Fair Isaac Corp (FICO) 2005 Q3 法說會逐字稿

Good afternoon and welcome to the Fair Isaac Corporation's third 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 is being recorded.

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

I would now like to turn the call over to JD Bergquist , Fair Isaac's Director of Investor Relations.

Thank you.

Ma'am, please go ahead with your call.

Thank you, Tina and good afternoon, everyone.

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

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

You may access the news release on our investor relations page on our website www.fairisaac.com.

A replay of this call will be available on our website approximately 2 hours after the completion of this call through August 24.

I would like to remind everyone that, except for historical information, the statements made on this call should be considered forward-looking 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 our 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 and/or implied by these 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 the annual report on Form 10-K for fiscal 2004 and quarterly report on Form 10-Q for the period ended March 31, 2005.

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

On the call today are Tom Grudnowski, Chief Executive Officer and Chuck Osborne, Chief Financial Officer, who will review quarterly results, both operations and financials.

In addition, we'll provide updates to our fourth quarter and annual guidance.

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

Tom?

Thank you, JD and welcome everyone to our third quarter earnings call.

As you can see by our new release, we had a great quarter.

We had record revenues, record earnings and record bookings.

These record numbers include the following: Revenue of approximately 204 million, net income of 36.6 million, diluted EPS of $0.53, and bookings of 143.3 million.

The EPS was about $0.09 higher than analysts' consensus and our guidance.

These earnings did include a tax adjustment and an adjustment to tax rate, which Chuck will talk about later in the call.

However, without the one-time adjustments, EPS would have been $0.47, still exceeding our guidance by $0.03.

Interestingly, as a result of our expanded sales strategy, we accomplished a new goal this quarter.

We issued over 1,000 new proposals to customers and this led of course to the bookings of 143.3 million.

Interestingly, we grew non-US bookings by 50% over last quarter alone to approximately 45 million.

We had almost doubled the number of very large deals that we did year ago.

We believe all of these are good indicators that companies are seeing the unique value proposition we bring in the marketplace, and our pre-sales efforts are beginning to pay off and we are gaining traction.

Our bookings were distributed well across all of our major product segments as well which is also a very good sign for us.

In the summary, those numbers represent for this fiscal year, a 43% increase in EPS over last year, 18% increase in revenue over last year, and 82% increase in bookings over Q3 last year.

As a result of our stock performance momentum, we are raising EPS guidance for our last quarter of the year, our fourth quarter of fiscal '05 to $1.83.

We are very pleased with organic growth which is strongest and our most profitable market units, and we expect this trend to continue for the remainder of this fiscal year and into next fiscal year as well.

This is probably the keynote of the entire presentation here.

The market units that led to us our excess again this quarter, just like last, were our major ones and our most profitable ones.

They include scoring, flood, consumer, collections, account management and our EDM Blaze products.

We had record revenues in all of these units.

Interestingly, the combined organic growth over last year Q3 of these particular units was an increase of over 24% from last year, which is just outstanding.

These six areas now represent 68% of our revenue this quarter.

Let me -- so, that's for sure the highlight.

Let me quickly go through each of the major areas just briefly here.

First of all, I'll mention the scoring solutions.

We had another record quarter, as I mentioned, approximately 42 million.

This was mainly due to strong increases in creative activities, strong PreScore sales and our continued and growing success of our three new scoring products expansion qualifying global cycle scores.

We believe that the use of the PreScore product for marketing originations activity will remain strong throughout this fiscal year and by the end of this fiscal year, we anticipate the growth in this unit to be over 10%, which is significantly higher than the anticipated at the beginning of the fiscal year.

On the consumer side of scoring, rising awareness of identity fast and general consumer knowledge of the FICO scores.

In fact, we highlighted in consumer reports last quarter which I thought was very interesting.

Our revenue here increased 23% quarter-over-quarter.

So, another outstanding quarter during the consumer side of myFICO.com.

The market attributes this growth to heavily rising number of ScoreWatch subscribers etcetera, etcetera.

As you may recall, as ScoreWatch grows, so does our recurring revenue in this particular unit and we -- which is also excellent news for the future and we are anticipating several new product launches throughout this year and next.

So, this continues to be a very fast growing area for us.

In Fraud, our Falcon product lines had another great quarter with strong revenues and very strong bookings.

In fact, our Falcon Fraud Manager and Fraud Predictor products led the charge with volume increases in several of our larger clients, on the Fraud Manager side and key wins on the Fraud Predictor side.

In addition with the completion of a new customer install, Fair Isaac is now positioned to enter new Fraud market in the telecom area called revenue and network assurance.

This was some pioneering work that has been done over the last year.

We will leverage our market position and firm commitment to development in this area and we anticipate this will continue to grow as well.

We are now exceeding about 25% growth in this area when we were planning about 16 organic at the beginning of this year.

So, again, Frauds has been very, very good to us.

In account management, we had another great quarter selling TRIAD in 15 different geographies.

Our processor trade relationship also remains strong.

Our organic growth here exceeds 10% which we have been planning for the fiscal year.

Our new CMT version of TRIAD is obviously ticking up and we see the momentum increasing here throughout this year and next.

