Fair Isaac Corp (FICO) 2006 Q4 法說會逐字稿

Good afternoon, and welcome to Fair Isaac Corporation's fourth quarter fiscal 2006 results 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 John Emerick, Fair Isaac's Vice President and Treasurer.

Thank you, Mr. Emerick.

Please go ahead with your call.

Thank you, Jamie, and good afternoon, everyone.

This is John Emerick of Fair Isaac and thank you for joining us for our fourth quarter and fiscal year end 2006 earnings conference call.

We issued a press release after the market closed this afternoon and you may access it on our investor relations page on our website.

A replay of this call will be available on our website approximately two hours after the completion of this call through November 29.

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 law 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, excuse me, 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 June 30, 2006.

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 also posted on the presentation's page of the investor section on our website.

On the call with me today are Skip Battle, Chairman of the Board, and Chuck Osborne, Interim Chief Executive Officer and Chief Financial Officer.

Once we have completed our prepared remarks, we will open the call for questions.

Now I will turn the call to Skip, our Chairman of the Board.

Hello.

My name is Skip Battle and I am the Chairman of Fair Isaac's Board of Directors.

As you've now read in our press release, Tom Grudnowski has stepped down as Chief Executive Officer and Board Member effective immediately.

While I intend to become more active in lending board support during this transition period, we have appointed Charles M. Osborne as the Chief Executive Officer on an interim basis.

Chuck will retain his CFO responsibilities as well.

Neither the board nor the Company is making any other structural or executive leadership changes at this time.

And the board will begin a search for a new Chief Executive Officer immediately and I'm comfortable that a search can be completed within the next four to six months and I'm also comfortable that Fair Isaac represents really an attractive opportunity for what we expect to be a large and a talented group of candidates.

We recruited Tom Grudnowski in 1999 to revitalize and invigorate the Company.

He brought a strategic vision and he put in place plans and an executive management team that has given this Company the capabilities to complete and win.

We thank Tom for his leadership.

And now we look to the future.

Our organization is well positioned today.

It's well positioned with Chuck's experience and leadership capabilities.

It's well positioned with a seasoned group of executive management that will support him.

And we are confident that this leadership team, together with 2,700, 2,800 bright and motivated employees, will carry forward the overall business strategy as well as the approved plans you will hear for fiscal 2007.

The scoring franchise that was started 50 years ago by Bill Fair and Earl Isaac is as strong as ever and it's well positioned for continued success over the next decades.

The enterprise decision management vision as it's defined today represents really an incredible opportunity for this Company.

The board's comfortable with our position as a leader in analytics and decisioning together with the scoring and the EDM franchise that all of this will translate to great success.

So in sum, we are really confident with Chuck.

We are confident with the executive leadership.

We're confident with the Company strategy and vision and all of its possibilities going forward.

So I will turn it now over to Chuck Osborne who will take you through our quarterly earnings results.

Okay.

Thank you, Skip, and welcome everyone to our fiscal 2006 fourth quarter earnings call.

As you can tell from our release this afternoon, we have a lot to discuss and in order to reserve ample time for your questions, we will keep our prepared remarks brief for this call.

The revenue for the fourth quarter was $207 million which reflects continued strength from first international opportunities, especially within EMEA and Asia/Pacific markets, and the scoring business and EDM product and service sales.

The net income for the quarter was $22 million versus $36 million in the same period of the prior year.

Remember, these results include the new stock option expense accounting rule which accounts for roughly $12 million of the pre-tax operating expenses presented in our financials.

In addition, this quarter also included almost $13 million of expense related to the exit from leased property in San Rafael, California.

We reported fully diluted GAAP earnings per share of $0.35 against our guidance of $0.33.

On a pro forma basis, adjusting net income to exclude the SFAS 123 stock option expense and the San Rafael lease writedown, we reported EPS of $0.60 which compares favorably to the First Call pro forma consensus on this same basis of $0.57.

In summary, our revenue for fiscal 2006 was $825 million which was a 3.3% increase over fiscal 2005.

In addition, through continued expense control, we expanded operating margins for both the quarter and the year.

We incurred several one-time charges in fiscal 2006 including merger related expenses in the second quarter, reduction in work force charge taken in the third quarter and the charge from the lease exit expense in San Rafael incurred this quarter.

After excluding all these charges, the 123 expense, as well as taking into account our aggressive share repurchase program, we increased our pro forma earnings per share from $1.86 in fiscal 2005 to pro forma $2.19 in fiscal 2006 for an 18% increase.

We've included in the press release a copy of our final waterfall report for 2006.

As you can see in the report, our total bookings this quarter were $113 million from which we generated $21 million of current period revenue and full year bookings of $440 million from which we generated $151 million of current period revenue.

In the fourth quarter, we closed nine deals with a booking value over $3 million and 24 deals over $1 million.

Similar to our revenue results, bookings were strong in the international markets as well as from our originations, fraud and EDM products and service units.

As we've discussed on prior calls, the bookings waterfall is just one indicator of future revenue for the Company.

However, in order to avoid further confusion, we've decided that going forward we will not show the waterfall report for future periods.

Instead we will provide you with the anticipated bookings amount for the full fiscal year, the amount for the next quarter and the estimated amount of current period revenue from those new bookings or as we call it, our yield on new bookings.

Shifting to our fourth quarter performance, our new client centric model or ICM structure is the primary means by which we go to market with our applications and services.

We believe this structure is ideal to capture both large and small size enterprise solutions, has been well received by the market since our introduction to the concept in the third quarter.

Result of this customer focus has been to create opportunities with a greater emphasis on multi-products and customized solutions.

