Fair Isaac Corp (FICO) 2007 Q4 法說會逐字稿

Good afternoon, my name is Lamont, and I will be your conference operator today.

At this time would like to welcome everyone to the Fair Isaac Corp.

fourth quarter 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, Lamont, and good afternoon, everyone.

This is John Emerick of Fair Isaac, and thank you for joining us for our fourth quarter and fiscal year end 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 of the completion of this call through November 27th.

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 may include statements concerning our business strategies and our intended results, as well as 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 statement 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 from in our SEC filings, including our annual report on Form 10K for the fiscal year ended September 30th, 2006, and our quarterly report on Form 10Q for the period ended June 30th, 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 presentation's page found within the investor relations portion of our website.

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

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

Now I'll turn the call over to Mark.

Thanks, John.

And thank you all for joining.

First, I'd like to begin by extending our deepest sympathies to the citizens of San Diego as they cope with the aftermath of last week's devastating fires.

Fair Isaac has many employees in that area several of whom suffered significant losses or disruption and while our San Diego office was closed for several days our teams worked remotely even as they attended to their personal situations.

Our company is made up of resilient, special people and I'll grateful for their safety, the safety of their families and for their unyielding professionalism during this difficult time.

Now on today's call I'd like to review the results for our fourth quarter and fiscal year 2007 both ending September 30th, 2007.

I'll also discuss our progress in the areas of client focus, sales effectiveness and strategic growth.

Then Chuck will provide further details on our recent financial performance as well as our guidance for first quarter fiscal 2008 and the full year fiscal 2008.

This quarter we reported fully diluted earnings per share of $0.52 versus the $0.40 we guided last quarter and the $0.35 we reported in the same period last year.

We reported revenue of $207 million and net income of $28 million.

Finally, we had a solid quarter from a bookings perspective with $95 million of aggregate bookings including 22 deals of over $1 million in value, and five deals of over $3 million in value.

Our revenue yield from this quarter's bookings of 26% and a weighted average life of 1.8 years for all executed bookings contracts.

In summary, our as-reported revenue increased 1% over the prior quarter and is essentially flat in comparison to the same period last year.

Adjusted for the March 2007 sale of our mortgage product line, which had previously contributed between $4 million and $5 million per quarter, we experienced 2% revenue increase over the same period last year.

Our GAAP earnings per share of $0.52 per fully diluted share was 24% increase over the prior quarter, and a 49% increase from the same period of the prior fiscal year.

Chuck will address the reported results and the one-time items impacting these results in a moment.

Our results for the fourth quarter were better than expected and reflected modest growth.

These results encourage me to believe that we now have laid a solid foundation to begin expanding our business in fiscal 2008 as we seek to achieve market rates of growth in fiscal 2009.

To give you some further color to the quarter let me first update you on some recent operational, strategic and technology-related initiatives, and then discuss how these initiatives are improving our performance in the marketplace through several client wins that show increasing traction for our enterprise decision management vision.

First, with respect to our operating team, this continues to drive process improvements and resource allocations to ensure that we remain responsive to the marketplace.

The team has recently focused on acting on the insights gained from our first-ever formal client satisfaction survey in which more than 70 clients benchmarked our performance to that of our peer competitors.

Let me highlight three findings.

First, clients have shared with us their perspective on our sales process and sales follow through, and as a result we have adopted and are now rolling out a best in class formal sales pipeline management methodology.

The tenants of this plan are as follows: ensuring that our sales teams understand their clients business deeply, ensuring that we have a consistent go-to-market approach, and compensating sellers in a way that motivates them to help clients realize full value from our EDM, or Enterprise Decision Management solution set.

We have made great strides in each of these areas.

Second, clients have told us that they want to better understand our product road maps and upgrade plans.

We have instituted a product release communication program that keeps client abreast of our product directions.

Third, they have told us that they want us to simplify our product portfolio to make it easier to understand and to ensure that we're investing in the most important product areas.

So we have now narrowed our industry -- now that we have narrowed our industry focus to four key industries, financial services, insurance, retail, and life sciences, we are similiarly prioritizing our product line-up with efforts underway to consolidate our current portfolio of 117 products to fewer than 50 offerings without appreciable revenue leakage.

We believe this simplification will allow us to run the business more efficiently going forward.

Now our strategy team, the second unit, continues to review our business in order to optimize our investments and prioritize our growth initiatives.

The core of our strategy remains Enterprise Decision Management, or EDM, which is helping clients to make smarter decisions across their organizations.

Increasingly we find that the EDM concept resonates strongly with clients especially as they understand it to the next generation of business intelligence, a capability that is now mainstream.

In essence, while business intelligence systems provide powerful insight into past behaviors and transaction, EDM uses predictive analytics to suggest optimal strategies for the future.

We continue to focus our EDM play book on those areas which are about strong growth segments and places where we have core competencies.

Our EDM play book will put this company on a growth map in fiscal 2008 towards our goal of achieving industry rates of growth of 7% to 10% in fiscal 2009.

The first element of our go-forward EDM play book is improve focus on Fair Isaac's core franchise of financial services clients, especially in North America.