Next, another home run and EDM software and services with Blaze Advisor, our Model Builder.

Our Blaze product line continues to gain momentum as the industry leader of decision engines.

Our Model Builder product continues to have strong customer support.

Our revenue this quarter was 67% higher than year ago and we grew at 23% over the last quarter alone.

With this (indiscernible) that we pose here to date and largest ever backlog of opportunities, we believe the growth rate for this fiscal year for this unit will now approach 30%.

This quarter, we had major wins at Del, Tyco, British Telecom, Capital One, GE and many others.

Our tractions on non-financial services customers remains strong and is helping our diversification strategy.

We are gaining traction with our strategy-winning customers who purchase Blaze as their enterprise decision engine and then also purchase other applications from us that now use Blaze.

Our new client Dell for example, was the best example this quarter, where they standardized and Blaze (Ph) is their universal decision engine, as they call it and also bought customized versions of Fraud and Credit products that utilize Blaze.

We see this as key to our strategic growth and execution in this area has been outstanding.

Also we have now passed one-year anniversary of the acquisition of London Bridge.

As we have previously discussed, this acquisition provided us with a great products that needed analytic decisioning capabilities in the collections area and also helped establish a solid platform for more international expansion.

Through the hard work of our R&D efforts, the London Bridge products have all been greatly improved and have all seen considerable market acceptance since the acquisition.

We have another record quarter again in this area.

And our product revenue in this area has grown almost 60% since the acquisition.

In addition, in the formal London Bridge product called BridgeLink, which gave rise to the Fair Isaac ScoreNet Service product, and I recall in mentioning this last quarter, this year it continues to grow at about 60%.

We now have 58 different databases from 39 different data vendors and 1180 service providers all connected to network that we call ScoreNet.

The objective of this offering is to provide a market for data service suppliers to gain access to the 10s of 1000s of customers that use Fair Isaac analytics today.

So, these two areas of the investment is definitely playing off.

As we discussed last quarter, we continue to seek and evaluate new strategies with respect to our marketing services and delivery market units.

Both these units have had a flat revenue growth this year in this quarter.

We made progress in the seeking and evaluating new partners that will give us all critical mass to help us, be more effective in these markets.

With these two market units, we need partners who are the analytic competitors who provide them a competitive advantage and their scale will provide us more success.

I suspect we will be making specific announcements about these units, on our strategies on these units this quarter.

Now briefly for Q4 and fiscal '05 guidance, a little bit of it remains.

Given the strong performance this quarter, we raised our '05 EPS guidance, as I said to $1.83, our revenue in Q4 will be around 207 million and EPS to $0.49.

Our revenue in Q4 will be little under the plan I talked about last quarter.

Because Fleet and Chase has rolled up our database services faster than we have planned to begin the year.

And so, there is about $3.5 million decrease in revenue from third quarter because of the final roll off of those customers.

We have been talking about this for a year and half ago.

We are finally done.

And those numbers will end up at about 802 million, which is a 14% year-over-year revenue growth, and $1.83, which is a 40% year-over-year EPS growth for fiscal year '05.

This is by far our best performance of over a year.

As for fiscal 2006, we are in the middle of our planning process as you probably know and we will provide further insight at the time of our fourth quarter call as usual.

I would say that given our strong momentum in all of our key product areas as I mentioned the current street projections for '06 are more conservative.

But I suspect we will be, on next quarter, as we currently have sort of net 9% revenue growth in '06 and 13% earnings growth in '06.

We will definitely be there.

Well, stay tuned for next quarter, we think we'll have all the details of '06.

In conclusion all our core products perform well again this quarter.

This decision at this market is growing and as it's leader we are winning more and more in the marketplace.

We are executing our growth strategies, we remain focused on global expansion, we see increased sales of our existing product lines and our confidence that our consulting service will continue to position us better in the executive stream.

So, with that quick analysis I'll turn over to Chuck for the financial details.

Okay, thanks Tom and good afternoon everyone.

As in prior quarters, I'm going to take a few minutes to review our third quarter results.

And then talk a bit about our guidance for next quarter's performance.

We reported revenue for the third quarter of fiscal '05 of 203.8 million, a 4% increase over the prior quarter and 18% increase over the same quarter the prior year and 1.2 million under our guidance of 2005.

The Year-to-date revenue is 595.4 million, up 15% increase over the prior year-to-date revenue or 515.8.

Equally important, we reported a 143.3 million in bookings for the second quarter, a 5% increase over last quarter and 17% better than we had indicated in last quarter's waterfall report.

The revenue contribution by industry segment is outlined as follows: Strategy Machines contribute a 115.1 million or 57% of total revenue against a 111.3 million or 57% of revenue for prior quarter.

Scoring contributed 40.7 million or 20% of total revenue for the quarter against 39.3 million or 20% of total revenue in the prior quarter.

Professional services contributed 32.2 million or 16% of total revenue against 33.6 million or 17% in the prior quarter.

And finally, Analytic Software Tools contributed 14.8 million or 7% of total revenue versus 11.8 million or 6% of revenues in the prior quarter.

