Fair Isaac Corp (FICO) 2006 Q2 法說會逐字稿

Good afternoon, and welcome to Fair Isaac Corporation second quarter fiscal 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Today's conference is being recorded.

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

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

Thank you.

You may begin with your call.

Ms. Bergquist you may begin with your call.

Thank you, Carrie, and good afternoon, everyone.

Thank you for joining us for Fair Isaac's second quarter fiscal 2006 earnings conference call.

We issued our earnings release after the market closed this afternoon, and you may access it on our investor relations page through our website at www.fairIsaac.com.

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

I'd 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 should be viewed with caution.

These statements are subject to risks and uncertainties which could cause actual results to differ materially from those expressed and/or implied by these statements.

Additional information concerning risks and uncertainties that could cause future financial results are described from time to time in our SEC filings including our annual report on form 10-K for the fiscal year ended September 30, 2005.

And quarterly report on form 10-Q for the period ending December 31, 2005.

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

A reconciliation of pro forma information we provide to the most comparable GAAP information is posted on the presentation's page of the investor's section on our website www.fairisaac.com.

On the call today are Tom Grudnowski, Chief Executive Officer and Chuck Osborne , Chief Financial Officer.

They'll review second quarter results and other business related information.

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

Now I'll turn the call to Tom.

Thank you Judy, and welcome everyone.

We had a good Q2, it was pretty much as planned, except we spent most of the quarter seriously considering an offer to buy another several hundred million dollar company, revenue company in the EDM space which we abandoned just a few weeks ago.

Nevertheless despite the commotion I'm happy to report that we hit our nonGAAP EPS of $0.52 which we guided to last quarter and as the current street number.

We reported fully diluted GAAP EPS of $0. 40, the difference is $0.10 related to option expense and $0.02 related to the abandoned acquisition costs that were one time costs associated with bankers, lawyers, accountants, et cetera.

At the end of the day, we decided our organic EDM strategies is working, although it would be nice to have a nice revenue bump we decided to stay the more profitable organic course.

The good news again is that despite this commotion we ended up with a record revenue quarter of 208.2.

With net income of 27 million after merger related expenses and non cash option expenses, as I said.

We also got a bit of a -- revenue momentum back as you may recall the last couple quarters we've been stuck around 203 because of good performing units we got some momentum back on the revenue growth side.

Again as I've said in the last several quarters, our mainstay areas continue to lead the charge, scoring did well TRIAD did well, Falcon did very well, and EDM services had its best quarter ever in terms of services delivered around our EDM capabilities.

We believe is a result of our continued focus on providing more client partners and sales focus on these new EDM application opportunities.

In summary we increased our revenue over 6.2% over the same quarter last year, and we increased our EPS over the same period last year by 24% again all as we had planned.

Our total bookings for the quarter were 106 million and you'll see on the waterfall report we include.

The majority for our bookings being light related to the off period sales cycles related to insurance review, our EDM software was a little light and collections and recovery licenses were light.

All these areas have very long cell cycles as you know, and the closings just didn't line up with this quarter but given that, we have a strong backlog going into Q3 and many of these deals are scheduled to be done then so we anticipate strong growth in those areas in the next quarter.

The good news was that our revenue yield on the lower bookings was actually our highest ever and so we ended up hitting close to our revenue.

Anyway, despite the lower -- actually actual bookings numbers.

One of the reasons for this is a couple quarters ago we did modify the sales incentive programs to factor revenue into the incentive system as well as bookings as you may recall before that all the incentives were around bookings regardless of when the revenue hit.

So some of the -- some of that yield probably relates to that factor.

Now that we have two quarters of the fiscal year behind us, we expect revenue will be around 836 to 846 for the year, which is just about where the streak currently has us pegged and we are maintaining our guiding EPS of $2.15 for the year, that remains unchanged we've been saying that for the entire fiscal year.

That leaves an expected operating EPS in the Q3 of $0.54 and $0.57 in Q4 to get to the $ 2.15 and you could use the lower range of our revenue numbers the next few quarters which would be 210 and 215 to get to those EPS numbers.

Before I dive into a little bit of the details around the performance of some of the product lines, I want to talk about a couple overall corporate issues that are important to note.

We've been discussing the last several calls, committment to increasing our investments and go to market strategies around hiring new sales resources and consulting client partners as we call them.

This has been going on for more than a year now.

The strength continues and all these new folks are on board.

Actually about 50% of them are new, it's taking them time to learn about our complicated product sweeps and to be really productive, we're getting up to speed now, making good progress, I think in that training.

Given that success we are now in the planning stages to add another focus on top of our current product oriented P&L organization and we call it integrated customer networks or ICN's, we're grouping our customers now into logical networks which we can serve in a more focussed and quality manner.