While we're well represented in this customer set, we have light product penetration with most of these clients, so we're now very focused on cross-selling opportunities, that is selling additional products to existing clients, helped by the increasing integration of cross offerings as our EDM product set roles out.

Second, we have a sharpened view of our opportunities internationally.

Eight countries comprise roughly 50% of our international opportunity, so while we have historically spread our efforts across roughly 30 countries, we'll now narrow that focus to the eight international markets that really matter and begin to prioritize our head count those markets.

Third, on our strategy team with the arrival ouf new Chief Marketing Officer Tracey Stout, we now have the right team in place to work on improving our EDM value proposition.

We continue to see a sweet spot for our company and a connected set of analytical offerings that span a life cycle from market to origination, account management, collections, recoveries and fraud management.

So our marketing team will sharpen this EDM message and move to raise your brand profile in this space.

Finally, as part of our ongoing strategy work, we have now determined that our marketing services is strategically coherent with this EDM vision as it is the first element in the customer life cycle.

Moreover the marketing service of business which we were evaluating strategic alternatives for continues to experience improving financial performance.

And there's considerable upside potential as analysts report that spending our marketing services is growing at 5% to 10% overall, with a 16% growth rate in the analytic sub segment where we with focusing our offerings, such as our [best next] action solution.

So thanks to that offering and related capability such as Prevision View the marketing services business is quickly becoming a high value-add component of the customer life cycle, especially in verticals such as retail and other parts of the financial services.

As a result, we have withdrawn the proposed sale of this unit, and we are recommitted to managing marketing services business as a integral part of our EDM strategy as well as investing to realize the full potential of this business.

Now our technology team has been focused on two areas over the past quarter, the rollout of our EDM products and new product innovation.

Concerning EDM, the team continues on course with the architectural blueprints and product development activities needed to achieve the three-year EDM road map that we delivered last spring.

Concerning new product innovation, we completed a review of over 50 new product ideas and selected the seven most promising ideas to fund and bring to market.

These seven initiatives now have innovation champions appointed and assigned to drive the offerings through our research and development teams into commercialization inside of 12 months, so that we can continue to grow our company's share of new product revenue.

Let me now tell you how these transformation initiatives are improving our ability to meet our primary objective of focusing on our clients.

As I noted earlier, we invest considerable effort in ensuring that Fair Isaac listens to client needs and responds with the appropriate products, services and support.

In the fourth quarter, this included hiring new sales leaders for our business in Japan and Latin America, and adding roughly 40 more sales and service personnel during the quarter, in addition to some 100 sales and service personnel previously added earlier in the fiscal year.

We have also introduced a new disciplined sales pipeline management process and education for our client-facing teams on our enterprise decision-management strategy and portfolio.

These efforts are beginning to take hold as evidenced by three EDM client wins achieved earlier in the quarter.

First, for a leading global computer assistance provider, Fair Isaac increased its EDM technology footprint through a three million -- $3 million enterprise license extension of our Blaze [Rules] engine.

This client has originally implemented Blaze to improve precision in it's credit pricing decisions, enabling them to create a continuous pricing system based on risk and opportunity.

With our expanded relationship they are now using Blaze to build a corporate-wide decision management framework.

One advantage of this starburst approach, the client will use Blaze to efficiently resolve customer service calls, dramatically improving customer satisfaction while significantly reducing their operating costs.

Over the next two years we anticipate many such large-scale implementations across this client as we work in partnership to help them realize the EDM vision.

Second customer win from last quarter, in financial services a major European banking group chose to partner with us to development their Basel II compliance program.

Using Fair Isaac Model Builder software and expert consultancy to develop risk models needed to satisfy the UK's financial services authority.

This banking group is aiming for advanced internal rating service, which means that they must prove that they can model risk and simulate economic scenarios across their entire credit portfolio.

Truly an enterprise decision management challenge.

The benefit to the client here is enormous Once the bank obtains their advanced status, they qualify for greatly reduced required capital reserves, freeing up capital for other more profitable uses.

Thus is this board-level for the client, which having previously purchased our debt manager, Falcon, and TRIAD products truly is in the vanguard for using EDM technology across an enterprise.

And the third example from the quarter we were pleased we were awarded multiple engagements with a [Denoble] auto finance entity to deliver custom analytics and business consulting services.

This included a company-wide license for Blaze worth $3 million.

This client is using Blaze to create sophisticated loan underwriting and pricing decisions and then will extend its use over time to it's collections and funding areas.

Now each of these three design wins illustrates an enterprise-wide deployment of multiple Fair Isaac solutions, signaling strong corporate acceptance of our EDM value proposition.

And we are seeing similar success in our direct to consumer unit.

MyFICO.com which sells credit scores and financial advice to consumers saw 18% year-over-year growth last quarter.

We're pleased that the November edition of "Kiplinger's Personal Finance" includes myFICO.com among its best of 2007 websites, and awarded myFICO top honors in the category labeled "Best Place to Get Your Credit Score."

Let me turn now to our scoring business.

With the recent mortgage market turbulence many questions have arisen concerning of Fair Isaac.

While we are not in the position to comment on the many complexities of the mortgage situation, what we can tell you is that all mortgage-related activity only represents between 5% and 10% of our scoring revenue.