Our third quarter revenue by vertical markets is as follows, 66% of our revenue came from the financial industry, 9% from the insurance industry, 6% from telecom, 8% from retail, and roughly an 11% from other verticals.

In addition, our transactional or recurring revenue represented approximately 75% of our total revenues as compared to 76% in our prior quarter.

We attribute the decline to the growing contribution of non-recurring revenue drive from tools and from professional services.

Finally international revenue represented 26% of our total revenues, which is consistent with last quarter.

Looking at expenses, total operating expense prior to amortization of intangibles for third quarter was 148.6 million, driving an operating margin equal to 27.1%.

This was a $5.8 million increase from the prior quarter's operating expenses of 142.9 million.

Break down of these expenses represented as a percentage of the quarter's revenue was as follows.

Cost of revenue was approximately 34%, down 2% from last quarter, primarily as result of staffing levels.

Our research and development costs were 10% compared to 9% last quarter, and will return to normalized R&D expense level for us.

Finally, selling, general and administrative cost was 29% against 28% in the prior quarter primarily as a result of increase in both recruiting and compensation-related costs.

In terms of other expense and income, other income net was 161,000 for the quarter and that includes interest expense from our convertible notes offset by interest income and a gain from foreign exchange translations, revaluations and hedging activity.

I think as all of you are aware, we adopted the provision of Emerging Issues Task Force 04-8 as of December 31,2004.

This accounting rule change mandates the addition of shares issueable from our $400 million contingent convertible bonds to our fully diluted share account.

As a result of the exchange offer completed on March 31, '05, we now only add the converged shares from the nominal bonds, which did not accept our exchange offer, and that's less than one-tenth of a percent.

So our fully diluted share account for the quarter, however converted shares do impact the prior quarter's fully diluted share account and will also impact the year-to-date fully diluted share account when provided at year-end.

As we have previously stated, you would also add back a proportionate amount of after-tax interest expense from the bond to net income when performing this calculation.

Looking at our taxes, as we discussed last quarter, we continue to study our tax position, the result of which allowed us to reduce the current quarter tax expense by 4.4 million.

This tax adjustment was based on identified additional federal deductions related to prior year's tax returns.

We have revised our 2005 and forward estimated tax rate down from 38.5% to 37%.

In addition, we believe we have additional future tax (indiscernible) planning opportunities especially on international side, which will further influence our tax rate.

Turning to our balance sheet, cash, and investments as of June 30, we're approximately 310.3 million, which is down from the 368.3 million reported as of March 31, 05.

This decrease is mostly due to our stock buyback activity.

Capital spending and the payment of our dividend.

These outflows were offset by the inflow of cash from our normal operating activities, as well as from the issuance of common stock and the employee stock option and purchase plan.

Net account receivables as of June 30, '05 totaled 164 million, down from the March 31, balance of 166 million.

Our Day Sales Outstanding was down from 76 days at the end of the second quarter to 73 days at the end of the third quarter.

We have focused on this component of working capital and continue to make progress in getting our DSO to our decided target of our lower than 70 days.

Our property and equipment balance is at 52 million against 54 million last quarter.

With regard to intangibles, net goodwill and intangibles totaled 809.1 million, which is up from the 807 million reported as of March 31.

The 809 million was made up of 689 million of goodwill, and 120 million of intangibles, and the 1.9 million increase was mostly attributable to the final allocation of the purchase price related to London Bridge acquisition.

Total current liabilities were 134 million, which is down from the 161.5 million reported last quarter.

This decrease is mainly related to a reduction in deferred revenue and the timing of our third quarter corporate tax gains.

Finally, shareholders' equity to 842.3 million, down 54 million from 896 million as of the prior quarter end.

This decrease is principally due the repurchase of Company's stock and the issuance of common stock under employ option and purchase plans.

During the quarter, under the authorized $250 million stock repurchase program, we purchased slightly more than 3 million shares of outstanding common stock at an average price of 34.71 for a total of 104.8 million.

We have approximately $132 million remaining under the 250 million authorization approved by the Board of Directors in February of this year.

Looking at headcount, our total headcount at the end of the quarter was 2804 compared with 2869 at the end of the last quarter.

This decrease of 65 positions was mainly due to work force reductions and normal attrition, partially offset by new hire activity.

Turning now to our fourth quarter guidance, we expect fourth quarter revenue of 207 million, which translates into full year revenue of 802 million.

From a baseline revenue analysis, our waterfall revenue report that is attached to the release, we believe we have a baseline forecast heading into the fourth quarter of approximately 184 million.

Therefore, we anticipate closing around 23 million in new revenues and 130 million in new bookings.

Of course, this new revenue will need to come mostly from traditional license revenue and from professional services.

By segment, we expect the 207 million of fourth quarter to break down as follows.

Strategy Machine, 116 million;

Scoring, 41 million;

Tools, 15 million; and Professional Services, about 35 million.

Total operating expenses, excluding the amortization of intangibles, are forecasted to be roughly 147 million broken down as follows.

Cost of goods sold of around 34%, R&D coming in at 10%, selling general and administrative nearly at 28% and amortization of intangibles of approximately 3%.

Capital spending is forecast to remain in line with our prior expectations of approximately 5 million per quarter.