Go to market resources of Fair Isaac will be assigned to these groups so that we can connect our clients needs more directly with our services and products and at the same time get our clients more directly involved in our product R&D processes.

The reason we're doing this, and the reason I'm mentioning it today, there's been a very noticeable market shift in the way our customers are viewing the Fair Isaac franchise, we have to adjust to it.

Our customers keep asking us for services and solutions for which we haven't built products yet.

So with our successful EDM software platform strategy starting to work we're asking for more help around products and services outside our traditional product application boundaries, in order to listen more closely to our customers and to get the best Fair Isaac resources working on these new problems or creating a more seemless way for services and products to be configured in solutions for our customers.

The reason I mentioned this is although this hasn't been rolled out directly across the organization, [inaudible] been working on this and we're going to start the migration of this approach this quarter and so I thought I would mention it, you'll be hearing about it out in the field.

Another organizational emphasis if you will, will be around creating something we call Horizons, and this is a new focussed part of our organization.

To really supporting all the EDM innovation going around throughout the company.

Regardless of industry or area, demand is growing.

So we feel right now we're a little supply site constrained and we need to build more reusable intellectual property to take advantage of this enormous EDM opportunity.

It's turning out to the fact that the key to growth in the EDMs is really services and thought leadership capacity.

And we need to build it in a quality matter faster to keep up with demand.

Our consulting revenues are now growing at over 20%.

Our run rate at $160 million per year, and our utilization is very high and all that's good.

Bad news is, we need more of it.

We're going to focus a part of the organization on manufacturing more EDM quality folks to help push this new area faster.

We plan to create another 100 qualified EDM client partners who can manage the EDM sales and delivery process in the next 6 months.

By the way, we have an analyst conference coming up in New York on May 16, and we'll talk about these last couple points in more detail as we roll them out across our customers.

This is also a new project analysis time of year for us in that interact our annual US event with 100s of clients showing up.

They'll all be showing up in San Francisco next week.

And will be outlining lots of our new product innovations there.

We'll be talking about the status of our innovation EDM platforms, Score Net, and the integration of all of our lifecycle analytical functionality, including FICO and Falcon, TRIAD and Debt Manager.

We've been molding these into a suite of services running on top of our EDM platform.

We have lots to talk about, it will be a very exciting innovation type of meeting for our customers.

We'll also have some new information about these products and services when we get together with you on May 16, as well.

I'll leave those for now.

Briefly go through a few of the segments and then Chuck can dive down to the details of the numbers.

Our scoring solutions market unit had another strong revenue quarter with 42.6 million, we continue to see strong product pole from FICO expansion, et cetera and increased volume commitments that continue to happen throughout this year, so we expect to see continued strength in this area for the remainder of the year.

Also during this past quarter as you know, the bureau's announced that they were teaming together to try to create another score called the vantage score, we spent considerable time with our customers, the media , you, the street, discussing our reaction to this announcement and very much has been published so rather than try to anticipate your questions here, I'll save time at the end to answer them so we'll leave it at that for now.

Our customer segment had another really great quarter, sales were just short of 20 million dollars which is our best ever.

The number of subscribers increased by 38%.

We think some of the confusion around the score actually helped us here, so the short term it's a good thing.

Finally we've introduced many new products on FICO.com which has improved our shopping cart size significantly, and takes advantage of the fact that we get about 54% of our customers are repeat purchasers on this site.

So the consumer segment continues to be a very, very big role for us, and we continue to invest there.

Fraud also had another great quarter.

Some of the big events here, we won another major debit deal in the UK, as you may know the top five credit card operations in the UK already had Falcon credit.

Now four of the top five have debit so by giving it the last of those, number two and so we're basically doing a very good job in that unit of living with the strategy to try to expand our platform, our Falcon platform to include several types of fraud it looks like that strategy's working as we cross additional fraud modules to our existing wonderful client pays.

Also achieves some success, there were some new products, new models, mostly Falcon online access, we also have our client signed on with Falcon ID and we have a client for our Falcon ID interview service, so we're making lots of progress here and continue to invest.

We also won a major processor deal with census in Brussels, they were established in 2003 and served banks with over 23 million cards in Belgian, The Chek Rebulic, Hungarian, Italy, Poland, Nederlands.

And we got a triple win there, they picked Triad, Falcon credit and Falcon debit.

A very competitive situation.

Fraud for Telecom remains another area of growth, we signed our first cable operator this quarter and expects it to be a new market segment for us in the future.

Nice work on the fraud area.

On the Triad side again, we pull several significant deals in this quarter.

One in the UK, another one in Russia, another one in Korea, another in Argentina, another one Brazil.

So our strategy of trying to use Triad in a global cycle is a way to continue to expand globally, is making good traction.

Our processor Triad products are actually performing better than planned as well.

And we're seeing good revenue growth there as thesis in FDR go to market with this in this particular area.