In addition, we believe the focus on the subprime situation may have actually driven more volume for our scores, indeed the business division portion of our scoring business continue to experience high volumes in the past quarter.

We believe this strength is due to versatility of our credit score coupled with its use over the credit life cycle.

However, we must exercise caution in forecasting this business as we enter fiscal 2008.

The guidance we have issued for fiscal 2008 assumes modest erosion in our scoring business with a potential for further downside risk if pricing pressures accelerate.

This stems principally from increasing competition, which we are already experiencing with our PreScore prescreen products and which we may experience in other parts of the credit life cycle.

Faced with this increasingly challenging environment, we seek to distinguish ourselves from the competition through continuous innovation.

We have upgraded our FICO scoring model with this release of the FICO 2008 score, FICO 08, to capture and incorporate new information and practices.

Our clients are embracing the FICO 08 release and we are now working with our bureau partners for delivery of this product.

In addition we continue to explore new markets with our global FICO score as represented by our recent roll-out announcements in Spain and Brazil.

So in summary, we have made significant progress towards the goals that we established when I joined this company in February.

A world class executive team is now in place.

Our EDM strategy has been perfected for the coming fiscal year and a suite of operation aim improvements is underway.

Our client teams now have the compelling story and a strong product portfolio to share with clients.

Their are engaging using a consistent go-to-market approach, and clients are reacting well both to the new Fair Isaac and to our EDM vision.

As you will hear shortly from Chuck, with this momentum and a solid foundation in place, we are guiding to a 3% revenue growth forecast for fiscal 2008, on our way toward market rates of growth of 7% to 10% in fiscal 2009.

With respect to EPS we are guiding to $2 per diluted share for this fiscal year or 10% above the GAAP EPS reported for fiscal 2007.

While our 2008 plan does have down side revenue risk in scoring, we also have upside potential in several areas.

Improved goodwill as we boost client satisfaction, accelerated new product innovation, strengthening market demand for big ticket EDM suites, international demand growing at double-digit rates, and significant cross-sell opportunities among North American financial institutions.

We remain focused on controlling our expenses, and are confident we can achieve our targeted EPS growth through these initiatives and through continued share repurchases.

So as we execute on our plan in fiscal 2008, I believe Fair Isaac is well positioned for successful revenue expansion on top of an optimal expense structure relative to both organic growth and opportunistic acquisitions.

Let me 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.

First, I would like to echo Mark's sentiments about all of our loyal and hard-working employees, especially those in southern California.

All our thoughts go out to all of them during this difficult and trying time.

In addition I would like to thank our entire finance team, both those in San Diego and those here in Minneapolis, all of whom came together to ensure we had no difficulty in delivering this earnings release.

To all of you a big thank you.

This afternoon I'll be providing a summary of our fourth quarter and year-end financial results, including some additional details concerning this quarter's results, and then conclude with our guidance for both the first quarter and the full fiscal year 2008.

As we stated in our release this afternoon, our revenue for the fourth quarter of 2007 was $207 million, a 1% increase from prior quarter, essentially flat from the same period last year, and above the $200 million guidance we provided on our last earnings call.

The fiscal 2007 revenue was $822 million essentially flat to our revenue in 2006 of $825 million.

However, as Mark already noted normalizing our results for the sale of our mortgage product line in March these results would reflect slightly stronger growth rates than I had stated above.

The net income for the quarter was $28 million, a $4.5 million or 19% increase over last quarter, and a $6.2 million or 28% increase from the same period last year.

Net income for fiscal 2007 was $105 million, a 1% increase from fiscal 2006 of $103 million.

As it relates to our net income, I would like to mention that this quarter our results were impacted by $1.6 million of after-tax, one-time related charges for a variety of expense-reduction initiatives.

These includes the closing of two underutilized offices, Baltimore and Emeryville, and a small reduction in headcount related to some organizational changes.

In addition this quarter's results were impacted by both $3.8 million of after-tax costs associated with the resolution of a customer lawsuit and in our insurance solutions product line, and a tax adjustment based on the conclusion of a federal tax audit for the years 1998 through 2001.

We reported fully diluted GAAP EPS for the fourth quarter of $0.52 a 24% increase from last quarter and a 49% increase from the same period last year as well as higher than our guidance of $0.40 per fully diluted share.

Our GAAP EPS for fiscal 2007 was $1.82, a 14% increase from fiscal 2006 GAAP EPS of $1.59 per fully diluted share, and higher than our guidance of $1.71 for the year.

The bookings for the fourth quarter were $95 million for which we generated $25 million of current period revenue as compared to bookings of $113 million in the same period last year, a 16% decrease.

This quarter's bookings were above the guidance we provide of $75 million to $80 million with $15 million to $20 million in current period revenue.

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

Per segments, our revenue contribution by market segment is as follows: Scoring contributed $46 million or 22% of the total revenue per quarter and $180 million or 22% for the full fiscal year.

Scoring revenue for the quarter reflects a 1% increase year-over-year while the revenue for the full year represent an 2% increase over fiscal 2006.

