Fair Isaac Corp (FICO) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Braun Consulting third quarter 2003 financial 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 call is being recorded, Tuesday, November 4, 2003.

Your speakers for today are Tom Schuler, Senior Vice President and Steve Braun, CEO of Braun Consulting.

I will now state the safe harbor statements.

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's service offerings, competition, overall general business and economic conditions, the nature of Braun Consulting's clients and project engagement, attracting and retaining highly skilled employees, the ability of Braun Consulting's clients to pay for services, timely payment by clients for services rendered and Braun Consulting's ability to effectively manage growth and client relationships as well as other risks identified in Braun Consulting's annual report on form 10-K for 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 conform these statements to actual results or changes in its expectations.

I will now turn the conference over to Mr. Steve Braun.

Please go ahead, sir.

Thank you Jennifer.

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 will provide the following -- a review of our third quarter results, an update on our strategy and approach to the marketplace, an update on our client development efforts and other strategic initiatives, guidance for the fourth quarter, and then we'll open the call for questions.

At this time I'd like to like to turn the call over to Tom Schuler for a detailed discussion of our Q3 results.

Tom?

Thanks, Steve, and good afternoon, everyone.

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

Revenue prior to project expense reimbursements for the third quarter of 2003 was $7.5 million, an increase of 2.3% from the $7.3 million recorded in the second quarter of '03 and a decrease of 14.2% from revenue of $8.8 million for the same period a year ago.

Total revenue for the third quarter of ’03, including reimbursable expenses, was $8.4 million, an increase of 2.2% from the $8.2 million record in the second quarter of last year.

Second quarter of this year.

And a decrease of 12.7% from total revenue of $9.6 million for the same period a year ago.

The net loss for the third quarter of 2003 was $2.8 million or 17 cents per share, compared to a net loss of $3.2 million or 15 cents per share for the same period a year ago.

Pro forma net loss, excluding certain non-cash items of $2 million, for the third quarter of '03 was $857,000 or 5 cents per share, compared with a net loss for the same period a year ago of $3.2 million or 15 cents per share.

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

Revenue before project expense reimbursement for the nine months ended September 30, 2003, was $22.3 million, down 41.1% from revenue of $37.9 million of the same period a year ago.

Total revenue for the nine months ended September 30, 2003, was $24.9 million, a decrease of 40.3% from total revenue of $41.7 million for the same period a year ago.

The net loss of the nine months ended September 30, 2003 was $10.4 million or 60 cents per share, compared to a net loss of $6.4 million or 31 cents per share for the same period a year ago.

Pro forma net loss, excluding certain non-cash items of $4.9 million, for the nine months ended September 30, 2003, was $5.5 million or 32 cents per share, compared with pro forma net loss, excluding special charges of $3.6 million, of $4.3 million or 21 cents per share, for the same period a year ago.

Non-cash items for the first nine months of 2003 consisted of changes in the valuation allowance for all deferred tax assets related to net operating losses.

Special charges for the nine months ended September 30, 2002, included severance costs and expenses associated with the consolidation of office space.

In terms of client metrics, our client concentration for our top five clients was 57% in Q3, compared to 58% in Q2.

Our top ten clients accounted for 82% in Q3, compared to 79% in Q2.

And our top ten twenty accounted for 99% of our revenue in Q3, compared to 97% in Q2.

The average annualized revenue for our top 20 clients increased to $1.5 million in Q3 compared to $1.4 million in Q2, and for our top ten clients it increased to $2.5 million compared to $2.3 million in Q2.

In addition, our overall repeat business accounted for 53% of our total revenue in Q3, compared to 56% in Q2.

Healthcare and pharmaceuticals continues to be or largest vertical, with growth in media and telecom and consumer packaged goods and retail.

Our industry concentration was as follows.

Healthcare and pharmaceuticals was 43% in Q3 versus 48% in Q2.

Media and telecom was 29%, versus 28% in Q2.

Consumer package goods and retail accounted for 20% in Q3, versus 18% in Q2.

And other, including financial services and manufacturing, was 8% in Q3, versus 7% in Q2.

We developed five significant new clients in Q3 and serviced 28 total clients in the quarter.

Our percentage of fixed price versus time and material projects was 46% fixed price and 54% time and materials in Q3.

That compared to 50% fixed price, 50% time and materials in Q2.