The collections recovery unit I mentioned earlier, we underperformed on the license sales but over performed in implementation of services, we're busy implementing lots of things that have been sold here in the last year and a half.

As we anticipate finishing these implementations over the next couple quarters, we're working hard to build the backlog of a new pipeline there.

Finally, we talk about EDM for a few minutes.

We have all the right signs and signals for strength, a strong pipeline, industry momentum.

Recent reports by Forrester, Gardener and INC have all added momentum to our efforts here.

We're giving good traction in this area and people are jumping on the bandwagon which is just great.

We have new product releases and as I mentioned a growing sales force.

However, as you can see the numbers, the pure software sales this quarter were less than planned but overall our revenue group because we had our record services quarter as you know, our strategy here is to create services on top of these new platforms so that we can create new applications.

So we had a great quarter of being very busy implementing new EDM solutions for our customers even though we had less pure license revenue.

Sometimes nice having both working at the same time, but the ultimate strategy is paying off.

I believe our client partner focus and sales focus working as teams is now starting to take hold.

We're identifying many adopter of EDM strategies and believe we're starting to identify the market trends necessary to get some very good projects in this area.

Last quarter I mentioned several accounts that aren't typical legacy type engagements that you hear us talk about, so let me add -- I think one of the best ways to explain our success in this area is to talk about things that are new for us and our new clients.

We did finish actually implementing a new authorization system for a very major card network using all of our new stuff.

So as you know, the platform model builder blaze, et cetera et cetera we're using internally in our solutions, that's been out long enough now that some of our first early adopter completed applications on it.

We just completed a massive application and has some good references sites as a result of it.

We also started EDM engagements with a major retailer, a major hotel chain.

A large Canadian communications company.

Three different insurance companies where they're using our EDM platform with us to build new underwriting applications, seems to be a market that's coming our way.

A casino operator and finally a large pizza delivery chain that will soon be seeing our pizza score, I guess.

Now, some of these projects that even the better news, some of these projects that we've launched are in the EDM process as we call it, they haven't even gotten to the software phase, we're finding this messaging about how to apply analytics to new problem areas, gaining traction, we're getting a lot of projects where the executive level they're asking us to try to identify how would analytics help make decisions in my corporate environment.

So we're not only getting sort of the software kinds of projects which are typical, but we're getting strategy kinds of projects which are great door opener to explain Fair Isaac competency in new customers.

The barrier, I think again this EDM area isn't our ability to open doors or to provide solutions as to build skills, and we're going to work really really hard in the next couple quarters really trying to accelerate our skills development there.

We're also talking to other consulting firms about arrangements that could leverage the EDM strategy into their accounts to better leverage the resources we have.

In closing, we have a very nice revenue earnings growth as planned this quarter.

Our momentum going into the back half of the year appears strong in all areas, although the EDM organic growth for the year maybe a little less than planned because we are taking a longer time to win some of these big deals around new applications and as you know the sales cycle is longer, and the revenue doesn't spike as fast because the revenue is dependent on people not as much as license.

At the beginning of the year, for example, we were planning aggressively planning to have this EDM area grow about 38% and I think it's going to be closer to 20% now which is still one of our fastest growing areas, but that brings our -- that revenue projection down from 860ish to 845ish.

So I wanted to point that out.

The good news about EDM services is that the costs follow the revenues, because this is an area where we can easily control costs, we don't hire as many people if we don't have the backlog deals, that's why despite the change in the revenue -- the EPS guidance remains $ 2.15 we haven't changed that.

In conclusion, we decided to build our company around the EDM strategy one brick at a time.

I keep talking about it every quarter, we're four-years into it, and 100 million dollars of investments so far, and I think the last phase here is to figure out the difficult step of how do we scale what we know into a machine that can keep the organic growth growing at the rate we would like.

With that, I'll turn it over to Chuck, we'll go through a more detailed explanation of the numbers.

Thanks, Tom.

Good afternoon, everyone as in the past, I'm going to provide a summary of our second quarter fiscal '06 financial results and then talk about our guidance going-forward.

Beginning with revenue, we reported revenue for the second quarter of 208 million, a 3% increase compared to the first quarter and a 6% increase over the same quarter in the prior year.

We were just a little under $ 2 million short of our second quarter guidance of 210 million.

As we discussed in our news release, and as Tom touched upon, our revenue contribution by market segment is as follows, scoring contributed 42 million or approximately 40% of the total revenue from the quarter as compared to 39 million or about 29% of the revenue in the prior year.

Scoring continues to benefit from an increase of risk scoring services of the credit bureaus as well as from strong sales of the prescored product.

As we have communicated, scoring revenue for this quarter as compared to the last two quarters is more reflective of our normalized revenue growth rate.