This performance reflects higher volumes with the credit bureaus and includes some pricing compression with our PreScore products.

Strategy Machines contributed $106 million or about 51% of total revenue for the quarter as compared to $111 million or 53% in the prior-year period.

The Strategy Machine revenue represents a 4% decrease or when adjusted for the sale of mortgage assets was flat.

Performance was driven by strength in collections and recovery and my FICO.com with slight declines in TRIAD and our insurance solutions products.

Fiscal year revenue for this segment was $439 million or 53% as compared to $453 million or 55% in the prior year, a 3% decrease or 1% increase when adjusted for the sale of mortgage assets.

Analytic software tools totaled about $18 million or 9% of the total revenue for the quarter as compared to $13 million or 6% of the revenue in the same quarter last year.

The 34% year-over-year increase was due to an increase in revenues generated from sales of the Blaze Advisor and Model Builder products.

Professional services segment of our business contributed $38 million or about 18% of total revenue for the quarter and for the same quarter of the prior year.

This similar performance is primarily due to an increase associated with customer management and industry consulting, offset by a decline in revenues derived from collections and recovery, fraud applications implementations and lower EDM implementations.

Fiscal 2007 revenues increased to $151 million or an 18% share of total revenue as compared to $149 million in the prior year.

Looking at our vertical markets, the percentage of this quarter's revenue by vertical was as follows: the financial services vertical was 66%, insurance vertical was 8%, telecom was 4%, retail was 8%, and all other verticals which consists of government, my FICO.com, consumer branded goods and other miscellaneous categories were 14%.

The company's transactional or reoccurring revenue for the quarter represented approximately 73% of our total revenues, again 75% reported in the same quarter in the previous year.

The percentage of consulting and implementation revenues held constant at 18% of our total revenues this quarter, one-time or license revenue was 9% of our total revenue, higher than the 7% reported both last quarter and in the same quarter a year ago.

Our international base decreased slightly from last quarter to this quarter with approximately 30% of our total revenue base coming from outside the United States.

This is a slight increase from the 29% that international revenue represented in the same quarter of last year.

Recent strength has continued to come from EMEA and Latin America.

Looking at expenses, the breakdown of our operating expenses shown as a percentage of revenue during the quarter and for the full fiscal year was as follows: cost of revenues for the fourth quarter and for fiscal 2007 was approximately 36% as compared to 34% in the same quarter last year and fiscal 2006.

This resulted from higher personnel cost plus an increase in direct cost associated with a greater mix of revenue from products that required data acquisition such as myFICO and marketing services.

Our research and development costs were 9% for the fourth quarter fiscal 2007 and same quarter last year compared to 10% for all of fiscal 2006.

This is a result from a continued shift of certain personnel to lower-cost regions such as India.

Finally, selling, general and administrative cost for the fourth quarter were approximately 37% and 35% for fiscal 2007, as compared to 32% for the same quarter last year and fiscal 2006.

The increase was related to compensation costs associated with additional client-facing personnel, amounts related to commission and incentive plans and increased costs associated with both the settlement of a lawsuit related to our insurance solutions product line and the continuation of the Vantage Score litigation.

Looking at operating income, our total operating income for the fourth quarter was $31 million compared to $32 million in the fourth quarter of last year, a 2% decrease.

The pro forma operating income was $38 million before amortization of intangible assets of $4.5 million and charges for office closures and organizational restructuring of $2.5 million.

The amortization expense declined by $1.6 million this quarter as certain intangible assets related to the HNC acquisition reached the end of their accounting life.

The amortization expense will continue to decline by roughly another $1 million next quarter as those same intangible asset accounts have no remaining balance to amortize.

Lastly, this quarter benefited from lower expense related to SFAS (123) stock option expense, the result of certain plan changes and the small reduction in headcount.

The reported operating income equates to a pro forma operating margin of 18%, a significant decrease from the 25% reported in the same quarter last year, excluding the restructuring cost in fiscal 2006.

This decline is mainly due to the settlement of the -- of previously mentioned lawsuit, increase in legal fees related to the Vantage Score litigation and an increase in commission expenses as certain accelerators were achieved in the quarter.

Total operating income for fiscal 2007 was $148 million with pro forma operating income of $173 million.

This pro forma operating income represented a margin of 21% for all of 2007.

We remain committed to our goal of increasing the pro forma operating margin to 30%.

Looking at net income, as I have already mentioned net income for the fourth quarter was $28 million, a 28% increase from the $22 million reported in the same period last year.

And net income for fiscal 2007 was $105 million as compared to $104 million for fiscal 2006.

Net income for fiscal 2007 was effected by adjustments made during the year and a discrete tax expense from the sale of our mortgage product line.

Excluding these items our effective tax rate for the year was approximately 36%.

Turning to our balance sheet, our cash, and investments as of September 30, 2007, decreased by $21 million to $247 million as compared to $268 million as of September 30, 2006.

The primary contributors to the change in cash and cash equivalents include the receipt of cash provided operations of $179 million as well as $84 million received from the exercise of stock options and stock issues under our employee stock purchase plan.

Significant uses of cash during the year-to-date period included $451 million used in our stock buyback activity and $23 million related to purchases of property and equipment.

