Fair Isaac Corp (FICO) 2004 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Q4 and fiscal year end 2004 results conference call. (OPERATOR INSTRUCTIONS).

Thank you, Ms. Forrester, you may begin your conference.

Good afternoon and welcome to everyone.

Joining me today are Tom Grudnowski our CEO, Chuck Osborne, our CFO, and J.D.

Burkawitz (ph), our new Director of Investor Relations.

This call is being webcast live and will be archived on our website at the conclusion of today's meeting.

I do need to remind you that during the call today we will be making statements that are forward-looking within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially, including those described from time to time in Fair Isaac's SEC reports.

We refer you to our 10-K and Form 10-Q.

With that, I will turn the call over to Tom.

And I'm happy to report today that we met or exceeded expectations in all categories, bookings, revenue and income for the fourth quarter, and remain confident in the fiscal year '05 guidance we recently provided you.

We believe that improving market conditions related to analytic applications in general and markets in which we practice, and specifically will provide a good platform for growth in fiscal year '05.

Today we will provide you with operating results for the fourth quarter, for the fiscal year '04 which we just ended, as well as guidance for the first quarter and next fiscal year.

As you may recall on September 21, when we announced the Braun acquisition we provided some high-level guidance.

Today we're going to do that in a little bit more detail, go down by segment today.

When I am done with my remarks we will turn it over to Chuck who will go through more details.

Interestingly this quarter we had lots of moving parts, with the London Bridge integration, the Braun closing, the pending sale of Phoenix, redeeming bonds and other year-end activities.

There is lots of numbers of moving around, so I look forward to trying to reconcile this when I'm done.

Despite all this activity, we had a very good operating quarter to end the year.

Our operating revenue, without the impacts of London Bridge purchase accounting, was 195.1 million.

Purchase accounting, haircut that by 4.7 million to get us to our reported GAAP number of 190.4 million.

Our original guidance was 189 to 195.

Fiscal year 2004 GAAP revenue was therefore 706.2 million, again within our guidance and right on analyst consensus.

That represents about a 12 percent annual growth rate over FY '03 revenue of 629.

On the earning side our GAAP earnings per share for the fourth quarter was 20 cents, which was at the top end of our guidance of 18 to 20 cents and at FirstCall analyst consensus.

Earnings per share for fiscal 2004 was $1.41, slightly higher than our guidance of 1.38 to 1.40 and beating analyst consensus of 1.39.

In our press release we also provided analysis between GAAP and pro forma numbers in order this time to compare years without the impact of certain nonoperating items.

And Chuck again will talk about the puts and takes that were in the release later on.

In summary our fiscal year '04 pro forma EPS grew approximately 12 percent over fiscal year '03.

Our bookings in the fourth quarter were 110 million, also better than the $100 million we projected earlier.

We had 8 deals over 3 million.

And that bought our total bookings for the year to 441 million, or $41 million better than we had planned a year ago.

The bookings to revenue waterfall report, which became in vogue last quarter, has again been provided to you.

And it shows how bookings convert into revenue in the future.

So we ended the fiscal year very strong.

And we're off to a good start for the new fiscal year, which I can say with a little more confidence than usual since we are almost half done with the first quarter already.

What I would like to do now is discuss some of the recent big events and then go through some guidance for the year and the first quarter.

Let me start off with the Braun acquisition.

As stated in our news release, we actually closed the acquisition today, with a fully diluted purchase price of 40.8 million.

Since they have about 10 million of cash on the books the net purchase price is around 31 million.

So that deal is closed.

As I said last time we were together, Braun will provide marketing expertise and a meaningful presence in new vertical markets for us, including health care, pharmaceuticals, retail and media telecommunications.

Braun represents about 35 million of annual market related consulting revenue, and should be immediately accretive given the upfront cost reductions of our two public companies.

Steve will also be staying on with Fair Isaac and playing a very lead role in growing our position -- marketing practices which I will be talking about a little later.

So we are also very excited Steve is going to continue helping us grow the marketing space.

We expect Braun will add approximately 8 to 9 million of revenue per quarter, and around 4 million will affect the Q1 from closing today through the end of the quarter.

On the London Bridge, also on September 21, we began a process to sell the Phoenix core banking division of London Bridge.

And as I said then this was our original plan since it was the one piece of London Bridge that didn't quite fit into our strategy.

I'm pleased to announce that today also we signed a definitive stock agreement for the sale of this division.

And we plan to close this over the next few days at which time we will announce the buyer in more specific terms.

So we got that done today.

As you may recall from my last call, this division represents about 17 million in revenue and similar expenses.

And the numbers I will be talking about for the rest of the day in terms of guidance would obviously not include those then.

As it nrelates to the rest of London Bridge integration, it has gone very well.

We have now divided the business into three markets that it serves and integrated those businesses into the existing Fair Isaac organization.

Those includes mortgage origination products, which will be integrated with our other origination platforms; collections, which will be integrated with our account management organization, Investis, which we will align with our EDM tools division.

The fourth quarter was our first full quarter of London Bridge.

And we had planned about 19 million of revenue, and came in at about 18 million, but our costs were also under by a million, so we were off to a good start in our first quarter in assimilating their organization.

In addition we have already reduced London Bridge expenses by $8 million for the new fiscal year based on found cost synergies already.

And although we had some losses in Q4 around London Bridge, as we had initially predicted, our plan for the first quarter now shows London Bridge making a profit.

We have a good pipeline of deals for Q1, which has now been scrubbed by us.

And we have traditionally -- they actually have traditionally closed more deals in the last calendar quarter, and therefore we anticipate good activity in Q1.