This evolving strategy will drive larger contract values per customer and make trends in market unit revenues less meaningful than the overall trend of our revenue.

That said, the following is a high level overview of those areas that were the strongest contributors to growth this quarter.

In Scoring Solutions, our Scoring Solutions market unit, which includes Professional Services, had another strong revenue quarter with $46 million of transactional revenue contributing to the $180 million of transactional revenue for the year.

The margins for this market unit remain strong and we do not see any reason for a near term change to this aspect of our scoring business.

We continue to see strong product pull from increased volume commitments as well as from the FICO Expansion Score and the Global FICO Score and we expect this to continue throughout fiscal 2007.

As many of you know, on October 12, we announced a legal action against the three major credit bureaus and VanageScore, LLC.

We've taken this action to ensure that the competition between our scoring business and theirs is conducted fairly and according to the law.

Our reported results re-enforce our initial reactions that the introduction of new competition would not likely cause near term effects on our business.

However, our review of the actions of the bureaus and VanageScore, both before and after the announcement of VanageScore, have caused us to take action in order to keep the competition fair.

We expect to conduct business as usual with our various distribution partners and expect the growth of our FICO score franchise to continue through innovation and further market expansion.

Unfortunately as a result of the ongoing lawsuit, we cannot take specific questions regarding the lawsuit or VanageScore.

Another area of growth continues to be our EDM solutions.

The combination of our analytic tool software or Blaze Advisor and related professional services generated a record 20 million of revenue in the fourth quarter against 16 million in the prior quarter and 17 million in the same quarter of the prior year.

The shift to a client focus has truly identified numerous opportunities for creating enterprise-wide decisioning platforms.

We experienced a growth in contract values during the quarter and have been working with a growing base of customers in both the insurance industry as well as more recently in the financial services industry.

International markets continue to represent a great opportunity for Fair Isaac.

In Eastern European countries, the adoption of consumer credit practices has created opportunities for our analytics group to provide customized solutions around originations and then sell into the life cycle.

These financial institutions can use Fair Isaac's solutions to build a more complete banking infrastructure, in turn competing more effectively and enhancing their enterprise value.

In the Asia/Pacific region, we also see a great deal of opportunity with much of this opportunity centered around credit and collections applications.

Again, our analytics group helped to create customized solutions around any combination of credit management, collection of bad debt and fraud.

These areas will require the investment of both capital and resources to quickly seize the opportunities before us.

Now let me turn to some more specific financial information.

Reported revenue for the quarter of $207 million, essentially flat compared to last quarter, and a 2% increase over the same quarter in the prior year.

This performance is in line with our guidance.

Our full fiscal 2006 revenues were $825 million against $799 million in the prior fiscal year for a 3% increase.

This is also in line with our guidance.

Our revenue contribution by market segment is as follows.

Scoring contributed $45 million or approximately 22% of the total revenue for the quarter and $177 million or 21% of total revenues for the full fiscal year.

Scoring revenue for this quarter reflects a decrease of approximately 5% year-over-year while the revenue for the full year represented a 6% increase over fiscal 2005.

Strategy Machines contributed $112 million or about 54% of total revenue against $110 million or about 54% of revenue in the same quarter of the prior year.

The Strategy Machine revenue represents a 2% increase, mostly due to the increase in revenues from fraud on volume-based transactional revenues, originations and collections and recovery applications.

Fiscal revenue for the segment increased to $457 million or 55% of total revenues as compared to $454 million in the prior year, an increase of 1%.

Analytic Software Tools totalled about $13 million or about 6% of the total revenue for the quarter as compared to $13 million or about 6%of the revenues in the same quarter of the prior year.

Fiscal 2006 revenue was $46 million or 6% of total revenues as compared to $48 million or 6% of total revenues last year.

The 5% decrease year-over-year was mainly due to a decline in revenue generated from sale of the Blaze Advisor product.

Professional Services segment of our business contributed $37 million or about 18% of total revenue for the quarter as compared to $33 million in the same quarter of the prior year.

This 11% increase is due primarily to an increase in revenues from strategic consulting services and from implementation services for EDM products.

Fiscal 2006 revenue increased to $145 million or an 18% share of the total revenue as compared to $130 million.

This increase of 12% was also due to the increase in strategic consulting services and implementation services.

Looking at vertical markets, the percentage of this quarter's revenue was by each was as follows.

Financial services vertical was 62%.

Insurance was 7%, telecom 5%, retail 6%, and all other verticals combined were 20%.

Focusing on our recurring revenue, the Company's transactional or recurring revenue for the quarter represented approximately 74% of our total revenues, slightly lower than last quarter and the prior quarter last year.

Percentage of consulting and implementation revenues increased to 18% of our total revenues this quarter as compared to 17% last quarter and 16% in the same quarter last year.

One-time or licensed revenue was 8% of our total revenue this quarter, same percentage as last quarter and slightly higher than the 6% in the same period last year.

Our international base has been steady from last quarter to this quarter at approximately 29% of our total revenue.

However, this was an increase from the 24% that international revenue represented in prior quarter of last year.

As mentioned earlier, we believe that the eastern European countries and the Asia/Pacific countries represent tremendous opportunities for Fair Isaac.

We are again presenting our GAAP expense numbers, in other words, with option expenses included.

For your analysis, we have provided a breakdown of the share based compensation expense by operating category as a note to our financial statements.

The breakdown of our operating expenses shown as a percentage of revenue during the quarter and for the full fiscal year were as follows.

Cost of revenues for the fourth quarter and for fiscal 2006 were approximately 34% as compared to 33% in the same quarter last year and 34% for fiscal year 2005.