We ended third quarter with approximately 167 consultants and 212 total employees.

Consulting headcount decreased from 185 consultants in Q2, and total employees decreased from 239 at the end of Q2.

Billable utilization was 67% in Q3, an increase from 66% in Q2, and annualized voluntary employee turnover was 20.1% in Q3, compared to 18.9% in Q2.

We expect significant future cost savings from actions completed in the third quarter, including the buyout of our Dallas lease obligation, a reduction of certain infrastructure support costs and a reduction in overall staff levels.

In addition, in October we completed the negotiation of a lease, a restructuring of the lease in our Boston office and anticipate finalizing that agreement shortly.

This will also generate future savings and in addition to that we're in active negotiation with -- to reduce our overall lease obligations in other facilities with the intent of, again, generating long-term significant lease savings.

We ended the second quarter with -- third quarter with $17.2 million in cash and marketable securities and no debt.

The uses of cash during the quarter included the financing of $2.8 million operating losses, financing the growth by $900,000 of our account receivables.

We did pay approximately $630,000 for the buyout of the lease obligation in Dallas, which, by the way, will save us approximately $1.2 million in future lease payments.

Approximately $450,000 was spent on seasonal tax and insurance premiums.

And approximately $300,000 was spent related to -- with regard to severance related costs at the end of the third quarter.

Company had approximately $1.01 in cash per share at the end of the third quarter.

Our account receivables increased from $6.1 million in Q3 to $7 million in Q3.

Our weighted average DSOs, were 39 days in Q3, compared to 30 days in Q2.

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

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

And as of September 30 of 2003 the company had 17,082,522 shares outstanding.

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

Steve?

Thanks, Tom.

When we spoke to you last quarter we reported that we were seeing gradual signs of improvement, both in the external marketplace, as well within our business.

This trending continued during third quarter resulting in important improvements along several dimensions, including a sequential increase in revenue, an increase in utilization, and an improvement in bill rates on new engagements.

In addition, as Tom mentioned, we made important progress as it relates to restructuring lease costs, which will yield significant future savings.

Sustained client relationships, several important new client wins and extensions, continued operational discipline, and a solutions portfolio that continues to demonstrate strong market relevance fueled our performance in the third quarter and has provided strong platform for the fourth quarter.

Let me begin by providing a brief update on Braun's evolving customer value architecture, vision and approach and more specifically discuss, one, how our message around architecting customer value continues to resonate with clients, translating into increased demand for our services among new and existing clients; and second, the investments we are making to further tailor our service offerings to take full advantage of the market opportunities within our core verticals and other emerging areas of focus.

This will set the context for a more detailed update on our client development efforts as it provides further insight into the trends and factors driving demand for our customer value management services.

Client-intense emphasis on ROI and focus on producing bottom line results has profound implications for professional services firms and CRM vendors.

Increasingly, companies are applying financial rigor to CRM initiatives, scrutinizing projections of benefits and total cost of ownership.

This trend is having two impacts.

First, executives are demanding more clarity around ROI figures, and second, with initiatives and investments now being determined at the executive level, expenditures will be viewed as annual investments and funding will be based upon business cases and financial metrics.

From our standpoint, these trends benefit Braun and draw upon our customer strategy capability, business process design capability, business intelligence heritage, and deep analytics expertise.

Raising the company's customer intelligence and driving value requires more than building a data warehouse, collecting data, and analyzing it.

That is an important piece of the equation, but clients need to take a more comprehensive approach.

They need to invest in understanding the varied ways customers drive economic value, and they need to invest in identifying the levers for increasing customer value.

Only with the ability to zero in on profitability metrics and growth potential, one customer at a time, and create treatment strategies based on the individual value, can companies manage their customer base as a true financial asset.

Integral to raising the company’s customer intelligence and driving value is a firm understanding of the customer dynamics and market drivers unique to a specific industry.

Beyond having a proven methodology and approach for driving customer value, industry specific experience and a well informed market perspective is equally critical during the sales process.

Clients want to partner with a firm who deeply understands their industry and can apply specific market insights to help them succeed.

We continue to compete against large, capable competitors, all of whom possess the requisite industry expertise.

What continues to set us apart from these larger firms is our deep resume and focused approach to helping clients solve specific business and customer challenges.