So our revenue expectations for fiscal year '05 around their products remains unchanged.

In addition, we have an organizational announcement to make.

We're moving one the four division group heads that report to me, Paul Perleberg, to London to help focus on growing our non-North America revenue.

I mentioned this idea before.

Paul has now taken on this additional P&L responsibility.

And he will try to grow the $160 million of non-North American revenue that is the our fiscal year '05 plan.

He'll have responsibility for P&L's in Europe, Asia and Latin America.

And we are very happy that Paul has taken on this very exciting assignment.

With this first (indiscernible) we plan to start building a stronger global management organization.

So those are a couple of the major big events going on.

Let me go through the market segments now briefly and provide some color on what we think will happen next year.

As you know, Fair Isaac has several go to market product lines or segments that roll up into our four revenue reporting segments of Scoring, Strategy Machines, Tools, and Professional Services.

In each one of these markets we have an analytic solution or application, if you will, that is key to the growth in that segment.

We now own more industry-leading production solutions both around analytics than anyone else.

In fact industry analysts like IDC now recognize us as the number one Company in operational decision systems in the world.

Now to understand where our growth is going to come from, I'm going to go through the nine segments, if you will, that we ended '04 with that will be key to '05.

So as a result of all of our activity, we now have nine different platforms or solutions in which to cover.

The last time we had our discussion in September, we said our revenue for the year '05 was going to be between 818 and 848.

We're leaving that the same.

And what I'm going to go through now is I'm going to tie out to the midpoint of that number, or 838.

So I'm going to go through some numbers that in the end when I'm all done are going to add up to 838.

So if you're trying to keep track, that is what where it is going to end up.

I'm going to go through each of the segments, briefly mention what they are, and give you some perspective on their size and growth.

And I will do it in top -- biggest to smallest.

Our first segment is Customer Management.

That is our largest segment.

It represents about $125 million of revenue related to the platform.

That segment has TRIAD, our number one account management system in it.

And that segment has been growing and will continue to grow next year at about a 5 percent clip.

We have several new products in that segment, including CMG, which is our new customer management version of TRIAD that we will be able to use across industry as an additional financial services.

The next segment is marketing.

Market Smart, which is approximately 105 million of next year's budget.

That is about a 14 percent growth from where we were in '04.

And this one is a little more complicated to reconcile.

It includes the additional Braun revenue, which is all marketing related, and the loss over time this fiscal year of some of our database marketing projects at some financial services companies as a result of consolidation.

The net net is that we will end up at about $105 million of marketing related revenue for next fiscal year.

Fraud is number three at $100 million, growing at about 17 percent.

And has a lot of strong new products that we will talk about later, including fraud id and an enterprise level version of fraud -- or Falcon I should say.

And Falcon there is our major platform.

Next major market for us is originations, which represents about $80 million of our revenue.

That includes products like LiquidCredit, Capstone that you have heard about before.

That is growing at a 15 percent clip.

Thanks to growth across a large number of segments including small business, which is growing very fast for us.

Insurance, is our next size market at 75 million.

There we have CompAdvisor, which is our major product.

And although this group is growing a little less than 5 percent this year, we continue to have big wins and big bookings and growing revenue.

You may recall that due to regulation we lost some revenue from last year, and so we've had to make it up.

And thank goodness that we've had very, very strong bookings and a lot of big wins here.

So we're actually growing some here despite the fact that regulations took away some revenue last year.

Next one, Enterprise Decision Management.

This is the newer segment.

This is now up to 70 million, one of our fastest-growing.

This is growing at 30 percent.

This represents the market where we sell our Blaze Decision Optimizer, Model Builder, etc., tools to companies that are interested in using decision technology to solve a number of problems.

And that used to be a very small division.

That is now up to 70 million and growing fast.

And the next one is collection recovery.

That includes the Debt Manager and our NS (ph) platforms from London Bridge.

That represents about $55 million of revenue next year.

It is new -- new revenue to Fair Isaac next year.

Very little of that was -- we had a little bit in the fourth quarter, but effectively that is new revenue in this next fiscal year.

The next one is consumer, that has myFICO product.

That is going to get to about $45 million this year, another 30 percent growth here.

And this is going to be fueled by the Fact Act and other new products that we will be announcing soon.

And finally, the mortgage division is about $30 million.

And that has a product called Dimond, which is also new revenue for us.

And as a result of this -- of the mortgage industry doing lots of retooling and optimization of processes, we see a lot of new opportunity in that space.

So if you add all of those up, that adds up to about $685 million.

If you add to that the $150 million that we do in scoring, and that is going to go grow again about 5 percent this year, that gets you to the $835 million of revenue for next fiscal year.

So that short of shows you how we are going to get that by the various markets.

Now if you break that 685 down into those revenue segments that we report on, I can help you out there a bit.

Approximately 495 of that 685 would be in the Strategy Machines category, 140 million of that would be in the Professional Services category, and 50 million of that would be in the Tools category.

So that gives you some idea of how the revenue ties back to those segments.

At the $835 million level we would have about an 18 percent revenue growth again for fiscal year '05.

Now we believe our application portfolio I just described is complete for now.

And our focus in '05 will be adding new customers to these existing platforms, and expanding analytics across these platforms.

Interestingly that $150 million of scoring revenue that I just mentioned, most of that scoring revenue really comes from two of the platforms, from the customer management platform and from our origination platform.

That is where most of Fair Isaac's analytics have traditionally been generated.

But now we have lots of platforms, or razors if you will, to plug our analytics blades into.

And therefore we believe starting next year we have lots of new customer behavior territories to explore.

So we look forward to next year.

