Fair Isaac Corp (FICO) 2007 Q3 法說會逐字稿

Good afternoon.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Fair Isaac quarter three earnings release 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, and good afternoon, everyone.

This is John Emerick of Fair Isaac.

Thank you for joining us for our fiscal 2007 third quarter earnings.

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 the call through August 22.

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

Additional information concerning these risks and uncertainties are described from time to time in SEC filings, including our annual report on Form 10-K for the fiscal year ended September 30, and our quarterly report on Form 10-Q for the period ending March 31, 2007.

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

Fair Isaac, however, reserves the right to update all information including forward-looking statements or any portion thereof at any time for any reason.

A reconciliation of pro forma information that we provide to the most comparable GAAP information is posted on the presentations page found within the Investor Relations portion of the Fair Isaac website.

On the call with me today are Mark Greene, Chief Executive Officer; and Chuck Osborne, our Chief Financial Officer.

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

Now I'll turn the call over to Mark.

Thanks, John.

Thank you all for joining us on the call today.

On our last earnings call I laid out for you both the challenges and opportunities facing our company and what we need to do to get back on a track for growth.

While we still have a lot of work to do in the months ahead today I would like to review with you our results and the progress we're making towards this goal.

This quarter we reported fully diluted earnings per share of $0.42 versus the $0.33 to $0.38 that we guided last quarter and the $0.40 that we reported in the same period last year.

Revenue was 205.8 million with net income of 23.8 million.

Our core products such as Scoring, Debt Manager, and Falcon performed well this quarter.

In summary, our year-over-year revenue as reported decreased by roughly 1% and our GAAP earnings per share increased by 5% over the same period of the prior fiscal year.

Adjusted for the March 2007 sale of our mortgage product line, which had previously contributed approximately $4 million per quarter, we experienced flat to marginally positive revenue growth in the third quarter.

While results for the quarter were better than we guided we still have substantial work to do to deliver sustainable growth.

As I will discuss later in the call, we believe we have a solid strategy in place to enhance our growth prospects and to deliver increased value to our shareholders.

But before I discuss this plan, let me first update you on progress that we've made on several issues outlined last time, issues affecting both our company and the industry overall.

I'll begin with sales.

We previously communicated that our sales organization was disrupted by last year's change from a product aligned sales model to an industry aligned model.

We stated that Fair Isaac is pursuing a client centric strategy, emphasizing software product sales, supported by high value professional services.

I am increasingly confident that this refocused strategy together with our continued emphasis on improved customer service will boost both revenue and margins.

To execute this sales strategy we have recently brought on board a world-class head of sales, Greg Corgan, who previously led sales at TA and was also formerly a senior sales executive at IBM.

In Greg's sales organization we have accomplished a few things over the last quarter.

We have added over 40 client support managers and client partners to improve our coverage and support.

We have developed a new strategic account program where senior Fair Isaac executives are assigned as sponsors for each of our top 30 global clients.

We have launched a complex deal pursuit team to drive multiproduct proposals for sales opportunities larger than $1 million.

And we have completed our first ever formal client satisfaction survey with the results due next month along with specific recommendations for improving client service.

During the quarter we also implemented our previously discussed streamlining of the sales organization.

Reducing the number of industry verticals from 9 to 5.

Those are financial services, insurance, retail, telecommunications, and healthcare.

We have shifted resources from other industries to support these five focus verticals, verticals where we believe we have strong offerings, compelling value propositions, and demonstrable market traction.

Now, supplementing these efforts in direct sales we've also launched during the quarter a formal indirect sales channel, led by a new Vice President of Alliances and Partnerships, Bob Berini.

Bob joins us from IBM where he played a similar role overseeing worldwide financial services partnerships.

Bob's team is driving global alliances at Fair Isaac with IBM and other leading systems integrators using a blended services model that combines third-party consultancy with our own product related professional services team.

We are building a robust pipeline of drink opportunities and we're optimistic about growth prospects from this partner channel.

Let me turn now to our Professional Services organization where Dick Stork's team has made significant progress in integrating the Professional Services unit, improving resource allocation and hiring additional talent to staff our engagements.

We currently have 483 active full-time consultants, an increase of 67 FTEs, or 16% since my first report to you in March.

Contractor resources have also ramped up in this time from 55 to 90 full-time contractors.