Strategy machines contributed 119 million or about 57% of total revenue, against 111 million or 57% of revenue in the same quarter the prior year.

This increase is due to growth in the consumer and Fraud products partially offset by the declines in the marketing services and insurance market unit.

In comparison of '06 revenue versus '05 revenue for the marketing services and insurance unit continues to be impacted by the loss of several key contracts that will not anniversary for comparative purposes until the fourth quarter of this fiscal year.

Analytic software tools totaled 9 million or about 4% of the total revenue for the quarter against 12 million or about 6% of revenues in the same quarter the prior year.

The decrease was mainly attributable to a decline in this quarter revenue for the Blaze advisor product.

Finally the professional services segment of our business contributed 39 million or about 19% of total revenue, against 34 million or about 17% of total revenue in the same quarter last year.

This increase was due to the success of the new client partner model which produced opportunities in the analytics, EDM and fraud market unit.

We also had success expanding into newer verticals such as pharma healthcare travel and entertainment.

The percentage of this quarter's revenue is as follows.

The financial industry was 63%, insurance was 9%.

Telecom was 5%.

Retail industry was 7%.

And all other verticals combined were 16%.

The company's transactional or recurring revenue for the quarter represented approximately 77% of our total revenues, the same as last quarter and marginally higher than the same quarter of the prior year.

The percentage of consulting and implementation services revenues increased 18% of our total revenues this quarter as compared to 16% in the same period last year.

One time or licensed revenue was 5% of our total revenue this quarter compared to 7% in the same period as last year.

We started to see more significant traction in the international market place this quarter.

Our international based revenue increased to 27% of our total revenue compared to 26% of total revenue last year.

We're finding a growing number of opportunities in Japan and EMEA and we're working to add people to these regions as quickly as possible.

Looking at expenses, the adoption of the FAS123R standard impacted all of the operating expense categories in our financial.

For purposes of this discussion I'll be presenting GAAP numbers with option expenses included.

However, for this quarter as well as for the remainder of fiscal '06 we'll provide a breakdown of the share based compensation expense by operating expense category as a note to our financial statements.

The breakdown of our operating expenses represented as a percentage of revenue during the quarter were as follows.

Cost of revenue was approximately 35%, compared to 36% in the same quarter last year.

Our research and development costs were 10% compared to 9% in the same period last year.

Finally, selling general and administrative costs were 31% against 28% in the same quarter last year.

Tom already mentioned we had been pursuing an acquisition that was abandoned during the last quarter.

We spent considerable time on a potential transaction that would have provided an enhancement to our EDM strategy.

Without going into further details, I will say that we were not able to come to agreement on the final terms and subsequently agreed to end all discussions.

As a result, we incurred 2.2 million of expenses in the quarter related to the transaction.

Which equals approximately 1.4 million after tax dollars or roughly $0.02 per diluted share.

Total operating income for the second quarter was 41 million.

The pro forma operating income before amortization of intangible assets of 6.3 million.

Stock based compensation of 10 million and 2.2 million from the abandon acquisition was 59 million.

This equates to an operating margin slightly above 28.5% and declined from the comparable margin in the first quarter of 29.2%.

Other net income was 1.5 million for the quarter which was the net amount of our interest income, interest expense and foreign exchange hedging activity.

The second quarter's effective tax rate was 36.1% compared to 36.6% last quarter and 25.6% in the same period last year.

In the second quarter of fiscal '05 we had a 6 million dollar tax adjustment that reduced the effective rate for both the quarter and the entire fiscal year.

Net income for the quarter was 27 million compared to the prior year quarter of 34 million an apparent decrease of 21%.

However, the prior year quarter did not include share based comp and also included the tax adjustment I just described.

On a GAAP basis the diluted earnings per share for the quarter was $0.40 includes $0.10 from our after tax expense from our shared based at comp, and $0.02 of after tax expense from the cost related to the abandoned acquisition.

As Tom mentioned we reported 106 million of bookings for the quarter, although this was less than 145 million we estimated on our previous waterfall report.

Our second quarter bookings yield was 20%.

This was an increase over the 17% bookings yield from last quarter and for the average yield for all of fiscal '05 of 16%.

This increase is mainly the result of the increased percentage of our services related revenue, which has a tendency to produce more current period revenue.

Turning to our balance sheet the abandoned acquisition also impacted our ability to be in the market under our current share repurchase authorization.

Therefore our cash and investments as of March 31, increased by 56 million to 426 million which was up from the 372 million reported as of December 31 '05 and from the 288 million reported as of September 30 '05.

This increase is due to cash generated from operations, proceeds from employee stock options and from employee stock purchase plan activity offset by capital expenditures and dividends.

Net accounts receivable as of March 31 totalled 161 million up slightly from 156 million reported as of September 30 '05 fiscal year end.

