Fair Isaac Corp (FICO) 2007 Q1 法說會逐字稿

Good afternoon.

My name is Jeremy, and I will be your conference operator today.

At this time, I would like to welcome everyone to the first quarter fiscal 2007 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a Question and Answer Session. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Emerick, you may begin your conference.

Thank you, Jeremy, and good afternoon, everyone.

Thank you all for joining us for our First Quarter 2007 Earnings Conference Call.

We issued a press release after the market closed this afternoon and you may access it on the 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 February 21st.

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

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

The forward-looking statements made on this call, and in the news release distributed today should be viewed with caution.

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

Additional information concerning risk 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, 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 posted on the presentations page of the investor section on our website.

On the call with me today is Chuck Osborne, interim Chief Executive Officer and Chief Financial Officer.

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

Now I will turn the call over to Chuck.

Thank you, John, and welcome to our Fiscal 2007 First Quarter Earnings Call.

In order to reserve ample time for questions we'll keep our prepared remarks brief for this call.

I am pleased to communicate that we had a good quarter even under the many changes we have seen in the last three months.

We are still in a transition period as we conduct our search for a new CEO and settle into our new integrated client network or ICN structure.

Despite these changes I can say with confidence we have a great company including our customers, people, products, and technologies.

The new ICN structure is allowing us to gain new insight into what our customers really want and need.

The search for a new CEO has helped us to evaluate the leadership qualities needed to accelerate growth at Fair Isaac well into the future.

Finally, I am pleased to see that during this transitional period we've seen a significant increase in support from all levels of management from within the company.

This brings me to my next point, our global business.

We have a lot of exciting activity happening around the world.

Clearly the value we bring is being recognized by more companies in more regions of the world than ever before.

Our revenue has doubled outside of North America in the last three years led by Europe, Middle East, Asia and APAC.

In response to market demand we are opening new branch offices in Australia, a market where previously we did business through a third party reseller, and in Korea.

Finally, we are planning to start doing business in China, a market where we have not been active and are opening sales offices in Hong Kong, Beijing and in Taiwan.

Additionally, we have made some key investment decisions to accelerate the company's growth.

In addition to our investment in our international resources, we will fund more ambitious marketing plans this year at the ICN and brand level.

Approving additional head count for our consulting function, with analytic consulting being a particular priority, increase in hiring for our scoring and fraud groups, increasing our investment in our technology infrastructure and putting more money behind our R&D and product development groups.

We've restarted what has historically been a successful partnership with IBM.

We have a new two-year alliance with them.

We are a service oriented architectural specialty program member.

We are members of IBM's partner world industry network.

We are very excited about the opportunity to partner so closely with IBM and their clients.

As you can tell from our release this afternoon, we've posted solid operating results, earnings per share and cash flows for the quarter.

Our revenue for the first fiscal quarter of 2007 was 208 million, which was a 3% increase over the same period last year.

This reflects continued strength from product and service sales around Blaze, fraud, customer management and analytics.

International markets continued to be a major pull for both our product sales and our consulting services.

In addition, we continue to control expenses in the first quarter resulting in strong operating margins for the quarter.

The net income for the quarter was 31 million against 28 million in the same period of the prior year.

Remember the net income numbers in both quarters include the impact of expensing stock options which reduces earnings per share by $0.09 in the first quarter of last year and $0.10 this quarter.

We reported fully diluted GAAP EPS of $0.52 versus our guidance and Wall Street consensus of $0.48.

Our GAAP EPS includes approximately 2.3 million or $0.04 per share of benefits associated with adjustments to our income tax reserves from the conclusion of a tax audit and the extension of the federal research tax credit.

Bookings for the quarter were 72 million from which we generated 20 million of current period revenue as compared to our guidance of 120 million of bookings and 23 million of current period revenue.

Within these bookings we closed 17 deals over $1 million.

Now obviously these bookings fell short of our nominal target.

However, we do not believe these lower bookings are a reflection of slowing in our market, but are more a factor of change we are seeing in our product mix and contract length.

For example, our EDM vision includes developing client relationships through consulting and tool sales which tend to generate lower bookings values with greater current quarter yield.

Over time these client focused relationships are expected to generate more cross-selling opportunities which will deliver consistent recurring revenue streams.

In addition, a single point bookings value for the quarter is very hard to interpret and can vary due to the interaction of several factors such as product mix and contract duration.

However, we are confident in our ability to forecast the estimated revenue we will earn from our baseline and the revenue we will derive from new bookings in a given quarter.

Some more on this in a moment.

I will now briefly touch on some of the positive contributors to revenue this quarter.

The combination of our analytic tools software and related professional services generated 20 million of revenue, as compared to 17 million in the same quarter of the prior year.

We continue to see strong traction in the European markets, with growth coming from both our core financial services markets and new industries including government and travel and entertainment.

