Fair Isaac Corp (FICO) 0 Q0 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Fair Isaac Announces Preliminary First Quarter 2008 Results Conference Call.

(Operator Instructions).

Thank you.

I would now like to turn the conference over to Mr.

John Emerick.

Sir, you may begin.

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

This is John Emerick of Fair Isaac and thank you for joining us this afternoon on such short notice for this preannouncement of our fiscal 2008 first 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 this call through March 14, 2008.

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 press 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 set forth from time to time in our SEC filings, including our annual report on Form 10-K for the fiscal year ended September 30, 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.

On the call with me today are Mark Greene, our CEO, and Chuck Osborne, our CFO.

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

Now I'll turn the call over to Mark.

Thank you.

As you know, we issued a press release earlier today that provided preliminary first quarter 2008 results as well as revised second quarter and full year fiscal 2008 guidance.

On this call we'll discuss both our expected financial results for the quarter and our guidance.

I'll now turn the call over to Chuck Osborn for his review of the preliminary financial results.

Then after his remarks, I'll provide an assessment of the situation and Chuck and I together will be available to answer questions.

Chuck?

Thank you, Mark.

As you've all seen in our press release this afternoon, we released preliminary estimated results for reported revenues, net income and earnings per share for our first quarter of fiscal year 2008.

Based on the unaudited information we now have available, our revenue for the first quarter of 2008 is expected to be in the range of $198 million to $200 million.

These results represent a decrease from the $208 million reported in the same period last year as well as a decrease against the $205 million guidance we provided last quarter.

We believe this reflects a general softness across all of our market segments.

Net income for the quarter is now expected to be in the range of $19 million to $21 million against $31 million in the same period of the prior year and implied guidance of roughly $24 million.

We expect our fully diluted GAAP earnings per share to be in the range of $0.37 to $0.39 against our guidance of $0.45, and our annualized tax rate is expected to be 35.1%.

Bookings for the quarter are expected to be in the range of $100 million to $105 million as compared to our guidance of $95 million of new bookings.

The increased bookings results are primarily related to three large, multi-year contracts in marketing solutions and bill review and these contracts have a longer contract life than the other contracts we signed this quarter.

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

Our revenue contribution by market segment is now expected to be as follows.

Scoring is expecting to contribute in the range of $42 million to $44 million.

The scoring revenue for this quarter reflects a decline of approximately $2 million year over year.

This decline reflects a drop in pre-score revenue that is largely the result of the pricing pressure mentioned in last quarter's earnings release as well as a decrease in prescreened marketing initiatives by our clients.

Strategy machines is expected to contribute $105 million to $107 million against $110 million in the same quarter of the prior year.

The strategy machines revenue decrease from the prior year is mostly due to the sale of the mortgage business unit in March 2007 which included approximately $4 million of revenue in the year over year period.

We believe this quarter's results will include year over year increases in collections and recovery, consumer and fraud, all offset by year over year declines in analytics, customer management, bill review, and marketing services.

Analytic software tools is expected to total in the range of $13 million to $15 million of revenue for the quarter as compared to $14 million of revenue in the same quarter of the prior year.

Professional services is expected to contribute in the range of $36 million to $38 million of total revenue for the quarter as compared to $39 million in the same quarter of the prior year.

This decline against the prior year period is mostly due to several unusually large professional service milestones that were recorded in the first quarter last year as well as several transactions that were closed this quarter that require the deferral of revenue for accounting purposes.

Looking at our share repurchase program, we were able to remain in the open market and repurchased a total of 2.1 million shares at an approximate cost of $82 million during the first quarter.

This was mostly done under the $250 million repurchase plan authorized by the board in November, 2007.

As of December 31, 2007, we still have 182 million remaining under this November '07 authorization.

Now looking at our guidance, our guidance for the second quarter and an update of our full fiscal year guidance.

In light of our execution issues and an increasingly challenging credit environment in U.S.

economy, we believe we should adopt a more cautious outlook for the balance of this year and therefore we are adjusting our guidance for fiscal year 2008.