Our research and development costs were 9% for fourth quarter and 10% for the full fiscal year '06 as compared to 10% for both the same quarter last year and the full fiscal year 2005.

Finally, Selling General and Administrative cost for the fourth quarter and for fiscal 2006 were approximately 32% as compared to 27% for the same quarter last year and 28% for the full fiscal year '05.

Total operating income for the fourth quarter was $32 million.

The pro forma operating income was $63 million before amortization of intangible assets of $6 million, stock based compensation of $12 million and charges for the previously announced lease exit of $13 million.

This equates to a pro forma operating margin of 30% for the quarter, an increase from the comparable margin in the third quarter of 28%.

Fourth quarter reflected the combined benefits from lower salary expense related to the reduction in work force announced in June and from some expense control initiatives started late in the third quarter.

Total operating income for fiscal 2006 was $153 million and the fiscal 2006 pro forma operating income was $240 million.

This pro forma operating income represented a margin of 29% for all of 2006.

Net income for the fourth quarter was $22 million compared to the prior year quarter of $36 million, a decrease of 38%.

This decrease is attributable to the San Rafael lease exit and the increase in share based compensation from the prior year period.

The net income for fiscal 2006 was $103 million compared to $135 million in fiscal '05, a 23% decrease caused by share based compensation expense and by the various one-time charges we incurred during fiscal '06.

Turning to our balance sheet, we were able to continue our share repurchase program.

Therefore our cash and investments as of September 30, decreased $85 million to $268 million as compared to $353 million at June 30 and $288 million at September 30, 2005.

Significant changes in cash and cash equivalents from September 30, '05 include cash provided by operations of $199 million for fiscal '06 and $64 million received from the exercise of stock options and stock issued under our employee stock purchase plan.

Cash used during fiscal 2006 includes $31 million related to purchases of property and equipment and $256 million to repurchase Company stock.

Our property and equipment balance was $57 million compared to $48 million reported as of September 30, '05.

The increase is a result of our normal purchases of computer hardware and software as well as the buildout of our new data center facility in Minneapolis.

Looking at share repurchase, we were able to remain in the open market and repurchase a total of 3.7 million shares at an approximate cost of $132 million during the fourth quarter.

This was done under two board authorized programs.

As mentioned in our press release, our Board of Directors has approved a common stock repurchase program to acquire up to $500 million of the Company's outstanding common stock.

This new program replaces the Company's previous repurchase program under which 2.4 million shares were purchased at an approximate cost of $85 million.

Looking at our staffing levels, our total head count at the end of the quarter was 2,737 compared with 2,840 at the end of the last quarter.

This includes approximately 200 sales and client partner positions that have a quota based compensation program.

Now looking at our guidance for the first quarter and full fiscal year 2007.

The Company expects revenues for the first quarter of approximately $210 million and earnings per diluted share to be approximately $0.48.

Further, we expect revenue for the year to be approximately $870 million and the GAAP earnings per diluted share to be approximately $2.10.

The earnings per diluted share guidance includes compensation expense related to FAS 123 and compares to the $1.59 of GAAP earnings per diluted share and $1.78 of pro forma earnings per share that we reported in fiscal 2006.

For modeling purposes, we can also tell you that we have assumed a 35.5% effective tax rate for each quarter of fiscal 2007.

Furthermore, we can believe we can maintain or improve the fiscal 2006 operating margin of 28% we described earlier.

Bookings for the year are expected to be approximately 500 million.

The bookings for the first quarter are expected to be 120 million with new revenue from these bookings projected at 23 million.

So in closing, let me say I would like to thank each and every one of our employees who have committed so much to the success of this Company.

Their contributions made this quarter the success that it was and their continued support will make this transition period smooth and our future bright.

Overall, we had an encouraging fourth quarter and I believe we are well positioned for fiscal 2007.

We are confident in our ability to deliver 5% revenue growth coupled with greater than 18% growth and fully diluted earnings per share.

The FICO score franchise is second to none and we see many great opportunities for existing and new products around the world.

The vision of EDM that was created by Tom is absolutely the right path to pursue.

We must now work to execute on and build from this strategic vision.

I can assure you that during this time of transition, we will be working hard to help customers and investors alike better understand our business and our value propositions.

As the share repurchase program announced today suggests, our Board of Directors remains committed to Fair Isaac's executive leadership, the employees, customers, prospects, opportunities and its future.

We will use our strong free cash flow and our new revolver of opportunistic to pursue our share repurchase targets.

We added the announced revolver in order to provide greater flexibility and lower our cost of capital.

As always, we have plenty of ideas for new products, product enhancements, expense controls and will continue to focus on these initiatives while seeking our next Chief Executive Officer.

I hope to see all of you on November 14 at the Waldorf in New York City for our annual investor day.

I think this meeting will be highly productive as we have already started to think about better ways to communicate our vision to our stakeholders.

Now let me turn the call back over to Skip for any concluding remarks he would like to share.

Thanks, Chuck.

Not much to add.

As you've heard several times this afternoon, the Board of Directors is very comfortable with this Company, with its leadership, with its vision, with its future.

While the change we announced today is certainly significant, the board and me personally are very confident of our ability to continue moving ahead while identifying our next CEO and we see some signs of improvement in our recent sluggish growth rate.

So thank you very much and I will ask the operator ti begin the question and answer session.

[OPERATOR INSTRUCTIONS] Your first question is from the line of Ed Maguire with Merrill Lynch.

Good afternoon.

A couple questions.

First of all, are there going to be any significant severance charges associated with Tom Grudnowski leaving?

At this time, it was, the discussion is underway.

I think the answer to that would be no.

