Fair Isaac Corp (FICO) 2005 Q1 法說會逐字稿

Good afternoon and welcome to Fair Isaac Corporation's first quarter fiscal 2005 earnings conference call.

Your lines have been placed on a listen-only mode until today's question and answer segment.

Today's conference call is being recorded.

If you have any objections, please disconnect at this time.

I would now like to turn your call over J. D. Bergquist-Wood, Fair Isaac's Director of Investor Relations.

Thank you, Ms. Bergquist.

Please go ahead with your call.

Thank you, Sara.

Good afternoon, everyone.

Thank you for joining us for Fair Isaac's first quarter fiscal of 2005 earnings conference call.

We issued our first quarter earnings release after the market closed this afternoon.

You may access it on the Investor Relations section of our website at www.fairisaac.com.

A replay will be available on the website approximately two hours after the completion of the call through February 25th.

I'd like to remind everyone that, except for historical information, the statements made on this call should be considered forward-looking statements within the meaning of the federal securities laws, including the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

These statements include statements concerning our business strategies and their intended results. and similar statements concerning anticipated future events and expectations.

The forward-looking statements made on this call and in the news release distributed today are subject to risks and uncertainties which could cause actual results to differ materially from those expressed in or implied by the statements provided.

Additional information concerning potential factors that could affect future financial results is included in our annual report and periodically, in our SEC filings, including our report on Form 10-K.

Fair Isaac disclaims any intent or obligation to update these forward-looking statements.

On the call today are Tom Grudnowski, CFO, and Chuck Osborne, CFO.

Tom will begin the call and provide you with an overview of first quarter's operations and Chuck will review the financials and provide updates to our to our guidance.

Once we've completed our prepared remarks we'll open the call for questions.

Tom?

Although I'd like to think I'm the CFO, Chuck won't let me, so I'm going to have to -- I'm going to have to be the CEO again today.

So, thank you, J.D., and welcome, to all of you.

We're very pleased today to report our results.

Our revenue came in at 195.5 which exceeded our low guidance that we provided last quarter and we are even more pleased to report earnings of 1.9 million for the quarter or $0.39 per share which is also $0.03 better than analyst consensus.

This is prior to the impact from dilution caused by new accounting rules around our convertible note, and Chuck will review this issue with you later, and I'll stick to reporting the numbers independent of this particular rule.

Chuck will handle that at the end.

We also have other positive developments in our business, including margin improvements, strategic wins, growing and promising pipeline, solid operating cash flow, and all these issues I'll discuss in more detail as I progress.

By revenue reporting segment we saw growth in revenues in Strategy Machines, Scoring and Professional Services, versus Q4, and we have a slight dip in revenue in our Tools segment.

And the fact that we beat revenue will strengthen our core, recurring revenue in the areas without the help of last-minute, one-time revenue from our Tools business, was actually reassuring to me, in a way.

Now, breaking this down a bit further what we really saw was very interesting.

Our three primary market leading units of Scoring, Customer Management, and Fraud, together all had a great quarter, growing organically around $10 million versus the prior quarter.

Now, for us this is extremely high growth and it's organic growth for these key verticals and positions us very well for meeting or exceeding our fiscal year '05 growth plans in these very important areas.

Three areas were at or slightly above plan as well: Marketing, Origination, and Predictive Analytics.

And four were slightly under plan: Consumer, Mortgage, Collections, and Insurance, although really they were just barely under plan, and the only area that was off a bit more was the Tools, and primarily because we had a very strong fourth quarter as you might recall.

All in all, each of the units performed very well.

From the bookings perspective, our first quarter was also excellent.

We hit 115.4 million of bookings and again referencing the infamous revenue Waterfall report, those bookings generated more new revenue that we showed in that report.

We generated 19.9 million of new revenue from those bookings.

So that's also very good news.

We had seven deals over 3 million.

Of that, one was over ten and one was over 20.

So we also had some very nice large wins as well.

Our operating income before amortization and acquisition costs as a percent of revenue increased from 24 percent in the fourth quarter to over 26 percent this quarter, and we are well on our way to hitting our goal of at least 30 percent by the third quarter.

So our margins continue to improve.

So, accordingly, we remain very confident in our previous '05 bookings, revenue, income, and EPS guidance.

That converts to guidance of around 198 to 203 million for Q2 revenue and $0.40 to $0.42 cents EPS in Q2, and our bookings goal for the quarter will be approximately 125 million in Q2.

We also had an interesting quarter in cash flow.

We reported operating free-cash flow of 76.8 million.

This amount is mainly attributed to our net income after adding back non-cash expenses such as depreciation and amortization, plus positive changes in our working capital for the quarter, including a large prepayment on a three-year scoring contract.

In our news release you'll note that we also provide analysis between GAAP and pro forma numbers in order to compare accounting periods without the impact of certain non-operating items.

And again, Chuck will cover this in more detail in a few seconds.

I will now outline several highlights from the quarter.

Our integration of London Bridge and Braun consulting, which you are all interested in, is going very well.

Steve Braun has now assumed responsibility for professional services across all of Fair Isaac and all of the London Bridge product groups have been integrated into the Fair Isaac organization.

We have reduced London Bridge and Braun headcounts by over 130 folks as we consolidated functions and we have gained good traction in consulting and London Bridge related products in the quarter, which I will talk about here in a second.

So we are on track to meeting our financial goals for the year in these areas despite all the obvious changes involved.

We also spent a fair amount of time this quarter improving our go-to-market tactics, if you will.

We've created two new management leadership positions this past quarter to continue to expand the way we go to market.