In addition to Europe, we experienced strong growth in the U.S., especially to several insurance companies that identified opportunities to use our analytic tools for their policy origination and underwriting.

We also continued to see strength in our international markets.

As we noted last quarter, the international markets continued to represent a great opportunity for Fair Isaac.

In eastern Europe the adoption of consumer credit practices has created opportunities for our analytics group to provide customized solutions around originations and then sell end of lifecycle.

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

We had a strong quarter in our customer management unit, specifically with TRIAD product sales.

In our financial markets we sold a significant deal where TRIAD is being used to score demand deposit accounts as opposed to the traditional use of scoring credit card accounts.

This represents a new deployment of the TRIAD product, and we believe this represents additional opportunities with other financial institutions.

I want to provide a brief update on the transition to our ICN structure.

As you may remember in the second half of fiscal 2006, we launched our ICN go to market strategy to focus more on a given client's overall relationship rather than pure product sales.

The customer response has been very positive to this change.

Under the structure we are finding new ways to solve our customer's problems, rather than simply pushing our products into their organizations.

In the U.S. we are actually seeing requests from customers seeking a more holistic approach to their needs and our solutions.

The result is a substantial increase in our opportunity for cross-selling our entire franchise suite.

This change is more than just shifting to a relationship led sale.

The new ICN structure allows to more fully integrate all of our acquired businesses from HNC Software, to London Bridge, which until recently had maintained independent product road maps, development and sales channel.

The ICN structure has accelerated our need to integrate these historically independent product groups to provide a more complete, comprehensive solution for our customers.

We made great progress in optimizing our internal structure around this new go-to-market methodology.

However, people are still settling into their, new roles and we believe that the full benefits from this approach will take several more quarters to become fully evident in our financial results.

Now let me walk through some of the more specific financial details.

Revenue for the quarter was 208 million, up 1 million from last quarter and a 3% increase over the same quarter in the prior year.

This performance was just below our guidance of 210 million.

Our revenue contribution by market segment is as follows: scoring contributed 45 million or approximately 22% of the total revenue for the quarter.

Scoring revenue for this quarter reflects a decrease of approximately 3% year-over-year which is attributable to unusually high prescore revenue in the first quarter of last year.

Strategy Machines contributed 111 million, or about 53% of total revenue against 112 million or about 55% of revenue in the same quarter of the prior year.

The Strategy Machine revenue represents a 1% decline, mostly due to a decrease in revenues from mortgage, origination and precision marketing.

Analytic Software Tools totaled about 14 million or 7% of the total revenue for the quarter as compared to 12 million or 6% of the revenues in the same quarter of the prior year.

This 20% increase year-over-year was mainly due to an increase in revenue generated from the sale of the Blaze Advisor product.

Professional services segment of our business contributed 38 million or about 18% of total revenue for the quarter, as compared to 33 million in the same quarter of the prior year.

This 17% increase is due primarily to an increase in revenues from strategic consulting services for fraud and customer management products and model development for analytics.

The percentage of this quarter's revenue by vertical market was as follows: financial services vertical was 67%, insurance vertical was 8%, telecom was 5%, retail 8%, and all other verticals were 12%.

The company's transactional or recurring revenue for the quarter represented approximately 74% of our total revenues, and is on par with last quarter, a little bit below the 77% from the same quarter in the previous year.

The percentage of consulting and implementation revenues held constant at 18% of our total revenues this quarter as compared to last quarter, an increase from 16% in the same quarter last year.

One-time or license revenue was 8% of our total revenue this quarter, the same percentage as last quarter and slightly higher than the 7% 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 base.

However, this was an increase from the 26% that international represented in same quarter of last year.

As mentioned earlier, we believe that the eastern European countries and the Asia Pacific countries represent tremendous opportunities for this company.

The break down of our operating expense is shown as a percentage of revenue during the quarter was as follows: cost of revenues for the first quarter were approximately 34% as compared to 33% in the same quarter last year.

Our research and development costs were 9% for the first quarter compared to 11% for the same quarter last year.

Finally, selling, general and administrative costs for the first quarter were approximately 33% as compared to 31% for the same quarter last year.

Total operating income for the first quarter was 45 million.

The pro forma operating income was 51 million before amortization of intangible assets of 6 million.

This equates to a pro forma operating margin of 25% for the quarter which is flat compared to the fourth quarter.

The first quarter also reflected the combined benefits from lower salary expense related to the reduction in the work force announced in June and from expense controls started late in the third quarter.

Net income for the fourth quarter was 31 million compared to the prior year quarter of 28 million, an increase of 10%.

This increase was attributable to favorable tax adjustments, resulting from a tax audit and the extension of the Federal Research Tax Credit.

Turning to our balance sheet, our cash and investments as of December 31, 2006, increased by 3.9 million to 271.7 million as compared to 267.8 million at September 30, 2006, and 372.2 million at December 31, 2005.