This continues to be a key differentiator and selling point, resulting in strong win rates.

We aligned our services by industry group earlier this year to bring more focused expertise to clients.

We've seen many benefits from this approach.

The continued momentum of our healthcare and pharmaceuticals and media verticals are strong examples.

Historically we've had a strong footprint in the pharmaceutical sector, and this is an area that continues to demonstrate strength, representing 43% of our business in the quarter.

Based on our pipeline and outlook, we expect this traction to continue.

This is supported by several important recent client wins, including Johnson & Johnson, Bristol Myers Squibb, Yamanouchi and Aventis.

From a media standpoint, this is an industry where we have built both a strong reputation and resume over the last three to four years.

As Tom mentioned, media represents 29% of our current business and continues to produce steady revenue and growth as a result of our long-standing relationships with marquee clients, including Rogers Communications and Dow Jones.

Building on the experience we've amassed to date in the financial services arena and the market opportunities we are seeing within this space, we recently formalized a dedicated financial services business segment.

We've been focused on and actively working with clients in the financial services sector for some time now.

However, with this step we are increasing our commitment to and focus on specific segments within this industry sector as well as expanding the ways in which we can take full advantage of growth opportunities in the marketplace.

As financial services companies shift their attention and their investments to differentiation based on customer value versus product offerings, their ability to operationalize customer data and strength in the marketing and customer care initiatives is becoming increasingly more important.

In addition, companies, especially insurance -- in insurance and retirement services, are now looking to extract the full value of past customer technology investments and achieve more actionable precision and measurability around customer acquisition and retention strategies.

From our vantage point, the time is right to invest in this important sector.

To lead this practice, we are happy to announce the appointment of Tom Madison, who joins Braun as Senior Vice President.

Tom has built his career helping client organizations within the financial services industry successfully implement innovative, actionable, strategic solutions to drive sustainable economic performance.

He understands the fundamental challenges facing financial services firms today and his extensive background in multiple aspects of the industry will help current and new clients optimize their CRM investments and drive business performance and results.

Moving forward, as we continue to hone our strategic direction and drive it through core industry verticals, it is our intent to continue to invest in this industry-specific approach, formalizing additional dedicated business segments when and if the right opportunities emerge.

To support this focus, we continue to invest in leadership and sales talent who can add industry-specific depth and sell at the senior level.

We also will continue to invest in those skill sets required for bringing these solutions to market, including customer strategy and analytics, call center optimization, business process design, and business intelligence and data warehousing.

From a client development standpoint, our emphasis on customer value management, coupled with our deep industry capability, continues to drive an important shift in the makes and type of work we are delivering.

We continue to migrate away from technology-specific point solutions and packaged application implementations to more strategic customer focused engagements that are sponsored at the executive level.

This is a trend we commented on last quarter and one that continues to progress.

Right now we are seeing strong momentum within our current client base, with project extensions delivering strong revenue impact during the quarter.

Specifically, we grew our relationships with several key clients, including Rogers Communications, Pfizer, Hillenbrand, United Stationers, Eli Lilly, and Oxford Healthcare.

Briefly, I want to comment on a few of these.

Billing on the results and recommendations of a contact center assessment completed earlier this year for one of our largest clients in the media and telecom sector, we recently secured a multi-million dollar contract to perform the follow-on process and implementation work.

This will entail an enterprise-wide contact center optimization effort to try and enhance performance and effectiveness.

At the highest level, just to give you a sense of the scope, this effort will touch upon virtually all of our core disciplines, from customer strategy to business process design, implementation, to training, and change management.

Another important extension is underway at Pfizer.

We have been asked to migrate three additional product marketing teams onto to the global product Internet platform that we created for Pfizer over the past two years.

The platform was design to streamline marketing operations and improve communications with internal and external constituents.

What started out as a small-scale isolated effort two years ago is becoming an enterprise-wide initiative due to the business benefits and results this solution has generated.

With its new engagement, we are migrating some of Pharmacia's product teams onto this platform.

Clearly, our knowledge of Pharmacia and their key product areas based on our long-term relationship prior to the merger continues to be an important differentiator.

These projects, in conjunction with other extensions I just mentioned, have important positive revenue implications for the fourth quarter, as well as the first quarter of next year and beyond.

Adding to this momentum, we are very pleased with our new client development efforts during the quarter.