These are strategically added resources in our Professional Services organization especially in high-skill areas such as modeling and analytics with the intention of lowering our utilization rates toward industry norms, better aligning with our sales teams and ensuring an adequate bench of talent to meet customer demand.

Our PS organization is also rationalizing its portfolio of service offerings which are now designed to help customers use our software solutions to their full potential.

We have repositioned the PS team to focus on our software assets, (inaudible) development for general purpose management consulting as in the past.

Turning now to product development and management, Fair Isaac's products have always maintained a cutting edge reputation and they still do today, but we can do even better.

Our technology team has several efforts underway here.

First, during the quarter we completed the integration of our product management and development teams unifying these efforts under a common management structure.

Second, product management head Mark Layden has begun a rationalization effort to consolidate our current portfolio of over 160 products into 40 simpler and easier to understand solutions.

This streamlined structure will benefit both our clients and our sales teams.

Third, our CTO, Bernard Nann has deployed a common development methodology, tooling, architecture, and quality assurance process across all of the development teams.

To ensure that we remain a world-class development organization, Bernard has also recently hired Holger Mueller formerly with Oracle, and SAP, as our new head of development.

Finally, in this area, to ensure that our products continue to benefit from our rich pipeline of innovation we have tapped Andrew Jennings to assume the leadership of our research initiatives, taking over from Larry Rosenberger who remains with Fair Isaac as an analytic science fellow.

Let me move next to our strategy around enterprise decision management.

As I've noted in the past, EDM is at the heart of our growth strategy, and it's really a very compelling idea.

Helping companies to know what they know in order to make smarter decisions across the enterprise.

The idea behind EDM is to tie all of the pieces together allowing companies to move beyond traditional business intelligence to a much more dynamic forward-looking decisioning system.

It's therefore important that I mention progress in one metric with both operational and strategic significance, namely market acceptance of our EDM strategy and concept.

Since we rolled out our EDM architecture and product road map last quarter we have seen considerable interest from many of our largest clients.

I'm happy to report that several leading institutions and diverse geographies have recently made strategic commitments to this road map with multi product, multimillion dollar purchases that represent design wins for our EDM strategy.

Examples include [GroperStant and Dair] across several institutions in Spain, Europe, and Latin America.

Akbank in Turkey, Alpha Bank in Greece, Banco De Credito Del Peru, and two of the largest financial institutions in the U.K.

A further indication of our success with EDM is a recent is win at the Department of Defense where we are helping around issues of purchase card abuse, misuse, and fraud.

This is a multiyear, multimillion dollar contract with numerous opportunities for expansion.

As these examples demonstrate, we will be helping institutions to automate, improve, and connect decisions across their enterprises, just as our EDM vision promises.

Our sales team is actively working to secure further such large scale EDM commitments from additional clients.

Moving on to some of our strategic initiatives.

I discussed last quarter that our strategy team is tops at identifying key areas of strategic focus and ensuring that we optimally invest to achieve long term growth.

The team is following a disciplined approach to evaluating investment priorities, resource allocation, competitive landscapes, and market dynamics.

One priority of this strategy team is to ensure proper investment in our five focused industries.

For example, in support of our healthcare vertical, in May we entered into a technology licensing and development relationship with Healthcare Analytics, Inc., or HAI.

HAI is a private company focused on range of revenue cycle activities with hospitals and healthcare providers.

We have participated as a minority investor which is reflected in our financials.

HAI has licensed Fair Isaac technology that will have useful applications in healthcare revenue cycle management.

We're excited about our arrangement with HAI and expect it will add to our growth well into the future.

Another priority of our strategy team is geographic growth, most notably our expansion into China.

During the quarter, we established a subsidiary in China, appointed a managing director for that country and opened our office in Beijing.

We are now working with four of China's largest financial institutions.

Bank of China and China Merchant Bank, both of which are existing clients who have broadened their use of our decision engine applications as well as another top four bank and a top three credit card issuer who have recently selected Fair Isaac to provide fraud management services.

In recognizing the enormous potential of the Chinese market where credit card volumes are growing at 100% a year this November we will be hosting our Asian Interact users conference in both Shanghai as well as Tokyo.

Let me conclude these remarks by saying that collectively these initiatives are designed to boost our operational excellence to help Fair Isaac maintain its success as an innovator and to reinforce our leadership position in EDM.