The second quarter revenue guidance will be $205 million and earnings per share guidance will be $0.44 per fully diluted share.

The full year revenue guidance will be reduced from $850 million to between $825 million and $835 million.

In addition, we are lowering our earnings per share guidance from the $2.00 for fully diluted share reported last quarter to between $1.80 to $1.90 per fully diluted share.

Our expectation is that operating margins will likely compress further.

This compression for the remainder of fiscal 2008 is mostly based on the decline in revenue and our high operating leverage model as well as the potential for a small impact from the continued investment in rebuilding our business.

We expect to release our final reported results for the first quarter of fiscal 2008 on Tuesday, January 22, and will, as usual, hold a conference call after the close of the market on that date to discuss these results.

Now let me turn the call back to Mark for further comments.

Thank you, Chuck.

Clearly, these preliminary results for our fiscal first quarter fall well short of expectations and the growth plan that we have for the company.

We'll provide a further assessment of this past quarter when we report the final results on January 22, but let me summarize our current view.

First, our business outside of North America remains healthy.

Our problems last quarter were limited to North America which accounted for essentially all of our estimated revenue shortfall.

Second, we can decompose this shortfall into three pieces.

First, our enterprise decision management tools and application business fell almost $5 million short of its plan.

Most of this was due to softer sales in the fiscal first quarter into the current quarter.

These were not losses, but rather deals that we expect to close near term.

Second, our professional services was roughly $1 million short of its plan due to revenue deferral requirements in several implementation projects.

And third, and of note, our scoring business met its plan which was a decline of approximately 4% year over year.

This means that scoring prices continue to compress as we had expected while volumes generally remain steady.

However, we are starting to see signs that the volumes for both pre-scores, which are scores used for marketing solicitations, and risk scores, which are generally used for underwriting activities, could experience a decline in the near term quarters.

Historically, credit prices in U.S.

financial markets has tended to benefit our scoring business as clients use more scores than ever to assess risk.

But we now expect to see a modest contraction in the volume scores used for prescreened marketing initiatives.

We have factored in this combination of market headwinds and execution challenges when setting current preliminary guidance to $205 million in revenue and $0.44 in fully diluted EPS, and in adjusting our full year guidance to between $825 and $835 million in revenue and $1.80 to $1.90 in fully diluted EPS.

We continue to believe in the attractiveness of the predictive analytics and decision management market and in the relevance of our products to that market, but we recognize there is considerable work yet to do to fully realize our growth potential.

Our January 22 call will provide further details on how we are addressing those challenges.

With that, Operator, you may now open the lines for questions please.

(Operator Instructions).

Your first question comes from the line of Tony Wible

I was wondering if your thoughts on buybacks or strategic M&A has changed at all given the challenges in the current backdrop.

And then second, I was hoping you could spend some time just kind of weighting the issues.

You went through a couple of reasons for the decline, but does -- it seems like there's more of an impact on the bottom line than there is the top line.

So is this more really just a pricing issue than anything else?

Tony, let me take for just a moment the first part of your question.

I think the share repurchase authorization remains, as we say here, we've got about 180-some million remaining under that authorization and I'm sure our board will continue to evaluate that and certainly at these prices we believe the stock's an attractive buy.

Nevertheless, we also have in our sights the possibility of M&A activity and we're looking at resources to conduct that as well as opportunities present themselves.

So we're not retreating from either of those two potential uses of capital.

And our cash flow remains strong and so we feel like we're just in a very good position to pursue both here in the future.

I think on the January 22 call we'll probably have some more conversation on both fronts.

But let me turn the second part of that back to Mark to talk to the revenue.

Yeah, you're looking for the weighting on what was behind the revenue shortfall and I think it's sort of equal parts what we characterize as market headwinds and some execution challenges.

What we did see in the late part of the quarter was a number of deals pushed to the current quarter.

So we think the spending is-- opportunity is still out there.

It was hard for us to capture it on time for the close of the quarter.

But the market headwinds thing is less of a commentary on pricing pressures which are continuing about as they were before.