As Tom referenced earlier, we secured five significant new clients, including Johnson & Johnson, Cendant and Starwood.

In addition to these third quarter wins, we have already produced several strategic wins early in the fourth quarter, including Bristol Myers Squibb, Aventis, Yamanouchi, and Pepsi's Gatorade division.

In each of those accounts we have initiated up-front work that we believe has strong potential to scale beyond the fourth quarter.

In summary, the third quarter was important on several fronts.

Not only did we grow our revenue base during the quarter, we secured several important client wins and extensions that lay the foundation for future growth.

We continued to see a steady uptick in key operational metrics and continued operational discipline drove additional improvements in our cost structure.

We expect the results of specific cost reduction initiatives, namely restructuring some of our real estate costs, to contribute to a lower cost structure in Q4 and beyond.

On the whole, in conjunction with the early signs of market stabilization and recovery, we expect to see this trending continue in the fourth quarter.

Looking ahead, we are encouraged by what we see.

Despite the traditional year-end seasonal pressures for the fourth quarter, we are expecting sequential revenue growth of up to 10% over the third quarter results prior to expense reimbursements.

With that, Jennifer, I'd like to open the call for questions.

Thank you.

Ladies and gentlemen, if you wish to register for a question, please press the 1 followed by the 4 on your telephone.

You will hear a three-tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your registration, please press the 1, followed by the 3.

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One moment, please, for the first question.

Our first question comes from the line of Tim Byrne from Robert Baird.

Please go ahead, sir.

Thank you for taking my call.

Steve, can you talk a little bit more about the outlook that you spoke of, you mentioned revenue growth sequentially of up to 10%, but you also spoke about kind of a firming in the first quarter as well.

I'm wondering if you could speak more about, as we get into 2004, what we might expect going forward given the strong performance this quarter and the outlook for 4Q.

Sure, Tim, thanks for the question.

I think one of the things that we have seen as it relates to Q4 is true momentum, and we're very pleased to see that, and I think that's a combination of factors that really are not just a near-term result, but some of the building blocks that we built over the last three or four quarters related to our deep focus around our verticals, really focusing and honing our solution set around the customer value architect vision, and I think we are finally seeing traction on that front and as a result of that, we believe for Q4 we have given guidance that is accurate and conservative, and we're pretty confident in that guidance.

The good news along with that is that some of these recent wins in relationships continue to remain strongly in place with current clients, and we're very pleased with some of the new wins with what we consider, you know, major companies that could result in very strong long-term relationships for us as well in terms of both the size, the nature of the client and the nature of the work that we're doing for them.

So, you know, I think we believe at this point in time that in Q4 we'll see a nice revenue pop and we fully expect that we can continue to see that as we go into next year.

I think as we mentioned on our last call, our capacity with our existing organization and based upon the utilization and billing rates that we are seeing still remains between $9.5 million and $10 million a quarter, and we feel that we have a good opportunity to be able to drive ourself in that direction over the next several quarters.

To that point, then, your capacity with the existing organization, let me kind of chew that apart for the moment, you had cost of service associated with the organization of $5.8 million, but I'm guessing that was a bit high because you had a reduction in force over the period, kind of normalized where did you end the quarter at and do you expect to grow head count over the next two quarters meaningfully?

Hi Tim, this is Tom Schuler.

I think normalized, you could probably see that number between $5.6 million and $5.7 million, and with regard to reaching capacity, it's one of those things where if we secure enough work, we certainly will consider growing headcount, but as Steve said, we do have the current capacity, if we're able to sell the business and staff it appropriately, to deliver $9.5-10 plus million in a given quarter at this time.

So when we sell beyond that capacity, then we'll add headcount.

And let me think of capacity or ask you to think about capacity in another way.

If you forget about delivery capacity for a moment, Steve, what is your best kind of gut feeling in terms of the revenue generation potential of your current partner and sales force?

You know, how much could that group of people do without doing meaningful new hires?

You know, that's a great question, Tim, because I think one of the things that we are generally excited about is that we have seen that inflection point where we believe that the investments that we have made in our sales and marketing teams, our account partners around our vertical focus have really kicked in and produced over the last quarter, and we're seeing momentum on that front.

We believe that the adding of the financial services sector and segment, which we're not expecting any significant results from in Q4, will kick in in Q1, and we have some strong pursuits in that area.