I think anything that we would see certainly will be disclosed in our filings.

It'll be possible to see that in the proxy.

But the answer would be no.

Okay, and on the scoring, it looks like scoring was down year-over-year, but off some pretty tough comps there.

Anything to read in that?

Or was it just a -- ?

No, I think it's a good question.

A year ago, in the fourth quarter we had a true-up.

We have those periodically from quarter to quarter.

It just so happens, we have them on balance on average for each year.

But the impact in the fourth quarter a year ago is directly comparable to this year and so it had an impact.

That true-up last year was I think little over 4 million so on balance, our steady state, we still saw our scoring business up.

Okay.

And are you still have plans to maintain the headquarters in Minneapolis?

Oh, yes.

That has not changed and we have significant clusters of employees in San Rafael, San Diego, Norcross, in Colorado, Texas.

But the headquarters we expect to remain in the Minneapolis.

Great.

And just finally on the bill review and the analytic marketing segments, how do you feel about the prospects for those going forward?

There were -- that's been kind of a trouble spot for you before.

How did those perform and do you feel any need to do anything potentially to shore those businesses up or explore strategic alternatives?

Well, Ed, we've talked about those in the past and from time to time, we've talked about seeking other partners.

We've also, during this time, worked to improve all of these businesses.

The comparables on these, of course, over the last year have been down due to loss of the business over a year ago.

We now, going into the first fiscal quarter of '07, we feel are on a steady state comparison.

That bleeding, so to speak, has stopped and we're actually guardedly optimistic about the prospects of the business.

And at the same time, we've done some things to trim expenses in those businesses and I'm not disclosing the notion of bringing other partners in, but we are at the point where we can be a little more selective, perhaps, in how we do that and still sustain value for the shareholders.

Great.

Thank you.

Thank you.

Your next question is from the line of Tony Wible with Citigroup.

Good evening, gentlemen.

Good evening.

I was hoping to talk a little bit actually about the scoring business, up nice about 4% sequentially, and I guess this is the second quarter we have seen that nice sequential growth.

What drove, I guess, majority of that scoring performance?

It looks like it's now a 16% annualized rate, but I assume there is PreScore true-ups and other things that are in there.

I was hoping you can provide some color on that.

We don't generally get into detailed breakdown of the impact.

I think you would see strength in this business across the board.

It's not only the PreScore elements but some of our newer products are now starting to contribute to this.

The expansion score continues to grow.

And then just the general demand for score pulls for both credit, and the credit cycle has contributed to this.

We, on an annual basis, I think now we are looking at a 5% growth and I think over time we've said that this business on a sustained basis just driving off the economy and the credit cycle should grow in the range of 5 to 7%.

In some times when we have demonstrated a higher growth rate than that double digit, it's often been because of these periodic true-ups with the bureaus or others that are buying bulk scores and self-reporting and as a result of compliance checks and so forth, true-up their actual rates.

On a revenue recognition basis, we take that in as received and it puts some lumpiness into the revenue stream.

As Skip mentioned and I mentioned at the end of our talk, we believe this franchise is as strong as ever.

It's demanded by the credit market and the credit public and it's been the standard for many years and we expect it to be so in the future.

Yes, 5 to 7 certainly seems like a healthy growth rate for that business.

Second question, I hope you go into maybe the restructuring effort a little bit more.

It's more difficult for us, I guess, to gauge the success you might be seeing in any one of the vertical areas that you are trying to expand into.

Are there any milestones you guys might have seen this quarter or any challenges that have come up in that restructuring process?

The strong growth is -- as Tom has mentioned in prior calls, the vision of EDM and taking our steps into the marketplace through the ICM structure and a more client centric approach and bringing all of our products to each of these verticals gives us, perhaps, a better opportunity to sell into what our customers really want.

We are also, in many cases, leading with professional services and licensed revenue and recurring revenue streams will follow.

We saw nice growth in EDM in the last quarter, and this strategy both the PS and the product element were expecting to grow 9 to 10% in '07.

So we think it's going to be a contributor.

This is the sort of thing where the sales cycle is longer and sometimes we are doing really missionary sales into new markets, new segments, and that extends things out.

But as we gain some momentum, we expect to see success not only in bringing in the analytic tools, Blaze, model builder, but some of our other products as well that can be joined with those platforms.

Do you guys see any opportunities surrounding, I guess, SEPA initiatives in Europe which I think go into effect in January '08?

Essentially looking at this that maybe a lot of credit issuing banks in western Europe now can target euro zone banks and eastern Europe more effectively?

Well, certainly expense of the credit market.

Up until now, the availability of data in international markets is an issue for modeling and analytic modeling.

But as those initiatives grow, we expect our credit products to follow as we mentioned in the talk origination is one of the things we take into the newer markets and so it seems that makes sense to us.

Last question is legal reserves.

Can you help break them out what you are anticipating over the next year?

We don't break those out or disclose them separately.

Frankly, on a consolidated basis, they are not material to the total balance sheet.

That's what I wanted to hear.

Thank you.

Your next question is from the line of Chidra Sundaram with Cardinal Capital.

Thank you.

Some operating questions.

When you talk about a potential improvement of almost 28% margin, what is realistically possible with investments needed in some of these new products?

Your call broke up there for just a second.

I will repeat it and see if I got it right.

I think you were asking me about our operating margin, which would be our pro forma operating margin before amortization of intangibles and some of these one-time things, up 28% and you are asking if that is achievable or sustainable going forward?

No, I was asking how, what is realistically possible when you say improvement over 28%, what kind of improvement?

Is there anyway to give a range or an idea of what is actually feasible over the next 12 months.

