Fair Isaac Corp (FICO) 2004 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Braun Consulting first quarter 2004 financial conference call. (OPERATOR INSTRUCTIONS) Statements made in this call are not strictly historical, are forward-looking statements that involve risk 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 in the forward-looking statements.

Such risks and uncertainties include, but are not limited to, the nature of the market and demand for Braun Consulting services offering, competition, overall general business and economic conditions.

The nature of Braun Consulting's client and project engagements, attracting and retaining highly skilled employees, the ability of Braun Consulting's clients to pay for services, the timely payment requirements for services rendered and Braun Consulting's ability to effectively manage growth and client relationships, as well as other risks that identified in Braun Consulting to annual report on form 10-K for 2003 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 the statements to actual results or changes or expectations.

I would now like to turn the conference over to Mr. Steve Braun with Braun Consulting.

Please go ahead, sir.

Thank you, David.

Good afternoon and thank you for joining us.

By now, I hope you have 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 financial result, an update on our strategy and approach to the marketplace, an update on our client development efforts and other strategic initiatives, guidance for the second quarter, and then we'll open the call for questions.

At this time, I would like to turn the call over to Tom Schuller for a detailed discussion around our Q1 results.

Tom?

Thanks, Steve.

Good afternoon, everyone.

Thanks for joining us on the call.

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

Revenue, prior to project expense reimbursements for the first quarter of 2004 was 9.2 million in line with our fourth quarter results of 2003 and an increase of 23.3% from revenue of 7.5 million from the same period a year ago.

Total revenue for the first quarter of 2004, including reimbursable expenses was $10 million and that compared to $10.1 million in Q4 of 2003 and an increase of 20.2% from total revenue of 8.3 million the same period a year ago.

On a GAAP basis the net loss for first quarter of 2004 was 2.5 million or 14 cents per share compared to a net loss of 832,000 or 5 cents per share recorded in the fourth quarter of 2003.

The net loss in Q1 of 2003 was 4.4 million or 25 cents per share.

Pro forma net loss excluding special charges and non-cash items of 2.9 million for the first quarter of 2004 was 419,000 or 2 cents per share.

That compares to pro forma net income of 96,000 or 1 cent per share in Q4 of 2003 excluding special charges and non-cash items of 1.3 million and pro forma net loss of 2.6 million or 15 cents per share for first quarter of 2003 excluding certain non-cash charges of 1.7 million.

Special charges included costs associated with lease restructuring and severance costs.

Non-cash items consist of changes in the valuational allowance for all deferred tax assets related to net operating losses.

In terms of client metrics, our client concentrations in the top five clients was 49% in the first quarter compared to 51% in Q4 of 2003.

Our top ten clients accounted for 70% in Q1 compared to 72% in Q4, and our top 20 clients accounted for 93% of revenue in Q1 compared to 96% in Q4.

The average annualized revenue of our top 20 clients was 1.7 million in Q1 compared to 1.8 million in Q4 and for our top 10 clients it was 2.6 million in Q1 compared to 2.7 million in Q4.

In addition our overall repeat business accounted for approximately 49% of our total revenue in Q1 compared to 51% in Q4.

Healthcare and Pharmaceuticals continued to be our largest vertical followed by Media and Telecom and Consumer Package Goods and Retail.

Our industry concentration was as follows: Healthcare and Pharmaceuticals was 49% in Q1 same as Q4, media and telecommunications was 20% Q1 versus 27% in Q4, consumer package goods and retail accounted for 18% in Q1 versus 13% in Q4 and other including financial services, hospitality services and manufacturing was 12% in Q1 versus 11% in Q4.

We developed five significant new clients during the quarter and serviced 31 total clients.

Our percentage of fixed price versus time and material projects was 45% fixed price, 55% time and materials in Q1 compared to 46% fixed price and 54% time and materials in Q4.

Prior to the end of the quarter staff reductions, we had 166 consultants and 209 total employees compared to consulting head count of 159 at the end of last quarter and total employees of 203.

After-staff reductions, from attrition, our consulting head count was 143 and our total head count was 182.

Billable utilization was 68% in Q1 compared to 72% in Q4.

Annual rev -- annualized revenue per consultant remained constant at 224,000.

Annualized voluntary employee turnover was 22.7% in Q1 -- compared to 20.7% in Q4.

We had 2.1 million in special charges, which were associated with the first quarter cost reduction, and strategic business alignment measures.

We completed the subleasing of space in our Chicago office in March.

The sub-leasing required a one-time charge of 1.9 million.

The charge included the cost of unrecoverable lease payments, the cost of space preparation for subleasing and the brokerage fees associated with the sublease.

This will save approximately 2.7 million in future lease payments.

We are in active negotiations to further reduce our existing overall obligation.

We also incurred approximately 200,000 in severance costs associated with the reduction of work force.