Depreciation will continue in the range of 6 million per quarter.

Other income net is principally interest expense from our outstanding notes, offset by interest income from our investment portfolio.

In the fourth quarter, we expect other expense to equal approximately 550,000 from the netting of interest income, interest expense and foreign exchange hedging activity.

In the fourth quarter, we expect our fully diluted earnings per share to be approximately $0.49 per fully diluted share, with earnings per fully diluted share for the fiscal year equal to $1.83.

The annual fully diluted EPS is calculated as net income plus a ratable portion of after-tax interest expense from the Coco of 135 million, divided by a fully diluted share count including a ratable portion of the contingent convertible shares of roughly 73.7 million shares.

As Tom mentioned earlier, we are presently in the middle of our fiscal '06 planning process.

We are working with the operating units to finalize these plans.

We'll then review and make a final presentation to our Board of Directors later on in August.

Once reviewed and approved by the Board, we'll communicate our first quarter and fiscal 2006 guidance on our fourth quarter earnings call.

So, with that, I will turn the call over to the operator and we can begin the question and answer session.

Thank you.

[OPERATOR INSTRUCTIONS].

Mike (ph) (indiscernible).

I am looking at the waterfall schedule, and part of the shortfall this quarter on the revenues and also the shortfall that you are expecting for next quarter stems from a reduction in contract -- it appears from contract that you signed in previous quarters that you now expect much -- to receive much less from in future quarters.

Can you kind of give us an explanation as to why that is?

Yes.

Mike, as you look at the -- you are right, we have taken some, when we evaluated some of these contracts, we had to stretch out some of the performance periods we also had in implementations since they are -- these of course are always in any cell and this is an estimate as of the time we do it.

And we have ended up adjusting our estimate of how that will work going forward.

And if you are to compare for instance the chart that we sent out this quarter with the one from last quarter, you will see that the adjustments, the larger adjustments are in our most recent bookings because this is how we -- we just had a chance to revise some of those direct to the historical or even the pre '05, but those adjustments tend to be fairly small and actually go both ways.

In some comes, we have added, in some cases, we have reduced them.

One thing I would always point out about this chart is that, for many of our contracts, it require that we estimate volumes.

And in other cases, we must estimate the implementation time and speed with which it will -- the software will be coming to place and lastly begin to recognize our revenue.

So, you are right, we do fine-tune this over time.

Our revenue group is always looking to refine each number that sits on this -- number that sits in each cell on this analysis.

Because it seems to me that you keep hitting the number that you need to make to get to the -- the number that you say you are going to hit is in terms of yields for the quarter, but you keep going back and restating what you think you are going to get from the previous contracts?

Now if you look in there it's relatively minor, an adjustment.

But it is the result of taking a look at how long it takes to implement and then once you start to see some volumes you can refine your forward estimates, you are talking with the customer, it is legally the bookings that come later in the period.

And then the number one thing that happens that's a real thing is -- remember so much of our recurring revenue is based on implementing something, implementing TRIAD, implementing Falcon, implementing MarketSmart, implementing whatever.

And sometime -- we don't have full control of those.

Clients obviously weren't involved in those processes and then most of them they are actually running the project.

So, the primary reason that something would slip would be because we haven't actually finished the implementation.

That's the primary reason.

And Tom, you had mentioned that excluding the $0.09 benefit from the lower tax this quarter, you would have reported $0.47.

What tax rate were you assuming because I thought last quarter you had told us to expect the 38% tax rate and I guess Chuck, what tax rate are you looking for to get to the $0.49 number for next quarter?

We have a combination of two things that impact this quarter.

We have again adjusted -- we have some one-time adjustment to a little over 4 million related to, as we said, deductions that are now available for -- on prior-period returns and we completed studies with the help of really two accounting firms to justify these and help us in the preparation of refund claims.

And then, we have also adjusted our rate going forward.

And then we have adjusted our rate for this year to 37% and for the remainder of '05 and as you saw, you heard at the end of my discussion on tax, we think there is more opportunity there that, as a result of frankly some moves on the international side, jurisdictional how we actually set up our revenue offshore in the case of some of our acquisitions we have acquired net operating losses that as we begin to show profit and these jurisdictions will begin to take advantage of.

As you know those NOLs can't be recognized to demonstrate that you are going to be profitable.

And we think all of those things argue for a lower current rate as well.

So, the original guidance was at 38.5%.

We shoot that up here in this quarter to 37% and for the remainder of the year and we think there is some more opportunity for us in that respect.

As one guide for this, if you compare us to some other companies, you would have more in international revenues than we do.

I think, you will see a difference in tax rate and as we move more of our revenue outside of the US jurisdictions we expect to improve on that rate as well.

Tom Ernst, Deutsche Bank Securities.

Tom, as you look at the revenue performance over the last couple of years in the last several quarters, it seems like this quarter to me, this is the way I calculate, you are getting back to that high single-digit organic growth rate depending on what assumptions you use after over the last couple of years having made several acquisitions that the kind of during the integration time frame took the growth rates down much lower than that.

Do you think in hindsight here that acquisition integration slowed you down.

