Fair Isaac Corp (FICO) 2007 Q2 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Fair Isaac Corporation 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) At this time, I would like to turn the call over to Mr.

John Emerick.

You may begin your conference.

Thank you, very much, Alicia, and good afternoon, everyone.

This is John Emerick of Fair Isaac and thank you for joining us on our final fiscal 2007 second quarter earnings 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 May 28th.

I'd like to remind everyone that except for historical information, the statements made on this call should be considered forward-looking within the meanings 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 are described from time to time in our SEC filings, including our annual report on Form 10-K for the fiscal year ended September 30th, 2006 and its quarterly report on Form 10Q for the period ended December 31, 2006.

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

A reconciliation of pro-forma information that we provide to the most comparable GAAP information is posted on the Presentations page found under the Company Information tab within the Investor Relations portion of the Fair Isaac website.

On the call with me today is Chuck Osborne, our Chief Financial Officer and Mark Greene, our Chief Executive Officer, who is joining us remotely from Asia where he is visiting with employees, clients and channel partners.

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

Now I'll turn the call over to Mark.

Thank you, John and thank you all for joining us on today's call.

I hope the connection is clear enough that everyone can hear me fine.

As you know, we issued an earnings warning last Monday describing a range of estimated results.

You can hear a replay of that call in the Investor Relations page of our corporate website.

On that call, I spent considerable time providing an assessment of Fair Isaac's situation and my vision for our company going forward, as well as the actions we're taking to return to an organic growth rate, standard with the industry, of 7 to 10%.

As I said last week, our performance last quarter, and frankly the last several quarters, has been below par, based upon the strength of our products, capabilities and robustness of the markets that we serve.

I'd like to quickly summarize the topics discussed last Monday for those who were unable to join that call.

First, sales.

Our sales organization has been more disrupted than we thought by our change from a product-aligned sales model to an industry-aligned model.

We need to pursue a product led strategy with services positioned in a role toward support product sales.

Fair Isaac has many amazing products available today and a great pipeline of new product innovation.

Refocusing our strategy around those products and how they can work together to deliver value to our clients will yield a more acceptable growth rate at higher margins well into the future.

We have initiated a company-side revamping of our product portfolio, with several components.

First, we have moved from an organization with many product silos, and artifact of our growth to acquisition, to an integrated product management and product development system that spans all of our products.

Second, we're simplifying the product portfolio, evolving to more bundled offerings, with fewer moving parts.

This will help both our sales teams and our clients to better understand our offerings.

Third, we have begun a remix of the product portfolio, focusing on high value analytics and scoring capabilities where we enjoy competitive advantage while shedding unprofitable or non-strategic product lines.

Our newly created operating team is reviewing all of our 23 industry vertical sales units to ensure profitability and to sharpen focus on execution.

The operating team is also driving several initiatives to move us towards a high performance sales structure.

These include a laser light focus on customer satisfaction and swift resolution of critical situations.

A revamped executive sponsor program, which supplements our daily sales personnel with senior Fair Isaac executives, who assist in relationship building and strategic selling at our top 25 customers.

And a new sales incentive plan designed to encourage larger ticket multi-product sales.

We've also launched a new alliances and partnership program to develop an indirect sales channel.

This will be an area that will be key for us going forward and one to which I bring knowledge and context, based on my prior experiences.

We plan to grow this indirect sales channel with a variety systems integrators and will be helped here by a renewed focus of engaging our own professional services team as enablers of our products, rather than as consultants who feed with systems integrators.

Our overall sales and marketing goal is simple.

We seek to earn the right to be our client's trusted advisor, delivering solutions for making smarter business.

Second, our professional services area.

This is an area that has not contributed as expected.

Our focus has been on meeting current service deliverables versus selling new service.

As I mentioned last week, we recruited Dick Stuart from SAP to drive these changes through the integration of the professional services organization.

Improvement in resource allocation and hiring of additional talent to staff more engagements, better meet client demand.

Dick is focused on providing quality services along our complete product suite, helping clients use these solutions to their full potential.