We expect that the GAAP revenue again will grow sort of on a quarter by quarter basis around $9 million a quarter in fiscal year '05, starting with about $195 million in Q1.

So for first quarter revenue guidance purposes we will use a range of 193 to 198 for Q1, and that would be about a 15 percent increase over Q1 of '04.

So that is our revenue guidance for the first quarter, and how we see it growing over the next fiscal year.

From an income perspective we guided on September 21 that we would hit $1.75 for '05, which would be a 24 percent increase in GAAP earnings from '04.

We expect EPS would grow about 6 cents a quarter in fiscal '05, starting with about 35 cents in this first quarter.

So for first quarter EPS guidance we will use a range of 34 to 36 cents.

And you can anticipate that growing, as I have said, across the next four quarters.

These increases each quarter will occur both because of revenue growth and productivity improvements.

For example, one that I'd mentioned before, our IT infrastructure expense in '05 is going down over $10 million next year due to the completion of migration from mainframe to Open Systems that we started about three years ago.

So finely we will be able to generate some reduced expenses this fiscal year because of all the hard work of our IT organization over the last few years.

Now let me give you just a few brief fourth quarter highlights, and then I will turn it over to Chuck.

One of our more significant wins this quarter was in the EDM area.

We completed a very major deal with Discover Card where we completed a very complex enterprise level decision EDM sale, which included all of our tools, Model Builder, Decision Optimizer, Enterprise Decision Manager, Blaze, etc.

So we are starting to see now the marketplace CIOs of large organizations committing to an enterprise level version of our technology for developing decisions across solutions that Fair Isaac has not been typically been exposed to.

So this is a trend.

We had some of these last quarter.

This quarter we had some more, so we are excited that this EDM division is starting to pay some dividends.

Interestingly, as a result of a good quarter and good fourth quarter we had approximately $13 million of revenue in this particular space, up from $8 million last quarter.

So we think that we are off to a very good start, and believe the traction in this area is going to continue.

The reason for that is this technology adds sort of a decision layer technology and an analytic layer if you will on top of already existing IT infrastructure.

So if a company wants to turbo charge their applications with some analytic decision power, they buy this tool, and the existing applications they have already invested in get better.

And this appears to be based on the last couple of quarters an investment that IT departments are putting very high at the top of their priority queue for next year.

The next one.

In the fraud area we won a very major contract with a large telecommunications company to use our new Falcon ID idea product.

And this was one that we recently announced, and we see lots of traction on this particular area coming in the very near future.

We have also announced an enterprise wide version of Falcon.

You're going to see a trend here as we keep talking about enterprise wide versions of our products now.

We now have an enterprise wide version of Falcon that covers many new areas of fraud detection, including loan and application fraud, checking -- checking item fraud, online banking fraud, electronic debit fraud, ACH transaction fraud, (indiscernible) fraud, telephone subscription fraud, retail instant credit fraud, mortgage fraud, equity line fraud.

And I don't know if there's any left, but if there are, we will probably figure them out.

So basically we're extending Falcon to a large number of new spaces.

Interestingly we have about 10 percent of our loyal credit card Falcon base has already moved to using some of these additional products.

And now that they are proven, we expect other Falcon customers will follow.

We are also working closely with channel partners like IBM on major campaigns around these new capabilities.

On the origination front, we won another large financial project, again with the help of IBM.

And this was another opportunity in Japan.

We also continue to see traction with LiquidCredit for small business.

We closed another 40 new deals this quarter in the small business area, a very successful relationship there.

And we also closed a multiyear deal with a very large telecom carrier that was sort of a bundle deal that included, again, that Falcon ID product that I talked about earlier, but also LiquidCredit for Telcom, and customer origination miles (ph).

It was one of those very, very big deals we got this quarter.

In the insurance space, as I said earlier, we continue to sign very large major deals that are very big bookings, again with a major insurance carrier.

And so our outsourced SmartAdviser ASP solution continues to win over the competition.

As you may recall, we also recently completed a new version of SmartAdviser last quarter.

So that product is already in production at some major customers.

We continue to see additional success in the insurance area in the health care arena around Payment Optimizer.

We, through our partnership with EDS, we have won three more additional deals here.

And we see the concept of prepayment fraud for patients and for providers rolling at about a 25 percent clip over last year.

So Payment Optimizer is off to a good start.

We see traction there.

In the customer management area, our largest area, we came out with TRIAD 8, our latest version last quarter.

We have already got two new sales as a result of that, one in Taiwan and one in South Africa, both over major competition.

On the consumer side, we continue to lead the creation of a whole new category in educating the consumer.

An interesting statistic we learned the other day was today more people are searching on Google for the word credit score than they are for the word cholesterol.

So apparently credit help is something that is becoming very important to the average consumer.

We believe with the Fact Act starting here on December 1, there will be continued interest and promotions going on around consumer education with credit.

And so we expect to be a beneficiary of the growing market in this area.

In particular you will be seeing some new products which we don't want to announce today, that will come online December 1 when the Fact Act becomes official.

Within the mortgage space, we had another large mortgage user go into production with our new Web-based mortgage origination system, called Diamond that came from London Bridge.

That is the major platform that we will continue to grow in '05.

We are already starting to cross our scores into the traditional London Bridge customer channels in the mortgage space.

In collections and recovery, we have completed the integration of PlacementPlus, an UniScore from Fair Isaac with the London Bridge Internet new services product called Bridge Link.

And we recently completed our first sale of that to a very large bank in the UK.

So we are starting to live up to the promise of integrating analytics into the debt manager collections platform.

They were a -- this client was a Debt Manager user.

And we have many other opportunities now as a result of this very quick success story.

Moving onto scoring.