It seems like the product store has been on the mark, really hasn't changed too much.

And now you are talking about, I think the 9% growth next year is conservative.

Do you think there is more spark to be (indiscernible)?

Where do you really get that confidence?

The confidence relate -- no, I don't think the acquisition has slowed us down.

Maybe in your eyes it did.

But these are assets that I believe are valuable if we are going to be a generalized decisioning Company, so I think it's worth the hard work.

Number two, the fact that all of our high profit legacy and leading market position type products are really organically growing well, that was my 24% comment there early in my remarks.

That to me the key indicator that -- we have hit good momentum, we have got good growth in our major markets and that we will be able to grow our revenue figure next year.

Remember, the marketing services went down $30 million last year.

So, we have grown replacing that $30 million with new revenue, new recurring revenue, new on-time revenue.

So, (indiscernible) a year and half now, I think we now said a year and half ago.

So, next year we won't have that impact and so, we have been going at 10% organically already for a last couple of quarters as you know.

So, the answer is because the strength of those six areas, I feel very confident that our organic growth engine is moving along very, very well and in fact, the tight strategy that we are working on increasing sales in Europe, pretty more feet on the street in general, focusing on upgrading those products where competitors are coming at as but yet we have a big lead in our -- aiming in our lead.

So, that focus is, I think starting to pay some dividends.

The fact that our backlog is bigger than ever.

The proposal activity is bigger than ever also gives me confidence that our organic momentum is definitely improving.

So, --.

Thomas, nice of you breaking out that 68% in the six areas that's helpful.

Has the been fairly consistent across the six areas over the last couple of years or is that accelerating as well recently?

No, that is accelerating the last couple of quarters.

I identify this trend, I think actually in the first quarter or the second quarter or the last quarter I talked about it a lot.

Basically, all I talk about in this quarter so, I talked about it again.

So, let me sort of summary here quickly, Fraud is going at 25%, that fashionably we bought a count management one of our biggest areas is growing at over 10%, Scoring is growing over 10%, that hasn't had happened in years.

EDM is growing at 60% which is fabulous for us because that's all new customers that many, many new customers that didn't use to know about Fair Isaac, that's DELL, that's BT, that's customers has don't know who Fair Isaac is that we are now going to expose our analytics too.

Collections, up 60% that's since we bought them, that's all sales that renew and improved since we got that asset.

So, consumer, going over 25% as well.

So, we have got a lot of plus 20s that are continuing to grow strong in the last two quarters that we anticipate will continue to grow strong, that we are hanging our hat on.

Now if you just get the other 32% of revenue, the difference (ph) between 68 and 100.

We can go fix it at other 32 a little bit, things will really be hopping.

So, we are spending a lot of time and trying to make the other 32 kick in, while we are trying to maintain the good organic growth of these strategic areas that the work for the slower growth areas would be along the kind of numbers I just talked about.

So, and these are areas that we have been dominant in an in sense for years.

So, its furthering the Fraud is a huge areas, consumers are huge areas.

These are all areas that our market opportunities way bigger than Fair Isaac today.

If you look at some of the other software companies that have been reporting in the EDM area, you will see this area is taking off, we are growing, I think faster than the others but there is see a lot of growth in these particular segment.

So, we anticipate that's going to continue.

So?

We are very bullish about those areas.

Brad Eichler, Stephens Inc

I guess the first is a broader question, and that I am having a very hard time reconciling, and it looks you have good bookings you get lot of positive momentum in the various business units that you have taken down the numbers essentially for the fourth quarter.

Can you help to be a little bit more specific exactly what's going on there please?

I think I am just seeing a little bit more conservative, I think, shooting for targets of 40% EPS and 14% revenue for a year are pretty.

So, we just had a great quarter, so, I am upping revenue a little bit from where we just ended.

So, I think this is Brad, it like to be revenue for a change?

We do great and you guys get disappointed about that one.

So, that's a little about that.

We know the loss of the business in marketing services.

Yes, in market services is going backwards a bit in the fourth quarter.

So, you have got that 3.5 million or so, into account so, it's just -- it's that.

Looking at the revisions to the bookings it seems like consulting has been a little bit like the past couple of quarters.

Are there any specific issues there that are causing implementations to stretch out a little bit?

No, something has been a little bit lighter than I would have liked, but I think it's more of -- what we are trying to do is focus more of our resources on the little bit bigger deals, and we're probably losing a little productivity, you know, a million here, a million there as a result of that focus, but that will pay off in the long term.

We still have, again, on the (indiscernible).

You know, we have capacity to generate significantly more revenue than that, and we are maintaining that capacity in anticipation of continued increases in our services.

You know, a fascinating statistics in this professional services number is, for as much revenue as we are growing in the Blaze EDM area, the amount of services that we sell for a dollar of license revenue is ridiculously low.

I think it's like $0.20, $0.25 on the dollar, which you know any normal exit company, you know, does a dollar on a dollar.

So, we think as we integrate the consulting resources that we have acquired here recently, and as we focus those resources on the tremendous growth opportunity at EDM, I think that number will start to grow a little bit faster than it has in last couple of quarters where it's been little flat.

But it's nothing to be alarmed about.