Finally, I want to highlight our free cash flow for the trailing 12 months.

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

The free cash flow for the trailing 12 months is currently $152 million against the $163 million of trailing 12-month free cash flow as of the end of fiscal 2006.

This decline is mainly attributed to our lower level of cash flow from operations, resulted of an increase use of cash and working capital and from refinancing our share repurchase activity.

Improvement in our receivable collection process as well as the potential refinancing of our convertible debenture could have a further impact on our free cash flow.

Net accounts receivable as of September 30th totaled $177 million, a $12 million or 7% increase over the September 30, 2006, balance.

However, this balance was a small decline from the June 30 balance of $179 million.

Our DSO, or days sales outstanding, was approximately 79 days for both this quarter and last quarter against the 74 days reported at the end of fiscal 2006.

While we continue to improve our collection process through more attention from the client relationship channels, we still attribute a portion of high 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 $52 million compared to the $57 million reported as of September 30, 2006.

This is the result of the net impact from the $27 million of depreciation expense recorded this fiscal year, offset by $23 million of capital expenditures during the year.

Looking at capital structure, we increased the amount outstanding under our revolving credit facility by $100 million this quarter, the proceeds were used mainly for the large amount of repurchases we made this quarter, but also for the small amount of our convertible debentures that were put back to the company earlier in the quarter.

We were able to be aggressive this quarter in the open market and repurchased a total of 4.5 million shares and the approximate cost of $169 million, representing roughly 8% of our total outstanding shares.

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

As of September 30, 2007, we still have $49 million remaining under this authorization.

We plan to seek a new authorization from the Board at their meeting this November.

The company continues to believe that the repurchase of our stock is an attractive use of our cash.

Looking at our staffing levels, our total headcount at the end of the quarter was 2,824, compared with the 2,760 reported at the end of last quarter, and 2,737 reported on September 30, 2006.

This includes approximately 846 client-facing positions versus the 705 client-facing positions we employed as of the year-earlier period, which includes ICM positions, product sales and product presale positions, client support staff and professional services positions.

Turning now to guidance, our guidance for the first quarter of fiscal 2008 is $205 million for revenue and $0.45 in GAAP earnings per diluted share.

Further our full-year revenue guidance for fiscal 2008 is $850 million.

From this guidance we expect GAAP earnings per diluted share of $2 for the full year of fiscal 2008.

The GAAP EPS guidance stated does not include the potential impact from the possible refinancing of the contingent convertible which can be put or called in August 2008.

For modeling purposes we have assumed the 36% effective tax for fiscal 2008, and we expect open market share repurchase activity will continue at the pace of about one million shares per quarter.

As for bookings we expect in the full year of fiscal 2008 bookings will be approximately $380 million with $178 million of these bookings needed to deliver our guided revenue of $850 million for the year.

In the first quarter, we will need to deliver $20 million of revenue from new bookings of $95 million in order to deliver our guided revenue of $205 million.

Now that concludes my prepared remarks, and I'll turn the call back over to Mark before we open up for your questions.

Thank you.

Thank you, Chuck.

Our overall goal at Fair Isaac remains to earn the right to be our client's trusted advisor while delivering solutions that help them make smarter business decisions.

We're confident we know how to achieve this goal and deliver value to our shareholders by executing on our growth strategy and achieving organic growth of at least 3% in the coming fiscal year.

I would like to thank each and every one of our employees who committed so much to the success of this company.

The contributions made this quarter the success that it was and their continued support will make our future bright.

On this note I believe we are well positioned for fiscal 2008.

One final note, we will not be hosting an analyst day this November as we have in the past, as our management team is heading shortly to the Asia-Pacific region for (inaudible) conference.

Therefore we'll look to spend incremental time with investors through one-on-one meetings and through [sell site] conferences.

Operator, we may now begin the question and answer period.

Thank you.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Mark Bacurin.

Hi, good afternoon.

Couple of questions on the Blaze Advisor and Model Builder sales, obviously pretty strong this quarter, can you talk about specific demand drivers and whether or not any of that is being driven off of the early EDM successes?

It actually sort of bodes well for the EDM successes.

What happens especially in the newer markets and newer geographies is companies first get to know our company through Blaze.

They start with that middle ware.

It provides the foundation.

It's the infrastructure that allows us to then go back and sell our EDM applications on top.

So we have seen particular growth of the Blaze products in markets such as China and India and into our entering industries such as healthcare and insurance.

Great.

And then, Chuck, I thought I heard you talk about some declining professional services revenue related to some EDM projects, and then but you also talked about staffing up the professional services staff it sounds like very recently.

So just trying to understand is there a big wave of professional services activity coming as we move into fiscal '08 that you staffing up ahead of, or just trying to understand those two comments, because they seem to be a little contradictory.

They do -- they do seem to conflict and part of the issue, of course is the EDM sales will be lead by a license sale and then will follow with a professional services implementation.

So the sale and the acceptance of the software precedes the actually a lot of work specking it out, precedes the actual implementation.

So we expect that that will -- will follow with the use of professional services personnel.