We had another record quarter here.

The business continues to gross steadily, and we see a very good start for Q1 as well.

There are lots of activity here in this pipeline.

The financial industry in general has responded very well to the recent launch of our three new scores.

These recent announcements have generated approximately 250 media articles, and these are all around the new scores, the global FICO Score.

We signed a multiyear deal with TP Information Group to make scores now available in Singapore and Malaysia.

With our Qualified Score, which we recently announced we have six very major customers who are in the validation process with that, and that should turn into contracts soon.

And with the Expansion Score which we announced last quarter we have over 200 companies somewhere in the sales through contracting process now, so lots of good success there.

At Interact, which we held our big user conference a couple weeks ago in Miami, had over 600 customers from 29 countries.

We introduced a new scoring product with Experian called ActiveView which now allows TRIAD users to utilize triggered scores and activities to drive customer decisions.

And this is the only such product in the market.

So we are happy that we worked with Experian, our partner on that one.

And finely, one more point, we also -- you usually ask about this when we closed our first very large prescore renewal with very large increased volumes for next year.

As you recall this is the product that is a predictor of credit card mailings.

And we renewed most of these contracts in the first quarter.

This what happened to get done earlier.

And if based on the scope of this one, if it is prediction it looks like we're in for a good year for marketing activity in the credit card industry.

Although it is just one big deal, it appears to be a precursor for what we expect this quarter.

Finally in marketing, as I mentioned this is a transitioning process for us where we are transitioning to strategic and Precision Marketing types of projects versus just database projects.

We are adding services from the Braun acquisition to help us in this particular domain.

The big news here is actually at the beginning of the first quarter, so this number isn't included in any of the bookings that I just mentioned.

We signed a very large 8 digit deal with one of the largest consumer brand companies on earth as part of a global Precision Marketing deal.

This is very huge for us because it provides continued verification and validation that our Precision Marketing strategy, which we started actually over a year ago with the acquisition of Serot (ph), is starting to pay off.

So with the Braun acquisition and this success, I think we have finally started to turn this vertical into one in which our strengths in analytics will differentiate our services.

And I would like to congratulate Mike Bragg for working very hard in getting this deal done.

With that quick analysis, I will now turn it over to Chuck who will go through some more financial details.

Thank you very much.

Good afternoon.

I'm going to take a minute to review our fourth quarter and fiscal 2004 results, and then expand a bit our first quarter and fiscal 2005 guidance.

First turning to our fourth quarter income statement, we reported revenue for the fourth quarter of fiscal 2004 of 190.4 million, an increase of 10 percent over the third quarter.

The revenue contribution by industry segment is outlined as follows.

Strategy Machines contributed 115.1 million, or 60 percent of total revenues versus 105.7 million or 61 percent of revenue in the prior quarter.

Scoring was 37.5 million, or 20 percent of total revenue for the quarter versus 36.3 million or 21 percent of total revenue in the prior quarter.

Professional Services contributed 26.4 million, or 14 percent of total revenue versus 23.2 million or 13 percent of total revenue in the third quarter.

Analytic Software Tools contributed 11.4 million, or 6 percent of total revenue for the quarter against 8 million or 5 percent of revenues in the third quarter.

Now we have broken down our fourth quarter revenue by vertical markets. 73 percent of our revenue came from the financial industry, 9 percent from the insurance industry, 6 percent from telcom, 6 percent from retail, and roughly 6 percent the remaining verticals.

Furthermore our transactional revenues came in about 81 percent against 83 percent in our prior quarter.

Finally, our international revenue represented 22 percent of total revenues, which is up from 20 percent in the prior quarter.

Net income for the fourth quarter was 14.4 million, with earnings per share of 20 cents on 71.3 million fully diluted shares versus our guidance of 18 to 20 cents with a consensus of 20 cents.

You may have noticed different analyst estimates on FirstCall, Bloomberg and other sources.

These differences were due to some estimates which did not reflect the charge we took for redeeming our 5.25 percent $150 million convertible subordinated note.

As noted we also had some onetime non-recurring issues which reduced our fourth quarter net income and earnings per share.

As we discussed, we redeemed our 5.25 percent convertible note.

As a result of this redemption we recorded a pretax charge of 11.1 million, which represents a reduction in earnings per share of 9 cents.

Going forward this redemption will reduce the Company's interest expense by approximately 9.6 million per year.

In addition the Company settled an employment litigation claim during the fourth quarter that had been ongoing for several years in an amount equal to 3.1 million or roughly 2 cents per share.

The total operating expenses for the fourth quarter were 144.4 million, against our guidance of between 147 and 151 million, representing a 14.7 percent increase over the prior quarter.

The increase over the prior quarter was mainly attributable to the integration of London Bridge, as well as the onetime litigation charge.

The breakdown for these expenses represented as a percent of total revenue were as follows.

Cost of revenue was about 36 percent versus 35 percent last quarter; research and development costs were 11 present constant with last quarter; and selling, general and administrative costs were 29 percent against 26 percent last quarter.

Other expense net was 1.8 million and represented interest expense offset by interest income.

Our Q4 tax rate has increase, which is due to the London Bridge net operating loss.

And I'll discuss that, as well as our expectations for fiscal year '05 tax rate, in just a minute.

Now turning to our balance sheet, cash and investments were equal to roughly 364 million, which is down from the 5 1/4 -- 525 million reported as of June 30, 2004.

This decrease is due to the redemption of the convertible subordinated notes and the stock buy back activity, offset by an inflow cash from our normal operating activities and exercised stock options.

The inflows of cash included almost 37 million from operations and 9 million from options exercised and stock issued.