It's more commentary on concern about volumes of scoring as customers begin to retrench their level of activity.

Is it fair to say that roughly half of the miss this quarter you anticipate getting at some point over the back half of this year or over the next part of this fiscal year?

Of the [MESO] certainly, yes.

Okay.

And then on the headwind, is that all pricing?

Or are you also seeing some unit losses facing competition --

It's a particular part of the business, and that is in the scoring portfolio, pricing pressures have been around for some time in what we call pre-score which is the type of scoring that clients use for marketing activities such as soliciting for new credit cards.

And that pricing pressure has not really changed as it has been in the past, but the volume of the scores used in that part of the business is beginning to decline.

So if you do the PxQ math that we've talked about in the past, that's the area of vulnerability that we see because the Q is starting to come down.

Okay, and your new guidance assumes that compression that you eluded to earlier in the comments for that risk that could be in this current quarter that we're in?

That's right.

So the guidance for the current quarter and the balance of the year takes account of our current view of that risk.

That's right.

Okay, thank you.

Your next question comes from the line of Kevane Wong

Maybe a different look at volume.

I'm sort of curious on if there's an impact that you're seeing from the share being taken away in like Vantage Score.

Or also when you're looking at strategy machines, there's -- Probe has always sort of been out there, the (inaudible) had some articles recently as far as competition in Falcon.

Could you address sort of the competitive landscape and whether you see any sort of volume dropping because of competitors taking some share?

Competitive pressures are about as they have been in the past, so neither increasing nor decreasing.

What we see is some softness in the business really attributable to the fact that some of our clients are beginning to decrease their usage of scores.

So as their business contracts, you can read in the paper about the banks that are having difficulty in the credit markets.

They are doing less new account origination activity and that impacts our business, but it's not a result of competitive pressures.

We've not seen losses once again to Vantage Score.

So we have yet to have a loss to Vantage Score.

Neither are we seeing increased competition from the other software products that you mentioned which are certainly competitors, but they're not more so now than they have been in the past.

How about as far as customers, particularly large banks, taking some stuff in house?

Has that become -- has that even shown up yet or is that really more to -- could happen as another reason?

We don't think so.

What we saw at the end of the quarter was some deals that we thought would come good pushed to this quarter.

You can make your own interpretation as to why.

Our current view is that those deals remain viable.

We expect some of the them to close in the near term.

But there was an extended sales cycle, delayed buying/purchase program on the part of the clients late in the quarter.

We don't think they're taking that business in house, but until the business is booked, that's a risk.

Two more if I might.

Equifax not telling the new FICO score, is that really having an impact?

I wonder if you can comment on that.

New FICO scores are due to roll out to the other two bureaus in the first half of this calendar year and we remain in discussion with Equifax about opportunity to get it there.

But there's no announcement to be made there.

Okay.

And then the last thing, a little ways off here, but in August you again have sort of the co-co-convert issue that comes up.

If the stocks remain at this level, I would imagine you're going to have to sort of refinance that potentially.

Could you give us a little bit of sense of have you made headway as far as sort of making contingent plans for that already?

What should we expect as far as that refinancing?

We have, to your point and you're correct in this environment you would expect that be put back to us and we have in place short term financing that would allow us to refinance that immediately and then execute against a longer term placement as capital markets improve.

But you're correct, we've anticipated that.

Got you, but the facility is in place so it's simply a matter of whatever the difference in the interest rate?

Correct.

Great.

Okay, thank you.

Your next question comes from the line of Tom Ernst.

Good afternoon.

Thanks for taking my question.

I'm curious, part of your business actually benefits from the shifts in your customer base.

I'm curious -- did you see any pickup in the business in terms of marketing or collections recovery, other sides of the business?

You're correct, the collection recovery part of the business did benefit from this and we're still finalizing the numbers but we expect to have an update on it next week.

But that part of the business looks strong.

What would you say is the mix of your business that's dependent on things you believe are sensitive in a negative way to the environment versus parts of your business that would be positively helped?