Okay, and then one final question on the insurance business and marketing, and others have been over the past couple of quarters, what should we expect over the next couple of quarters in terms of seeing some of the -- a turnaround in those businesses?

Right, I think the strategy is to -- I'm still projecting relatively flat revenue in those two for Q4.

So, I'm not expecting anything great in a sense in my assumptions.

What I'm assuming is that we are in discussions with some other companies about how we could work together better in those marketplaces that those, particularly in health care and in marketing services in general, particularly in financial services, and we are simply working on some ideas and some new partnerships that we hope will provide us with some more critical mass that that allows us to compete more aggressively.

As you know, particularly in marketing services and financial services, that's become a very commodity-oriented business.

And so, in a sense that commodity-oriented dimension of that business is going down for us, if it was flat.

The scoring aspect of marketing is going up pretty slower in our activities in Blaze around marketing opportunity.

So, when we sell our best stuffs in marketing areas, you know, we get a very good response, and we're trying to sell commodity data base services, we don't do as well.

So, we are trying to find some partners that we can work with to help in that regard.

So, you'll be hearing something this quarter at what those partnerships might entail.

Thank you.

Ed Maguire with Merrill Lynch.

First a quick question.

Just looking at the deferred revenue, it's first time in a while that deferred revenues are down.

Could you provide a little color around what was behind that?

Well, that happens because, of course, we recognize the revenue, it comes forward.

Now, we had some pre-payments for scoring, and we even talked about those in prior periods where people have actually given us cash ahead of time, because of the large deal, and of course, we work that business off, and the deferred revenue accounts comes down.

I mean, that would be the reason for the adjustment.

It's just that our recognitions exceed any new additions to that account during the period.

Okay.

Looking at your international revenues, it looks like you are starting to see some traction there.

Could you provide a bit more color on which products or solutions in geographies you are starting to see some progress?

It's Fraud, it's Falcon, it's account management, Triad.

It's Blaze, Capstone.

So it's our -- yes, we had some liquid credit sales for the first time overseas.

So we are -- it's primarily, collections has been dynamite.

So it's those main six areas that I talked about in the beginning, and remember our strategy this year was to focus, you know, we haven't done competing aggressively in the non-US markets.

As I have said before, our customers, our big banking customers pull this along into those countries, and we are about 60 different countries now at least we have products in such countries, but we don't have a marketing and sales presence in 60 countries obviously.

So, by working with new partners like IBM and Hewlett Packard and others who have, you know, people everywhere by increasing our sales presence including the direct sales presence, I think we have about twice as many people in direct sales in Europe that we did last year at this time.

So, we are simply selling the stuff we have in markets where we haven't been competing very aggressively and it's starting to show, in fact we had 13 tried sales in 13 different countries last quarter is indicative of that, that's one of our better quarters in a long time.

You know, we're not going to have more (indiscernible) for close of our business, it's sort of block and tackle.

And just kind of a more general question around expenses, your operating margins have kind of got hit since London Bridge (ph), I mean do you feel that you've reached an area, where you can eek out a couple of 100 basis points over the next few quarters or is there an opportunity to get back to those pre-merger levels over time?

You know, the fact that marketing services and insurance are a little bit lower without flaying off that expense load yet tends to delude our ratios a bit and that impact of loan can affect you as much as a couple of percentage of points.

Well, we significantly increased operating margins since year ago.

So, annually, you saw our headcount was down a little bit, little bit, so the productivity of our force continues to be outstanding and as our main stay products is that 68% of revenue related products continues to grow and increases our productivity because these are the ones that we have had, you know, we've made major investments in over the many, many years.

So, you get nice profitability when those go up.

Right, and the EDM sales, are you finding that also helping the gross margins at least?

Absolutely, absolutely.

And, you know, the pipeline for opportunities EDM, you know, are at an all-time high and if you look at what's being public, the term EDM is now being used everywhere, you know, we started using that about a year and half ago.

That has now become an accepted, you see lots of people publishing around that term.

They are set off by that term.

There is industry analysts following it, and there is a lot going on in this decision engine space that we're the leader in and I think is a huge growing marketplace for us.

So, the fact that that number is going up is good for the overall decision in business, which was a major player.

Okay.

Thanks a lot.

Thank you.

Your next question comes from Tony Wible with Citigroup.

Good afternoon.

Couple of questions.

Where do you see the expenses eventually panning out in the Company, especially in the R&D line, you'd indicated this level was kind of a normalized level.

Do you anticipate us sustaining this level, you know, the percentage of revenues to go forward or do you think we will gain leverage you?

The focus is on R&D and I think we have decided that the normalized, we are moving back towards a more normalized level of R&D, and in our space that's necessary to sustain our opportunity for new products and development at the 10% level.

But we've stated that our goal is to bring our operating margins before amortization and intangibles up to 30%.

And I think we're making progress towards that.

I think as it was pointed out by one of the questions given when some of our -- some of the denominator moves on us, things like marketing services, it de-tracks from our performance in reducing expenses, but that's -- it's really reducing the growth of expenses and making sure that what we're spending, generating that topline that gives us some opportunity for profit.