The net accounts receivable as of 9/30/04 were about 141 million, up about 5 million from June 30, when the Company reported net accounts receivable of 136 million.

Our days sales outstanding were down from 71 days at the end of the third quarter to 68 days at the end of the fourth quarter.

Property and equipment came in 53.3 million, up slightly from the 52.7 million last quarter.

Net goodwill and intangibles came in at 838.1 million, which is up slightly from the 831.4 million reported as of June 30, '04.

This is made up a 702.3 million of goodwill and 135.8 million of intangibles.

The increase in intangibles is due to the current quarter adjustments for the final allocation of the London Bridge intangibles, partially offset for current quarter intangible amortization.

Total current liabilities were 133.3 million, which is down from 150 million reported last quarter, a drop of 16.5 million, which is primarily due to a decrease in the other accrued liabilities account caused by tax payments.

Shareholders equity came in at 916.5 million, which is down 5.1 million from the prior quarter, principally from the net impact of earnings, dividends and the repurchase of stock and the exercise of stock options.

And finally, total headcount of the end of the quarter was 3,058 compared with 3,094 at the end of the last quarter.

This small decrease was due primarily to normal attrition within the Company.

Headcount is up 703 from the end of last fiscal year when we ended at 2,365.

This growth is due to our acquisitions of Sarot (ph) and London Bridge.

So turning now to the income statement for the full year.

Revenue for fiscal 2004 was 706.2 million, a 12 percent increase over the prior fiscal year.

Total operating expenses for fiscal 2004 were 506 million.

Net income for fiscal 2004 came in at 102.8 million, with earnings per share of $1.41 on a weighted average 73 million fully diluted shares.

Our annual tax rate increased to 39.1 percent compared to 37.8 percent in the prior year.

About a quarter percent -- a quarter percentage point of this increase is due to the loss of research and development tax credits under the current law.

We know that current legislation will renew these credits, but for now our rates have increased accordingly.

The rate is also increased to reflect our inability to utilize the London Bridge UK net operating loss at this time.

Our expectation is that the fiscal year 2005 tax rate will be approximately 38.5 percent.

Now turning to guidance for Q1 '05.

For first-quarter fiscal '05 we expect revenue to be in the range of 193 to 198 million, which includes about 4 million of Braun revenue.

We believe we have a baseline forecast heading into first quarter in the range of about 173 to 175 million.

Therefore in the first quarter we anticipate closing around 19 to $23 million in new revenue.

This should come mostly from new license revenue, but will also include professional services engagements and quick ramping transactional revenue.

By segment we expect the 193 to 198 million to breakdown as follows.

Strategy machines, 115 to 117 million; scoring, 38 to 39 million; tools, 11 to 12 million; and professional services between 29 and 30 million.

Gross margins are estimated to be in the 60 to 64 percent range.

Total expenditures in cost are forecasted to be roughly 146 to 148 million, broken down as follows as a percentage of revenue, cost of goods sold around 37 to 38 percent;

R&D coming in at around 11 to 12 percent; selling, general and administrative in the area of 26 to 27 percent; and total amortization around 6.8 million for the quarter which includes London Bridge and Bron amortization.

Capital expenditures are forecasted to remain in line with our prior expectations within the range of 4 to $5 million per quarter, and appreciation in the range of 5 to $6 million per quarter.

Other expenses net is principally interest income from our investment portfolio offset by interest expense from our outstanding convertible note.

So we expect that to be about 1.5 million.

We expect our earnings per share to be in the range of 34 to 36 cents per share, which suggests net income in the range of 23 to 26 million on 71 million shares.

I would also like to mention the effect of our $400 million note on our potential future share count.

Certainly if pending regulation is implemented we will show future dilution of 9.1 million shares, with a quarterly interest from this note added back net of taxes of just under $1 million, or 3.7 million annually.

The numbers we have included in this call do not include the effect of this regulatory change.

So now turning to guidance for fiscal 2005.

As Tom mentioned, our revenue guidance range for fiscal year 2005 is 818 to 848 million.

This is made up of a baseline of around 670 million to 680 million, and new revenue of between 148 and 168 million.

We expect net income will be in the 120 to $125 million range, and earnings per share will be approximately $1.75, which will be an increase of about 24 percent over fiscal 2004 on a GAAP basis.

Finally, on the subject of share counts we are proceeding with the stock repurchase program that we announced last quarter.

The fourth quarter we repurchased nearly 1.2 million shares at a total cost of about 32 million.

We anticipate that we will continue to repurchase stock from time to time under the program, which allows the Company to acquire up to 200 million of the outstanding -- $200 million of our outstanding common stock.

So with that I will turn the call back over to the operator, and we can begin our Q&A period.

Thank you.

(OPERATOR INSTRUCTIONS).

Brad Eichler with Stephens Inc.

A couple of questions.

One, the $18 million in revenue from London Bridge, how did that break out among the revenue line items?

Did that all get lumped into Strategy Machines?

No, no, that would be -- that would go across tools, collections and origination.

So it would be distributed across the units that it relates to now.

We're not running a P&L any longer called everything that London Bridge had.

We have distributed it out to the various units.

Any guess as to much how much that added to strategy machines in particular?

Hang on.

Somebody's joint that the answer here.

And the answer is -- of the 18, 17 million is the strategy machines and 1 million is in tools.

On the scoring, the new three new scoring products you have, it seems like unlike the NextGen products all these are kind of incremental scoring opportunities over and above the FICO Score?

Absolutely yes.

And so how do you quantify or think about how big an opportunity those could represent?

Great question.

For purposes -- for purposes of our budget I said 5 percent for the fiscal year, which has been the same number we have been actually doing for the last couple of years.