I don't necessarily want to put out there a number that goes to -- this is, of course, obviously before taxes.

We've seen some improvement in our tax rate.

We believe there's still areas which by product mix and the way in which we go to market to achieve maybe 200 or 300 basis points above this level.

We can certainly see our way clear to that.

But the other thing that we keep in mind is we're also looking for ways to invest in new revenue base and driving our revenue growth to higher levels.

Sometimes that involves expending more on the operating side early on for improvement in future periods.

I think it's very clear from our numbers that scoring remains some of our most profitable revenue.

And so as we change, that grows perhaps at a 5 to 7% rate and our newer areas grow at faster rates where there is more professional services perhaps.

We expect that to drive revenue at a faster rate.

But it will still come through, perhaps, at little lower margins.

Having said that, we still think there is places where we can pick up more and perhaps adding another 200 or 300 basis points to that 28% is certainly a good target.

Great.

And in terms of guidance, just looking at for '06, you had discussed some sort of cash flow and EBITDA kind of guidance.

Is that something that comes up later on in the year or would you be able to give some ideas?

I don't think we gave out any -- we didn't give out any direct free cash flow or EBITDA.

I think if you take your percentage, if in your modeling you simply tack on the same percentage growth that you applied to the operating income level to existing free cash flow and EBITDA, you will be very close.

Very good.

And I am assuming that on the restructuring cost going through the numbers next year, I think everything is completed?

Yes.

We don't have anything like that built into our guidance frankly at this point.

The San Rafael lease exit was really a true-up that if you are an accountant, actually permitted us to put that property on a release basis, actually helps cash flow.

But you are essentially recognizing the difference between market lease rates and what you are required to pay on a long-term lease.

As we abandoned an element of that property we are required to record that true-up and that's what you see in the form of the $13 million expense.

Very useful.

May I ask just a last question?

I was curious what was the key catalyst for the CEO, Tom, stepping down.

I think we're going to let the press release speak for itself.

This was an agreement between Tom and our board.

Tom made the decision to resign, leave Fair Isaac, and beyond that, I'm not going to comment.

Thank you.

Your next question comes from the line of Kevane Wong with JMP Securities.

Hey, how are you doing, guys?

Good.

Few things.

First, other income was -- well the last quarter wasn't that big but up over a year ago.

Could you give us that breakdown which you usually do for other income?

Actually we're fortunate to have Mr. Emerick here, our Treasurer.

I'm going to let him do that.

Sure, Kevane.

Give me one second here.

Why don't you ask Chuck the next question?

I can tell you.

The yield is about 4.5% on collected balances.

I think our collected balances were 260 million in the quarter.

We had some fluctuations for share repurchase.

One of the reasons you see it up is because interest rates have popped up a little bit and we are not putting the cash out into instruments.

Generally we don't go out beyond 270-day instruments and in some cases we have got some other programs that give us a little more yield.

John, you want to add anything to that?

Yes.

The only other thing, Kevane, is that we've got just a small amount of FX losses and gains in any particular quarter.

This quarter was a small loss.

Okay.

And then also looking at the R&D as a percentage.

That was down to was it 9.2%, I believe, in the quarter.

Is that something that we should still be looking at for that rule of thumb of 10%, 11% going forward or is it sort of a change as far as the levels there?

We certainly haven't changed our approach towards research and development.

This is a Company that's driven by the creation of intellectual property.

That's an investment we intend to make and I wouldn't be surprised if actual head count and so forth drives a little bit north of that.

We have been increasing the number of people that we use in India which you know comes in at a decreased or a lower nominal cost to us and has some impact on total cost.

I think that that 9 to 10% range still makes sense.

Okay. 9 to 10%.

Okay.

And also in your press release, you mentioned a decline in consumer scoring was part of the -- part of what impacted the Strategy Machines part.

I was curious about that and why that was down.

Was there a specific thing that was happening that was causing that to be down?

No, no specific event.

I think we were just citing a 90-day statistic here, the impact here.

Many of our businesses incur volatility driven simply by consumer demand cycles.

Our third quarter is the summer months here and, excuse me, our fourth quarter is summer months here in the U.S. and financial services will go into our first quarter we are into heavy consumer season, both account openings and consumer activities that add some volatility to that number.

That's a help.

Do one more and I will let someone else hop in here.

Those senior converts have moved up to the current liabilities from the long term.

Was that the normal timing for that or is there anything else?

Yes.

The reason for that and I can invite Mr. Emerick to comment again.

But we have -- we moved passed the anniversary, forward anniversary of a put date on those securities, which essentially requires we put them up to within a year's maturity so they move up the balance sheet.

John, you want to comment on that?

It's just the put date and it's nothing more than that.

So it's not that it necessarily had to be actually pulled in necessarily with accounting rules?

Is that what I'm understanding?

That's correct.

Within a year from now, those investors, should they choose, could put those securities back to the Company.

Since they can do that, we have to feature them as a short-term liability.

Got it.

Perfect.

Thanks.

Your next question is from the line of Brad Eichler with Stephens, Inc.

Hi, good afternoon.

Couple of questions, Chuck.

First of all, on your guidance, what's the amount of 123 expense you are assuming in that?

It looks like about 40 million.

So it's pretty steady state going forward.

On the share repurchase, does the fact that you doubled the authorization, will that increase your level of aggressiveness in buying back the stock?

Or are you basically at the limit right now in terms of how much you can buy based on volume.

Yes, I think, as all of you I'm sure on the call know, the way in which you buy back the shares is either in open market purchases which are pretty much regulated by your daily volume or function of your daily volume and then block transactions which unsolicited blocks, which are presented to the Company and can be purchased.