The key to getting this all right is to ensure that our teams understand our strategy and have a shared sense of mission.

For this reason, management has invested heavily over the past few months in reestablishing a set of core values that emphasize a focus on clients, a commitment to high performance, and an emphasis on innovation.

The ongoing reinforcement of these values and the accompanying investment in our people and talent development are bearing fruit as we see improvements now in both productivity and employee retention.

In summary, I believe we're making good progress in building a platform for growth.

Sharpening our industry focus, pursuing geographic expansion, making good on the promise of EDM, and assembling a world-class team.

I will now turn the call over to Chuck to provide you with further details on 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 third quarter of 2007 was 205.8 million slightly above the 195million to 200 million guidance we provided in our last earnings call.

And a 1% decrease from same period last year.

Net income for the quarter was 23.8 million versus 26 million in the same period of the prior year an 8% decrease.

However we reported fully diluted GAAP earnings per share of $0.42 for the third quarter against our guidance of $0.33 to $0.38 per fully diluted share.

This is an increase of 5% from the prior year quarter.

The bookings for the third quarter were 90 million from which we generated 18 million of current period revenue.

As compared to the guidance provided of 55 million to 75 million in bookings with 15 million to 20 million in current period revenue.

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

Turning to our segments, our revenue contribution by market segments is as follows.

Scoring contributed 47 million, or approximately 23% of the total revenue for the quarter, against 44 million or about 21% of revenue in the same quarter last year.

The Scoring revenue for this quarter reflects an 8% increase on a year-over-year basis, mainly the result of higher volumes from the credit bureaus.

Strategy machines contributed 113 million or about 55% of total revenue against 115 million or about 55% of revenue in the same quarter of the prior year.

The Strategy machine revenue represents a 1% decrease from the prior year due to the divestiture of the mortgage product line sold last quarter.

Slight declines associated with customer management and originations, offset by a strong quarter in collections and recovery.

Analytic Software Tools totaled about 10 million or 5% of the total revenue for the quarter as compared to 12 million or 6% of the revenue in the same quarter of last year.

The 15% year-over-year decrease was due to a decline in revenues generated from the sales of the Blaze Adviser and Model Builder products.

The Professional Services segment of our business contributed 35 million or about 17% of total revenue for the quarter as compared to 37 million in the same quarter of the prior year.

This 4% decrease is primarily due to a decline associated with industry consulting, fraud, and collections and recovery implementation services partially offset by an increase in revenues derived from customer management and EDM implementation and consulting services.

Now looking at our verticals the percentage of this quarter's revenue by vertical market was as follows.

Financial services vertical was 68%.

The insurance vertical was 9%.

Telecom was 4%.

Retail was 6%.

And all other verticals which consist of government, myFico, consumer branded goods and other miscellaneous categories were 13%.

The Company's transactional or recurring revenue for the quarter represented approximately 76% of our total revenues versus the 75% reported in the same quarter in the previous year, and generally on par with the 75% reported at the end of fiscal 2006.

The percentage of consulting and implementation revenues held constant at 17% of our total revenues this quarter.

One-time or license revenue was 7% of our total revenue this quarter, constant with the 7% reported a year ago.

Our international base increased from last quarter to this quarter with approximately 31% of our total revenue base coming from outside the United States.

This is an increase from the 30% that international revenue represented in the same quarter of last year.

Now turning to expenses, the breakdown of our operating expenses shown as a personal of revenue during the quarter was as follows.

Cost of revenues for the third quarter was approximately 36% as compared to 35% in the same quarter last year, which resulted from higher personnel costs plus an increase in direct costs associated with a change in product mix.

Our research and development costs were 8% for the third quarter as compared to over 10% for the same quarter last year, which resulted from the continued shift of certain personnel to lower cost regions such as India.

Finally, selling, general, and administrative costs for the third quarter were approximately 35% compared to 32% for the same quarter last year.

The increase was related to compensation costs associated with additional client facing personnel, amounts related to commission and incentive plans, marketing costs related to our annual InterACT conference, and costs associated with settling an ongoing lawsuit relating to our insurance bill review business.

Total operating income for the third quarter was 36 million compared to about the same 36 million in the third quarter last year.

The pro forma operating income was 42 million before amortization of intangible assets of 6 million.