We expect the reduction in employees and the reduced facility expense and decreased overhead to lower our quarterly cost by approximately $900,000.

We ended the quarter with 14.3 million in cash and marketable securities and no debt.

Our cash and marketable securities position decreased 1.4 million during the quarter.

Accounts receivable decreased from 8.3 million in Q4, 8.1 million in Q1.

Our weighted average DSOs increased to 44 days compared to 38 days in Q4.

As of March 31, 2004, the company had 17,134,153 shares outstanding.

With that, I will return you to Steve Braun.

Steve?

Thanks, Tom.

The first quarter showed continued strength we began to see in the second half of last year.

When we back out some of the budget flushing, we saw in fourth quarter we now see four quarters of successive growth.

We came in about center of the guidance of 9 million to 9.5 million we provided last quarter.

There was an upside scenario that was impacted by some pending M&A activity with some clients and prospects but we are pleased to continue to execute against our stated goal.

The underlying factors supporting our strong Q1 and go-forward performance include continued success at closing new business opportunities.

We secured five significant new clients during the quarter but what we are particularly encouraged about is the strategic nature and scope of these projects.

We are also seeing a similar trend among our current client base.

This is something I'll cover in more detail shortly.

Continued cost savings opportunities.

From a cost standpoint, as Tom mentioned, we completed the subleasing of a portion of our Chicago office space and further streamlined our internal operations.

These actions will lower infrastructure costs and generate a significant future savings.

The continued evolution and honing of our model during the first quarter our senior management team along with select members of the Board of Directors and outside industry experts performed a complete strategic review of our business strategy.

I will discuss this important process and its specific outcome in a moment.

And finally, a gradual positive upturn in the economic environment.

During the first quarter, our executive team in conjunction with select members of our board and industry experts undertook a business strategy review.

The goals of this process were to carefully consider some of the shifts in the marketplace including offshore competition, out sourcing and M&A among competitors and recommend necessary course correction to our business and financial model.

From a market perspective, the review reconfirmed Braun's market position around architecting customer value.

As the economy strengthens, companies shift their focus from cost containment to profitable growth.

We believe we are well positioned to capitalize on this shift.

We have a Blue Chip resume of clients who have help gained profitable market share to a tightly integrated ability to develop break through market strategies, realign the necessary sales, service and marketing organizations and provide cutting edge data infrastructures.

This has been supported by a continued pipeline of executive level relationships where these efforts typically emerge.

On the offshore issue, we do see less pressure on our business given the strategic and generally complex nature of the work we are asked to do.

However, we do feel we will need to provide an option for clients when this is a direction they would like to pursue.

We are exploring a series of best of breed(inaudible) partnerships we feel would support our brands should the need arise.

From an operational prospective we are pursuing a series of internal adjustments to simplify and focus our business around our core positioning.

We have begun de-layering the business to move some of our operational management back in front of clients where we know they can excel.

We are also working to reduce the number of internal groups to simplify our business and encourage more integrated relationships.

Finally, we brought in Paul Marushka (ph), to lead our sales, marketing and marketing solutions groups reporting directly to me.

Paul brings a wealth of experience in driving business development efforts, guiding market strategies, developing and promoting strategic solutions sets and managing marketing and sales channel.

We have already under Paul's leadership made significant progress in integrating and packaging the core solutions Braun will go to market around.

While the details are still unfolding we can report on a few changes that have been implemented.

We shifted our staff mix to de-emphasizing lower end commoditizing(inaudible) work.

This resulted in reducing our consulting staff in these impacted areas while we added staff in our core areas.

In addition, as Tom discussed there were additional reduction in internal staff and lease commitments.

On the whole resulting in expense reductions of approximately $900,000 per quarter.

On the senior management side, I have reassumed the President's role removing redundancy between mine and Craig Lashmet’s responsibilities.

Craig has spent a significant amount of his time over the last six months focusing on developing and supporting a number of strategic accounts.

On an on-going basis he will continue to work in that capacity as an Executive Vice President.

In addition, he will work closely with me to identify strategic growth opportunities based upon our recently developed strategic growth plan.

Craig has joined us on the call today to talk of his new responsibilities and will be with us shortly.

From a client development standpoint, our strategic framework for capturing customer value, coupled with our enterprise data capability and industry expertise has served to elevate our roles within our client's organizations.

We continued to see an increase in the size and scope of existing client opportunities.

Today, the assignments we are tackling are far more strategic and sustentative in nature.

We are working side-by-side with senior executives to bring strategic, enterprise-wide customer solutions from concept to reality.

Many of the new client’s engagements that were initiated in Q4 have progressed through successful up-front requirements and design phases and we are working actively to transition them into substantive follow-on implementation phases.

Even more exciting is the breadth at strategic nature of several new client opportunities.