As we focus our professional services efforts on supporting our products, rather than General Purpose Management consulting, we also expect to partner, not compete with, other consultants and business integrators.

Third, our product development and marketing areas.

These efforts have been ineffective to date.

As professional services grew in importance, under prior leadership, investment in some of our top products lagged.

Fair Isaac's products have always maintained a cutting edge reputation and we still retain this position today, but we need to do better as this market becomes more competitive.

We need to make sure we completely understand our clients' needs and keep our products in the lead.

To this end, I expect to achieve significant improvement in output through a unified and disciplined approach to both product management and product development.

We've made changes to our leadership to make ensure that our work reflects the voice of the customer.

Our new technology team is driving toward common development methodologies, tooling and architecture across our various products.

Fourth, with respect to our overall strategy, our focus has not been sharp enough to let us anticipate and navigate through changing market conditions.

A newly formed strategy team tasked with pulling together the various sales, product management, development and services streams.

This strategy team's goal is to put us on a path of sustainable, long-term growth by focusing on investment priorities, resource allocation, competitive landscape and market dynamics.

Now collectively, these organizational changes, support initiatives, are designed to boost our operational excellence so that Fair Isaac's succeeds in its strategy of becoming the innovator and leader in the Enterprise Decision Management market.

I've heard repeatedly about the lack of clarity in our messaging around EDM.

Therefore, starting next month at our interact users conference, we will begin articulating the business benefits of EDM.

Laying out an EDM architecture and technical point of view, detailing EDM product road maps, selling out the migration tools and services that will allow clients to leverage their existing investments as they move with us towards making Enterprise Decision Management real.

EDM is a simple idea -- help companies know what they know in order to make smarter decisions across their enterprise.

EDM is about advancing beyond traditional business intelligence, which tends to be backward looking, through dynamic forward-looking decisioning systems.

We're now ready as a company to move from the theory of EDM to real world EDM deployment and we're about to show clients how.

As I stated, Fair Isaac has lots to do and the disappointing results of the past quarter highlight the need for us to do it with urgency.

We'll be cautious in promising how quickly we can produce improved financial results, but I'm confident that we're getting the Company pointed in the right direction to succeed in a very exciting market.

Let me again thank our employees, customers and shareholders for their continued support of Fair Isaac.

I hope to meet as many of you as possible at our mid-year analyst's day in San Francisco on May 15th.

Now I'd like to turn the call over the Chuck to provide you with the details around this quarter's financial results.

Chuck.

Thank you, Mark and good afternoon, everyone.

As we stated in our release this afternoon, our revenue for the second quarter of 2007 was $201 million, in the middle of the $200 to $202 million range we announced last week and a 3% decrease over the same period last year.

The net income for the quarter was $21 million versus $27 million in the same period of the prior year.

The net income for the quarter was within the range of $20 to $22 million we provided last week and a 22% decrease over the same period of the prior year.

We reported fully diluted GAAP earnings per share of $0.37 versus our preliminary range of $0.35 to $0.37 per fully diluted share.

Our annualized tax rate is now 37.3%, exclusive of discrete items.

The second quarter tax rate was roughly 42%, including the impact from the sale of our mortgage product line, which added slightly less than $2 million to the tax expense for the quarter.

Bookings for the quarter were $59 million, from which we generated $15 million of current period revenue, as compared to the range provided last week of $55 to $60 million in bookings, with $11 to $13 million in current period revenue.

A few additional comments I think are warranted here.

First, the decline in bookings is in no way a negative reflection on the quality of our revenue or earnings.

Specifically, the decline in our bookings is attributed to a shorter average term for all contracts signed during the quarter and fewer deals closed in the quarter versus historical levels.

This means we now have pressure to renew contracts more frequently.

However, this is a trend that is occurring throughout the industry.

Second, in the last two quarters, we have experienced a decline in the fraud-related bookings.

This is concerning.

However, we have identified the issue as a delay in a product upgrade and not driven by market demand.

