to be recognized over 2 and 3Q.

Tim, this is Tom Schuler.

We are still working with that client.

We did recognize that revenue over the course of the quarter, but the size of the overall engagement was bigger than what we talked about in the last press release.

That was just one phase of it.

Okay.

So we did take that revenue in and we'll be working with that client in Q3 and Q4.

Great.

And then on the update on the external environment, I guess, Steve, what do you attribute the rise in the bill rate to?

Is that mix of projects?

Is that getting into some new customers where maybe there's a little bit less billing pressure?

I think it's clearly both.

Mix of projects, specifically as it relates to the new work that we closed in the quarter, and that's why as I talked about being excited about some of the new client relationships, we're all very strategic in nature, integrated, sold at very high levels, larger projects.

In some cases, we continue to see a fair number of fixed-bid projects but we're also seeing a little bit of a shift as it relates to being able to do some of the larger projects on a time and material basis.

So, I think it's a combination of those factors, but it really is most related to the type of work that we're doing.

And related to that, should -- you know, I look at some of the metrics that you folks give out, the new clients appears to be relatively steady here, and I think that speaks to opportunity.

I'm guessing not all of them were very large up front, such as a couple that you chose about this time where it's more you got in with, more of a starter project, if you can comment on that.

And then I guess the one metric that sounds a little bit funny to me, maybe, in that discussion is your revenue from integrated projects is down about 10 percentage points from what it had been running at last year, so -- and that doesn't fit, to me, with the trend you're talking about, Steve, of more integrated projects.

I'll let Tom answer that piece of the question first.

Then I'll pick it up after that.

Yeah.

That's more of a function of exactly what we were saying, as a lot of these projects were front end, the single piece and the way we do the calculation is if we're on the front end of a large project but the first phase is, say, clear strategy, then that wouldn't be considered an integrated project for that quarter.

Okay.

So it is -- it maybe is a reflection of the new customers you're getting with kind of a starter phase being seen in that quarter?

That's correct.

Okay.

And I think also along those lines, Tim, I think the -- the types of relationships that we entered into and the five or six key project closes that we identified for the quarter, all had that nature of having an up-front strategic front-end requirements type approach with an opportunity for a larger -- significantly larger implementation tail to them.

Okay.

And then I guess the -- the next question, or maybe just a couple of quick questions, is on, you know, break-even.

You had thought to be break-even on an EBITDA level at about $8.5 million in revenue in 3Q.

I understand that 3Q is probably not an appropriate target right now, unless I'm missing something, but is that still your target in terms of cost structure, or do you plan on taking further actions on your cost structure?

Yeah, I think as Tom had indicated, there -- there are actions that we have taken to date that we're working through that continue to bring down the cost structure over Q3 and Q4, and, you know, somewhat significantly.

We are working through and successfully restructuring certain areas like our lease obligations, and we continue to see certain issues around those, but you know, our hope and desire is that in fact we can get through most of that in Q3 and, you know, we've made substantial progress.

We didn't get it done in Q2, as we had hoped initially, but we continue to work down that path.

So to answer your question, we will continue to see, based upon, you know, current actions and previous actions, the cost component come down significantly.

Would you care to offer a target, either in dollars and/or timing of when you would hope to be break-even?

Well, well.

You know, we're certainly targeting this year, and the Q4 break-even number is within the range that we've been targeting for Q4.

Okay.

And I guess -- and I don't know how to talk about this other than to paint a hypothetical picture.

Let's say you get revenues back up to the $10 million mark, and you would have been break-even at $8.5, just to follow my hypothetical example here.

How much of that incremental revenue will fall to shareholders versus be allocated towards partner and other employee bonuses?

I'm just wondering how much leverage is in the business once you do turn break-even.

One of the things that we have done that are in the current numbers, we have made the decision to go ahead and accrue a percentage of bonuses and pay those bonuses within -- intent to, again, invest in our personnel, as I said in my script.

So some of that is already in the numbers.

It's not a full bonus, but some of it is in there, so the other aspect is that the organization that we have in place today, we believe is aligned correctly and still has the capacity to do that $9 to $10 million revenue number.

So as it relates to additional hiring, as it relates to additional investment in bonuses, we think we're in a pretty good position on that front.

Okay.

So the new hires that you're talking about are more strategic adds in specific verticals or functions as opposed to capacity adds.

I think it's a combination of both.

I think as you saw in our numbers, unfortunately we are still seeing some voluntary turnover for a variety of reasons.

That is certainly higher than it has been historically for us, much more in line with the industry standard, but higher than historically for us.

So, some of it will be related to rebuilding capacity in certain key areas.

We have certain initiatives that we have identified as it relates to critical capabilities that we want to add to on the strategy and the process design, side of the equation that we will continue to invest in, and then, yes, we do intend investing in deeper functional and vertical capabilities as well.

Okay.

But in terms of capacity and headcount, you're saying the number that you have, which could be a net over the next couple of quarters, is enough capacity to do somewhere in the $9- to $10- million in revenue range?

That is correct.

Okay.

Great.

Thank you, folks.

Thanks, Tim.

Gentlemen, there are no further questions at this time.

I will now return the call back to you.

Please continue with your presentation or any closing remarks.

Thank you, Rachael (ph).

Again, I want to thank everybody for joining us today, and look forward to talking with you next quarter.

Thank you.

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

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