Our day's sales outstanding was 69 days as of March 31 and improvement from the 71 days reported as of last quarter and on target of our goal of 70 days.

Property plant and equipment was 45 million compared to the 48 million reported as of the September 30, 2005 year end.

The net reduction is the result of our quarterly depreciation off set by normal purchases of Computer Hardware and software, as well as from the build out of our new data center in Minneapolis.

As we have dicussed in the past the completion of the data center in Minneapolis will allow us to begin consolidating all of our data centers.

Intangibles and good will totalled 789 million for the quarter, for those of you that break out intangibles and goodwill separately, net intangibles were 102 million and goodwill was 687 million.

Shareholders equity increased to 918 million up roughly 113 million from the 805 million reported as of the fiscal year end.

The increase is from the year to date net income, employee stock options exercised, employee stock purchase plan activity and our small amount of share repurchases in the first quarter.

As I mentioned we were unable to be in the open market for any share repurchases due to the now abandoned acquisition, we still have another 159 million remaining under the $ 200 million authorization approved by our board of directors in August of '05.

Finally looking at our staffing levels, our total head count at the end of the quarter was 2876 compared with 2844 at the end of last quarter.

Now focusing on our guidance going-forward we expect third quarter revenue of 210 million from the baseline revenue analysis and our waterfall revenue report attached to the press release we believe we have a baseline forecast heading into the third quarter of approximately 185 million.

We anticipate generating 25 million in new revenue, bookings yield of 16%, to reach the 210 million of estimated revenue for the quarter.

Of course this 25 million of new revenue will mainly need to come from traditional license revenue and professional services, third quarter estimated revenue of 210 will be about 170 million from our product segments and 40 million from our consulting and implementation services.

Therefore, based on our pipeline and general market conditions we feel it's prudent to address our full year revenue guidance to a range of 836 to 846 million.

As for earnings per share guidance we previously reported annual guidance of $ 2.15, which did not include the impact of the FASB123R standard, nor did it anticipate the $0.02 write off of our M&A cost.

After the share based comp expense and the abandoned acquisition charge we now expect GAAP EPS of 1.75 for fiscal 2006.

As I noted earlier for the remainder of fiscal '06, we will call out the differences in earnings per share caused by the FASB123 standard, in order to assist in prior year quarterly comparison of our financial results.

Before I turn the call over to the operator, we would like to remind everyone of our upcoming mid year analyst day in New York City on May 16, if you need registration materials and other information, please contact JD Bergquist or John Emerald.

With that, we may now begin the question-and-answer session, thank you.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Brad Eichler from Stephens Incorporated.

A couple questions, it seems like insurance and marketing continue to be a drag and I know last year there was a lot of discussion about doing something with those businesses.

It sounded like some type of strategic partnership.

Could you update us where we are and how big of a drag that is right now on the business?

Actually, the revenue has stabilized in both and so they're not -- they're actually going a little bit and we're still looking for some good strategic partners to help us grow them more, so at this point we keep looking for creative ideas and we have had several -- we talked to several people and we haven't finalized it yet, so unfortunately, we don't have anything new there, but strategically, we're going to do something different to make those units more profitable over time and to get them to grow.

Scoring has been running 64-65% operating margins over the last couple quarters, what is it this quarter?

We don't actually disclose the separate margins on -- It will be in our Q in a few weeks.

I don't expect that to go down.

It will probably -- There would not be any change of significance there, Brad.

Okay.

Maybe we don't understand the question.

No, I'm just curious, is it continuing to run in the mid-60s or coming back down a little or what -- it just had a couple quarters where it was substantially higher than what it's been in the past.

I'm curious if it's staying at that level or coming down a little.

Year over year a little lower because as we have always had at year end true ups and that will impact the margin somewhat.

We'll still be in the mid-60s range.

Okay.

Final thing is, I know you're probably limited on what you can say on this acquisition, can you just talk a little bit about strategically what a deal would add?

What you were looking for and what type of opportunity there is?

I think in general for -- I've sort of addressed it indirectly by some of my other comments.

We think we have the software strategy figured out and we think we have the thought leadership position, so we're looking for various ways to get into new industries with enough resources to make a big hit and so we have an interesting idea.

And it just didn't quite pan out.

But that's -- I should probably just leave it there for now.

But it was meant -- it was meant to try to get us to super charge, if you will, the EDM strategy a bit.

Okay.

Thank you.

Your next question comes from the line of Tony Wible with City Group.

Couple of quick housekeeping questions to start off with.

The gross margin and then also going back to the scoring business, just kind of sequentially we're used to seeing both of those things improving from the December quarter to the March quarter with some seasonality.

Can you walk us through in dollar terms what caused the magnitude of the sequential differences.

I understand the growth rate is more normalized but on the scoring business it was down a fair amount sequentially.