Paul Perleberg is now responsible for all non-U.S. operations, and will expand our organization overseas around Fair Isaac legacy resources and our newer London Bridge capabilities.

His goal is to build the capacity to double our non-U.S. revenue as soon as possible.

About 160 million of our total revenue this fiscal year is non U.S.

You should note that quarter-over-quarter, this quarter and last quarter, our growth in non U.S. revenue was about 32 percent.

Paul will be headquartered in London and we see this new focus as a way to accelerate our organic growth.

And Steve Braun also will expand our go-to-market approach by building industry-focused leadership groups around industry domain capabilities.

And this is similar to the manner in which the larger enterprise consulting firms or technology firms go to market.

We now do about 140 million of consulting around our products.

And his objective will be to generate new demand and new markets for new analytic services and products.

We see this as both a high growth area in itself, and one that will pull additional product revenue growth as well.

This channel is particularly important when selling analytic services and products into new industries where C-level relationships are often required.

Now, combining these two go-to-market approaches with our historic strong, analytic product orientation, we now have several ways to go to market, and whether the buyer is excited about our product, or our services, or our geography, we have a way to meet their requirements.

With these changes, over the last quarter, we have already increased our consulting and product direct sales capabilities with a focus on compensation as it relates to sales, so they're sales-incentived individuals.

With this new focus we have now grown that group 70 percent to 200 people.

So we'd expect the impact of this to be seen in earnest in Q3 and beyond as bookings increase beyond those planned at the beginning of the year.

So those are a couple of general comments about the organization.

Let me cover now, briefly, some key highlights of the major units.

Again, let me start with Scoring.

We had an exceptional and a record quarter in Scoring up 5 percent sequentially.

Our traditional scoring products are doing very well, and our new products in this area are gaining traction which is why some of the growth is occurring.

We completed a very large contract for our new qualify marketing score, which we mentioned before, with a major credit card company, the first of this magnitude.

We also completed a large deal with another major credit card company around our new FICO expansion score, adding our first really large client to a growing list of expansion score users.

Given these two large events, we hope that the general market acceptance for these scores will grow and we'll get others to sign on soon.

On the marketing pre score side we usually talk about renewals in this quarter.

I'm happy to report we renewed our pre score contracts with volume projections larger than last year's.

And, finally, our New World FICO score, which was new this year, is now in production in Poland, Mexico, Sweden, and South Africa, with Singapore and Saudi Arabia soon to follow this quarter.

So we're getting good traction in our global FICO score.

So that's Scoring.

On the fraud side we had our strongest bookings and revenue quarter ever.

Many big deals and strategic successes.

Just to mention a few, a very large, major retail bank in the U.S. just signed up for our new Falcon ID product, which was just introduced last quarter.

This is a very major win for us, very excited.

Another major U.S. debit card co-signed up for Falcon Debit which is now, interestingly, becoming the standard in debit as well as the standard in credit.

And MasterCard is now using our fraud products for their ATM product so another major win.

So, a very strong pipeline of opportunities is building and we see this fast-growing organic segment to continue having a good year.

Originations also had a very good strong quarter in revenue bookings and pipeline, caused by an increasing client base, as well as high revenues from transactions, processing yet existing clients.

IBM again helped us in this segment with a win in Japan.

And so our experiences here are showing strong demand for all of our origination products in numerous geographies; that is the U.S., Canada, Japan, Mexico, Portugal, and Chile, across multiple delivery channels, our ASP and end-user software.

And finally that demand is growing across numerous lines of businesses that include small business, student lending, credit card, and unsecured correct loans, so Originations is off to a good start as well.

In Insurance and Healthcare, we rolled out our new bill review platform, Smart Advisor, and our fraud detection software, Payment Optimizer.

We had extremely solid bookings.

Our goal was about 15.

We hit 26, including the signing of the largest workmen's comp carrier in the United States and California.

These deals coupled with large bookings in previous quarters continue to build a solid base of future revenue in this area that we're growing our dominance in.

In the Customer Management/Account Management area, we had a solid quarter including the sale of our new transaction scoring products around TRIAD to a major U.S. card issuer, and in the non U.S. we had several large TRIAD wins in Turkey, Portugal, and Australia.

In Marketing Services, we see the story here evolving, our strength here is becoming one where we combine our marketing services and customer account management services, and we're seeing the use of our credit and debit card transactional data becoming very key for our clients as they cross some of that over to their client base.

In the Consumer segment, our FICO revenues are up 30 percent over the prior-year quarter.

We continue to see good organic growth here.

Interestingly, the FACT Act, started December 1st, has had no negative impact on my FICO traffic.

In fact, it continues to rise, so we were a bit worried that maybe free credit reports being available would impact us, but the good news is it has not.

And our traffic at our website also continues to grow.

We also came out with a new exciting product right in the middle of December so it hasn't had much of an impact.

It's called Score Watch.

We did this in conjunction with Equifax, our good partner in this space.

This is the first and only product to actually monitor an individual's FICO score changes dynamically, so very exciting product.

Interestingly, this is our-- one of our first, we had some, this is one of our strongest, we believe, subscription products, so when someone signs up for this monitoring service we'll actually be getting recurring revenue for this product, and not just one-time revenue like we do for some of the other consumer products at myfico.com.

So, we believe this will help us build a more stable recurring revenue stream in this growing space for us.

Take a deep breath here.

In Collections and Recovery we're off to a great start with our new collection and recovery business.

In fact, in Q1 we had the most license sales of debit manage-- of Debt Manager ever.

This goes back to the London Bridge days.

So the power of our brand and our commitment here is already shown in Q1.