While the total balance of our cash and investments increased slightly this quarter, we did draw 70 million on our new $300 million credit facility.

Other significant changes in cash and cash equivalents from September 30, 2006, include cash provided by operations of 60 million, and 31 million received from the exercise of stock options and stock issued under our employee stock purchase plan.

Cash used during the first quarter includes 5 million related to purchases of property and equipment and share repurchase activity which I will cover shortly.

Our property and equipment balance was 55 million compared to the 57 million reported as of September 30, 2006, a decrease is the result of depreciation partially offset by $5 million of CapEx spend during the quarter on normal purchases of capital equipment such as computer hardware and software.

We were able to remain in the open market and repurchase a total of 3.7 million shares at an approximate cost of 154 million during the first quarter.

This was done under the $500 million repurchase plan authorized in November 2006.

As of December 31, 2006, we still have 346 million remaining under the November 2006 authorization.

Looking at our staffing levels, our total head count at the end of the quarter was 2,712 compared with 2,737 at the end of last quarter.

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

Now just a moment on guidance.

Our guidance for the second quarter and an update on our full fiscal year 2007.

The company expects revenues for the second quarter fiscal 2007 of approximately 215 million, and earnings per diluted share to be approximately $0.48.

Further, we continue to expect revenue for the fiscal 2007 to be approximately 870 million, and we are raising the GAAP earnings per diluted share by $0.05 to 215.

This includes the $0.04 we over delivered in the first quarter and adds an additional penny in the outer quarters.

Now as it relates to bookings, we expect that we will need to deliver between $24 and $27 million of revenue from new bookings in order to deliver our guided revenue of 215 million.

In order to achieve our revenue targets in the second quarter and beyond, we expect bookings to revert to our historical levels of 90 million to 100 million per quarter.

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

In closing I want to provide a brief update on a few personnel matters.

First, the CEO search.

In the last three months our search committee has been active with interviewing and screening candidates and moving through the process.

We have reviewed many very competent and qualified candidates and believe we are on target with our previously communicated strategy to have a new CEO in place within four to six months, and we expect to stay well within that timing.

Next as you read in the press release this afternoon, Andy Cecere has elected to step down as a board member effective immediately.

Andy's decision was driven by his recent promotion to Vice Chairman and Chief Financial Officer of U.S. Bancorp.

Andy will be missed by the company as a source of great financial expertise and sound business judgment.

I echo Skip's comments and extend my thanks for his efforts and wish him well in the future.

Skip Battle, our chairman, is also on this call and he can answer any questions concerning the CEO search and the departure of Andy Cecere from our board during the question and answer session.

And I want to thank you all again for joining us today.

With that, operator, we can begin the question and answer period.

Thank you.

[OPERATOR INSTRUCTIONS].

Your first question comes from Brad Eichler with Stephens, Incorporated.

Good afternoon, Chuck.

Hi, Brad, how are you doing?

Good.

A couple of questions.

First, one of the things that stood out to me is R&D expense in the quarter was quite a bit lower than we were looking for.

And when you look at it, it seems to have come down pretty much every quarter for the last five.

What exactly is going on there and what expectations should we have on a go-forward basis?

As I said in the talk, we're very much committed to continuing our innovation.

I think one of the things we've seen throughout is some of our analytic resources have been diverted to some extent and some of our consulting operations.

Some of this of course is how we assign the activities of our people and with kind of the uptick in PS revenue, some of our folks have been taken that direction, and we have had some turnover in the ranks.

It doesn't change our view of how important this is to this company.

The heart of Fair Isaac is still analytics, and we deliver that in software, and we need good development people throughout.

We're committed, and our locale is adding to some of those areas.

We also have increased in to some extent our hiring and placement in India, which has a lower cost factor.

You may have seen the percentage of our revenue is a little bit lower.

Some of that is simply efficiencies, and I expect it gives us some room to add some more dollars of investment in the future.

So in absolute dollar basis you can see that number come up a little bit from where we are?

I think so.

I think so.

It depends on the mix and the locale in which we add those resources.

Okay, on the ICN, just to go a little bit, deeper, last quarter I think you made a comment that top tier producer would be expected to have something in the neighborhood of a $5 million quota and somebody that's a middle tier producer 2.5 million.

Just to give us a sense as to where you are today relative to where you want to be in that delivery vehicle, can you give us an update as to some metric to look at your progress there?

Well, I mean, it's the first quarter, these people now are working against their sales plans for the year, and it is probably a little early to see what I quoted for you is an annual target, and it is a combination in many cases of the plans of both bookings and actual revenue, so it muddies the calculation a little bit.

We still think that's a worthy target.

Now we don't get everyone performing obviously at 100% of the quota.

We often have individuals who well over that and many of our people are still moving in the career path up toward that number.