This equates to a pro forma operating margin of 21%, a decrease from the same quarter last year when excluding the restructuring costs in fiscal 2006 and up slightly from the 20% reported last quarter.

Net income for the third quarter was 24 million down from the 26 million reported in the same period last year but an increase of 11% from the net income reported last quarter.

The resulting GAAP earnings per share of $0.42 per fully diluted share compared to this quarter's guidance is mainly due to higher revenue, a lower tax rate, a lower fully diluted share count, all offset by the higher operating costs already described.

Our effective tax rate was approximately 35% for the quarter.

The improvement in this rate was mainly driven by the increase in our revenue from foreign jurisdictions.

Turning to our balance sheet, our cash and investments as of June 30, 2007 increased by 3 million to 271 million as compared to 268 million as of September 30, 2006.

The primary contributors to the change in cash and cash equivalents include cash provided by operations of 129 million and 77 million received from the exercise of stock options and stock issued under an employee stock purchase plan.

Significant uses of cash during the year to date period included 282 million used in our stock buyback activity which I will cover in more detail in a moment and 17 million related to purchases of property and equipment.

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 145 million against the 163 million of trailing twelve-month free cash flow in fiscal 2006.

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 buildout.

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

You should note improvements in our receivable collection process, and a potential refinancing of the convertible debenture outstanding could have a further impact on our free cash flow.

Net accounts receivable as of June 30, totaled 179 million essentially flat from the March 31, balance of 179 million.

Our DSO or days sales outstanding were approximately 79 days this quarter compared to 80 days at the end of the second quarter.

We remain focused on improving this component of working capital that is impacted by our invoicing process.

We also attribute the higher DSO to longer payment terms on certain contracts with international clients, terms which we believe is an appropriate use of our capital given the financial strength of our client base.

Our property and equipment balance was 54 million compared to the 54 million reported as of March 31, 2007.

This is the result of the net impact from this quarter's 6 million of depreciation expense offset by 6 million of capital expenditures during the quarter.

We were able to be fairly aggressive this quarter in the open market and repurchased a total of 2.4 million shares at an approximate cost of $86 million representing approximately 4% of our total outstanding shares.

This was done under the current 500 million share repurchase plan that was authorized by the Board in November 2006.

As of June 30, 2007, we still had 218 million remaining under this plan and continue to believe that the repurchase of our stock is an attractive use of our cash.

We were also successful this quarter in taking another step towards lowering our cost of capital, as announced in our press release today we have successfully doubled our revolving credit facility to $600 million with a syndicated 11 financial institutions.

The proceeds will be used for working capital and general corporate purposes, for refinancing of existing debt, for the continued repurchase of our stock, and for selected new tuck-in or new platform acquisitions.

Looking at our staffing levels, our total headcount at the end of the quarter was 2,760 compared with 2,686 at the end of last quarter and 2,840 on June 30, 2006.

This also includes approximately 203 sales and client partner positions that have a quota based compensation program.

And we are recruiting for additional quota-based compensation positions at the current time.

Turning now to guidance, our guidance for the fourth quarter of fiscal 2007 for revenue is 200 million, and earnings per diluted share of $0.40.

Further, our stated revenue guidance for fiscal 2007 remains at 815 million which includes the impact on the divestiture of our mortgage products.

From this guidance we expect GAAP earnings per diluted share of $1.71 for fiscal 2007.

The GAAP earnings per share guidance stated includes the potential impact from the possible refinancing of the contingent convertible using our expanded credit facility which is likely to have an all-in interest cost of 5.9% versus the 1.5% rate on the contingent convertible.

For modeling purposes we have assumed a 36% effective tax rate for the remainder of fiscal 2007 and share repurchase will be consistent with our historic purchase activity.

As for bookings we expect in the fourth quarter we will need to deliver between 15 and 20 million of revenue from new bookings in the range of 75 to 80 million in order to deliver our guided revenue of 200 million.

We are currently completing our plan for fiscal 2008.

We'll share the final results of this process with our Board in August and then issue our fiscal 2008 guidance based on the Board's approved plan when we release our fourth quarter earnings.

That concludes my prepared remarks.

I'd now like to turn the call back to Mark before we open for your questions.

Mark?

Thanks, Chuck.

Let me summarize.

As a company Fair Isaac's goal is to earn the right to be our client's trusted advisor by delivering solutions that help them make smarter business decisions.