Finally the downward trend in overall bookings value is impacted by a greater focus on revenue goals in our commission plan.

Now, let me walk through some of the more specific financial details with regard to our segments.

Our revenue contribution by market segment is as follows.

Scoring contributed $42 million or approximately 21% of the total revenue for the quarter, against $42 million or 20% of the revenue in the same quarter of the prior year.

The scoring revenue for this quarter reflects a flat performance on a year-over-year basis.

Strategy Machines contributed $112 million, or about 56% of total revenue, against $119 million, or about 57% of revenue in the same quarter of the prior year.

The Strategy Machine revenue represents a 6% decrease from the prior year, due mainly to a decrease in sales within the fraud, mortgage and customer management product lines.

In addition, the consumer business reflects a year-over-year decline, however this analysis is complicated from a one-time true up that was included in the second quarter of fiscal 2006, and from the sale of roughly $3 million in FICO kits on the QVC network this quarter.

Analytic Software Tools totaled about $9 million, or 5% of the total revenue for the quarter, as compared to $9 million, or 4% of the revenue, in the same quarter of the prior year.

The 6% year-over-year increase was essentially driven from sales relating to our model builder product.

Professional Services segment of our business contributed $38 million, or about 19% of total revenue for the quarter, as compared to $39 million in the same quarter of the prior year.

This 3% decrease was primarily due to lower revenue from implementations of fraud and collection and recovery products and from lower industry consulting revenue.

With regard to vertical markets, the percentage of this quarter's revenue by vertical was as follows the financial services vertical was 64%, .

Insurance was 8%.

Telecom was 5%.

Retail was 9%.

And all other verticals, which consist of government, My FICO consumer branded goods, and other miscellaneous categories, were 14%.

Focusing on our recurring revenues, the company's transactional or recurring revenue for the quarter represented approximately 77% of our total revenues, versus the 77% reported in the same quarter in the previous year and generally on par with the 76% reported at the end of fiscal 2006.

Percentage of consulting and implementation revenues held constant at 18% of total revenues this quarter.

One-time or license revenue was 4% of our total revenue this quarter, also flat from the 5% reported a year ago.

Our internation base declined from last quarter to this quarter at approximately 28% of our total revenue base.

However, this was still a small increase from the 27% that international revenue represented in the same quarter of last year.

Turning now to expenses, the breaking down of our operating expenses shown as a percentage of revenue during the quarter was as follows.

Cost of revenues for the second quarter was approximately 37% as compared to 35% in the same quarter last year.

Our research and development costs were 9% for the quarter, as compared to 10% for the same quarter last year.

And finally, selling general administrative costs for the second quarter were approximately 34%, as compared to 31% for the same quarter last year.

I'd like to provide some additional commentary relating to our expenses.

First, Fair Isaac's total expenses are made up of almost 65% personnel-related expenses and this can have an impact on the fluctuation between our three operating expense categories.

The fluctuations between one expense category and another can be the result of employees charging time to different projects.

Second, the changes in total expenses from one period to the next can also be impacted by this high personnel cost.

For instance, our overall expense structure is significantly impacted in certain quarters by our pay review cycle, incentive and commission expenses, and the resetting of payroll taxes.

Finally, expenses are impacted by changes in the amount of direct costs in the quarter that are more -- is more the result of the mix of the revenue than the amount of the revenue.

More specifically, a higher mix of sales from services, consumer and/or insurance bill review business units will cause an increase in the direct cost component of the cost of revenue, regardless of the change in the overall revenue.

Okay.

Our operating income, total operating income for the first quarter was $36 million, compared to $45 million last quarter.

The pro-forma operating income was $41 million, before amortization of intangible assets of $6 million and a one-time gain of $1.5 million from the sale of our mortgage product line.

This equates to a pro forma operating margin of 20%, down from the 25% reported last quarter, a statement to the amount of operating leverage in our business and the impact this leverage has on changes in the amount of revenue.

Net income for the second quarter was $21 million, compared to the prior quarter of $31 million, a decrease of 31%.