We had three substantial sales internationally, and I won't mention the names but one of them was particularly enjoyable because we snatched from AMS at the very last minute.

So the scope of our services is providing some value to that marketplace like we anticipated.

So that was very good news this quarter.

We hope that the strength of our brand will open up more doors and pipeline for new opportunities in this particular segment.

Also, Debt Manager which is -- has a very new and exciting version which is on the web.

It has been in development and being installed for quite a while.

It's also great to report that one of the early adopters of this product, Capital One has this now working in production, so that's great.

That was a major milestone and accomplishment for us.

On the Mortgage side, revenues were slightly below plan in Q1, but we've made good progress integrating scoring and analytic technologies into the core market software arena that came with London Bridge.

As a result we're seeing lots of new opportunities, and our pipeline is growing, and we're just a bit under in Q1, but we did have a significant order from a top ten mortgage broker, which was really good news for us.

We also see a lot of opportunity in changing our business model with our diamond product by bringing in more services to help reduce the risk in the mortgage market and we're using some of the Braun resources to help us in this regard.

In Marketing, Precision Marketing, I think I mentioned briefly at the last call, we've now signed a huge business partner here, [inaudible], to do a very large booking on a global basis and this was a very big win for us and will continue to help generate our growth in marketing and data technologies outside of traditional financial services arena for us.

In the Enterprise Decision Management area, although we were down a bit from last quarter we did have some significant wins here as well.

Sun Microsystems has now embraced the technology which was major enterprise win for us, and another major telecommunications company is now using Model Builder to begin building analytics on a custom basis for themselves.

So some of our newer product are continuing to gain traction with very large customers outside the financial services arena.

So all in all, the year's off to a great start.

We had a great quarter.

Our earnings were strong.

The integration of our new businesses is nearly complete and market acceptance for our product seems to be as strong as ever.

So, with that I'll turn it over to Chuck, who will go through some more of the financial details.

Thanks, Tom, and good afternoon to everyone.

I'm going to take a few minutes to review our first quarter results and then expand a bit our second quarter and full-year guidance.

First, turning to our income statement, we reported revenue for the first quarter of fiscal 2005 of 195.5 million, an increase of approximately 3 percent over the fourth quarter of fiscal 2004.

The revenue contribution by industry segment is outlined as follows: Strategy machines contributed 117.8 million or 60 percent of total revenues, versus 115.1 million or, again, 60 percent of revenue in the prior quarter.

Scoring was 39.4 million, or 20% of total revenue for the quarter versus 37.5 million or again, 20% of total revenue in the prior quarter.

Professional services contribute 29.5 million or 15% of total revenue, versus 26.4 million for 14% of total revenue in the fourth quarter, and Analytic Software Tools contributed 8.8 million or 5% of total revenue for the quarter against 11.4 million or 6% of revenues in the fourth quarter of fiscal 2004.

Our first quarter revenue by vertical markets is as follows: 67 percent of our revenue came from the financial industry, 8 percent from the insurance industry, 6 percent from telecom, 6 percent from retail, and 13 percent from the remaining verticals.

In addition, our transactional or recurring revenues, came in at roughly 80 percent of total revenue against 82 percent in our prior fiscal quarter.

Finally, our international revenue totaled 49.4 million, or 25 percent of total revenues, which is up from 22 percent in the prior fiscal quarter.

Net income for the first quarter was 27.9 million.

Now as all of you are aware, U.S. companies were required to adopt the provisions of EITF, the emerging issues task force 4-8 as of the most recent quarter end.

This accounting rule change mandates our addition of shares issuable from our $400 million contingent convertible bonds to our fully-diluted share count.

Upon conversion of bonds these additional shares will increase our fully diluted share count from 71 million to 80 million shares outstanding, with a corresponding dilutions of earnings per share from $0.39 to $0.36.

Of course, if you are doing the math you also add back the after-tax interest expense of the bonds to net income when performing the calculations.

Now, if this is still confusing we can get into it a little more detail in the Q-and-A and I've got some more fact on this when we talk about guidance.

An added note on this subject, the so-called CoCo shares will continue to be dilutive to our earnings per share calculations until such time as the bonds are amended, redeemed, or retired.

We plan to ask our Board at their regular quarterly meeting next week, to consider offering to amend the bond indenture to require a cash settlement of the par value of the bonds.

If implemented, this change would effectively convert these bonds into term debt with warrants for issuance of shares from any premium over the conversion price earned in the market for our equity.

As such, the share count would revert to our fully-diluted shares used prior to this accounting change for approximately 71 million shares, effective with the date of any such amendment to the bond indenture.

Total operating expenses for the first quarter were 144.3 million against our guidance range of between 146 and 148, representing a nominal decline over the prior quarter's operating expenses of 144.4 million.

The break-down of these expenses as a percent of total revenue is as follows: Cost of revenue was about 36 percent, flat with last quarter.

Research and development costs were 11 percent, also flat to last quarter.

And finally general -- selling, general, and administrative costs were 27 percent, against 29 percent last quarter.

Other income net was 330,000, and was the result of interest income and foreign exchange gains offset by interest expense.

Our first quarter tax rate decreased to 37.7 percent, which is primarily attributable to research and development tax credits that were taken during the first quarter as a result of tax legislation that was signed into law during October of 2004.

Turning to our balance sheet, cash and investments were roughly 344.3 million, which is down from the 364.3 million recorded as of September 30, 2004.

This decrease is largely due to our stock buy back activity and the purchase of Braun Consulting, offset by several inflows as follows: the inflows of cash included approximately $80 million from operations, 23 million from the sale of the London Bridge subsidiary Phoenix Software, Inc., and 17.9 million from options exercised and stock-- stock issued.