With our streamlined product set, stronger sales organization, renewed commitment to our people and high performance management in place we are now confident that we have the key elements needed to achieve this goal and to execute on our growth strategy.

Operator, you may now begin the question-and-answer period, please.

Thank you.

(OPERATOR INSTRUCTIONS) Your first question is from the line of Mark Bacurin.

Good afternoon.

Couple questions.

Can you hear me?

Yes.

Great.

First, on the Scoring, surprised to see that rebound as well as it did.

Just curious if you could -- I know you said it's obviously through the credit bureaus.

Can you give us any sense of what the big drivers were?

Presumably loan originations have been down and I guess risk management type applications have been increasing.

So just looking for a little more color on the growth there.

That's correct.

This is fundamentally driven by volume at the bureaus.

I have always described this business as a P times Q business, price times quantity.

We saw a good pick up in the Q with the volume and transactions from multiple partners in the last quarter.

Do you have any sense of what the underlying demand coming through those bureaus, what drove that incremental activity?

I think that among the factors is one you cited, which is concerns about risky parts of the market.

You want to hear questions about subprime, et cetera.

We do see our clients increasingly looking to FICO scores as a way of assessing risk in a number of market segments.

Great.

Then been a lot of noise in the press lately about this authorized user issue.

Can you just comment on what actions you guys are taking at this point to make adjustments to the FICO score related to authorized users and what the cost and revenue implications of that may be over the next quarter or so?

Second is part of your question, we don't foresee any revenue implications to us.

For those not familiar with the issue, FICO scores have long had a feature, sometimes referred to as the piggy backing feature whereby the intent of your inference would be that family members could benefit by having their parents good credit score reflect favorably on the credit scores of children attending college, for instance.

That favorable and intended use of the piggy back feature has been compromised in a few cases.

It's alleged by people making unscrupulous use of the facility and bowing to market pressure we have removed that capability from the FICO score as of September.

We recognize that this will impose a hardship on many innocent parties, but our issuers are demanding that we put this in place to avoid liability for misuse of credit ratings.

Is there any reason to think that that specific change has driven incremental volumes on the scoring side as people reassess after that feature had been shut down?

First of all the feature is not yet shut down.

It's effective as of September.

And, no, I don't see this issue driving volumes.

The volumes have more to do with macro economic features, and not so much this piggy backing issue.

Great.

Then just interesting to hear you talk about the client surveying process.

Just wondering if you have had any results back in yet, and what, if any common themes you're hearing out of that.

I want to be careful to speculate too much but the early findings are three-fold.

Our clients generally very much like the products and they like them not just for their functionality but for the strategic value they add.

The clients also are providing favorable feedback on our people and their creativity and expertise and they are providing decidedly mixed comments around customer service and support.

We sort of anticipate that and expect that that will be the area we'll want to focus on when the final results are in.

Thank you.

Thank you.

Our next question is from the line of Thomas Arndt.

This is actually [Joseph Borre] on behalf of Tom.

Can you hear me?

Yes, we can.

Just following up on the earlier question here, you are saying that you're seeing a pick up in volumes at the credit bureaus.

Are you seeing at the same time any pressure from the Competition Advantage score or maybe the peak offsetting anything that you can see as a loss through the Advantage Score presence?

Thanks for your question.

Well, as you noted we just reported fairly strong revenues in that business.

I will also tell you that we like the capabilities of our FICO scores, especially some of the enhancements we've announced in FICO '08.

So we like how our product plays in the marketplace in a competitive sense.

We do recognize that our customers are looking at a number of alternatives including both competitors and in some cases, internally build solutions.

That said, to our knowledge I don't think we've lost any single customer as a result of those pressures although we are seeing this reflect in some pricing pressure as we engage in proposals.

Okay, great.

And then let me, if you allow, I'll follow-up with another question.

You mentioned in your press release that as part of the international expansion you're looking into China for instance and you've set up an office over there.

Right now which regions would you say are kind of the next best places where you are going to be expanding successfully?

Obviously in the U.S.

you have a strong presence, and probably you have lots as well in Western Europe.

What are the first, the easy targets you are going after right now?

Two different kinds of expansion.

In the U.S., which you are correct, it's our largest market there remains considerable opportunity for cross-selling.