So we really believe that the investment that relates to our account management strategy and our sales and marking can drive this business 15%, 20%, 30% beyond where the revenues are at today without a whole lot of significant new investment.

So incremental to where you are today as opposed to -- you're not talking about sequential quarter quarterly growth there, Steve.

No, we're not talking about sequential quarterly growth.

Definitely, if you were –

No, we're talking about the ability, in terms of being able to put what we have developed as a demand model in place, to support that level of revenue beyond where we're at today.

Okay.

And then in the last call, guys, you talked about aspiring towards break-even for 4Q.

Do you still expect that?

And I guess the related question is given all of the action that you're taking on leases and other overhead costs, what do you expect that overhead net of $4.5 million to do on a quarterly basis?

Let me backtrace your question there.

First, as far as breakeven goes, excluding what I will assume will be pretty substantial charges in Q4 relative to negotiating two major leases, one of which is pretty much in place, I expect to sign very shortly, and I know approximately what that cost will be, and I've got a larger one that I don't know what the cost will be but we're in the negotiation phases now.

If I exclude those, then I'm looking at what I think will be a breakeven, and assume that I get those done during the course of the quarter, the breakeven number is in the mid 9s, and could be lower than that depending on the timing of when I get that done, so if I roll that out into Q1 and assume other kind of fixed costs, we could see breakeven at $8.8 million to $9 million once all that restructuring is completed.

Does that answer your question?

Yes.

I guess what confused me a little bit there was when you expected to achieve that.

Do you expect that in 4Q or 1Q?

I think just to clarify the question, what we talked about today, just moving to an EBITDA breakeven.

What Tom is talking about is a profitability breakeven.

Okay, a net Income breakeven.

Yeah, so an EBITDA breakeven based upon everything we see today, excluding, as Tom indicated, some variables around those one-time charges, we were looking at a shot to get there or close to it potentially in Q4, and we believe that as we move into Q1, again, addressing some of these variables, that that EBITDA breakeven as well as the breakeven numbers that Tom mentioned should come down significantly again moving into Q1, giving us a chance to move beyond the cash flow neutral position and moving towards that breakeven number in Q1.

Okay.

And then, Tom, as we've seen kind of going forward beyond that, let's just call in it Q1 a breakeven cost structure of $8.8 million to $9 million, how do we think about the incremental leverage beyond that point in time of every incremental dollar, how much drops to the bottom line?

You're going to need to pay bonuses, et cetera.

How do we think through that?

I think one way to approach that is to assume that within the delivery costs that you have budget, bonus costs run between 10% and 20% depending on the success of the organization and the individuals, so anything above that cost will drop through because I think from a G&A standpoint, we've got pretty significant leverage of what we have in place.

Okay.

And then can you give us any sense, Tom, on the tax rate benefit going over -- going forward?

I know that it kind bounces around a bit with the net NOLs, but how should we think about that for modeling purposes?

You know, I think approximately 40% is the way to look at that from a tax percent, and maybe I can get back to you and do a little more research on that.

But right now, obviously we’re not going to be paying taxes for quite some time.

We've got nearly $20 million, a little more than that actually, of net operating loss.

Carry forwards on the balance sheet right now are at least in the footnotes to the balance sheet.

And last question.

I'll let somebody else jump on here, but the attrition of 20%, how much of that was attributable to kind of one-timeish people going back to school versus other reasons and to be able to grow as you want to grow is difficult facing 20% annualized turnover.

How do you expect to handle that?

Tim, that's a good point.

Historically, obviously we're used to numbers that are some what lower than that.

I think coming into the quarter, there was a variety of reasons and/or the last several quarters we've been at that higher range of 18-20%, but we had really targeted our headcount to be about in the range of where it's at today, so I think there's a variety of reasons as it relates to why the turnover was at 20%.

I think more importantly, on a go-forward basis, we do not expect to see that same level of turnover and, in fact, as we look today through October, that number is significantly down.

Okay.

Great.

Thank you.

Yep.

Ladies and gentlemen, as a reminder, to register for a question, please press the 1, followed by the 4.

There are no further questions at this time.

I will now turn the call back to you, sir.

Thank you, Jennifer.

Once again, I'd like to thank everybody for joining us today and we'll see you next quarter.

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

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