Is that just the true ups you saw in the December quarter.

It's the option expense that is causing the confusion.

No, this is excluding the option expense in both quarters.

The cost of revenues you were at 67 million backing out 2.8 million leaving you with 64 million.

Then you were at 70 million excluding.

I see where you're going.

Fist of all, remember, our quarters -- our first quarter is actually the last quarter of the calendar year, and the second quarter is the first quarter of the calendar year and we get hit with all of our pay roll tax increases.

Seasonally we start to work that off and we become more sequentially profitable off of our basic personnel charges going through to our fourth quarter and we actually become the most profitable in our first quarter because of that has gone.

The other thing is just the seasonality of people burning off -- we're a human resources company in the use of vacation in the mid quarters here in North America is driven in the winter months, you don't have people taking as many vacations, it sounds kind of pedestrians, but in a company that dominated by labor related costs, it has an impact.

Okay.

And the scoring business?

Well, I think the volatility you're seeing there as I mentioned in my talk, what we're seeing this year in terms of about a 6 to 7% growth rate is really more indicative of what Tom overtime has said as sort of a baseline growth rate for that business.

Some of the jump in revenue you saw over a couple quarters was due to -- we sort of one time impacts of our -- of true ups with our bureaus or other partners which we have every year, but they tend to fall in lumps, will actually impact that growth rate.

The usage rates are up, the volume is up, it was up in Q1, so I'm not sure we have more color than that.

There's really nothing new.

It's the best way to say it.

Last question is, census, I'm correct, that's the giant?

That entity was created from a venture of a whole bunch of European banks, how big is census now, and from my understanding it was a relatively large entity.

About 23 million.

They have 23 million accounts that they process for -- I don't know if we -- off the top of my head, 20 some.

I'm not sure about the number of banks, but it's about -- I know the exact number is 23 million accounts across those 8 or 9 countries I just mentioned.

They have 3 or 4 major banks that represent the major founders of that group in 2003 and they put this consortium together to try to do a better job of improving the quality of their offerings, so it's a big deal for us in that part of the world.

It was a very big deal.

They're selling that now or is there a ramp time?

No.

There's a -- I don't know if I'm supposed to say.

There's a very large bank in the process of implementing it as we speak.

Once the processor has the global agreement with us if you will, then together we go market to their members and we have one of their very large members already lined up to start to go, so that -- and overtime their banks will migrate to it and we'll get more recurring revenue like we do with the other processor relationships that we have.

Thank you.

Your next question comes from the line of Phil Mickelson with JPMorgan.

Good afternoon.

My question is on the bookings shortfall and just trying to understand first of all, was there any large transactions or a number of large transactions that got pushed that you would still have good visibility going into this quarter?

Yes, but that always happens and I -- so the answer is yes, so we have lots of deals that we're closing as we speak that didn't make it to the accounting deadline.

So that's normal.

And we have some big -- we had some big ones as usual that we thought we were going to get that we didn't get that we'll get this quarter.

So it wasn't anything.

I mean, it would have been nice to have more.

I think in the insurance bill review, you may recall in previous years we had a phenomenal year last year in that particular area, and lots of big bookings and we're really busy implementing the clients there and haven't focussed as much on trying to sell more.

We just had a great year last year.

So when you factor out many of these $10, $15, $ 20 million bookings we're getting in the insurance review every quarter last year.

That sort of has an impact.

We're not seeing that kind of traction, we didn't see that kind of traction last quarter anyway.

I guess is there anything abnormal in the amount of deals that were pushed this quarter?

Say again?

Was there anything abnormal in the number of deals.

No.

That were pushed into this quarter?

No, just like normal we think we're going to get them all and then in the last week some of them get pushed.

So I don't think it was any different than the past.

Got you.

So and then also trying to get a handle on kind of a renewal rate on contracts.

Is the bookings shortfall, is that anything to do with maybe a renewal rate declining on some of your projects?

That's not even in that number.

That's all new stuff.

That's all new contracts.

So.

So a Falcon renewal that's ended and is upping up, than that's not in that number.

That's up in the renewals category.

In the baseline.

Which we really don't report.

In our baseline that continues.

So any of that kind of -- they had nothing to do with that bookings number.

Got you.

That's new contracts, we multiplied the expected value toward the number of years that particular deal might go.

That's how we come, we didn't -- what it usually means when the bookings are a little bit lower, we didn't get as many multi, instead of getting a five-year deal, usually what it means is some of the deals were shorter in the cycle than longer in the cycle.

And that's --

And which areas, which segments of the company are longer term contracts more normal?

I mean, more typical?

I think the -- in bill review.

In short, I'm trying to understand, is there a certain area of the company that the bookings fell short beyond just EDM which I think it seems to me.

Well, yeah, the major issue there was licenses, but we actually, I'm just sitting here looking, bill review is by far the biggest.