This decrease was mainly due to the lower revenue in the quarter, as well as the higher level of taxes.

Our annualized tax rate was 37.3% for the quarter, exclusive of discrete items.

This increase in our annualized rate was mainly driven by the impact of our revenue short fall in foreign jurisdictions.

The rate for the second effective quarter was roughly 42%, the result of the sale of our mortgage product line, which had a book basis that exceeded the tax basis, thereby creating an additional discrete tax expense in the quarter.

Turning to our balance sheet.

Our cash and investments as of March 31, 2007 increased by $37 million to $304 million, as compared to $267 million as of September 30, 2006.

Primary contributors to the change in cash and cash equivalents include cash provided by operations of $88 million, $62 million received from the exercise of stock options and stock issued on our employee stock purchase plan and $14 million received from the sale of our mortgage products completed on March 23rd, 2007.

Cash used during the first six months includes $12 million related to purchases of property and equipment and $196 million used in our stock buyback activity, which I'll cover in more detail in a moment.

Finally, I wanted to mention our free cash flow for the trailing 12 months.

We define free cash flow as cash flow from operations less capital expenditures and less dividends paid.

The free cash flow for the trailing 12 months is currently $138 million, a decrease from our historical levels.

This decline is attributed to our lower level of cash flow from operations including the use of cash for working capital and a greater amount of capital expenditures related to the data center build-out.

I would expect the trailing 12 month free cash flow for the balance of fiscal 2007 to remain consistent with the current level.

Please note, improvements in our receivable collection process and a potential refinance of the convertible to venture could have a further impact on our free cash flow.

Net accounts receivable, as of March 31, totaled $179 million, up from the December 31st balance of $177 million.

Our DSO, or days sales outstanding, were up from 78 days at the end of the first quarter to 80 days at the end of this quarter.

We are very focused on improving this component of working capital.

We can attribute the DSO increase to internal process and efficiencies, slower payments associated with certain international clients and longer payment terms on certain contracts.

Our property and equipment balance was $54 million, compared to the $55 million reported as of December 31, 2006.

The nominal Increase is the result of the net impact from depreciation, capital expenditures and the sale of our mortgage product line.

We are able in the open market and repurchased a total of 1.1 million shares at an approximate cost of $42 million during the second quarter.

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

As of March 31, 2007, we still have $304 million remaining under the November 2006 authorization and continue to believe that our stock is perhaps the most attractive use of our capital at this time.

One impact of our share repurchase activity involved the offset against the diluted impact associated with granting non-qualified stock options.

For the prior three fiscal year periods, Fair Isaac has granted an average of 4.1 million shares per year, including the granting of options forfeited by attrition.

In alignment with market trends, our fiscal year '07 equity allocation model involves a substantial reduction in overall equity award activity, as well as a shift toward the use of restricted stock units.

As a result we anticipate total FY07 equity awards will total approximately 2 million shares, representing a 50% decline over the prior three year average.

In other words, the net impact from our share repurchase activity will be improved going forward versus our historical basis.

Looking at our staffing levels, our total headcount at the end of the quarter was 2,686 compared with 2,712 at the end of last quarter.

This end-of-quarter headcount includes the reduction of 60 people from the sale of the mortgage assets.

This also includes approximately 200 sales and client partner positions that have a quota-based compensation program and we are recruiting for another 15 like positions at the current time.

Turning now to guidance.

The guidance for the third quarter and for our full fiscal year 2007 will remain unchanged from our release last Monday.

We lowered the expected revenues for the fiscal third quarter of 2007 to a range of $195 to $200 million, and earnings per diluted share to be approximately $0.33 to $0.38.

Further, we stated revenue guidance for the fiscal 2007 to be in the range of $795 to $805 million, which includes the impact from the sale of our mortgage products.

From this revised revenue, we expect GAAP earnings per diluted share of between $1.55 and $1.65.

To be very clear, the GAAP EPS guidance stated last quarter did not include any impact from the refinancing of our existing bond.