So we still think that's a good metric and a good measure to put out there for our client partners and others who are responsible for carrying the product into the marketplace.

One more quick one, and I will jump off.

Can you just give us a quick update on some of your other scores like global and expansion, how those are doing?

And then thanks.

The global scoring and expansion score both are still relatively small.

I think you know our scoring business is about 170 million.

I'd still -- a combination of both of these is still less than 10 million, but they both have some excellent growth prospects.

They're both relatively recent in their introduction, but we're seeing some good traction, and I think we'll be able to report more here in the future.

You know, the expansion score addresses what we think is a pretty large market and think there is probably 50 million people in the U.S. that don't have a file or data at the bureaus.

We think that this will give us an opportunity to bring those people into the credit economy, and as was the case with the FICO score which frankly took 20 years to develop and introduce to the market, we think it is well on track to success.

Global Score of course is part and parcel of our international strategy and carrying us into economies outside of the U.S., and the issue there of course is that there is not in many cases a central collection of data, and by using analytic models that draw upon data from other markets or by large providers in that market we're able to also provide a FICO-like score in a new economy.

So it is part of our international strategy as well.

All right.

Thanks, Chuck.

Your next question comes from Michael Nemeroff with Wedbush.

Michael.

Hi, Chuck, how are you?

Good.

Just a couple of quick questions.

Does the bookings short fall this quarter and the recurring revenue seems to have gone down a little bit.

Does that suggest that the revenue mix is shifting on a more permanent basis or is that just a one-off for the quarter?

Well there is no question that our emphasis, the strategy of EDM is often a consulting-led sale, so it leads with a consulting engagement perhaps which is PS revenues.

Our PS revenues tend to be on contracts of shorter duration.

It is followed typically by a large license sale, perhaps Blaze or Model Builder or Decision Optimizer that carries again a one-time license sale, and then the applications, many of our applications which provide for recurring revenue streams are appended to and attached and added to and there are professional services mixed in.

So the movement -- one of the things we're seeing is the success that our folks are having in carrying this strategy forward also is changing the mix of our sale.

The other thing that clearly we've done, our compensation program has been tweaked and designed to drive our folks in that direction and to more focus toward current revenues.

We clearly can see the result of that even though the bookings were nominally lower.

They were in areas of professional services and licensed sales which lead to a higher yield in the first quarter.

The other thing, too, is often times our P S engagements, we're pretty strict on the bookings calculation.

If there is not a contractual revenue stream or an actual estimate or minimums baked into a contract, we tend to be conservative in the booking value yet we know that many of our PS engagements although of a certain term will renew almost automatically.

And so this is one of the factors I think over several quarters, even, and Tom before these conversations we shared with you that bookings and we put it right in the release, you have you to be careful about how you use the bookings value necessarily.

You want to look at a trend line on revenue as well, and this quarter is certainly emphasizes that.

On a much lower booking value we generated almost exactly the amount we predicted we would for yield in the first quarter, so the percentage yield was quite a bit higher.

Okay.

And then just to look at -- when I look at the scoring revenue, obviously it appears a little weak because prescore was so strong in Q1 last year, but have you noticed any increase in competition?

I know that you guys are involved with that litigation, but have you noticed any shift in customer renewal rates and/or transactional levels since the arrival of a competing score out there?

No, you're right.

I can't really comment for much on -- I can't comment on litigation.

Obviously there is the Vantage Score LLC did introduce a VantageScore as a product.

To our knowledge it is mostly still in test, and that would, that's a firm to buy our basic data on our traditional scores.

The disparity here, the difference that you see in this quarter, we had clearly the prescore product in the prior period was quite a bit higher, and as you know those are sort of the bulk sale of scores for campaigns and credit card offerings, and simply a lower level of those sold in the current period.

So I am not predicting by any means that's a trend in our basic scoring business.

And then just lastly, the ICNs, have you noticed any change in the length of the sales cycles?

Have they been longer, shorter or can you comment on that at all?

Yes, I mean, the EDM sale is a longer sales cycle.

In some cases our folks are doing almost missionary like work going into new industries, showing them a new way of making decisions, a new way of automating their businesses.

They're dealing at very high levels in the organization that the CEO, CFO's, chief technology officer, level where these people are responsible for long range planning, policy and organization.

They're thinking very seriously about spreading this technology down throughout the organization.

It takes a longer period of time.

The sales cycle on Blaze can be nine, twelve months, even eighteen months at times.

It is not only a large sale, but it has a far reaching impact within the organization.

So as we shift toward those types of transactions, we expect that to lengthen out.

The ICN structure was introduced really mid-last year, and it was a tremendous undertaking on the part of Fair Isaac to train all of its client-facing personnel in an entirely new organizational structure focused on the client as opposed to along the lines of an individual product.

So it is not only a change in the way we face the market, it is a change in which our people relate to each other.