So I have not included any sort of bust out huge new volumes.

So that is point one.

Point two, each of those could represent very large numbers.

To give you an example, the Expansion Score represents now FICO Scores on tens of millions of consumers who don't have FICO Scores today.

So in theory some day all of those had FICO scores and they came to us to get them.

That could be a significant increase of revenue, significant -- that would be measured in 10s to 20s of millions potentially upside.

Now we're not going to get that next year, but it is a big market.

The Qualified Score similarly has very big opportunities.

And the World Score is getting lots of traction in lots of new countries.

So I'm going to -- let me just leave it at that and say that all of those scores, along with this new Triggers product, give us an opportunity to have some upside in scoring next year that I'm not really reflecting in my numbers.

As you know, whenever we come out with new scores, even though we have tested them for a long time, the take-up is based on customers testing them, feeling comfortable that they are of a high-quality before they turn their systems over to them.

So I'm being a little conservative here on the take-up.

An then finally, the Precision Marketing deal you guys announced it was 10 million plus.

Can you elaborate a little bit on exactly what you're doing there?

The objective here is to figure out a way to help a large company do what we call now Precision Marketing.

As you know, when we bought Sarot -- there is a book on the topic.

There is actually a book you can buy on Amazon that explains it.

The objective is to help consumer products and other types of companies direct what typically it is their advertising spend more directly to targeted marketing, Precision Marketing as we call it.

And this particular company has embraced this new science.

And it is going to try to roll it out around world.

So it is an analytic project around a database In consumer products, which is a whole new space for Fair Isaac.

Thanks.

Nice results.

Michael Nimarot (ph) of Maxim Group.

Can you tell me how many of the -- last quarter there were 13 deals that slipped.

Can you tell me how many of those closed during the fourth quarter?

And out of those that haven't closed yet, are they still out there, can they close?

I don't know right off the top of my head.

But as I said in the third quarter, -- what quarter are we in now third quarter -- I think you are reflecting on -- one of the reasons that we -- some of those deals that we slipped were the big software deals that we got in the fourth quarter, right?

So you saw us have a really great fourth quarter in software, that the result of closing those deals that we thought we were getting in the third quarter, but we didn't.

So that's consistent with what we have said many months ago.

Okay.

So I don't know the exact number, but it was a significant number of them at this point.

And then on the guidance for 2005, to get to the 175 number that you guys are quoting here, it looks like it is going to be a reduction in the operating margin in fiscal 2005?

Do I have that right?

Yes, that would -- and largely because of the intangibles, the amortization of intangibles coming out of the acquisition of London Bridge.

And I think that's correct.

And you had mentioned that there were some maintenance revenues that were not added during the quarter.

Can you tell -- were those revenues -- what divisions were those revenues from?

I think there was a difference between the 195 million and the 190?

Purchase accounting really takes us down -- you're right -- that is the haircut that we were forced to take on the London Bridge maintenance and a deferred maintenance in one deal where because of purchase accounting, we lost actually about 1.6 million on one specific deal due to purchase accounting.

And that is just a function of -- we sold the product.

We earned the revenue, but we couldn't record it because of the GAAP rules surrounding acquisitions.

And going forward, do you -- how much do you anticipate that that is going to impact revenues in the first quarter?

I think about 2 million -- (multiple speakers).

The ramp down it affects us about 2 million in the first quarter and --.

And it bleeds off of --.

And bleeds off.

By the third quarter it is gone.

We only have two more quarters (multiple speakers).

We still see the revenues.

We can start recording them.

Yes, we finally get to count it.

One then just last one.

As you focus more on the software sales of the Company, can you tell us specifically what you're doing as far as the structuring of the salesforce to go after a different size deals?

I think we're hiring more, which is simple.

So we are -- we are having more feet on the street.

This is particularly true overseas.

And we're treating our more experienced sales executives to deal with the higher levels of reorganization.

We're now selling -- most of these -- (indiscernible) didn't traditionally sell enterprise level deals.

We're now meeting with the CIOs of these very large companies, doing very big sales, doing 6, 7, 8 digit deals where the CIO is saying to the organization, you'll use this technology for decisioning across all the divisions of the company.

So we're doing two things, adding more feet to the street and educating our more experienced people on how to deal with the higher level -- higher levels of the organization in which we must compete.

Tony Wible with Smith Barney.

A quick housekeeping question and then a couple of others.

What was the organic revenue growth rate this quarter?

I don't know that off the top -- (multiple speakers) we're going.

What is your next question (multiple speakers)?

We've got about -- of the 12 -- for the entire year we are up about 12.2 percent, of which 8.8 was acquired revenue and 3.4 percent was organic.

So that's for the whole year.

That's for the entire year.

For all of '04.

Do you have what it was just for this quarter year-over-year?

I don't know, we --.

Maybe we can get to that later on.

But the second question really has to do with looking out to '05 and kind of your expectations on the revenue.

I guess part of that expectation hinges on some kind of assumption about how fast you can work through the new bookings and bring them on.

The question I have is that if you look at now the full year results for '04, it looks like you were able to bring on about 28 percent of your new bookings for the year.

However, if we look at the fourth quarter numbers and we look at your projections on the contribution, it looks like you're getting through about 38 percent of that in the first year of having that.

What is causing that kind of acceleration of the pace where you get new bookings into the revenues?

Is it the type of deals, or can you kind of just walk through that?

Yes, the issue the really is what sort of yield you see on the frontier of the curve.

And early in '04 we had a large number of insurance deals which have very long implementation schedules, and really continue on for up to 18 months even to implement them.

They tend to weight that ratio.