However, based upon the current price of our stock, we believe it is only prudent to model a potential impact from the refinancing of the contingent convertibles, with higher costing term debt.

Focusing on margins, as I previously noted, we expect to experience a slight compression in operating margins for remainder of fiscal 2007, based upon the lower revenue levels and some increase in expenses, as we work through the changes we have identified and discussed.

However, as we move beyond fiscal 2007 we expect to see pro forma operating margins expand from pricing improvements from the continuation of our expense management initiative.

For modeling purposes, we can also tell you that we have assumed a 37.5% effective tax rate for the remainder of fiscal 2007 and share repurchase activity consistent with our normal buying patterns.

As it relates to bookings, we expect in the third quarter we will need to deliver between $15 and $20 million of revenue from new bookings, in the range of $55 to $75 million, in order to deliver our guided revenue of between $195 to $200 million.

As Mark stated, I want to thank you for your continued support of Fair Isaac.

We're very confident that our products and cash flow will lead to a higher valuation.

In addition, I hope to see all of you at our mid-year analyst's day in San Francisco on May 15th Operator, with that, we're finished with our formal remarks and we may begin the question-and-answer period.

Thank

At this time, I would like to remind everyone [OPERATOR INSTRUCTIONS].

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Tony Wible of CitiGroup.

I guess, with regard to your prepared remarks, I thing you mentioned something about working capital potentially changing the cash flow assumptions.

Could you provide a little bit more color on what you were specifically referring to.

Yes.

Tony, there what you can see our days sales outstanding is up and our receivables and, frankly this is an area which, on our part, is partially intentioned because of the granting of some terms in some of our contracts, a little longer terms in the -- in the initial stages and that will ease off as the contracts work out.

We also have with regard to some of our multi-element transactions and some of our international transactions, some inefficiencies frankly in invoicing that just mechanically adds to our days sales outstanding and we're going to make some changes there, that will improve that and we're looking to bring that back down.

I think, roughly, one day of receivables is about $2 million and I think we've got -- if we just return back to sort of our historical levels, that frees up another $4 to $8 million of cash flow.

And on your other comment, I think I caught there you're saying that you could potentially refinance the debt, but at the same time, also providing a decline in new equity awards.

Should we anticipate those two offsetting each other, for the most part?

Well, really the issue there, it turns -- there's a couple things.

First of all, the contingent convertible currently carries a pretty low interest rate, a percent and a half.

And we're just assuming in our modelling, that we'll have to refinance at a higher sort of term rate.

The granting of few -- it's really the granting of not so much fewer awards as the use of restricted stock, which carries less dilution that helps cut down on the number of shares actually issued and outstanding.

The contingent convertible actually was, you may recall, reissued a couple years ago to actually call for the issuance of equity only for the uptick, the premium over the par value.

So that dilution has already been severely cut back from the $400 million to about, at most, really sort of, $80 million up to the conversion price.

And so that already -- that was really a change that's been in place for some time.

Okay.

Last set of questions here and I'll jump off and let somebody else.

But the actual expense line items between R&D and, I guess, gross margin, what we were looking for, a little bit of mix shift.

I think you saw some good leverage on R&D and a little bit of weakness in gross margin.

Is that because that employees that you were talking about before, that you were saying some employees roll over to the --

The comments really reflect the fact that our R&D will move and is volatile depending on where we've assigned people.

If they're assigned to a specific engagement, that's an element of cost of sales operating expenses.

If in fact, it's research and development projects or new product development falls into R&D and we end up moving scientists back and forth.

We also incur some higher cost of sales from My FICO which had a nice uptick in the quarter -- we had -- on QVC, I think, as we commented and that added a little bit to the cost of sales as well.

Would that be the biggest driver behind the sequential change?

Yes, yes, sequentially that has the biggest impact.

Is that something you would anticipate heading in the third quarter and going ahead or was that just a one-time.

I think that's probably more of a one-time impact.

The QVC sale was specific to this quarter.

Great.

Thank you.

Your next question comes from Ed Maguire of Merrill Lynch.

Hi.

Good afternoon.