So, we expect that we will continue to move toward that goal of a 30% margin before amortization and intangibles.

And we can do that without cutting R&D and any kind of weight.

We will get some leverage obviously, but (indiscernible) we are growing it, we are pounding it.

So that is an area where we continue to invest more because the reason we win is we have the best product.

With regards to the mergers that you guys have done in the past, I think you guys have accumulated a number of data centers.

Is there any plan in place to start maybe getting cost saves from consolidating some of the operations you have accumulated over the years in streamlining?

Absolutely and we will talk about that next quarter as we project those numbers for fiscal year '06.

We are going through a consolidation process of all of our data centers.

That's the thing which showed from the gross profit line?

Absolutely and that will have an impact in '06.

You will hear about that in next quarter.

I think we have done a couple of questions on this.

I am just going to ask you another roundabout way but with a good portion of your business growing as nicely as it is it seems like a lot of the store you've kind of hinging upon the under performing businesses and with everything that has happened over the last couple of years, how will you track of exactly when certain head wins hit on those businesses, when would you expect to see just as the comps got easier, the head wins ease on some of the marketing and insurance side of the business.

This (indiscernible) last quarter, you guys announced you were pairing off some of the insurance business but are there any another particular quarters off-hand that you can think of where you start to see just easier comps there?

The major issue was the reduction of that 30 million because of the two customers last year because of industry consolidation.

In insurance, (indiscernible) we had another great booking quarter and the point I am trying to make is that, that area isn't going as fast as some of the other areas is growing but is not as fast.

In precision marketing which is the non-financial services dimension of marketing services, we are getting very good growth but the financial services commodity where the banks are consolidating their prospect data business, we are not getting growth.

I don't think anybody is getting growth there?

When did that hit you last year?

We knew that, we have been saying that for a year and a half.

What particular quarter did you see the revenues (indiscernible)?

It's been going down for year and half.

Just trying to figure out when did that stabilize?

Well, actually it's now over, I think what I was trying to say is there is no more revenue in the future including this fourth quarter or forward that will be impacted by any of the losses that have happened because of consolidation, all that behind us as of this quarter.

I think Tony you were talking about when does the comparison, when do we anniversary the event is I think your point?

Correct.

Mergers have just a lot of them just kind of started to settle as if about a year ago.

So I am not sure exactly when you might--

You'd it see clean I think in Q1 '06, that's when you would begin to see it.

We started to lose it in Q1 '05.

So in the same fiscal year, were you starting to see the data consolidation benefits (Multiple Speakers)?

Correct.

And with regards to the consolation that has happened, have you guys thought anything about -- I guess strategic wise -- I guess suppliers in the industry meaning processors, analytic firms, and getting together to say pool their resources to kind of offset some of the pressures?

It is like -- as your customers get bigger and bigger sometimes suppliers get bigger and bigger?

Well, are you talking about in effect looking to others to provide or--?

Correct, is the partner may be a little bit more in offering bundled services to prevent further erosion in the future?

Yes, that's what we are working on.

Anything specifically?

No.

We will tell you here as soon as we get it done.

Dough Campbell, Zurich Capital

This is intended to be a pretty broad-brush question and a qualitative question.

Wonder if Tom could provide some perspective what I am thinking about is about a conference call that was a year and year and three quarters ago and Tom had returned from seeing the Chief Executives of the number of (indiscernible) companies I think both in North America and in Europe and reported that these executives were kind of astonished that the broad capabilities of Fair Isaac and how that those capabilities could help the respective firms and it seems pretty exciting (indiscernible) that's just a cloud to pull certain things together and now there was a little sense here that perhaps an inflection point has been arrived at as a result of number of steps the Company has taken in the mean time.

Just wondering whether how do these people see Fair Isaac today versus how they did then and does Fair Isaac have enough--?

Sales people and enough products that are properly integrated and the professional services, so that in fact -- the promise is now occurring almost as we speak?

I think you are referring to his comments made about EDM space in general where Fair Isaac is moving from being -- a pure product Company that sells a solutions that has been working for years to a company that sells generic decision, technology capabilities.

And in the non-financial services world or in customers who don't know what Fair Isaac has done before.

I believe, we are gaining traction in them recognizing that we are a unique Company to call up when they are building sophisticated, operational, decision systems.

So through the marketing efforts of all our people from seminars to cocktail parties where we are preaching that Fair Isaac's capabilities are unique in this EDM space.

However, you are also right, I think the fact that are soft, so that's what we said (indiscernible).

The fact that our software jumping up the shelf is the good news and the fact that we are not giving our services to follow as quickly and we are not keeping that maybe with and this is a general demand.

There is tipping point of repairing I believe is what we are trying to address by moving more resources to this generic decisioning marketplace.

So, I believe -- I don't know for the absolute tipping point, I am not good in predicting that perfectly, but given our platform sales of EDM technology, given our non-financial service customer who are asking us to help them solve really, really hard problems.

When British Telecom said to us to do process 1.5 billion call records a day to find network insurance fraud.

They couldn't find if anybody else who would say, yes.

We said yes, we solved the problem.

We are getting huge benefits and that's wonderful, that's wasn't a product, now it's a product.