The product people supporting client centric organizations, they are still in a sense finding their way and then at the same time we as I said we tweaked our sales plan to help them look at this in that way.

So I actually feel pretty good about where revenue is under this constraint of that many changes all at once.

Okay.

Thanks, Chuck.

Your next question comes from Tom Ernst with Deutsche Bank.

Good afternoon.

Thank you, Chuck.

Hi, Tom.

Chuck, I wanted to step back and ask you a bigger picture question.

Now that you've been running the business for three months now, I know you're not the kind of guy to sit there, sit on your hands while you're waiting for a new CEO, so I am wondering, strategically what do you want to nudge the company to that's different than what we've been used to the last few years with Fair Isaac?

You know, that's an interesting question if you know anything about interim leadership roles you generally have the aegis to do a few things but not license to do a whole lot more.

And it is usually because you're waiting for and you don't want to tie the hands of a new person coming on board.

I think it would be wrong to suggest that there is anything fundamentally broke or, about Fair Isaac.

Fair Isaac's I think one of those types of companies that can survive most leadership changes without any, even skipping a beat.

The core structure of this company focused on analytics, and the great acceptance that we have in the financial services markets and some of the newer markets we're moving into the base, the installed base of our products that we have make many of these products incredibly strong against competition.

There are a few things that I think the organization and certainly under Tom was already focused on changing.

The company's grown by acquisition, not only the merger with HMC but the acquisition of London Bridge, the acquisition of new talent in consulting, but one of the things that we look at all the time and that EDM is intended to do is to align the architecture of some of our underlying, our products, the underlying architecture for our products, and that is an ongoing emphasis within the organization.

We also, as I think I have talked about in prior calls, we, in our process of acquiring other companies picked up many data centers and many different platforms and many different groups of developers using different types of tools.

And one of our ongoing projects and this actually was begun under Tom, was, is to standardize and align our products around common architecture, and that's the sort of project that takes a significant period of time, and I must say as I get closer to some parts of the company now in this role I can validate and verify that that's a great need in Fair Isaac.

Another area that with the identification of the ICN structure that we are always reminded is very important to go forward on is the go to market strategy, the ICN structure of course being client centric, but behind that, ensuring that there is a linkage between not only these client facing personnel but all the way back into product marketing, product management and to R&D, research and development.

We have research and development staff in a couple of locations that need to work together with our analytic scientist community to bring these products forward.

And the alignment of those products and the insurance that our people are always seeing what our customers want is an ongoing emphasis.

I know the comment about research and development costs, sometimes the way we isolate costs and classify them for SEC purposes doesn't give justice to some of the ongoing development work that's even done by essentially our sales folks carrying information back to our development staff.

So those -- the consolidation, costs, standardization and our product marketing groups are ongoing efforts, and I have to say after watching them a little closer for a period of time not only am I impressed with the people that we have in the area and the depth of their knowledge and professionalism, but I can see the magnitude of the tasks they have in integrating the acquisition.

So it is ongoing, and I think it is going to do nothing but get better.

Great.

Very helpful.

And if you'll permit one more question because I am curious about the east Asian expansion.

Now you've had some successes as we've seen over the last few years in east Asia.

I'm curious on China with the the three offices because it's been across various niches in software and services, the ability to penetrate China has been difficult.

Generically they don't like to take the high-end solution.

They don't have the dollars for it.

What gives you the confidence that the investments worth it now for China in you.

Well, one of the things that I will say about this is the investment is not a huge investment.

The offices that we're opening are relatively small.

In some cases or in most case they're actually being staffed by individuals that are employee-based that actually are from China and in our, either our San Diego or San Rafael facilities and are actually looking to return.

So we don't have some of the traditional hurdles of expatriots transfer, and language if you will.

We know there is, to your point, while it is correct that in many cases the access to and the control over infrastructure exists at even a government level, hence some of the office in Beijing and linkage with partners and third parties that can help us make inroads to these markets.

There is nevertheless an explosion under way in terms of financial instruments offered to the public, a growing middle class if you will that wants to use methods of funds transfer that we can help originate and protect.

So we think it is a great market for us.

We want to be very cautious about how we enter it, and it is going to -- the strategy is more than just making cold calls on institutions.

It is also working with policy makers and others who frankly are going to be gaining factors in how we access this technology, and we think we should be there.

We think that we have the skills and the tools that can make a difference there, and we're just going to be cautious about how we enter them.

Great.

Thank you again.

Your next question comes from Phil Mickelson with J.P. Morgan.

Good afternoon.

A quick question, I think there was -- Tom Grudnowski had given in a previous call a couple quarters ago talking about some of the new products in scoring and the contribution in fiscal year '07.

I think it was, the range was 15 to 20 million in revenue from new products.

Do you think you're still at that kind of level for those products moving into, as we get into the one quarter?