When you're discussing the trend in bookings toward shorter terms, is there a mix shift involved with that or are customers just interested in just booking shorter term lengths?

I guess what I'm trying to get to is, are you booking a different -- is there a different characteristic to the deals that you're booking?

You know the -- what's happening here on booking -- it's both an industry trend and then also specific to us.

Of course the -- we've seen a shift, at least with some of our larger contracts going from, say, an average of just say three years down to a year-and-a-half in terms of term.

That in and of itself, will reduce the booking value because we're only estimating out the sum certain revenues for the contract period.

But, but we know that in most cases we're going to renew those.

So although it doesn't show up in booking, it doesn't necessarily portend or forecast a diminished revenues in the future.

It just puts pressure on us to renew that booking.

And that is a customer desire.

They want to bring everyone back to the table again in, in a short period of time to negotiate.

And I think that's something that is true within the industry, as well.

There is, of course, a mix element to this, to the extent professional services are increasing in relationship to others.

Those tend to be shorter term contracts and argue for a smaller booking element, as well.

And so, I don't know if that addresses your question.

No, that's, that's, that's very helpful.

On research and development, as you're looking at the portfolio of products and deciding where you want to really invest, it sound like, from your comments, that there may be a few product lines where you, where you feel like you might need to invest more heavily.

Do you see potentially needing to ramp up your R&D efforts or potentially outsource?

This is Mark.

I think we'll see a modest increase for a quarter or two in a couple of the product areas.

But mostly what we're doing is reprioritising the R&D spend to focus on a high leverage product.

Okay.

And just a final question.

As you look at the 23 different ICNs and rationalize that to, toward -- along with your product sales priorities, what are the areas where you guys feel like you really have the greatest potential?

And which products do you think might have fallen behind where you'll be really focused on?

With respect to the ICNs there's a couple that stand out as having great traction and compelling value (inaudible) to deliver.

Those would include the financial services, insurance, healthcare, retail and Telco.

A couple names not mentioned there, are the areas that we're having close scrutiny on to see that we have relative offerings and can gain traction.

So, the five that I mentioned I feel very good about.

The others are under review.

Okay.

Thanks.

Thanks a lot.

Your next question comes from [Thomas Arnst] of Deutsche Bank.

Hi.

Good evening.

This is actually (inaudible) covering for Tom.

One short question we have here.

With regards of the dispute with the credit bureaus and Vantage core, can you give us an update on the situation here?

Yes, as mentioned on last week's call, you'll not be surprised if there are ongoing discussions both of a legal and business nature, but giving the pending litigation there is no update we can provide at this time.

If I could have a follow-up, not related to the legal situation.

Are you seeing any erosion on your business, related to the Vantage core being out there in the market?

No, clearly -- I think we also covered this point last week, we have not actually seen significant traction to date from the Vantage core offering.

Clearly the existence of that product is an added stress in our sales and marketing effort, but to date we actually don't see any significant market momentum for that offering in our customer set.

Your next question comes from Nik Fisken, Stephens, Inc.

Hey, good afternoon, Mark.

Given all of the changes the last six, nine months, can you talk to where you're seeing the most employee turnover?

And then specifically address the sales and R&D centers?

Yes, we had some turnover, both voluntary and involuntary, in our sales organization over the last six to nine months.

We look very closely at attrition rates and, just in the last few weeks since we started making some of the changes outlined here, we are quite encouraged by our ability to sort of hold on to key employees.

The attrition problem that we had faced months ago seems to be coming under control.

It's an area that wants continued attention going forward, so we don't think we're out of the woods yet.

But our attrition rates are much more in line with industry norms at this point, than they were even two or three months ago.

We've seen that issue, especially in some of our services areas, where the professional services folks needed to understand the strategy going forward.

And given that there was lack of clarity in some of that, we had some morale and retention issues in that part of the business.

With the arrival of Dick Stuart, that area also feels particularly under control at this point.

So, work under way to further progress this issue, but I'm encouraged so far with our ability to hold onto key employees.