This is a, several things.

It's a demonstration of the Company's own confidence in the equity going forward.

We think this is a good move to help us reduce our cost of capital.

We're a very credit worthy organization.

Nearly 80% of our revenue is on a recurring basis.

That predictability gives us predictable cash flow against which to leverage.

We are not really over-leveraged by any means.

On a weighted average cost to capital, our equity capital is probably 10, 11% and after tax, our debt capital could be anywhere from 4 to 6%.

And so it's in the best interest of the shareholders, we think, to replace some of that expensive equity capital with debt.

And I think you see this move throughout the technology sector now.

On a market cap of 2.2 billion here, a $500 million move is good size.

It's not anything that's going to place the Company in any sort of risk from cash flow.

That sort of a maturity even put into term loans over 4 to 6 years could be easily extinguished in just 2 years of our cash flow.

We feel very comfortable taking this approach.

Our board feels very comfortable with it and we're simply putting this out here as notice of that and our plan to sustain the programs we've conducted in the past.

The 210 estimate for next year.

What share count is that based on?

Give me a second.

I'll get you that.

Brad, it's about an average of 63.

Okay.

And this might be a question for Skip to answer.

I'm just trying to think of the chatter tomorrow in the market as everything opens up, but I would suspect one of the things that people will be speculating on is Tom's departure.

Feelings and speculation that that puts the Company in play somehow.

And I would be curious if you make any comments about the board's view on how best to maximize shareholder value from here forward.

Yes.

Let me answer first of all, possibly among the chatter tomorrow morning will be are there any financial irregularities and there are not.

There is no options issues associated with this.

We've reviewed all of our options since 1997 and we are fine there.

There is no restatement potential that has anything to do -- we don't -- I would be stunned if there was anything like that.

So we are fine in that regard.

And this is neither -- this is an entirely neutral act that was made by Tom and accepted by the board without reference at all to whether we would be more or less appealing to some sort of an outside offer.

Our board owes the shareholders the duty of loyalty and care to run the Company as best we can without a buyer and treat any buyer who might come our way with the kind of frame of reference that says is this right for long-term shareholder value.

There is not a -- that wasn't part of our calculus at all.

Okay, thank you.

If I could ask one further question and it's maybe to just help me reconcile something in my mind.

I realized you said you couldn't discuss the lawsuit.

But if I could ask a tangental question to it.

There have been several comments on the call today about the positive nature of the FICO franchise which is obviously one of the best probably ever in the market.

Also about the growth prospects.

And it seems that that runs somewhat in conflict with some of the comments that were made in your complaint about the VanageScore damaging your franchise which I think to most people that read that, it was a surprise given Fair Isaac's stance as it relates to Vanage as late as last quarter's conference call.

Anything that you could share with us to help us reconcile those two sets of comments?

Brad, to answer your question, no.

And not because I don't want to, but just as a practical matter, when you're in litigation like this, what little advantage with this audience I may gain will be squandered in court.

And I need to simply direct you to our complaint and to our comment earlier that we really just can't get into any discussion on that since it's under litigation right now.

Okay.

I thought I would ask.

Thanks, Chuck.

Thanks, Skip.

Your next question is from the line of Allen Zwickler with First Manhattan.

Hi.

Hello?

Hello, Allen.

How are you?

Good.

It's been such a long time, Chuck, that you got yourself a good job.

The CFO jobs, I don't know.

Anyway, I'm just trying to reconcile this 5% growth for next year.

I mean, we have heard for a number of quarters and maybe years now that once this anniversaries and once that anniversaries, could you maybe spend two minutes or so going through the various segments and how do we get to the 5%?

Just because I think there was some confusion about the marketing and insurance this year and what impact it had on the numbers.

Now that you have the numbers, you could be more clear about it, and just give us a sense for where the 5 is coming from.

It just seems like a little low to me given everything that we've heard.

Well, Allen, I don't want to go through a complete re-- review of the elevator analysis here on that.

If you want to do something offline with John or myself, we can make that happen.

But suffice to say when I say that one of our major franchises, Scoring, has a growth rate of perhaps 5 to 7%.

And then I tell you, Strategy Machines is about 450 plus million in revenues has elements of it that have been negative over insurance bill review, marketing services over certain periods.

The fact is we are now engaged in shifting to a not only new approach and going to our customers, the ICN, but we are also attempting missionary sales into sectors that we have heretofore not been involved.

You perhaps have a harbinger of that in what you see in the EDM growth rate, 20 over 17, 20 over 15, that I quoted in the talk.

But you have to take some time to shift to that.

I think also we are and Tom even spoke to this last quarter, we have taken a, what I would think is a frankly a finance guy, and remember I got both hats still, a naturally conservative approach to the projection of that growth.

And then looking to outperform that and I will let you and your modeling and others take that to where you wish.

Having said that doesn't mean we still can't deliver a good growth to the bottom line by effective expense control and effectively recognizing the last year we pummeled this with several one-time charges and the comparison on the 123 expense.

So I certainly wouldn't want you to think that the guidance at 5% means we are taking our eye off the ball in terms of making this grow faster.

At the same token, I think we want to be conservative in our guidance going forward.

It's not the answer you were looking for, Allen, but the one I can give you today.

I never known you to be conservative, Chuck, so this is really a shocker to me.

Thank you.

Your next question is from the line of Phil Mickelson with JP Morgan.

Good afternoon.

First of all, is Tom Grudnowski taking any sort of consulting role in the interim?

I thought in the press release it said he would.

Go ahead, Skip.

Tom's last day as an employee of the Company will be the 31st of January, and during that time, he is available for consulting to help with transition and the range of activities.