So in other words a strong analytic and Model Builders sell this quarter probably -- is foreshadowing improving professional services revenue and that's the reason for the staffing up this quarter?

Correct.

That would precede the run-up for PS.

Great.

And then just wanted to get an update, didn't hear any mention of kind of ongoing efforts to build sales distribution through system integrators such as IBM, and I know Mark that sounds like that is one of your key strategic priorities, so --

Yes, we're making good headway there.

We don't yet have big joint wins to announce publicly.

We are very well engaged particularly with IBM in many countries around the world now.

So I'm quite optimistic as we look at that pipeline that you'll be hearing about that in the future.

And we now have a team focusing on two or three other similar alliances, not just IBM.

So the foundation is in place, the pipelines are building.

You should receive results in the near future.

Great, and then just finally, insurance solutions.

I know we talked about this several quarters being a drag.

Can you share with us what is left the that may be at I risk?

And when the comps start to get a little bit easier from some of the turn you have seen there.

We think we have insurance solutions sold both on the analytics side and on the insurance bill review business.

We have positions there and as I think we discussed before we continue to evaluate bill review for strategic alternatives.

And -- but we're very -- frankly we're very optimistic about some of the solutions we bring on the analytics side.

So can you -- is it easy to strip out what bill review was in the quarter and kind of what the comparison will be in Q1 '08?

This is John.

So during the quarter bill review was down a little bit as a contract fell off, but we also had some wins, and so we expect that that revenue actually can go up.

It's not a one-way declining prospect.

There's actually a number of deals that were signed in prior quarters and that revenue will start to pick up.

So you are kind of in a valley and I would expect to see that Q1 kind of picks up a little bit, and this quarter was just down from a couple of prior deals that fell off.

Okay.

Perfect.

Thank you.

Yes.

Thanks, Mark.

Your next question comes from the line of Thomas Earnst.

Hi, this is [Anan] on behalf of Thomas Earnst from Deutsche Bank.

Couple of questions, one is on your exposure to financial services, you said 66% of your segment -- vertical revenue comes from the financial sector, but on the mortgage side you said only 5% to 10% of the revenue is exposed to the market.

What are the other sectors that you are serving and are you seeing any impact there?

It's largely think credit sector and other portions of retail banking, so DDA and credit -- debit applications, but principally credit.

Okay.

And you are not seeing much impact there?

That's correct.

Okay.

Not -- I'm sorry not impacting those segments from the mortgage issues.

Of a negative nature.

Right.

That's what I meant.

Okay.

And then on the other question, clearly, your new marketing activities seem to have held, create a uniform marketing message and so on, but as you expand globally what do you see that is left to do so you have a good head of steam going into 2008?

I thank you for the complement on marketing.

I think we know what we want to do there.

I think we're still in the very early staging of doing it.

So establishing a consistent brand profile, raising our image, defining value proposition, taking segment leadership and thought leadership and so on, that's all in front of us yet.

We now have the team on board to do that, and I think we've got a good plan for doing it, but we're not there yet.

Okay.

And of the eight countries that you believe account for about half of your international segments, would you be willing to name any of the countries that you're focused on?

Yes.

A couple of them will not surprise you.

The places where we're probably light relative to the opportunity include Australia, Germany and Japan.

So those three come to mind as places where we are already present, but we would strengthen our capabilities.

China is also on the list for different reasons, but that has been previously covered as you know.

Right.

Okay.

Thank you.

Thanks.

Your next question comes from the line of Fredrick Searby.

Yes, thank you.

Couple of questions.

One, I wondered if you could talk about -- you said TRIAD was slightly down.

I'm sure it's a disappointment.

Can you talk about what your expectations is and the launch of any new product and what you see there?

And then secondly, I just free cash flow, if you can help us.

Should that move in line?

I think you are a guiding for 10% earnings growth.

Should that track earnings growth in your '08 -- fiscal '08 guidance?

With respect to the TRIAD portion I'll take that one.

This is normal sort of product transition.

We are rolling out in the coming months TRIAD 9, which has gotten a lot of strong reception from customers who had an early look.

So you should expect improvement in that line item in the next quarter or two as that product begins to develop traction in the marketplace.

So nothing unusual going on there, and we are well on track with the next product release that should improve the fortunes of the TRIAD market.

On the free cash flow, we should expect that to move in line with net income the other factors that add back to that don't -- we will see some impact on income upward because of our reduced amortization, but the sum of the two will still come out to the same number.

So the -- and we should see those grow with -- with net income.

Our CapEx will be in line with last year, and I wouldn't predict any changes in dividend at this point.

And one quick follow-up, just to -- if you can remind me, the bookings number is not a good year-on-year if we look at that?

And what is the change again that explains, it's down year on year, but you have in the past highlighted that there's a change in the way?

Yes, Mark highlighted this in his talk in terms of the average life of contracts.

The bookings value is merely the sum of the bookings value of items taken during the quarter and as contracts have shortened both in Fair Isaac and across the industry, the absolute value in terms of total value of the bookings in any -- in the quarter is less, but it doesn't necessarily predict that revenue achieved from that in following periods will be argue, it simply argues, perhaps that renewals will come quicker.

That said, we did see two quarters in a row now of improvement in bookings.