While we may not acquire many new customers there's lots of opportunity for us to expand our footprint within our existing customers in the U.S.

In terms of new markets, in addition to China we have quit a bit of focus these days on India.

You may know that we have a substantial presence of nearly 200 people in India but that is largely a sourcing market which supports our operations in other countries.

We are now looking to see whether we can leverage that to start selling into India as a domestic market.

Great.

Thank you very much.

Thank you.

Your next question is from the line of Tony Wible.

I was hoping we could start off by looking at the new bookings this quarter.

Can you talk about qualitatively where you're seeing the pick up in the new bookings?

Are you selling more consulting in that mix, or is it more of the longer term strategy machine type of application?

This is not really centered in any one product.

It's across our product line.

I would not say that it's necessarily in the Professional Services.

That will tend to follow price in sales in the tools area.

We see an awful -- our pipeline, we see great interest as Mark alluded to in EDM and we think that that's going to portend opportunities here in the future, but right now really all four of our segments showed a pick up in bookings in the third quarter.

So does that bookings time line like a two to three year time frame to work through that?

Yes, you may recall in years past some of the bill review and others were longer than that, but as Mark indicated across the industry, you're seeing shorter time frames on contracts.

That in itself had an impact on the actual metric or the evaluation of a booking.

Nevertheless, we're gratified by the pick-up in current period revenues from this level of bookings which came up from, as you know, from last quarter.

I would add that although all four segments showed pick-ups probably Strategy machine showed the largest pick-up in consulting.

The last quarter, I guess, did you guys see any slippage from last quarter into this quarter's bookings and also at the end of this quarter have you seen any carry-over prospects for the current quarter that we're in or comments on the pipeline that you're currently seeing for new business?

I'd say the cut-offs in both quarters were pretty clean.

I wouldn't attribute this volatility to anything significant, sort of slipping between one period to the other and I think the pipeline remains strong.

Our people are taking the EDM message into new areas of our customers and think as we've commented in the past that tends to be a little longer sales cycle, but the cut-off between periods seems appropriate here.

Can you provide us an update on Falcon?

I think last quarter you indicated that there were some issues with the initial rollout.

Have those been largely resolved at this point?

It's a two-phase process.

The first stage in consultation with the clients that are affected and there is roughly six to ten in this category is to put a series of patches in place to ensure that they properly function through the upcoming holiday season this fall and winter, and that is largely in place as we sit here today, given that those clients will be soon entering the lockdown period where they don't make changes.

The more strategic fix, the rearchitecting of the product, if you will, is on track for delivery in the first quarter of next year, first calendar of next year as previously discussed.

Last question is as we get ready to head into the quarter for true-ups on pre score any qualitative comments you can provide about what's assumed in your '07 guidance that you have provided?

Tony, this is John.

Can you just repeat that one more time?

Yes, essentially the pre score product that you have typically historically you've had a true-up in the fourth quarter, either positive or negative, based on the actual amount of pre mailers that you've done and I was just trying to get a sense if we should be modeling for Scoring to--?

No, nothing material.

Nothing this year, no, Tony.

Okay, great.

Thank you.

Thank you.

Your next question is from the line of [Brett Huff].

Good evening.

Wanted to ask just a couple quick questions.

Number one, can you tell us a little bit about the shifting of personnel back and forth between the consulting and the Professional Services and some of the other categories?

Did that cause some of the impact that we saw in the moving around of the expense lines?

Impact on expenses.

Well, if you're talking about the cost of personnel and the hours burned, no, I don't believe so.

That isn't the factor.

In some of our expense lines we really saw more in terms of the increase in client facing personnel, some of our sales and marketing staff and some of the efforts in the marking programs behind the efforts to carry forward the EDM message.

That's really what we would attribute some of the increase to.

And on the Vantage score, just to follow-up with that, or rather the pricing pressure that you saw although it sounds like nobody has moved the pricing pressure can you just characterize that a little bit more?

How does that conversation usually go or any other color on that?

Well, this is a price for value delivered discussion we have with clients.

So as I noted earlier there's been secular pressure on pricing for many years.

Long pre dating events.

What we need to be able to demonstrate increasingly to clients these days is that there's some special sauce in our solutions.

The enhancements we made in FICO '08, which add a fair amount of predictive power, on the order of 5 to 15%, which is a pretty big number for a mature product, that allows us to rebuff some of the pricing pressure that otherwise exists.