And where are we hiring right now, just to get the full scope?

We're hiring in market-facing parts of the business, so we're hiring in sales, particularly in what we call the customer support teams, to allow our salespeople to really focus on selling rather than administrative activities.

We're hiring also in the services organization on delivery teams.

We are not particularly hiring in the back office or infrastructural parts of the business.

We're emphasizing hiring in the parts of the business that touch customers.

Okay.

Are we going to -- when are we going to guide FY '08?

We would not put that out until our call for the -- for the fourth quarter is when you'll see the final guidance on '08.

Okay.

And are we not going to guide non-GAAP anymore?

Well, actually, we're trying to -- no, we're not.

I mean, we aren't, we aren't -- we don't have any significant reconciling items that -- and frankly, we think the comparison to everyone else in the world, we're trying to keep it as comparable as possible, so --

And then the same thing for bookings?

The GAAP, I mean, bookings are not a GAAP concept, of course.

But we are giving, we are giving out our forecast for our bookings and the revenue that we expect to derive from those bookings in the immediate following period.

Okay.

And then lastly, can you give us a score card?

I know you guys touched on the EDM strategy a little bit, but can you give us a score card, in terms of what sales you've had there and what industry verticals?

Yes, I'll take that one.

The financial services -- we have a sales methodology that speaks to the maturity of adoption in different industries.

We understand that different industries are at various points in terms of their understanding and willingness and ability to adopt EDM.

Financial services scores very high in that regard.

Not surprisingly that's a business that spends a long time investing in data warehouse, business intelligence, and they understand the issues and the technology involved here.

We are making good progress, similarly, in the retail industry, but that industry as a whole tends to lag a little bit, in terms of their use of analytical tools.

Some of the other areas that I mentioned, such as healthcare and telco, these are newer thoughts.

And while we're very encouraged by the progress there, those industries are much earlier in their adoption of some of the EDM technologies.

But no significant sales outside of financial services, it sounds like?

The principle ones, so far to date, have been financial services.

That's right.

And we looked there for a couple things.

We looked for multi-product sales and we looked for integration among the components.

As a possible example, for instance, a bank that has one of our collection activity, collection receivable modules and uses the knowledge they gain there about fraud to feed it back into their origination system, so that they stop doing business with fraud officers in the first place.

That kind of linkage and integration is characteristic of EDM.

Banks get it.

Some of the other clients I mentioned are earlier in their understanding of that.

Okay.

Thanks so much.

Your next question comes from Kevane Wong of JMP.

Hey, how you doing?

Two things.

I guess, first for Chuck, before you guys have given a bit more of a Strategy Machine segment breakdown.

I was wondering if you could give that or if that's not going do be given out at this point.

To get much more within that, would be going down the product line and we -- that we don't do anymore.

We stopped that frankly about a year and-a-half ago.

That's fair enough.

And then, also sort of curious as far as credit cycles, really curious what you're seeing.

When you're looking at sales of origination products versus more marketing stuff, have you -- have you seen any shift yet where banks or credit card guys are looking at moving more towards marketing?

Or is it really still at the point of the cycle where they're looking more at managing their current stuff (inaudible) versus origination and marketing?

That differs by country.

And it tends to do with the economic cycle.

Clearly in the U.S.

with the focus on subprimes, the answer to that question would be different than it this Europe or Asia, where I am at the moment.

But I would say, the offsets are, are going in different directions.

On a whole we don't see much of a shift between those market segments.

How about if you're looking specifically at the U.S.?

In the U.S.

we obviously see some interest in the originations area to understand activity in the subprime market.

And there's also interest there in the fraud activity as well.

So, there are dynamics at play in the U.S.

market.

All right.

Thanks very much.

Thank you.

Your next question comes from Bruce Simpson of William Blair.

Good afternoon.

Couple of quick ones for you, Chuck.

You made some remarks about free cash flow.

Can you give us just sort of what you think is a stabilized annualized level here?

Is it sort of in the $150 million range, as you define free cash flow?

I think it's probably just a little higher than that, Bruce.