So the trend is favorable, but Chuck is correct the overall macro factor that's affecting the entire tech industry is that customers tend to be buying shorter amounts of contract at a time, so --

I think your question really goes to the fact that the bookings this quarter are still lower than a year ago.

Yes, Fred, this is John.

I wanted to just clarify it sounded like we have never alluded to the fact that there is a change in any way that we do anything with bookings.

That was something that an analyst wrote about, but we do not -- don't agree with that representation.

We're measured on the same but we're observing an industry-wide phenomenon.

Okay.

Thank you, gentlemen.

Thank you.

Your next question comes this line of Michael Nemeroff.

Hi, good afternoon.

Couple of questions.

First and foremost, there has been a lot of talk about financial services spending, enterprise spending and the fact that it is slowing or some companies are being cautious given the tie to the financial services vertical.

Are you seeing anything out there, Mark, that would give you pause about the pipeline or anything related to activity going into the budgeting for next year?

Thanks for your question.

Actually, no, the space we operate in tends to be the sort of high value and if you will almost mission critical space.

So this will be actually an area where many of our clients double down if they have worried about where they can afford to spend on the technology.

So we are not seeing the kind of weakness in pipelines and market conditions that you have heard other tech companies refer to.

Okay.

And on the scoring business, you alluded to an erosion of that business in fiscal 2008.

Can you talk a little -- what kind of a decline can we expect?

And also can you enlighten us on who the competition that is gaining share especially in the PreScore area.

Okay.

The decline that we've figured into our models are on the order of a couple of percentage points, so we're not talking dramatic numbers.

But there is erosion and there's, as I indicated, potential for further pressure downwards from there.

Two sorts of competition.

First, a fair amount of it is in-house as the credit card industry is consolidating a number of our clients have sufficient organizational capacity to take some of this work in-house.

Even when they do, I should point out, that doesn't mean a loss of all of our business, we can still sell such clients tools and frameworks to allow them to build their own scores.

But it may have a depressing effect on our scoring sales.

Second, probably the most notable external competitor would be Vantage Score and we do see that product being evaluated and tested in the marketplace.

Okay.

And then on the sales cycles, you -- EDM obviously had a very strong quarter, but we have seen this in the past where there has been pretty strong variability in those results.

Can you talk about the sale cycles, whether they're shortening for the EDM, have you guys got a better process to closing those deals?

And also, if you could give us a little bit of flavor of what the ASP is for the EDM deals and how that has been trending over the last couple of quarters?

With respect to sales cycle, I don't see it shortening.

It's still on the average of nine months, plus or minus.

What we are getting better at is consistency of executing against that sales cycle.

We have a pretty good pipeline management discipline in place now.

We have closed plants, as they say in the industry, which help us bring these transactions in on a pretty smooth guide path.

Right.

So we have pretty good visible any the pipeline, and we know what we are doing and we are doing it better, but we're not necessarily shortening the sales cycle or making it more predictable.

Second part of your question --

Yes, I don't think we have any data right on hand on ASP related to EDM at least that we're prepared to release.

So --

Okay.

And then the last, final question is related to acquisitions.

In the past the company has been inquisitive.

There's really been no activity from you guys since you started.

Do you feel like you are in a better shape to maybe rev up the acquisition program again?

And how much of that is factored into your guidance.

I would give sort of temperate response here.

Yes, I think the company is in increasingly better shape, so we have a more solid foundation on top of which we could acquire.

The 3% number that we guided to assumes only organic growth.

There is the opportunity for selected acquisitions on top of that and indeed we are looking at a few.

So once you think about niche acquisitions at this stage, not large-scale acquisitions.

Thank you very much.

Thank you.

Your next question comes from the line of Tony Wible.

Good evening.

I was hoping that you could start by describing where exactly you would see opportunity to better manage costs.

I think you had mentioned in your commentary that there would continue to be cost -- better cost management.

And I think the guidance implies nice improvement in margins.

Can you talk about where exactly that could come from outside of the intangibles?

Yes, we continue to experience opportunities both in facilities.

We have a pretty wide reach consolidating some of our facilities, and allowing us to be a little more efficient in the way our people are positioned, and -- and how particularly with some of the acquisitions we did.

We had some fairly small facilities which -- with consolidation would help our process.

We have made some strides in how we manage some of our benefits.

Certainly, the efficiency of our PS ranks and some of our administrative staff, we have been able to improve.

We look for areas both in some of our units for cost efficiencies on the development side using off-shore.

We made a reference to the R&D -- the fact that R&D has come down, but it's really been as a function of putting people in India, adding to our similar development efforts there.

All of these things kind of add up.

It's a game of inches when you get right down to it and you look for opportunities everywhere.

Okay.

And the charge that you took for the legal charge this quarter, what was the pre-tax amount on that?

There was an after-tax amount --

You can back into it using about an 36% rate --

36%?

Yes.

Great.

And can you guys quantify how big PreScore and myFico.com are today?

I think our PreScore revenues are just under $30 million in total, and we are looking for -- we are experiencing some pricing pressure on some of those as both analytic staffs and even Vantage Score in some cases are used to negotiate better deals.