What we're seeing now, particularly as the bookings that we expect through our organizations like Braun, there are faster turning -- in some cases consulting revenues which come through immediately.

And that tends to start to tip it back toward what we would expect would be a higher yield there.

And so as you work through the waterfall, we're really looking to increase productivity and efficiency in bringing those revenues through from a booking -- quicker.

Having said that, some of those very large insurance bookings early in '04 should start to show proof in '05 and add to that number as well.

And actually if you look at the waterfall report and study it, the assumptions that we're making in '05 are not very much more aggressive than the assumption -- than the actual results in '04.

So they appear very doable, based at least on that assumption.

Do you have a number that you can put out there as far as what percentage of annualized new bookings you expect to bring on in '05?

You can calculate it by looking at the waterfall report.

We're not publishing a number.

That really depends on the mix of businesses that comes through by quarter.

Let me answer year first question.

The organic growth in the fourth quarter was 4 percent.

And 6 percent of our growth was acquired from last quarter from over '03 -- or quarter 3.

And actually, as long as you are on that question, in '05 in the budget we're assuming about a 5 percent organic growth and a 13 percent acquired growth is the way the numbers work right now.

So we're being, again, I think fairly conservative.

Great.

And just last question is actually speaking to that conservatism.

It looks like in TRIAD you said about 5 percent growth is expected.

Can you go into what is included in that expectation?

Is the TRIAD --?

Everybody has bought it.

Okay.

So in other words there is no incremental assumption in there for just in cases of the financial services consolidation starts to --?

There's obviously lots of ins and outs.

Let me give you a more expensive answer.

But the answer is, it is the number one marketshare product.

The way we're growing that revenue and have been for the last couple of years is three things.

One, we're selling it hard internationally.

Two, things like strategy science and credit line management, new algorithms we added into TRIAD, people are buying.

So we're cross-selling new algorithms in.

So that's where we have been getting a lot of growth in this area because of that.

And then finally, we do keep coming out with new improved versions.

So TRIAD 8 has a lot more functionality than TRIAD 7 does.

So it has in it things like Blaze and other new tools in it.

So people have to pay upgrade fees, if you will, to move on to that new platform.

So we get new platforms, new analytics, and international is how that number grows.

Ed McGuire of Merrill Lynch.

Could you talk a bit -- you mentioned there were a couple of contracts for database marketing that had gone away because of consolidation.

Were there -- would these end up competitive losses or are there other products in your portfolio that might also be similarly exposed to risk from consolidation?

Yes, I mentioned there is a big -- one or two quarters ago -- with the consolidation of Chase into Banc One and Fleet into B of A, there were a couple database products that we had running at the acquired banks, and they ended up using the products that the acquirer had rather than our product.

That is usually what happens when the acquirer wins.

And so, actually those conflicts are still going on.

They're going to be phased out in '05, and that is still going on.

So we're anticipating our '05 budget that a couple of those database projects and financial services will be phased down.

Luckily, we're trying to back fill those with like this new deal and others.

And our hope and our plan is that by the time those deals phase down here sometime in '05, we will have replenished that with new revenue that we been trying to work on the last couple of quarters.

We have known about this -- these are six to nine months we have known about this.

We have been reacting to it for that long.

Moving on to the Braun acquisition, as you look to roll out the -- their service offerings with some of your new offerings, how much do you have in terms of solutions that are currently available that the team can go to market with now?

And how much are you looking to kind of develop solutions that combine some of their domain expertise that would be rolled out over the next several quarters?

Great question.

In general they could pull any of our products through their consulting engagements.

But the primary ones that we're focusing on in the short-term are in the pharmaceutical area for sure.

I mentioned that one because we're working hard on this one.

Even invented some new algorithms there to help in the pharmaceutical area selling through channels -- without going into any more detail on that.

And Steve's group has lots of expertise in the pharmaceutical field, and so we're using that expertise to expose some of our research and development to lots of new customers as we speak.

So I think the pharmaceutical area is the first area that a "product" might come out of.

The other obvious pull is this whole EDM strategy.

As they try to sell big consulting projects to help companies do a better job of customer segmentation, our tools are necessary.

So rather them cross-selling somebody else's tools, potentially like they have in the past, they will have an opportunity to bundle our tools with their consulting practice.

So you'll see Blaze and Model Builder and EDM Manager, those products will be pulled through by Steve and his group I believe.

And it looks like next year you're looking for fraud to really contribute some pretty significant organic growth.

Could you comment on how much of that is new products?

How much of that is pricing power?

And how much of that is just going to be purely growth in volume?

Actually it is primarily growth in new product sales.

We dominate, as you know, the credit card space.

We have been getting lots of our customers to start using our debit card fraud product, Which is an obvious cross-sell opportunity for us.

We have now come out with our Falcon ID product.

That is new.

So we're trying to cross-sell that.

So actually the short answer is lots of new products cross-sold into the Falcon user base where it is easier for them to add an incremental solution to that -- to the Falcon platform than it is to go try to implement an entire new platform.

So we expect to see lots of fast-growing bookings there.

As you know, this is transaction revenue so even though we will get big bookings, it takes a little while to get that revenue -- (indiscernible) install Falcon, have a new feature, have a new model before you really start to recognize the revenue.

But you're right, this is a big organic growth area for us.

It is one of our fastest-growing.

I wouldn't be surprised, given how hot this fraud market is that this is probably going to be one that is going to have a very future.

And we're trying to take advantage of that right now.

Andrew Jeffrey of Needham & Co.

You had mentioned again this big Precision Marketing deal, as well as insurance.

And in the fourth quarter you posted about a 72 percent financial institution contribution from a vertical market standpoint.