Net Accounts Receivable as of 12/31/04 was about 142 million, up slightly from the September 30, '04 balance of 140.8 million.

Our days sales outstanding were down from 68 days at the end of the fourth quarter, to 67 days at the end of the first quarter.

Property and equipment remain stable at 53.2 million.

Net goodwill and intangibles totaled 818.5 million, which is down slightly from the 825.1 million reported as of September 30th.

This amount consists of 683.2 million of goodwill and 135.3 million of intangibles.

The decrease in the current quarter is from quarterly amortization of intangibles and the sale of the Phoenix software subsidiary all offset by increase from the acquisition of Braun.

Total current liabilities were 151.9 million, which is up from 120.3 million reported last quarter, an increase of 31.6 million.

This increase is mainly due to a $15.3 million increase in accrued liabilities which largely accrued taxes from first quarter income, an 18.2 million of deferred revenue due to a one-time prepayment of revenue received in our scoring segment.

Shareholders' equity totaled 867.6 million, which is down 48.8 million from the prior quarter.

This decline is a direct result of our share repurchase activity and our dividend, offset by current quarter income and the impact of a stronger British pound sterling on the translation of the London Bridge balance sheet.

Finally, total headcount at the end of the quarter was 2,929, compared with 3,058, at the end of the last quarter.

This decrease was primarily due to the divestiture of Phoenix, downsizing of London Bridge, offset by the acquisition of Braun Consulting.

Now turning to guidance.

With this in mind, we expect the second quarter of fiscal '05 revenue to be in the range of 198 to 203 million.

We believe we have a baseline forecast heading into the second quarter in the range of 184 million.

Therefore, in the second quarter we anticipate closing between 14 and 419 million in new revenue.

This should come mostly from traditional software licensing revenue including TRIAD and our EDM suite of products.

By segment, we expect the revenue guidance to break down as follows.

Strategy machines will represent 115 million.

Scoring will represent roughly 39 million.

Tools will represent approximately 13 million.

And Professional Services will provide 36 million.

We estimate that gross margins will be roughly 64 percent.

Further total expenditures are forecasted at 145 to 149 million, broken down as a percent of revenue as follows: cost of goods sold around 36 percent, research and development coming in around 10 percent, selling, general, and administrative, in the area of 27%. total amortization of 6.5 million for the quarter.

Capital expenditures are forecasted to remain in line with our prior expectations of between four and five million per quarter.

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

We expect that to be a quarterly expense of approximately 1.5 million.

For the second quarter we expect our earnings per share to be in the range of $0.40 to $0.42 without any effect from the impact of the convertible debenture.

In other words, on a basis similar to that used in many of your financial models.

This implies that pre-coco fully-diluted share count of 88 million shares and a net income range up to 27.3 to 28.6 million.

We expect our GAAP earnings per share that is including the impact from the dilution of the convertible shares, to be $0.37 to $0.39 per share which again suggest net income of between 27.3 and 28.6 million on a fully diluted share count of 77.9 million shares.

Also, we do expect the tax rate to remain at the previously guided rate of 38.5% going forward in the year.

Turning to guidance for fiscal 2005 in total, as we have previously guided, our revenue estimate for fiscal year '05 remains at 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 still be in the range of 120 to 125 million.

On the basis of calculating earnings per share prior to the EITF rule, this would guide to an implied EPS of $1.75 per share on a share count of 69.7 million shares.

As I mentioned, we will be approaching our Board for approval to offer amendment to the convertible bond holders.

We believe the outcome of our Board's action will cause our guided share count to change only nominally for the remainder of 2005.

In other words, even with the impact of dilution for approximately five months in fiscal 2005, we are maintaining our full-year guidance on a guided earnings per share at $1.75 per share.

Finally, on the subject of share counts, we are proceeding with the stock repurchase program that we announced in the third quarter of fiscal 2004.

During the first quarter of fiscal 2005, we repurchased nearly 3.3 million shares for $110 million, and when added to the previously purchased 1.2 million shares, a cost of total of 142.4 million, leaving 57.6 remaining for authorized repurchase activity.

We anticipate that we'll continue to repurchase stock from time to time turned under the currently-authorized program, which allows the company to acquire up to 200 million of our outstanding common stock, $200 million of our stock.

So, with that, I'll turn the call back over to the operator and we can begin the question-and-answer period.

Thank you.

At this time I would like to remind everyone in order to ask a question please press star then the number 1 on your telephone keypad.

Your first question comes from Brad Eichler.

Hey, guys.

Can you hear me okay?

Yes.

Ok.

Because the connection is really bad on this call.

Nice looking results.

Had a question first on your new scoring products the expansion global and marketing scores.

How are those things priced relative to, you know, a more traditional FICO score?

The marketing scores are probably priced similar to the pre score kind of contracts.

The expansion score, of course, is priced on a full-credit report basis, so when you buy a credit report for the under served marketplace, you're actually dealing with us as a credit bureau, if you will, and so you're actually buying the credit data, the report, the score, everything.

So there we get a bigger amount of revenue per transaction, and the World score is more like the typical FICO score.

There we're just getting money for the score itself.

When you look at the guidance for your scoring for the year how much do you anticipate to come from these new scores?

Yeah, we're assuming that most of the growth that we're projecting here comes from our traditional business and the real take-up is some significance, these other product will be more of a 2006 is, 2007 event.

What's key, though, Brad, that you heard today, is typically what gets the volume growing is when one of the big guys starts to embrace the scores.

And we're getting the big -- our bigger customers to embrace, you know, all of these things.