Probably, say, $160.

Okay.

And also can you talk about your thoughts about leveragability of the balance sheet in terms of repurchasing shares?

I mean, where are you comfortable or uncomfortable, what do you want to do with the share repurchase, particularly as you start to overweigh the option issuance?

Well, we've got -- I mean, I think your, some of your question here goes to the ability of the balance sheet to support the debt that would take us to another level.

And we have already by the placement of the debt we've got in place, the current line we've got in place, where we've got lots of capacity, we're well within that, plus our cash flow is -- You've got a certain amount of operating cash for a company this size that you should maintain, say, $100 million, because of the various locations and what we're doing, maybe over one operating period are out-of-pocket cash expenses, are about $150 million in any given quarter.

But I think we, we could, we could leverage up beyond where we are right now if our board certainly chose to.

Okay.

And then a couple for Mark while I've got you.

The -- what senior hires do you need to make?

Are you looking for a senior head of sales?

Are there -- within the top 10 guys within the organization, what roles are open that you need to hire?

We have a search under way for a general counsel and senior head of sales and a senior marketing officer, those three.

Okay.

And then Mark, I guess this is appropriate, given that you're in a different time zone.

Can you give us kind of a -- step back and sort of assess where you think is the health of the Fair Isaac International Empire?

The last time the company really gave too much information about this, it was in context of purchasing London Bridge.

Haven't gotten a great deal of detail about that for a couple of years.

And so, tell us if you would where you think the best opportunities are, to what extent the assets that you bought in London Bridge have lived up to what you wanted them to be and so forth?

RIght.

Well, the London Bridge assets, although they have the name London are actually broadly applicable globally.

So it's actually not a particularly relevant part of the thinking around how we expand internationally.

I can tell you that I'm very encouraged by the opportunities we face internationally.

The typical balance of this type of business that I would like to see us move toward is roughly equal thirds -- Europe, America and Asia.

In fact, that's the number I was familiar with at IBM and the kind of number you see generally in the software industry.

As you'll know, we are no where close to that today.

We drive about 72% of our business in North America and only 28% from the other markets internationally.

Having been recently to Europe and being currently in Asia, there's enormous opportunity for us here.

And so, we are aggressively looking at how we best expand into Eastern Europe.

How we best expand into China, where I am at the moment, and how we strengthen our business which is already footprint in Japan, but there's clearly upside there as well.

The markets that I'm referring to of China, Japan and Eastern Europe clearly need the capabilities we have.

There is great uptake of our products when we meet with clients.

And the challenge for us is to find the appropriate levels of investment to keep up with the market demand.

Is that 28% of revenue that comes internationally now heavily dominated in Western Europe?

That's correct.

So how -- if we could think about like what asset base you use to drive success in the next few years internationally, is it going if what you've already purchased or is it joint ventures with others or greenfield start-ups?

In terms of the products, the bulk of what we need in those new markets is stuff we already have on the truck today because a lot of these markets are earlier in their adoption of EDM technologies.

And our traditional products serve those markets very well.

In terms of how we penetrate the markets will be a combination of two things fundamentally.

One is to follow some of our larger global clients into those markets as they themselves expand.

So you'll know, for instance, that U.S.

banks are quite active in China.

It's a good opportunity for us to take work we're already doing in those banks domestically in the U.S.

and replicate it in China.

The other route to those markets, of course, is partnerships.

And we have, as mentioned on prior calls, quite a bit of effort under way now to start a fairly formal alliance and partnership program and drive indirect sales in combination with partners in the various markets.

Thanks.

Your next question comes from Dawn Talbot of One-on-One Research.

Hello, gentlemen.

You have addressed my question.

It was respect to the refinance of the convertible debt.

Thank you, Dawn.

As a reminder (OPERATOR INSTRUCTIONS).

There are no further questions at this time.

Okay.

Well, thank you all very much for joining us.

We look forward to your attendance, if at all possible, in San Francisco at the May 15th analysts day and thank you all for attending.

This concludes today's teleconference.

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