This is an amicable environment, and after that, if we need him for anything, I'm sure he'd be responsive.

And then, Skip, just speaking from the board, I know it's obviously early, but can you think about as far as a replacement for Tom Grudnowski, would you envision, owing to the technical nature of Fair Isaac and their businesses, somebody from the industry would likely be named?

Would it be somebody that maybe could be internally that would have the skill set to run Fair Isaac and then finally maybe would the skill set be in some sort of contrast to maybe Tom Grudnowski himself and his growth kind of focus on the Company?

It's very early to decide what the ideal CEO candidate would look like, and thinking about the industry, knowledge of financial services would be helpful.

Knowledge of consulting would be helpful.

Knowledge of analytics would be helpful.

Knowledge of software would be helpful.

So I can see candidates from all of those backgrounds being able to bring this Company forward.

And where we go is, this is very early.

We haven't even had our search committee's first meeting yet.

And granted, there had are a lot of product lines that have disappointed.

Does the board's position that they think this Company overall should be growing faster than it has?

I think it's been disappointing from a financial analyst's perspective.

But are you guys pleased with some of the growth areas of the Company?

Nobody in the Company is pleased with the growth areas, with the level of growth the past six or eight quarters.

We all wish we would be doing better and we think we have a plan in place to be able to do that.

The board is no different from the managements, no different from the employees, no different from you.

I guess this is a question somewhat for our interim CEO, Chuck Osborne, and the board itself.

Do we see a strategic change in kind of direction for Fair Isaac going forward once we have a new management team in place or is that going to be up to the new management team?

And kind of what are you thinking, is there some areas that are going to be de-emphasized and some areas that are going to be resurrected, I guess, to some sort, as far as interest level.

Before Chuck answers that, we have a management team in place.

What we are looking for is a new CEO.

We are very happy with our management team and confident that we will get a CEO who is perfect to lead them.

I want to make sure that this isn't like Michael Jordan and the Bulls, right?

Who after he left said they're one player short of a championship.

This is 2,800 very smart people with very good management and we are comfortable with that. want to make sure you understand that the organization needs a new Chief Executive Officer.

There's no doubt about that and we will miss a lot of Tom's strengths.

But this is a great group of people.

And now Chuck, I will let you answer the hard part.

Thanks, Skip.

To answer that, I would say I don't anticipate any shift in strategic direction over the next four to six months or however long it takes for this to go forward.

And then I would suggest that whoever it is who comes on board here as the next Chief Executive Officer is going to take at least the next four to six months after that to get their feet on the ground and understand the 23 different ICNs we have in this Company and the 80 some products, major products that we bring to market and the technologies behind that and then the people who make it all work.

So I really think our plan as expressed in the last call and now moving forward into '07 is in place.

We're going to stay the course and make sure we are all good stewards of this organization until that new leadership steps in place and then we will look to that individual to ratify, verify or further tune the organization.

Thanks very much.

And then just one last question is along the bookings.

I think your target was closer to $140 million during the quarter and it was shorter than that again this quarter.

Once again, was there any large deals that slipped in the quarter?

Anything that -- or is this a function completely of shorter duration kind of contracts?

Could you give us some color on the bookings?

And as we discussed in the past with the shift here now toward I think, as Tom mentioned last week, we changed some of the compensation plans to make sure our folks are focussed not so much on bookings but on the revenue that we actually recognize in the quarter.

There has certainly been a shift to a little shorter term deals.

As you shift to more professional services, they by their very nature are shorter term deals that nevertheless tend to repeat.

The fact that they repeat though isn't a booking.

They simply tend to repeat and so while it makes the booking amount look less, although I will point out that it showed a very nice increase from the, sequentially from last quarter, even though it comes in at less, the yield on those revenues is still stronger and we see that pickup in the current period.

I think our target against that we did 112.

We are looking to next quarter about 120 on 500 for the total.

We look to about set for the year here about 440, 450.

So we're still projecting nice increase.

We can see in the pipeline strength.

We also can see a shift toward larger deals.

As to your question of whether we push some between here and there, we have a little of that happening almost every quarter.

I'm not going to get into that.

What's recorded here, the 207 that's recorded, was our revenue for this quarter and what we record next quarter will be that revenue.

All right, thank you very much.

Your next question is from the line of Thomas Ernst with Deutsche Bank.

Hi, guys.

Hi.

This is [Durbin Matthew] on behalf of Thomas Ernst from Deutsche Bank.

Couple of quick questions.

Can you give us some light on the nature of competition you are facing in product line?

As in we know you have [inaudible] fixed cost, so wonder what the EDM product line or the Blaze product line?

We face competition with others in analytics.

We, professional services, the major consulting firms that would come to these markets and be providing a development or other services.

When you talk about our fixed costs, of course, professional services, EDM is both services and license.

We end up with similar cost structures.

We are all competing for the same talents in our work force.

I don't think our cost structure necessarily is that much different in providing either those services.

Across the broad range of Fair Isaac's products, we really don't have any direct competition.

In other words, you essentially fill the space in the same way that we do.

If you look at the segments of our business and in our analyst presentation that sits out on our website, you can see all of the various competitors that we list that compete against given product lines.

But really for Fair Isaac you are looking at a mix of products that frankly is quite unique and offerings that are quite unique which is why we think the EDM offering outside of financial services in the new industries is such a great opportunity.

Great.

You guys had mentioned appointment of a new VP of Operations last August.

Can you the new wins has been [inaudible] new appointment?

I'm sorry, I didn't hear.

A new --

You announced the appointment of a new VP for APEC operations.

Ah, okay.