Where should we think about '05 being?

Is '05 the year you start to show some meaningful end market 'diversification.

Our do you think it is going to be out beyond that?

We saw good insurance bookings, but sort of slower-than-expected revenues.

Is that going to be the case with some of these new vertical markets too?

I think that is probably fair.

We're putting in place organization and products and Braun and others now, so we have made some strategic moves.

And we should start to see those numbers move.

Do we have how those change in the '05 budget?

Do you want to do that or not?

Okay.

I think the answer is don't think of substantial change in '05, it is going to be '06, and we hope to reap the benefits of these changes now of the acquisition of London Bridge, the acquisition of Braun.

And then competitively can you speak in a little more specific terms about some of the success you had in TRIAD, especially internationally?

And does that come largely at the expense of Experian, or are there other companies out there with which your are competing more effectively?

No, it comes at the expense of Experian.

So that is a little catch up maybe then from some of the take away success they have had.

If you go back -- again, it is complicated here, it depends on (indiscernible).

The customer area we dominated at the expense of Experian.

In the EDM area we compete a lot with iLOG, but they don't have the breadth of tools we do now.

So we're trying to bundle some solutions there that are broader.

Every one of these segments we tend to have someone who is our dominant competitor and keep us on our toes.

And on balance you would argue that you're taking share globally?

I would argue that.

Certainly from the perspective of a vertical -- of a technology company who is trying to build vertical applications that make decisions, again, there aren't very many companies like that.

So we think our focus on this is our advantage.

I think the other thing -- I think the market is getting bigger.

If you follow Forrester and IDC -- when I started here a few years ago the word analytic and predictive analytics, very few articles about that.

Now you can go buy all sorts of research now on how big those markets are growing, who is in the lead, what they're doing, who the competitors are.

So the fact that Gartner and other thought leaders see this trend in movement to decisioning type applications bodes very well for the number one company in production decisioning applications.

So I think now only do we win our fair share, but I think the market is finally getting bigger.

You see my point?

There's lots of room for growth there regardless of who is computing I think is my point.

Tom Ernst.

Focusing on the growth one high-level question, and I will save the rest for the Analyst Day.

For some time now you been focusing on trying to spark an accelerated organic growth.

Do you feel like now that you've made several kind of key additive acquisitions that you've got the razors in place to finally kind of produce predictively 10 percent organic growth?

And a follow-up to that.

Do you see further opportunities for bringing a broader product set into the suite through acquisition as well?

Good question.

I think I've got the platforms, I have got the razors.

I want to innovate now the blades.

And I still think for us to get increased organic growth it is increase in our spend and go to market and sales more than it is products.

I think we have the products to grow in the markets that are growing.

And now we have to become a leveraged Company across more geographies, across more industries.

And it just takes time to build the organization to do that.

So I think to your point, I think this fiscal '05 for me is more of a -- from a management perspective -- is more of an execute, execute, execute, sort of short on strategy, big on go build the organization, the management structures and the reporting structures and the incentive structures to get increased organic growth.

It is a great seque into my next question.

It seems like your EDM is your fastest-growing sector.

It certainly sounded like that on the call today.

Do you feel like you have the staffing in place both from a management and field perspective to go out there and maximize the revenue opportunity?

No.

To maximize, no for sure.

This is an area that we're hiring and growing fast.

We're trying to get a bit ahead of the curve here a little bit.

If we hire more salespeople we get more sales.

This rules management, decision management space has lots of opportunity.

Our pipeline of opportunity is very, very large here.

So it is all about execution.

There's a market for sure.

What about the management of the division?

Is that stacked out to continue?

Give us a little bit of insight into who is running the initiative?

Okay.

Sorry.

Of the four group heads, Lori Sherer runs the EDM division, which includes what I'm talking about.

So all the revenue related to EDM and EDM services falls under Lori.

Lori was the rainmaker who launched Strategy Science a couple of years ago.

And the key to us selling EDM tools is explained to customers how we help them build new solutions.

So we have staffed that group with our best sort of solution innovators, proposal writers, thought leaders, right?

So I believe Lors has got the ball and you will see her run with it very quickly.

So permit me one financial question, then I will let others ask questions.

Can you qualitatively describe to us how the average terms of bookings were this quarter?

And perhaps qualitatively as well -- I know you don't quantitatively this -- what the first-year contribution of your bookings look like relative to the last couple of quarters?

That's in the press release, in the waterfall (multiple speakers).

So we gave you that.

13.1 on 110.5.

That's right.

I apologize.

I don't have the press release handy (multiple speakers).

No, here it is 13.1 million on bookings of 110.5.

And whole year is --.

Well (indiscernible).

You can see on there what it is for next year as well.

For the full year we pulled in 106.6 on bookings of 441.3.

In '04.

In '04.

Excuse me.

Thanks again.

Have a good night.

You could also see how those '04 bookings moved into 05.

So --.

(indiscernible) attached to the release.

At this time there are no further questions.

Mr. Grudnowski, are there any closing remarks, sir?

Thank you very much.

Thank you all today.

And someone did remind me to remind all of you that will we be hosting our annual Analyst Day in New York next Wednesday, November 17.

The top management of Fair Isaac will spend a day explaining what we do.

It will be webcast and available on our website, www.fairisaac.com.

And with that I would also like to thank Megan, who has been helping us with IR here for the last year and a half.

Who, because of her ability to communicate what Fair Isaac does, we're now moving on to sales.

So look out customers.

So I would like to thank Megan for her help for the last year and a half.

And with that, thank you very much.

That concludes today's Q4 and fiscal year end 2004 results conference call.

You may now disconnect.