If we didn't have that kind of innovation and updates to our products we would be susceptible to more commoditization pressure.

On the partner side at your analyst day you talked a lot about three or four people who were kind of nearest on the radar screen.

What is the status of that?

It sounds like in China you're doing some of that.

Can you give us more details?

Yes.

Across the Flex portfolio, the name I would mention at the moment that is furthest down the road is IBM where we have a number of activities underway which I hope to be able to report wins as a result of in our next call.

And we're somewhat earlier stage in two or three other partnership discussions but the machinery is in place now to be able to support comfortably four partnerships on a global basis.

Okay.

That's all I needed.

Thanks for your help.

Thank you.

Your next question is from the line of Ed Maguire.

Hi, this is actually Garrett Bekker for Ed.

Wonder if you could talk a little bit on -- go back to the sales side of things, you've obviously put a number of initiatives in place.

Wonder if you could give maybe give us an update on some of the training initiatives that you had going on this quarter and also you were talking about headcount that you will be actively looking to increase the number of quoted reps.

I wonder if you could give us an update on that.

Fair enough.

In terms of training, two stages.

The training that is essentially complete and was rolled out over the last quarter is on the sales pipeline management process that we're using, Miller Heiman process, so that we have a very consistent way now of tracking opportunities, progressing opportunities through our pipeline, and understanding when an opportunity is ready to be closed.

So we have a fairly formal management system in place now that our entire sales team is trained on.

The second round of training will occur in our October kickoff meetings where we have sales rallies that will deepen training both around industry knowledge, so that our teams really understand what a bank or Telco or healthcare cares about, as well as further training in our products.

So the combination of the three types of training, the one that we've already done on how to sell, the second one that we're going to do in October on what our customers care about and the third one on what our products can do for those customers, that should get us to where we want to be by this fall.

In terms of the hiring of additional sales personnel there are some areas where we're still a bit thin in our coverage.

We feel pretty good these days about support that we now have for our largest North American clients but we main a bit thin in parts of Asia and in Europe and the bulk of the new hires are going to those regions.

Will those new hires largely be incremental to your existing headcount or any of that replacing any turnover you may have seen during the transition?

There's some replacement higher but the bulk of that is intended to be net new and quota based.

So the competition system skews heavily towards results and performance.

Any chance you might give us an idea of, in terms of the numbers perhaps?

30 additional client facing.

That's right.

30.

Great.

Thanks.

Thank you.

Your final question is from the line of Fred Searby.

Good afternoon.

It's actually Fred Searby, JPMorgan.

Thanks.

You've kind of touched upon this, but my question was, with the launch of FICO 2008, the new Score, is that somehow attributable or having an impact upon this--?

Fred, you just cut out.

Operator, are you still with us?

Yes, I'm still here, Mr.

Searby?

(OPERATOR INSTRUCTIONS)

Looks like we lost Fred.

Operator, are any other calls in the queue?

No, there are no other calls in the queue.

Okay.

It's okay, operator, I think we're all done.

So at this point--.

I'm sorry, Mr.

Greene, Mr.

Searby is back into queue.

I will reopen his line right now.

Fred, we lost you midway through.

Please repeat--.

I'm sorry about that.

Tech to Houston, we had a little problem but that's all right.

Can you guys here me now?

Yes.

You've touched upon this but I'm just curious this is a great number, the Scoring side, up 8%.

I'm just curious, is FICO 2008, the launch of the new FICO Score, did that drive have any impact, or is that something that really was just purely a result of volumes picking up independent of the new Score?

Yes and no.

So the FICO '08 product isn't yet shipping.

It ships beginning of December so it could not have had actual impact last quarter.

What it does do though, is reassure clients that we remain committed to an innovation path.

So to the extent that we had had clients needing to re-up last quarter the confidence that they saw that we were rolling out new capabilities that they valued cause them to re-sign with us.

But mathematically what drove last quarter was really the increase in values.

I'm not sure if that's a clear answer.

That's exactly what I wanted.

Thanks.

Thank you.

Okay, operator, I think, unless there's any other calls?

No, sir, there are no further questions at this time.

Thank you very much.

Thank you very much, everyone.

This concludes today's Fair Isaac quarter three earnings release conference call.

You may now disconnect.