Any certainties about regulatory environment changes for either of those businesses?

No.

If anything outside the U.S.

there's a somewhat favorable movement in certain countries towards regulatory climates that would favor our scoring technology, so no downward scores here.

And just to check we have seen the life cycle of the bookings come down, and it appear there is a bigger tech trend that is driving some of that shorter life cycle on the bookings, but is that in part at all driven by Fair Isaac, or is there a contemplation of maybe changing the pricing from Fair Isaac from more of a per transactional to maybe a higher license and maintenance fee over a shorter period of time?

Does that ever come across the board as an idea?

Yes, as a strategy or as a tactic, I think we'll look for whatever terms especially in contracts that will allow us to partner longer with a financial institution.

So we'll look for ways to provide professional services on an ongoing basis to help them with their modeling to have product sales that will allow us.

If that means we have to carve a contract up into more elements with multiple licenses, we'll do things like that.

Some of those things will appear as though the books are smaller in the near term, but it gives us an opportunity, and throughout this we try to keep our client-facing people in front of the customer at all times with renewals and other opportunities for new products.

I guess is it fair to say looking at the '08 commentary that you are generally expecting the new bookings life cycle to be still about two years?

That's what it has been trending on average, I think as Mark cited about 1.8 this -- of the contracts done this quarter.

That's right.

And we see that number remaining roughly constant.

Okay.

Last question is just can you comment on how Falcon did this quarter, in particular the new product?

We aren't calling out additional revenues by product line, but we have been experiencing some recovery in Falcon as we deal with some of the issues that were created.

And it certainly hasn't declined, but it's -- we're really looking for it to perform in '08.

Great.

Thank you.

Thank you.

And your next question comes from the line of Kevane Wong.

How are you doing, guys?

I guess first looking at the scoring segment, I know before when you were looking at this quarter you were basically sort of indicated that a 3% to 5% growth that you would be seeing.

Actual growth was lower than that.

Was that drop-off because of a drop in some other part of the scoring or was that because of the pricing being a little bit more aggressive down than you were expecting?

I think it is a combination of two things.

The pricing pressures were somewhat stronger than we anticipated, and although volume grew , it grew by a little bit less than we had seen in the prior quarter, so the business was up just over 1% instead of 3%.

Sort of in the range of what we might have expected, but a little

Got you.

And how should we think about that business?

I mean, as we go forward is this going to start to become more like what the bureaus see, where you get good volume, but you start having a sort of flat to downish pricing sort of on a year on year basis?

Is that a good way to start thinking about it, or how would you guide us to sort of think about that?

I'll let Chuck speak to the guidance question.

But the way I've discussed this business in the past, I always think about it as a P times U prices quantity business price for many years has been on a downward trend and of that late that downward trend, that commoditization trend, has somewhat accelerated.

Q on the other hand, the volume has been growing.

And of late the volatility and thus the economic sector has sort of benefited us, right, and so any Q as been up fairly significantly the last two quarters.

So we've done okay of late.

The way we try to resist the P pressure going forward is through innovation.

And so these new FICO scores that we've referred to, the FICO 08, the global FICO score, [dex] capacity index, something called transition matrices which will show clients how FICO scores will perform during business cycles, what can you expect to happen in your portfolio scores as the economy goes up or down?

All of those are differentiators for us that we think will allow us to hold onto the P.

Got you.

Also, just sort of a follow-on question, but looking at the tool sales, kind of a nice jump that has been volatile.

Do you -- you talked about sort of the pipeline, you've got a little better execution in visibility on that, should we be expecting your tool sales on the quarter-to-quarter basis to start becoming more stable around this level, or are we still looking near-term for a little bit of choppiness, simply by the nature of these kind of sales?

Well the sales cycle for these is longer than for some of our products, and so -- but they also are very high value-add contracts, they also include a fair amount of professional services, so we still expect perhaps some near-term volatility, but over time, we still look for that to continue to grow above the -- be one of the leaders in our growth rate.

These are also very profitable contracts, and so we expect that to continue as well.

Got you.

Also when you were talking about narrowing the number of the countries down to -- from 30, really, to eight as far as a focus.

Would there be any charges that we should be looking on that basis as you sort of refocus?

No, this is not a case of exciting countries, this is a case of reallocating resources to put the majority of them where the opportunities is, but no charges associated.

Got you.

And lastly, sort of a -- just as far as 4Q, is there a particular impact we should be looking for from the fires, from the San Diego operations?

It is sort of negligible?

How should we look at that?

No, I think this is -- we aren't looking for the financial impact per se to Fair Isaac, but certainly there has been a disruption to our staff in San Diego.

We have had many people displaced from their homes.

Our office had to shut down for a week, and right at a very critical time.

Much of our finance staff is housed in San Diego as well as our fraud teams --

We had no damage to the facilities, and we're back fully in business to that location now.

So it was disruptive but in the past.

Perfect, thank you.

Thank you.

And at this time there are no further questions.

Thank you very much, operator.

We appreciate it, and we'll talk to everybody next quarter.

Thank you.

And this concludes today's Fair Isaac Corp.

fourth quarter earnings call.

You may now disconnect.