Agee [Puck.] GY Puck, excuse me.

Your question?

So are the new wins in this product attributable to management changes?

Is in Singapore and that is normal executive appointment in the Company.

I don't think you see that as signalling anything other than retention of some new and additional talent in one of our growing markets.

Okay.

Thanks.

Thank you.

Your next question is from the line of Bruce Simpson with William Blair.

Hey, Chuck.

Hi, Bruce.

Any color on the specific line items you expect to improve to get from 5% top line to 17% bottom line next year?

Well, the first of all the -- you want to take a look at those things.

This is on GAAP earnings so you want to look at those things that hit us, the San Rafael lease exit cost, the RIF, the actual reduction enforced that we announced during '06.

Simply not having those charges will help us.

We aren't going to have -- we don't anticipate any M&A charges or restructuring charges.

So that in and of itself will, in your modeling, you may wish to do a model which takes that out against pro forma.

We have and I came up with 17% bottom line growth.

That's what I'm asking.

How do you get from 5 -- ?

Again, with this growth rate, right sizing the staff which has begun and the fact that many of the products are selling licensed revenue have excellent operating leverage and bring more to the bottom line than necessarily you drive at the top percentage-wise gives us the belief that we can make that happen.

We also -- our tax rate continues to improve frankly.

We modeled it out at 35.5%.

But as we continue some of our international growth, there is some favorable attributes for us and sale through EMEA against some of the acquisitions that we made that had operate -- net operating loss carry-forwards and I think there is opportunity there for improvement as well.

So that sounds like a lot of non-operational stuff.

I guess what I was hoping was you would be able to say particular instances of either R&D, whether that's going to be emphasized or de-emphasized or whether you think G&A is stable as a percentage of revenue or falling?

I think SG&A will probably as a percent of that -- will come down.

That's where you'd see some of the operating leverage.

We saw actually some of that late in the fourth quarter and even things like T&E costs.

Some of this is simply some of the controls that we spoke on the call that we put in some very aggressive controls and those things will continue into '07.

Okay.

Can you talk a little bit about did you experience higher than average turnover in your sales force since you had your restructuring?

No.

I wouldn't say that we have.

Actually with me on the call is Rich Deal, our Head of Human Resources.

Rich, I don't know if you want to comment on that.

I don't think we saw that.

The turnover rate in our sales force has been stable to prior years consistent with market norms from our perspective.

The transition to our ICN structure and the focus on client centricity frankly has been warmly received by our sales force who recognize it's frankly more logical way to interface with the market.

We have are seeing a positive reaction from our group and certainly no concerns about turnover at this time.

Okay.

And then I have a question for Skip that's a little bit more conceptual.

And that is it seems to me like there's a little bit of a disconnect.

We have got a very optimistic CEO in Tom who has laid out his vision for a few years.

And now Tom rather abruptly disappears from the scene as you characterize it as he came to you and was willing to resign.

And yet you seem to be endorsing the major planks of his vision ahead with respect to EDM and so forth.

So you said that generally you are unhappy with the growth rate over the last six or eight quarters but still I'm grappling to try to find out why Tom is leaving.

Is it largely a function of you think this Company should grow faster than it has been?

No, Tom's leaving -- Tom has decided to leave to pursue other interests and that's all I will say about Tom's leaving.

Are you asking me why do we have a 5% growth budget?

Is that what you are asking about conceptually?

I'm asking about two things.

I'm asking first of all to try to shed some light as to why abruptly your CEO leaves when you appear to be endorsing his vision and then separately and perhaps related to that, what do you think is a stable organic growth rate for this business?

All right.

The answer is I don't know enough about the business to know what a stable organic growth rate is.

I believe that it's considerably above what it has been as we perfect our approach to EDM and we bring it to other marketplaces.

I think this can be a substantially greater growth company.

That is slow to develop.

As far as why Tom has decided to leave, I'm not going to say more than you saw in the press release.

Okay.

Bruce, let me just comment on the steady state growth rate or secular growth rate is what you really are driving at.

While scoring, we've already commented on, perhaps 5 to 7%, but of course a very profitable business for us.

We always try to benchmark ourselves by a variety of means against those things that we think demand or would drive demand for the sorts of analytics and tools that we bring to the marketplace.

And in broad ranges for those things in Strategy Machines and particularly EDM, you might get to a, outside of that you might get to a blended growth rate more in the 9 to 11% range would be sort of a steady state secular growth rate we'd expect.

So, frankly, two times where we are at right now.

Having said that, to get there we are pursuing markets that in some cases we are only just making our first foray into, very long sale cycle that are very large proposals sometimes that involve initial PS work to help our customers see the help which our products can bring to their business in decisioning and analytics over broad range of data in operating their business.

So we're actually helping them see a new way of doing business.

It's present now in financial services because of the high transaction flow but in other types of businesses, consumer goods and so forth, even government, it's a new way of doing business.

So as we expand that and it builds to grow,we think then those markets define for us an opportunity perhaps in that 9 to 11% range.

When you say secular growth rate, are you talking about with or without acquisition activity?

I'm talking about with or without economic cycles.

But is that inclusive or exclusive of acquisition activity?

That would be even without acquisition activity.

So you think you can target about a 10% organic growth rate activity?

In these broader markets on a long-term growth rate.

Okay.

Thank you.

Okay, I think that's --

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

I will now turn the call back over to Mr. Osborne for closing remarks.

Thank you very much, and thank you for your continued interest in Fair Isaac.

Also want to remind you of our analyst day in November and hope to see all of you there.

Thank you.

Ladies and gentlemen, this conclude today's Fair Isaac conference call.

You may now disconnect.