And there's a scattering just across -- I would call it sort of across the board, there wasn't anything else that was more significant than I just mentioned so -- our expectations, yes, our expectations are rising.

The way we sort of come up with that number to begin with has a lot to do with the number of people that we have on the street and so maybe we're getting a little bit ahead of -- we're probably getting ahead of ourselves in terms of -- now that we have so many people out there, you multiply the average bookings per head on the -- in theory, we should be getting higher bookings, but sometimes as I said earlier, we have lots of new people the productivity rate may not be as effective and so it takes time.

Again, I -- I don't have a metric that will brilliantly convert bookings into revenue.

That's why it varies all over the place.

There is some relationship, so we try to show it to give you some visibility about what's happening in the future.

Sure.

Can you give us some metrics around the scoring initiatives.

You talk about scoring in FICO.

Can you give us a sense of how many customers are in production or in the pipeline and how -- I know you talked about these are $30 million opportunities, do you still feel these are 30 billion dollar opportunities or -- we get a little color along those lines.

Let me -- I tell you what.

Let me do that at the analyst conference, I don't off the top of my head know all the customer that is have signed up for all these services, that's a great question and let me try to pull something together there that -- we haven't on purpose we haven't been telling revenue by specific project.

But it would probably be good to reflect revenue by all these sets of new products, vis-a-vis the traditional products.

And our view of the market.

Let me see if I can get you.

It isn't a -- yes, I'll say the obvious, it isn't that significant yet, it's growing, it's not that -- significant strategically, very significant strategically, economically it doesn't make the difference between whether we make a quarter or not quite frankly, but it will in the future.

One last question comes -- structurally with the acquisition and the EDM or the potential acquisition that was in the EDM space, it seems like you're spread out as far as some of your customer wins.

I mean, do you think this is a focus on just plain getting sales people up to speed or do you think strategically you're just focusing on the wrong verticals and that you need to kind of have a better kind of more focussed strategy in selling EDM solutions?

I think it's really skills.

It's a set of skills.

When we have executive sessions with our customers, we need sophisticated individuals who can explain the strategy of EDM, how important it is to making decisions at a high level.

At a CEO level.

That's one set of skills and one set of projects that we sell around EDM strategy if you will.

You're right another set of skills is simply -- since EDM is a set of services and products, it's not just a services sale or a product sale.

It's a more complicated sales process, where you're training and educating the clients along the way.

It's not like -- everybody knows what Falcon and Triad is, EDM is new, so it takes more skills to convince someone to trust you in this newer area, if you will.

Finally, implementing this we need lots of implementation skills we're trying to do a good job of making sure we don't screw up these critical engagements.

I'm sort of constrained on all of the above.

Is my point and the good news is, I'm constrained and our problem has a lot to do with building -- as I said, building the scale of EDM.

And our best day with our best people, we can win almost any EDM type of opportunity.

We haven't turned it into a systemic process yet, that 250, 300 people can execute seamlessly, that's my challenge, it's a good challenge to have, it's a good problem to have.

Finally, Tom, one last question along those lines, you talked about a shortfall.

Is this product deficiency in this whole process, in this umbrella.

Do you think you just don't have the right product set to address this market?

No, no, no, no, no.

That's the number one product in the rules market unquestionably ask anybody in the industry.

We're at the top of the quadrant.

It's acknowledged as the best product.

We're trying hard to leverage that product though and the surrounding products that make up the EDM suite if you will or platform we're trying to leverage that product into multimillion dollar re-engineering projects of major decisions in new industries.

And in that whole sentence I didn't say our objective was to increase Blaze license revenue, now the good news is, it's still growing, it comes in because we're the number one product.

But we're working hard to educate our sales force and to upgrade the capabilities of those tools to the broader marketplace than just the specific segment in which that particular product has already become famous.

The fact that "one of the tools revenues licenses isn't as high as we would like, you know, is an issue, but it's not the one that keeps me up at night, what keeps me up at night is how do we turn the entire EDM services dimension into this innovation mechanism to help new industries create analytic applications.

So on that front we had a great quarter.

On the license front we didn't.

So --

Okay.

Thank you.

Your next question comes from the line of Tom Ernst with Deutsche Bank.

Hi, guys -- on behalf of Tom Ernst.

Just a question on launch of uniform -- how would you respond to investor concerns regarding the impact of this quarter.

Yeah, yeah, yeah.

Well, I think they've -- as we said in the press and to many people here in the last couple weeks, what they've done is create something similar to what we had five-years ago called NEXGEN.

They've worked together typically they haven't worked together to compete with us.

Here they've tried to work together to try to come up with a new scoring approach.

And as I've said before, the press -- we applaud the competition but even NEXGEN which was a better product than the FICO score we came out five-years ago, when you change the reason codes the definition, they're even changing the score range interestingly.