Yes, I don't have the transcript in front of me, but I believe his comments was directly mostly towards expansion score, and the knowledge of where we had demand building for that product.

It is still, in '06 it was building from a very small base, but the combination expansion score and global core, I think can get us by the end of '07 to the levels you're citing.

Okay, but for, on an annualized rate?

Or you could get for the year that kind of revenue level?

I believe that they'll be that, for sure there, at that, I feel more more confident about a rate but they could even in total.

I got you.

And then, just kind of a refresher as far as your relationship with the credit bureaus.

The FICO scoring contracts, those are set, those haven't been altered with any of the issues with a lawsuit, any pricing pressure from there, it would be just all volume driven through the credit bureaus that would impact your scoring revenue.

Is that -- maybe you could give us some color around that?

Well, I will just verify your comment.

We have contractual relationships with the bureaus, and you're right, the pricing is specified.

And if we see volatility as primarily volume as to the impact of litigation, I couldn't comment, and it is as you might imagine, really these are still very good customers of ours, and we want to continue to go forward with them.

The litigation is really marshalled as a separate issue.

But there was no changing that contractual relationship with this lawsuit or anything of that nature that's been altered since that's happened?

No.

There has been no outcome of the litigation yet, or impact as you're describing.

Got you.

Real quick, I guess when it comes to scoring from a macro perspective, in the economy, it is always difficult analysis to do.

I know we talked about this with mortgages in the past.

But, can any thoughts as far as just credit origination activity and mortgages, is that somewhat influencing -- you do have tough compares for these past two quarters in scoring, but is any impact from the macro environment?

You know, as to a quarter by quarter comparison, your last point is well taken.

The impact of either 90-day volumes or true-ups in any one period relating to any individual bureaus billings has a far greater impact than say a macro level impact due to the credit cycle or refi's or upticks or downticks in credit issuance.

Scores are obviously pulled for many reasons, not just origination, but also to monitor accounts, to collect accounts and to otherwise manage them for up-sale and credit lines, credit line management and the like and I don't want to say demand is constant regardless of economic level, but the impact on any 90-day period would be far more influenced by just individual bureau upticks or downticks due to volumes than anything else.

Got you.

Chuck, Fair Isaac has been notoriously inaccurate in trying to gauge the level of bookings up quarter, and bookings up coming in a quarter.

What kind of -- you have somewhat of a sequential increase again in bookings.

What kind of confidence do you have in that number?

It seems like that number jumps around so much and it seems to be trending lower and lower every quarter as you talked about on this call, but is that kind of a best case scenario again and we're going to come in light from there or what's your confidence in that bookings number?

Let me say it this way.

I know that the pipeline for Fair Isaac is still is strong.

I know that we very a lot of activity under way.

I know that the types of proposals that we're making and are large especially in the EDM space.

I am also aware of the fact that the type of bookings that we demonstrate or we put forward is an estimate of the contractual revenues out in the future, so term will affect that.

The fact that we've now are moving away from sort of the, some of the longer marketing services bookings where we were engaged for services up in the future, bill review which had some very long-terms, is an example of how our contractual term -- time term is coming down.

That is simply the fact that our use of the word booking is the estimate of the flows that will come to us under the contract in place.

We also know -- an example of this that I like to use is the PS revenue where we may have a six-month PS contract someone, but the nature of the work that we have, although not contractually bound, almost dictates that that consultant will be in place perhaps for two years.

And that contract will be renewed four times.

Yet for us we only post that as a six-month booking because of the way we define it.

So I guess what I am generally suggesting here is that you put less emphasis on the booking value per se as to what we estimate at the beginning of a period we need in terms of new revenue over baseline to get to our target.

I think we supplied those numbers here today and I think history shows that we've been pretty good at pegging what that number needs to be.

The revenue estimates here, you're right historically Fair Isaac has been I will say optimistic aggressive in its revenue estimates and more precise on its earnings estimates, and that's perhaps to some degree a demonstration of the extent to which we integrate our internal and external communication.

We want to be aggressive with our sales force, and marketing as well.

And one last subject, and I apologize for the questions, but is kind of the anniversarying of some of these contracts that had kind of disappeared over time, and that was like in the marketing area, I believe, and some of the bill review contracts, I think this was possibly the last quarter we were kind of through those difficult -- in terms of that business rolling off or the comparisons were more difficult.

Is that true and is there any more large contracts at risk in the pipeline?

Your answer is that we are at the end of that very negative comparison, that was the loss of some business from the merger of a couple of large financial institutions, and the answer is no, I don't have -- we don't have any large contracts that are moving out from under us right now.

If there is any volatility here at all, it is pretty much volume driven.

Okay.

Excellent.

Thanks, Chuck.

Thank you.

Your next question comes from Bruce Simpson with William Blair.

Good afternoon.