So when that happens, usually as their experience grows, others, you know, follow based on the good results they might get.

But that takes time, that takes experience, so most of the growth is just the good old growth that we've -- from our normal products, if you will, but this is sort of hedging that growth in a sense.

Okay, then on the IBM deal, you mentioned on the call some progress with that in the quarter but could you talk a little bit about the pipeline there and how that relationship is playing out?

Well, the area -- we got another deal in Japan with their help.

That's one of several they've helped us with in that part of the world.

We have -- so the relationship is continuing to grow.

We have -- I think what's interesting is most of the deals that we're working on with them I would classify, Brad, as pretty big deals, where they're, you know, the integrator, they're the prime, and they're trying to sell something pretty big.

And so the good news is I've got a pipeline sheet in front of me that's pretty long of a very large number of deals.

It's just going to take some time for those to come in, but when they do, they will be significant.

So likewise we're building a relationship in a similar vein.

I think I mentioned this last quarter, with Teradata, another large database-oriented, lots of big customers primarily outside of financial services in other segments that were not as strong.

And we think we have some great opportunities there on some very big analytic projects.

So we've laid the framework, we've gotten some early successes.

The pipeline is big.

Myself and others do meet with the IBM counterparts, the Teradata counterparts to discuss how we're working together.

So this is a program that's supported at the top of the company.

Okay.

Then the final question just a numbers question, on the Consumer, you mentioned that was up 30%, I believe.

What was the actual revenue for that in the quarter?

From a quarter perspective, it was pretty much flat from last quarter.

We added a big bump a couple quarters ago, with you it's -- think of it as basically flat.

Part of the problem is we just came out with some of these new products that have gotten some good traction, so we'll see what happens here in the next quarter.

So the FACT Act did not have sort of a Y2K.

Everybody worried and not much happened, would be my interpretation of the data that we've seen.

Okay.

Thanks, Tom.

Your next question comes from Tom Ernst.

Hi, it's [inaudible] for Tom Ernst.

Could I get a follow-up question on the IBM relationship?

I'm wondering if there was any impact to that relationship given IBM's recent acquisition of SRD.

I was wondering if you're still working with IBM on the gaming vertical and also what new verticals you may be targeting with IBM or other partners in general?

As far as I know it had no impact and our relationship is growing and we're working hard across Fair Isaac's product line with them.

So no impact that I'm aware of yet.

I don't anticipate any, either.

So --.

And then also, in terms of compensation for sales managers, and product changes you've made over the past year.

What has worked well and what hasn't worked well?

And are you planning on making any new changes?

The only change that we made was that we're moving more and more people to an incentive based sales system and we're doing -- we're both moving more Fair Isaac-experienced resources into those roles to incent them to perform in specific areas.

And we're hiring lots of new direct sales people into the organization.

So we're simply using proven strategies from the past and we're just growing more people in those roles.

So no new strategy, just more volume,simple as that.

With -- that's point 1.

Point two is the newer strategies that we're trying after the Braun acquisition, is we have many, many industry-focused consulting types, partner types, principal types, who work at C-levels of companies selling consulting-type projects and we've significantly increased the number of people who do that as a result of our acquisition of Braun.

So in working with IBM, in working with Teradata, in working with these other partners, they communicate through the consulting language system, if you will.

So I needed more distribution myself that -- or more people myself to communicate with that distribution channel.

So that's newer since the Braun acquisition a quarter and a half, two quarters ago.

And we'll see how well that works in the near future so that's what we've done that's new.

Just sort of double down.

We had about 125 people doing this quarter ago, we're now up to close to 200, and we're going to -- we believe the markets -- we're moving more people, we're hiring in other parts of the world and in other industries.

That's where these new resources are going.

So we think the market is ready for the products that we have and we're simply growing feet on the street.

That simple.

Thank you.

Your next question comes from Tony Wible.

A few questions.

I was wondering if you can first start on like a broad conversation of your conversion rates on the new bookings, and what are your expectations going forward should we see that kind of stable hold where it's at, or do we see it tick down depending on the deals you're targeting?

Yes.

The good news was, amazing as it appears, we actually, if you look at what we had last quarter on the revenue report we were right on, which is a lot of sales to be right on in.

And the most important one, of course, is the new revenue earn out of the bookings that we got.

So even though our plan was to get 120 million of bookings I think I said to the get to the 9.9 or whatever we got to the 9.9 or 9.8 out of the 115.

So we had a higher percent, you know, earn this quarter, but if you start looking at these numbers you're going to see how they vary, so I think we've established a baseline that we'll try to report against and we'll all learn as we go how predictable this data becomes, so we're off to a good start.

Great.

Second question has to do with the consumer business which it sounds like you're still optimistic on.

I'm just trying to gauge what your appetite might be to build that business, maybe say through acquisition.

Yeah.

It's a great question.

And right now this is all organic growth primarily driven by sort of product innovations.

We have some new products we just came out with.

We have some new products that we are going to integrate to My FICO, like Falcon ID and others, so we think right now the low hanging fruit is simply, you know, running more products through our existing infrastructure.

There's not that many other folks who are really focused in this space.

So at this point I'm assuming this is an organic growth area.

Okay.

And the last question has to do with the consolidation that's happened amongst the large credit card issuers.

Just curious if you've had any progress with the top three now if things have changed any within the last quarter with either of them taking any more interest in EDM or whatever?

Yeah.

In general anything that happened last year relative to consolidation we've already dealt with, it was already in the numbers in the '05 estimate so there's actually-- there's nothing new to report there.