Briefly, let me up date you on a few of these recent client wins.

We have been employed by one of the largest global insurance brokerage firms to develop the capability for the client to measure profitability at the customer level.

Understanding customer level value will provide executives with a strategic insight to drive value at the customer segment level.

With this insight, targeted strategic initiatives can be undertaken to achieve margin improvements among low value segments, enhance client retention and loyalty among high value segments and increase product penetration among high potential value segments.

Organizations in dynamic and competitive industries need go beyond just managing profitability at the business segment and functional levels in order to become leaders in their marketplace.

Recent advances in capabilities around rigorous analytical modeling and customer information management have allowed organizations to drive value in the demand side of the business at each stage of the customer life cycle.

This is a new dimension that further enhances the traditional supply-side product-driven approach to profitability management.

Braun Consulting is uniquely positioned to deliver this capability.

Its deep customer strategy experience and expertise ensures that customer analysis and strategies develop address key business issues.

At the same time, its strong technology capability can provide the appropriate framework for building the analytical, operational and technical infrastructure needed to enable these strategies.

On another client front, during this past quarter, we initiated a strategic relationship with a leading property and casualty insurance company.

We are currently providing a strategy and implementation road map to help our client create a single view of the customers across multiple lines of business.

The follow-on to this initial road map effort is a substantial multiyear, multi phased implementation effort.

With a single view of the customer asset in place, we will enable our client to achieve the following strategic and operational benefits.

Expansion of market share for existing products due to improved cross-selling visibility, entrance into new markets for new and existing products which can be vetted through more sophisticated analytical models and scoring approaches, quicker detection and reaction times to market and demographic shifts in their core client base, and reduced total cost of ownership for their data warehousing and business intelligence investments due to a common platform approach.

As I mentioned, we are in the planning the road map stage of this project and expect to convert this into a larger scale implementation phase by early Q3.

Both of these projects underscore our continued ability to use our market position, our industry depth and a strong resume to generate new strategic client opportunities.

As I mentioned earlier, Q1 revenue was impacted by the postponement of work with a few key existing and new clients that were involved in pending merger discussions.

Q2 revenue as well will be impacted by the timing that when and if these projects move forward.

In addition, we have an unusual number of projects that are in early phase completion stages that we expect to move forward into large implementation projects.

Again, the timing of our ability to smoothly transition these projects will impact Q2 revenue.

Finally, we continue to see a growing steady pipeline and have confidence that this strength will support future revenue growth.

We have put in place aggressive hiring plans in our core capability areas to support this growth and demand.

We continue to maintain a conservative outlook on the economic environment.

Based upon these factors, we expect revenue for the quarter to be in the range of 8 million to 9 million.

Our lower guidance range reflects some of the unknowns outlined above combined with the slightly lower revenue capacity resulting from our cost-saving action.

These cost reductions however combined with our new strategic alignment have positioned Braun well for future growth and profitability.

At this time as I mentioned earlier, I would like to ask Craig to join the call and provide an update on his new role.

Craig?

Thanks, Steve.

As you alluded to in your message, I'd like to just provide little bit more context to my role change.

Over the past several months, Steve and I have, as well as other members of the executive team have, been assessing our progress towards the establishment of our brand.

That being a preeminent firm that identifies and architects customer value for our clients.

We have also been assessing our progress towards growing the business by bringing that brand to life within our client engagements.

Simply put, our ideal client is one where we're working with very senior-level executives, preferably the C-level executives, in identifying significant revenue and profit potential existing even in their prospective customer base.

We would create customer strategies that capture that value and then shape new technology and data solutions and processes to achieve success.

We have seen some real progress over the past year with this positioning.

As we've grown, the size of revenue within our key accounts, we’ve increased the breadth of the capability that we said have been involved within those accounts.

We realized higher billing rates and we’ve increased project profitability.

These are all great things.

The vision of creating a customer strategy and aligning data intelligence and process improvement to realize the identified value has worked and it continues to work.

However, it's extremely hard work, and it requires a very senior level executive to guide these strategies through to the light of day.

We have over this past year set an expectation that all our senior executives need to be engaged and must be engaged, in account management execution in order to optimize our potential to yield the results that we're framing for our clients, and as such, I personally have been and currently remain involved in a number of strategically important accounts which has required much more time for me and this is beginning to require more time than I'm able to provide given my current duties in the role of President.

On the secondary tack, the current marketplace is providing a number of really interesting strategic opportunities for Braun Consulting to consider, which may provide additional growth potential.

In order to fully assess these opportunities, Steve and I have agreed that I should re-channel more of my time towards identifying and assessing these opportunities as well as meeting the increased time commitment necessary to achieve our strategy within a select group of accounts.

Given that it's simply not possible for me to continue to remain in the role of President for this period of time and we agreed to transition operational responsibilities at this point.