Hi, Bruce.

Hey, what's the share count that is embedded in your fiscal '07 EPS guidance?

How do you see that trending through the year?

We're pretty much using current levels, and then current levels, shares outstanding, and then we have -- there is timing issues with both option issuance historically during the period and the continued share repurchase activity.

Now, I am trying to be conservative in the estimate of that, but I think the denominator that we're using throughout here is about 58.5 million shares on a weighted average basis, Bruce.

Okay.

So when you give us a 2.15, that's a GAAP number, so as I think -- I want to make sure I understood what you said.

The $0.04 -- I am sorry?

I said fully diluted GAAP, that's correct.

So we've got to incorporate the $0.04 benefit in this quarter into that number?

Exactly.

Okay.

And then I would like a little bit more information about the disposition towards cash flow deployment.

I am a little surprised that, given that you're generate ago lot of cash -- well, let me take a step back.

What is your outlook towards how you want to spend operating cash in a balance between acquisition and share repurchases?

Is the fact that you're modeling a flat share count saying that you're really not going to be actively repurchasing shares or are you just holding that steady for modeling purpose, but that's probably where your excess cash is going to go as opposed to acquisitions.

Well, a couple of things.

First of all, the allocation of cash, and this is simplistic, I realize it sounds somewhat simplistic, but the allocation of cash is governed really by our expected returns.

Obviously many of our products, many of our opportunities to penetrate markets bear our greatest possible return, and we're fully funding those programs and plans within the context and goals of operating earnings that we're trying to generate.

It is always a balancing act between investments quote unquote and elements that are actually expense, things like R&D, new infrastructure, new offices, and either acquisitions or CapEx, and then finally share repurchase.

It is true that accounting tends to bias you towards, in one way or another towards the acquisition of revenues at a profit, but in fact for cash generation you should look at that in the same light as an operating investment and expenses that lead to the same revenue growth.

And in fact, the risk adjusted calculations there would tend generally to favor internal investments, particularly internal investments in innovation and R&D of new products, which is our first desire.

Acquisitions are obviously something we look at and we're faced with many times, but we try to, and our board encourages us to put those under a microscope, and make sure that we have clearance over our essential cost of capital which we estimate to be somewhere around 10 to 12%.

And we want to make sure that we're over that.

And then that leaves share repurchase.

We haven't talked about dividend, but we clearly favor the share repurchase over expansion of the cash [inaudible] even in the current tax market.

So I don't know if that's helpful, Bruce, but the -- we would continue to do share repurchase.

We still have authorization under the existing plan for modeling for this purpose.

We just don't feel comfortable doing something more than what we would normally continue to do to just offset option issuance and general inflation in our share counts due to option exercise.

So let me clarify the question.

How much free cash flow would you expect in this fiscal year and what would you expect would be the proportion of how you spend it?

Well, the share repurchase, the capacity is 340 some million remaining, and free cash flow, I think, you know, a little over 200 million we generate, so I -- you can just balance those two out in our own timing and prediction of capital markets and where they're going to go and at what price we would be allowed to acquire the stock in any volume.

You know that we have certain restrictions in that we can only acquire during certain periods.

We suffer blackouts and daily restrictions, so those have to be factored in as well.

Beyond that, I don't think I can be more precise, maybe don't want to be.

Okay.

Let me change the channel with a follow-up question.

Please give us a little bit more detail about the segments within Strategy Machine Solutions.

That seems as if it is kind of stagnated over the last six quarters or so in terms of reported revenue.

What's working, what's not working within those various segments?

And when you think about growth throughout the year here for '07, is that growth primarily going to come from the EDM businesses?

You know, I don't think I can -- I am not going to be breaking down for public consumption any more product growth rate information beyond the way we do it for the segment, Bruce.

So, beyond that, I don't think I can - generally speaking, I think in the call we talked about TRIAD certainly did well this quarter.

And there is some rotation in the applications too as they're installed.

I think the question about sales cycle, certainly our profit that we see out of licensed sales for Blaze, Model Builder, Decision Optimizer, give us an opportunity to emphasize those products but the sales cycle is longer, and you're going to see the results a little more volatile.

But I don't want to get into individual product line growth rates or for performance over any discreet 90-day period.

Okay.

So you did 208 in the first quarter.

I think you said I believe you said you're looking for 870 for the full September year revenue.

Is that right?

Right, right.

So that implies some, implies some sequential improvement as we move through the year, so where is that improvement going to come from?

Is it from tools and professional services rather than from Strategy Machines and scoring?

I think the essential, the EDM strategies you see in the growth rate as we cited is a little higher in the tools segment and Professional Services suggests that's mostly the EDM strategy going forward.

Depending on economic conditions, you might see in any discreet 90-day period scoring even go up, and you know from the segment information the essential profitability of scoring and the impact it can have on earnings, so you can model out the 870 with the GAAP between 208 and our original number.