When you change all those things, it takes a long long time to make progress, let's put it that way.

I think in the long term it's a very serious competitive threat that we're taking seriously.

But industry standard takes a long time.

So -- having said that, this isn't -- this certainly wasn't a surprise in the sense that in the last year and a half we've introduced ourselves, we're now a credit bureau ourselves, the expansion score we introduced a year and a half ago, doesn't use any of the credit data from the bureaus, we introduced score net where we're building data feeds to data companies all over the world in addition to the bureaus.

So we can create scores using other data.

We introduce world score here over a year ago, so you know we've been doing things to put ourselves in a position where if the industry wants to evolve to a different approach we have some other ideas about how you may want to do that too.

So we still think given the quality of our score and the fact that it's keeping -- keep giving credit appropriately around the world we feel good about that, we think that if the industry wants to evolve to new standards that we'll be involved in that in one way or the other.

So specifically about strategies that we have to address it specifically, it's a relatively new product announcement and to the extent that new information comes out about it, we'll be happy to react right now it's still more of a marketing campaign than a -- something that we have a lot of facts about yet.

But I'm sure there will be facts and when they come out, we'll be more than happy to respond we'll obviously been in touch with the bureaus, our partners were also selling the FICO score and we're talking to them about what this means about how we go to market in general.

So right now it's sort of business as usual.

It's going to take a long time to change but we're keeping our nose to the grind stone and paying attention and making sure that we do a good job much representing ourselves to our customers.

Thanks.

Just another question on EDM initiative how deep have you -- have your references been on the usage -- and kind of what is your EDM product.

We have lots of satisfied customers and clients, many, many, many, many.

So we can provide all sorts of customer references to -- what I'm talking about is real, it's in production.

Lots of people have it, and so --

Just tell us specific in substances of where you've been very successful.

Yes, I think if you go back -- if you go back to the last conference call I gave 9 examples on the last quarter calls by client.

Go back and look at the transcript there's nine of them there I think.

So --

Anything specific in healthcare?

Yes, they're mentioned in that by comments last quarter.

Yes, sir, thanks.

So go read that one and you'll see them.

If you -- there's a good point.

In our may conference we'll -- we're excited about this, we have lots of customers.

So we'll -- we're happy to give references or whatever, I'm just not prepared to do that here on the call.

Thanks.

Some people want the -- want you to know about it, and some people don't.

So I want to make -- I don't know those off the top of my head.

I need some help from my P&L guys on what we can say and what we can't.

Thank you.

If you call our IR guys we can tell you that.

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

Your next question comes from the line of Kenneth Carr with CIBC Capital Market

Just going back to the question just about maybe related to backlog, I don't want to beat a dead horse on it.

With -- were acquisitions at all included in that.

Or was this an acquisition that didn't happen included in the original guidance for the year?

No, the guidance for the year has been organic from the beginning.

So the high end you know the higher end was closer to 900, I guess, was really assuming that some of the EDM products were happening sooner rather than later?

Yes.

Okay.

And then -- when you look across the -- if you want to call it shortfall or at least delayed gratification on it, does it span across the scoring side the strategy machine side?

No, that's why I tried to -- that's why I tried to single it out.

Fraud had a record quarter, biggest one ever.

Triad had a great quarter, consumer had the best quarter ever, all the things I just said.

So the thing that's doing great but not as great as maybe we -- aggress everyone said, was this whole EDM thing and I think it's not a question of are we getting traction, it's just not -- instead of going at 38 or 40%, you know, we're going to 20%, and that's a big number on the base of EDM activity that we have.

Since we're not -- we don't hire people to implement things that we don't have yet, it's a -- we have a lot of back end loaded costs in our budget for the year.

Even though our head count's up for the year, we won't hire as many people in that particular area, that's how we can keep our earnings in line with our early projections, this is not a cross the board thing at all is what I was trying to say.

It's our -- fastest growing things aren't quite growing as fast.

Okay.

And last question, the analytic software side, if there's going to be some lumpiness there, obviously, the Blaze shortfall this quarter, can that possibly reappear in the third quarter?

Sure.

That number -- the good news is, that's such a small percent of our total revenue, it does bounce around a lot.

Tends to have a couple million dollar impact because it falls to the bottom line, but that number has been bouncing around for the last 8 quarters and we have a good backlog of opportunities and we're -- I suspect it's going to bounce back up again, but I'm covering that -- hedging on that by trying to build more services around the client that is we have.

Okay.

Thanks.

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

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

Thank you very much.

And we'll see you here on May 16, in a few weeks to fill you in on some other details.

Thank you very much for joining us.

Thank you for participating in today's Fair Isaac corporation second quarter physical earnings 2006 conference call.

You may now disconnect.