A year and a half later that's happening now more and more every day and we think that's a good trend for our general growth capabilities in the future.

Of the vendors, if you want to call us that they talk about EDM.

There are several software companies, so we have not only the software we've got the services and we have the analytics and we have the data to score that.

So, our competitive advantage is the integration of software and analytics and data that reminds our story and when a customer understands the importance of the integration of those three, we tend to be in a pretty good competitive position.

And more and more people are starting to get that and read what the industry analyst say in software technology, but what our customers are trying to say in their case studies and testimonials to what we have done in the last year and a half.

Bruce Simpson, William Blair.

You talked a little bit about workplace reductions, the total headcount, can you give us more detail on what that entails ?

That was like a general workplace reduction.

That was the result of turnover and performance related adjustments that we make every day.

So, that wasn't a specific company wide type of things.

That was just the result of every day business.

A couple of questions and quantitative questions for Chuck.

You have an estimate of what you considered to be the full-company organic growth rate?

Yes, and it's right this quarter including the negative that we feel off of everything is were probably just flat, really a 5% really for the full -- for the nine months.

Against prior year, it's about 5% hardly and for year-to-date at about 7% really count them over.

5% in the quarter year-over-year.

In the quarter, year-over-year, and 7% for year-to-date.

Is it okay?

Paul Cairose (ph), Apple Advisor.

A quick question for you, when you look out to the '06, even though it is in the planning process right now, and just a gut feel that the 9% and I think it was 13% growth is -- probably would be conservative.

Is that excluding acquisitions or is that -- are you including some acquisitions when you say that for '06?

When we give you numbers in '06, we will give you both numbers.

What we think we might have acquired?

What we think we might be organically and either way it's low.

Andrew Halperin, First Manhattan Company.

Just two questions, I guess to follow up on one that was asked.

Can you update us on your appetite for share repurchases versus acquisitions?

And the second question is, I guess Tom, he might have mentioned that you are upgrading some products in areas where you are seeing the competition coming at, so I am wondering if you could just expand on that, what are you seeing the potential for the most competition going forward?

Andrew, just with regard to share repurchase, I think we have indicated, we got about 132 million remaining on the authorization.

We were very active this quarter; as you know, the quarter before we had to stay out of the market because of our exchange offer on the Coco.

So, we think at this the level it's still a good buy, and so we are going to be active and they were limited obviously on our daily amounts.

But we also watched for blocks and we take advantage of those when they come along, and so I think you should expect that to remain active.

You asked the question in the context that of as against M&A activity, and our Board has established some pretty healthy hurdles for us in terms of how we look at this activity.

And I think without too much work someone can calculate our cost of capital, somewhere in the 11, 12% areas.

So anything we do has got to beat that on the M&A side and with some healthy premium for risks.

So, in any event, that gives you some feeling for where our appetite might be.

Having said that, Tom has already indicated that we will be looking at opportunities in '06 and as we kind of map those out, we will talk about them on the next call.

Yes, as it relates to products, all I was trying to say is, I think sometimes our competitors and others say that, we might be milking Falcon, or TRIAD, or Blaze, or all these products.

We continue to make huge investments in those products.

We are on versions -- we have real available versions of Falcon, TRIAD, and some of our products that most of our companies haven't even involved to it, upgraded to it yet.

So, I am simply saying we continue to invest in our number one products, ahead of why I think most people would anticipate, so that we can maintain our leadership.

Do you see any competitors closing the gaps, your advantage?

No.

Phil Mickelson, JP Morgan.

Quick question, sorry I jumped on late.

I juggled in a couple of calls, but hope this wasn't asked.

Just talking about some of the utilization rates within the service organization within Braun, maybe just a quick color on kind of what's going on headcount-wise, opportunities within that kind of--?

We are probably at about 10%, under the utilization we could be at to make me really happy.

So right now our utilization rate is a little lower than I'd like, but that's okay.

I mean we have capacity.

It's not easy to go higher, train consultants in all these technologies, in all these industries.

So we will go sell and fill up that capacity, I am sure.

So, I mean some of the initiatives you are taking on that side, I mean it is just more of a finding business for them?

We have observed (indiscernible).

We have, you know, well over 500 people now in our consulting organization, and you know we have integrated all of the consulting organizations that we have.

You know that takes time, alluding our product takes time, learning how to work with, you know within our system takes time.

So, I am not (indiscernible) better but I am very optimistic.

Again because of the low utilization of our resources; utilization across EDM, cross-sell of our products with a little bit more work you know we could up that.

So, our sales organization does a great job of cross selling services, you know, and our consulting organization of self services I am sure once I get cranked up will get higher utilization.

You know you intend to shoot for 75% private utilizations to retain the budget that you know when you ask to take out training indications on time etc, so we are probably well under that today.

Ladies and gentlemen, that's all the time we have to take for questions.

Mr.Grudnowski, I will turn the call back to you for closing remarks.

Thank you very much.

I have nothing else.

I look forward to talking to you next quarter.

Thank you very much.

This concludes today's Fair Isaac Corporation's third quarter fiscal 2005 earnings conference call.

You may all disconnect.