So that I can spend the appropriate time on these important initiatives.

Steve has my support and I remain committed to accomplish these objectives.

With that I turn it back to you, Steve.

Thank you Craig.

David at this point, we'll open the call to questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Tim Byrne from Robert Baird.

Please go ahead, sir.

Steve can you talk a little bit more about the project delay?

From the vertical industry break down that you provided, it looks like the sequential media performance was very weak.

Is that where the area was and was it in fact one client or more than one client?

You know, interesting enough, Tim, it was not from the media side of the equation.

If you look back over the latter part of last year we had brought on a significant number of new pharma clients, which quite frankly would have supported even stronger growth in that area.

It was a couple of clients in that specific space that were the primary impact, not the media side.

On the media side, we are in transition on a couple of critical projects around a couple of critical clients that were very large clients of ours last year and there are a couple that we expect to see moving into larger transitional implementation work as we get into later this quarter in Q3.

In fact, there are several clients that have been traditionally in our top five that were kind of in that phase late Q1, Q2 that will re-emerge back into the top five based upon the expectations as we go forward into later Q2 and Q3.

Did you in the fourth quarter, in retrospect now, see more budget flush than you thought back in the maybe February time frame?

I think there certainly was some there.

I think there was also some completion of fairly large projects with final payments.

You know, but it wasn't anything, it wasn't anything extremely substantive, combined they probably were some more in the $400,000 to $500,000 range.

As you look now on your book of business, would you expect to see sequential growth, as we start to move into the latter half of this year?

You know, it's interesting, we talked about that.

Last year was an interesting pattern for us because we didn't, we didn't see that demand pick up until the latter part of the year.

I think what we're actually seeing today is still some measured decision making on the client's part, and one of the reasons we're being conservative is that there are a lot of aspects and issues that need to be put in place as you're transitioning from one phase to another or are you kicking off a big project.

But I think generally we believe that companies are going to and are loosening and making decisions a little bit quicker than they did last year which turned out to be in the September, October time frame.

Do you expect to be cash flow positive in the second quarter?

Tim it's Tom Schuller.

It kind of depends on a couple of things primarily on the rate, which we can drive collection.

But given the cost cuts we have made, there are costs associated with that that would hit in Q2.

We are pushing as hard as we can to get to cash flow neutral.

I guess, overall, than what changed because coming out of fourth quarter you had expected to be cash flow positive going forward?

Right.

On the collection side we slowed down little more than we expected and there were some cash uses that were also required during the quarter.

Any sense of where you may end the second quarter in terms of cash?

Like I said, I'd like to be cash flow neutral.

We going have to push very hard on the collection side and that would also include taking care of some of the payments associated with some of the restructuring costs and severance costs that we're going to deal with -- it's an aggressive goal but it is one we are going after.

Can you talk, Steve a bit more about what you mean --you and Craig mean in terms of pursuing growth opportunities?

Does that include M&A and if so, what might that look like?

Yes, I think as we talked about last time, Tim, there is a fair number of companies out there that are -- I would classify in that smaller tuck in category that have some really significant capabilities.

And we are seeing some really strong demand in a couple of our core areas specifically around things that we're doing on the business intelligence state of warehousing, E solutions front and right now, we see a lot of good companies that come across our table that have some strong capabilities.

So that's the nature of largely of what we're looking at.

And as I think about your revenue as you've moved from 4Q to 1Q to 2Q, is there an element of revenue just rolling off which is and I know you've taken some staff reductions here, kind of the lower end commodity work?

That is the case.

We had a reasonable investment around supporting package implementation work, both on the Oracle and Siebel fronts.

And we have seen some tremendous cost pressures on that front and felt that there was some lack of critical mass as it relates to some of the specific implementation efforts around those packages and that's where we have primarily focused the reductions.

Can you give us some idea of what the revenues were in the fourth quarter in 1Q from that work?

You know, I don't have that at hand right now, but it was -- it wasn't a significant number of consultants, it was in the 12 to 15 range.

Okay.

And I guess the last thought is, Steve, can you describe for us your kind of policy and philosophy on stock sales?

You had a couple of sales in past quarter.

Yes.

When we went into this year, through some discussion sets with the various groups, there was an agreement to put a blind sale program in place that is automatically triggered just for this year.

At the same number of shares every quarter based upon a certain stock price.

So, the intention was to provide a little bit of liquidity into the marketplace in terms of shares and provide a little bit of liquidity for myself.

Obviously, it's a small number in total as it relates to my total ownership position.

Thank you.

Thanks, Tim.

Mr. Braun, there are no further questions at this time.

I'll turn the call back to you.

Please continue with your presentation or closing remarks.

Thank you, David.

I will just like to close by thanking everybody for joining us today.

Take care.