We're guiding to 215 for the second quarter, and I think take it from there.

Okay.

Thanks.

Your next question comes from Leo Culp with Citigroup.

Hi, guys, I just had a couple quick questions on modeling and then one more strategic one.

For your 2007 guidance, does that include the $0.04 from the tax benefit from this quarter?

Yes, it does.

Okay.

And could you -- I didn't see it in the press release.

I know you guys said that options impacted the EPS by $0.09.

Can you break that out by the expense category like you usually do or --

Actually we don't.

The geography of that in the P&L, it's spread throughout.

As you might imagine, a significant portion of it sits in SG&A, but there is some of it up in cost of sales as well, and maybe offline I can help with you that.

I don't really have it at my finger tips.

Okay.

Thank you.

And then, one quick question.

Besides, you said you saw some use of the demand deposits for TRIAD, and the --

Yes, the use of TRIAD in actually the management of DDAs where they, historically the products been used to manage, provide customer management tool for credit cards and debit cards.

Right.

Exactly.

Have you seen any other cross-selling opportunities like that into new verticals of your existing products?

Oh, yes, that's the foundation of frankly the accretion of the new ICN's and a host of vertical opportunities in retail, government, travel and entertainment, media.

The use of neural net models, the use of score cards, the use of correlation and regression techniques outside of financial services is one of the ways that we really are looking to expand the addressable markets for Fair Isaac.

Great.

Thank you.

Your next question comes from Ed Maguire with Merrill Lynch.

Hi.

Good afternoon.

This is actually Garrett Becker for Ed.

Chuck, just want to focus maybe a little bit on head count and hiring plans.

I know you mentioned with the ICN structure that it could take a few quarters to start seeing some of the traction.

Just wondering if you could maybe give us some color on your hiring plans and to what extent is the timing on that contingent upon your hiring strategy?

Okay.

I am not sure I understood the second part of your question.

Let me say it this way.

We do have -- we're at 2,712 this quarter down from 2,737 at the end of the year.

We have like all companies we suffer some attrition.

We compete with some very strong economies for talent.

Obviously the type of sale that EDM represents requires talent from the analytic consulting arena.

Our developers come with math and science backgrounds.

That's really where some of our most ambitious hiring strategies and efforts are targeted.

And we do this on our own pace with our own internal recruiters and some external recruiters, but we're looking to add to our analytic staffs.

We're looking to increase our international staffing, people overseas or willing to work overseas, and so that's sort of the emphasis that is required.

Also, several of our platforms require -- we sell the license but then we provide implementation services, and that requires implementation consultants, Professional Services personnel that can travel to a customer's location, and assist their staff in establishing models and otherwise creating intellectual property within these products.

Okay.

That's helpful.

I guess what I was trying to get at was maybe the relative importance of ramping up staffing versus training the people that you have in order to meet those -- some of your internal expectations on the ICN rollout.

Well we do both, and there is a training cycle too.

We hire both experienced staff, and in the interim to meet the demands of our revenue generation we'll often contract for personnel who for one reason or another are not willing to commit to a full-time or permanent I should say permanent employment relationship.

We actually address this in both ways.

We're actively recruiting and training while at the same time bringing in contractors who can help us on many of our projects.

Okay.

And then just one quick follow-up to that.

Any particular vertical focus within that?

In the hiring?

Yes.

I would say it is across the board.

Obviously by definition both as you've seen already financial services, insurance, telco, and then retail, perhaps represents some of our strongest efforts.

But we have 23 some ICNs that really have initiatives planned across the board that are going to require the help of these analytic scientists.

Great.

Thanks.

That's all I have.

Thank you.

Your next question comes from Dawn Talbot with One-On-One Research.

Hi there.

I've got a question for you about the larger deals that you recognized this quarter.

Can you give us any kind of further detail on how they were dispersed geographically or perhaps across industry sectors?

You know, we don't distribute that information, Dawn, discreetly.

I think I will ask you to accept the totals as they are.

We mentioned we had 17 contracts over a million dollars, and that's a function in our bookings.

That's a function of both license and PS transactions.

But we don't generally break it down by other geography or industry.

Okay.

Is there any way we can get a little color on the international expansion efforts, where you see strength or the most strength?

I think we commented that in EMEA and APAC present some of our best opportunities.

We also have the South American economies, and right here in North America and Canada several applications that give us great opportunity.

And primarily and initially in the growth of the financial services sector I guess I would say it that way, when to in, and get to international.

And that's probably closely followed by fraud as an opportunity to apply Falcon in these other economies.

All right.

Thanks very much.

Thank you.

There are no further questions at this time.

Okay.

With that, I want to thank you all, and we'll look forward to talking with you again in about 90 days, and thanks for joining us.

That concludes today's first quarter fiscal 2007 earnings conference call.