So I think the major -- I think the major issue we see is when there's change, management of these new organizations ask lots of new questions, and we think that's really to our advantage.

So there's no change that's happening automatically because one company is moving to another.

We've already reflected all of that.

You know about all that.

There's nothing new.

However we have lots of interesting discussions going on with those companies who now have learned about other things they may not have been aware of.

So far I think it's going to help us, not hurt us.

Perfect.

Thanks a lot, guys.

Your next question comes from Phil Mickelson.

Hi, guys.

Just wondering with the integration of Braun Consulting and bringing Steve Braun on board, what have you learned so far in discussions with your consultants, that whole kind of army of people out there to find out kind of what are the opportunities within the verticals they serve, the farm area, I believe, consumer type products.

What have you learned, and what should we kind of expect going forward?

What we've learned is that consulting organizations try to solve, you know.

I remember I used to be at Accenture for 25 years so I sort of get this part.

They solve a problem for customers regardless of what product it takes to solve the problem, because their customers are more interested in just having you help them with something regardless of what their problem is even if we don't have a product for it.

So Steve and his folks, is out trying to figure out how to use analytics in our EDM software, to help solve any kind of analytic problem or business problem, not just the problems we've already solved with TRIAD and Falcon and the products we have.

So what you'll see is more projects, more Sun Microsystems, more telecommunication.

You're going to see us going to more companies trying to help them solve problems that we don't already have products for.

Now, the strategy behind that obviously, is by exposing us and by building more industry expertise in these new areas, we hopefully will begin creating more products over time as our customers help-- help turn us on to some new ways of solving problems.

So in the short term you'll see the PS revenue go up, you'll see more projects outside of Financial Services, because most of Steve's organization was outside of Financial Services, and you'll see the more interesting, innovative customer-focused projects going on, and then hopefully leads to something in the future.

You'll also see, I think, quite frankly, these channel partners, the IBMs of the world, probably go a little faster because we'll now be talking the same language that they do in a sense, so --.

And the one other question regarding the FICO scoring.

That prepayment that you had, I think it was a large prepayment for FICO scoring, is that something you've done in the past, I mean, is that some sort of new pricing methodology, are we going to see more of that?

Or kind of what was the thought process behind that deal?

No, we haven't had anything done to that scale before.

And it's not something that we do normally.

So it was unusual item.

Was there a reason why that you just wanted to do a transaction of that nature in kind of -- or was that something customer driven?

It's something they brought to us and we said yes.

Obviously that revenue, you know, is all deferred.

We don't get to recognize that revenue for I think if it goes over three years, right?

Three years.

So we -- we'll be recognizing that three years from now.

I guess I feel pretty confident that the customer will continue to do that since they, you know, gave us the money.

So I'd say we call that recurring revenue that we have up in our baseline.

Right?

So it's happened before, not to that scale, and it's not something we're particularly trying to do.

The customer just asked us, and we said fine.

Thank you.

Your next question comes from Alan Wigler [ph].

Great job, guys.

Just a clarification on the coco, which is probably an oxymoron,the $1.75 that you're going to earn this year, which you projected before the year started, you-- Chuck just said that we're going to continue to project $1.75.

What I'm asking is what amount, if any of, the coco is included in that new $1.75 or old $1.75?

The way to look at that, Alan, it's a great question, and it's very helpful that you're asking that.

We in doing that would suggest that assuming our management's recommendation we would have the coco shares in our weighted average share counts for about five of the 12 months this year.

And as a result of that and given the fact that we did a bit better in the first quarter than we had guided, and the fact that only a portion of the second quarter will be diluted, in effect, it's going to have only a nominal effect on the weighted average shares for the remainder of the year.

So for the last seven months, and if you're familiar with how that's calculated, the earnings per share is sort of a true up calculation to each operating period, and so the fact that they were in the first five months dilutes the share counts a little bit in the out period but given our performance above guidance and yet the dilution, we don't expect -- we're holding to that $1.75 on a GAAP basis.

So the way we had it calculated, the coco's were about $0.09 diluted on a GAAP basis.

It will not be -- assuming, again, this is all perspective--

Yeah.

--assuming our Board takes the action to amend the indenture will not have that large an impact.

The impact will be something -- it was $0.03 here in the first quarter-- Right.

--maybe a penny and a half in the second, penny and a half, $0.02, then basically it would be out of the calculation.

Right.

So that that $0.05, give or take, would be -- so it would have been $1.80 less 5--

Eh.

Yeah.

I mean, give or take.

So that's the way one should look at it?

Exactly.

Very simplistically.

And secondly, just in terms of looking at the scoring and what's going on at some of the bureaus, there's a lot of noise from Equifax, Experion, TransUnion, about having their own types of scores and I just wonder how that's playing out relative to the FACT Act and what kind of noise is there in that regard?

Well, I don't think there's anything new at all.

They have had other scores that they sell to the marketplace, you know, in competition with, you know, the scores that we have, and -- so there's nothing new there that I'm aware of.

Okay and--

Now, on the Fact Act, you know, they do -- I think they're now selling on the -- the Fact Act website, scores at least TransUnion and Experion sells scores different from FICO scores so I'm aware of that.

Equifax is working with us and they sell FICO scores.

So, but that's the consumer side of it, Alan, not the B2B side.

Right, and lastly, when you look at the private label world, and the First Data and GE doing a lot of card conversion and a lot of movement how does that affect you, Tom, in the short and long run, in terms of movements of these major players and retail private label?

Could you maybe expand on that?

Well, again, most of these players use our scores and continue to use the scores.

Most of those players use Falcon and TRIAD, and whether they merge or not continue to use Falcon and TRIAD.

And since most of those products are sold on a transaction basis, if they have twice the size portfolios, you know we're price protected, if you will.

An area where we see consolidation affecting us would be in the mailing campaigns of a couple big credit card companies get together, before they were both mailing to the same customer now they're not, so our -- in our budgets we have trending for the scoring related to marketing, going down for those customers that have merged.

So that could have a negative impact.

We've got that all built into our plans for '05.

So, you know, sometimes we win, sometimes we lose, but in general, you know, we feel pretty confident about what our projections are for '05, as it relates to this topic.

So --.

Okay.

Thank you very much.

Thank you.

Your next question comes from Ed McGuire.

Yes, good evening.

As you build out your international operations, could you talk a little bit about how you look to structure the organization?

Are you going to adopt a sort of more product focus or more vertically focused?

Pardon me, I'm getting over a cold here.

Yeah.

Great question.

We're going to maintain our product focus but the P&L's, the management in non-U.S. locations will also have direct responsibility for those P&L's.

So--so-- so we're going to put the incentive power in the hands of management located outside the United States in a sense and-- but it will still be Falcon, TRIAD, Capstone, Blaze, EDM, we're not -- the low hanging fruit for us Ed, is simply going to market in some of these places where we just haven't been very aggressive, to be quite frank.

We're not moving lots of people, hiring lots of people and going after that as you can see and some of the numbers of our non-U.S. practice is growing very, very fast, and that's been happening, as I like to say, sort of despite me.

And our customers have sort of proactive there more than we've been proactive.

So now we're going to try to attack the marketplace by putting not just more sales individuals in those locations but true management folks, product management folks, sales support, you know, customer support, delivery, analytics, et cetera.

So we're moving -- we're creating other locations around the world that are more than just a sales office, or a field office, which has been our sort of traditional approach.

We're creating full-blown operating units, you know, in new locations.

So that's -- it is definitely a different approach than what we've been doing here in the past.

And just moving on to, you know, London Bridge, you made some changes and let go of some of the business like Phoenix.

Has the dust really -- do you feel like the dust is finally settled and you can just really dig into driving a value out of the assets?

We're definitely digging.

We've made great progress.

We've hit some -- got some nice hits.

We've met the customers.

You know, we're trying to solve the issues that we're aware of that were there before us.

We're trying to take advantage of our new presence in these collections and recovery and mortgage spaces, so I'm pretty pleased with how well it's gone.

So we -- we're very close to the financial targets that we projected so that's good.

Most of the consolidation that I mentioned was primarily in, you know, in the G&A as you can tell from the numbers.

You know the sales and the product management and the key leads, you know, are still here.

It was sort of in the accounting and the overhead departments, sorry, Chuck that we -- that we try to do the consolidation rather quickly.

That was also true of Braun, which was a public company that had the related overhead a public company has.

So sort of the low hanging fruit I think we've taken out, now we're trying to increase sales of these product and we'll see what happens over the next couple of quarters.

So far so good.

All right.

Thanks a lot.

Your next question comes from Michael Nemeroff.

Couple quick questions.

Could you talk a little bit -- the software tools was pretty disappointing this quarter.

Could you talk a little bit more about that and also if I have this correct I'm trying to reconcile the guidance to, you know, your comments on the call and what you've said.

So as I see it you're basically saying that the strategy machine is going to go down yet you said the -- and the bookings number is going to go up and the conversion rate based on your answer to Tony's question is going to remain about the same.

But it seems as if your -- there's a disconnect between, you know, what you're planning on doing in new business and the bookings relative to the conversion rate.

Could you explain why the-- why the guidance is so low relative to that?

Well, I think part of the reason to that question is because of the variability of software.

Last quarter we hit it out of the park and this quarter was just average.

The approach I'm taking to EDM, or we're taking to EDM, is that we're -- we have a lot of really big deals, and, you know, when you get them, you're a hero, and when they get deferred you're not, and so I'm trying to factor into the guidance, you know, an average quarter in that regard, not a great quarter.

That's sort of point one.

And we're not, you know, in the last minute of some of these deals, sort of giving up on you know -- our pricing so I think that's the one area that's the least predictable.

It is growing, but it's not as predictable as the others, obviously, and so that's where some of the variability comes in our numbers quarter to quarter.

So why the guidance on the decline in the Strategy Machine segment?

I think we're just sort of being conservative.

Okay.

I mean, actually, this quarter -- this quarter we did better on the baseline than we did -- than we project.

What's interesting if you follow the Waterfall we're going to develop some interesting statistics on how we guess across all of these dimensions.

But I think we -- I think the only reason that that one may have been down a bit is there's some renewals in there that we have to make sure we get.

So the baseline does have renewals in it, so, you know, there is an -- we usually get all of our renewals but every now and then we don't, so that's -- the only risk in that line is renewals, so --.

And could you break out how much the renewals would be worth on the dollar terms for the quarter?

I don't know it off the top of my head, to be quite frank.

It's not significant.

Okay.

And then --.

The answer is, you know, we add good quarter.

We're -- I think we're well positioned, and I think we're going to stay calm about our guidance.

Get another quarter behind us.

And, you know, see if this trend of traction continues.

Okay.

Just one quick housekeeping: the sales headcount figure, Chuck?

I'm sorry, could you repeat that?

The sales headcount figure.

And could you also explain what the -- why the spike in deferreds this quarter?

Spike in deferreds was the prepayment that Tom referred to in his talk.

Yeah.

Let me get real specific on this 200.

Okay?

Because I -- there's two kinds of people in that 200.

Two categories of folks.

Consulting folks whose objective it is to sell so many million dollars worth of services a year, and sales folks whose objective it is to sell so many dollars worth of product per year.

They have bogies, they have metrics, they get measured on that performance, they make good money if they do well, they make lousy money if they do poorly.

If they do too poorly they get fired or they quit because they don't make any money.

So, we've just moved a lot more folks into that realm, and you know what happens when you do that, and we've done that for two reasons.

One is we're getting very confident about the market that we serve and the difference between some of this organic and nonorganic growth, simply putting some more feet on the street and our track record now of simply Eric's team and management has been in place for awhile, they're getting pretty good at signing bookings and getting folks to deliver those bookings, so we think we've got enough of an organization there to scale it up a bit.

It's really that simple.

On the consulting side, you know, with Steve Braun's organization now, we have consultants who get up in the morning and write lots of proposals and knock on doors and figure out how to convince big companies to do interesting projects.

So, that is new in the last couple quarters and hopefully-- and of that 200, there's about-- I'm going to be round, there's about 30, 30 to 40, that I would put in the consulting side, and you know 160 on the product side.

That'd be-- so call it 35, and you know, the difference product.

Okay.

Thanks guys.

So by 35 that's folks who you and I would like to see go out to a C-level customer and explain how Fair Isaac can do something for them using their analytic prowess.

So, we've got 35 people who running around who do that now independent of-- you want to buy TRIAD, you want to buy Falcon, you want to buy, you know, all the products that we have.

Thanks.

Your next question comes from Bruce Simpson.

Good evening.

Hello.

I was wondering if you could back out quarter-over-quarter acquired revenue or the acquired growth?

Ummm, you know it's sort of a-- I can't do that real time here.

I think what was-- the salient statistic to me this quarter was you know, scoring and account management, and fraud, which if you go back the last four or five quarters, have had I think relatively slow organic growth, because they're big.

They're our biggest units.

We have you know, the most market share there.

It's really, really hard to grow those.

The good news is, what I'm trying to say is, we've got, a very, very large organic lift in those three areas.

And so there's other organic stuff that may have gone backwards or an acquisition that may have helped overall growth.

The key fact this quarter that's new, that's exciting, you know, that's interesting, is that fact.

Now do you guys-- you guys have the calculation here while I was stalling while you guys were figuring it out?

Yeah our acquired revenues in the quarter were 20.6 million against 17.5 million in Q4.

So that gives you an organic growth rate about three point-- about 3.4 percent.

Okay and Chuck do you feel that is kind of equilibrium levels for the firm right now or is that somehow ---

No, no, no, no.

--[inaudible] because of the acquisition-- because of the recent merger?

You're missing the point I'm trying to make.

I mean, if we would have had a couple more Blade sales.

You can sort of picture, we went down three or $4 million from Q4 in just that one area.

So, yeah that was an organic backwards, in a sense, from Q4.

A good point is our Legacy products had a great, recurring revenue, you know organic growth revenue -- I hope that continues.

Those three products in one quarter, grew organically, almost 10 percent.

You know, as a group, they haven't been doing anything close to-- as a group, you know, nothing quite like 10 percent, quarter-on-quarter growth.

So.

So.

We're well aware of your-- I like the revenue no matter whether I acquire or I organic it, so you know it sure is nice to have lots of organic growth too so this was a good quarter showing some traction in that area.

Those three products you were talking about, when you say 10 percent Tom, you're talking about sequential from September to December?

Yeah.

And Chuck, do you have that calculation for that group on a year-over-year basis?

I don't give-- I don't quite give you all that detail.

Okay.

I don't want my competitors to know exactly what that means.

But I- I- I- I- I. So--

Okay.

My follow-up question has--

You can sort of get to it, pricing, so forth.

I'm sorry, Bruce.

Go ahead.

My follow-up question has to do with headcounts and integration of Braun and London Bridge.

Can you either quantify synergies, cost savings from there?

Or maybe give us some sense of where we are, you know, a baseball analogy.

Are we in the top of the third, or so forth, as the impact of cost savings, I'm not talking operational or integration, but the financial impact of integrating those two properties?

I think the specific merger-related cost activities are done.

Now just the normal Fair Isaac corporate-wide desire to be, you know, as lean as possible, would take effect..

So, my comment about seeing our percentages, our margin percentages grow here over the next couple of quarters has more to do with productivity of Fair Isaac in general, not having anything to do with those two in particular.

And and [voices speaking at once] how do you square that with there was something like a dozen data centers and you wanted to get that down--

Yeah, yeah, yeah, yeah, exactly.

That is the normal--

Yeah.

--sort of thing Tom's referring to, just in strategy and looking at the data server issue that's ongoing.

That's ongoing.

I guess I'm saying ongoing in a data center consolidation increases the productivity in our Professional Services, doing a better job of solving that problem.

But our normal activity is selling.

You'd almost think we would try to work on that every day.

I think, and to be fair, we have, independent of London Bridge or Braun, we have lots of products we're doubting their profitability all the time.

And, the ones that are profitable we try to make more profitable.

So, I think we're going to see some increase in productivity simply from normal operations, is why I made that comment about you're going to see our margins go up.

And Bruce, to your metaphor, I would say that's still at the first to third inning.

We're nowhere near being done with that stuff.

And I would say the fact-- you know the fact our growth this quarter was in some of our most profitable lines, you know, gives us some opportunity too.

So.

Anyway.

Okay.

Thank you.

Thank you.

And that's all the time we have for questions.

Mr. Grudnowski, I'd like to turn the call over back to you for closing remarks.

Thank you very much, and we'll see you soon.

Thank you very much for your time.

Bye now.