The volume based parts of our business are scoring and the portion of our EDM software which is run in a hosted bureau, hosted fashion typically on behalf of the credit bureaus themselves or the processors.

And those two pieces of business, Chuck, amount to --

Well, the -- of course scoring, as we said, some little over $40 million.

Yeah, there are a couple of other sensitive areas of course as credit cards are closed or people stop using them.

Triad has some effect, Falcon has some effect.

These are usage based products would have some sensitivity to sort of general economic levels.

The capital spending plans of financial institutions can also be impacted by delays in -- installation delays, and in adoption of new software that -- although we know they still wish to invest in these things, they'll stretch out the investment cycle and the period time in which they'll do it and that has some nominal impact on us as well.

Okay, and one final follow up.

How much do you believe you have your arms around your customers' actual plans in terms of their capital spending next year or is there a pretty wide range of uncertainty at this point early in the year?

We think we have it pretty well around.

And we have not actually heard customers talk about retreat in spending intention.

So we're not aware of budget cuts that they plan.

There does seem to be extra caution.

The sales cycles are slightly lengthening.

There were deals, as I said, that pushed from last quarter to this.

But as we talk to customers about the reasons why, we've yet to hear customers saying that they are slashing or cutting their spending intentions.

Thank you again.

Your next question comes from the line of [Petra Sandorum]

Thank you.

I had a quick question on Falcon and Triad.

Can you give us a sense whether those updates or outbreaks have been launched and if they have not, how much has that affected the numbers that we're seeing now?

We are on the path that we announced early in the year, really last year, for upgrades, so there's been no retreat from our upgrade path.

And therefore, customers are comfortable that we remain sort of on the plan that we promised them.

So we don't see any delay in purchasing of those products due to concerns about specific product deliverables.

Oh no, no, I didn't mean that.

I wasn't sure whether those two upgrades had already been launched and if they've not yet been launched, I'm wondering whether the weakness you're seeing or the numbers on the revenue side being a little different from what you had guided, whether part of that is because that upgrade launch has not yet occurred?

No, there have been minor upgrades per schedule to both of those products in the last few months.

Major upgrades come later this calendar year.

I see, okay.

Thank you.

Your next question comes from the line of Jonathan Cohen.

Hi, guys.

Thanks for taking my call here.

Just a quick question on the convert -- any thoughts about taking this thing out a little bit earlier than the put and call date this August?

Pick up a little bit of a yield buy back, get rid of some of the shorts that are out there against your stock?

It may well be.

I mean, I think we'll go against the best use of cash at any point in time.

As we've already discussed, we've got the convert actually -- if this is what you're referring to, the convert actually is in a sense a bullet with the premium, were there to be any, tradable in shares.

But the fact is, the -- we've got a -- we know we've got probably a put staring at us in August and we've got a temporary facility in place to deal with that, then we'll look for opportunity between now and then.

Have you filed anything on that temporary facility?

I'm sorry?

Have you made any filings about the temporary facility as of yet?

No, this is a bank line in place.

We've announced this in the past I think, I've got John on the call, several quarters back.

Correct.

Gotcha.

Thank you.

Your next question comes from the line of Fred Searby.

Thank you.

A couple questions.

One is just, you might have said this, but I didn't pick up -- Falcon on the new, on the upgrade -- is there a sense of clients waiting or holding back on spending until that's out?

Is that -- have you launched on that?

And could you just break down -- it sounded like you were actually saying Triad and Falcon had seen some softness in client orders and I just wonder if you could give me some specifics on those two.

Thanks.

We're not suggesting there were softness in orders on those two.

I guess what I would say in answer to your first part of your question is, we've been pretty upfront about the roadmap for delivering upgrades, particularly on the Falcon product later this year.

Many of our clients take stock of those upgrade plans when deciding when to purchase.

So we announced the roadmap, we said when things are going to ship, we're making good on that.

Customers continue to buy.

It's possible that some customers are waiting for the new versions.

Of note, I would tell you that the Falcon product held up quite well during some peak usage over the holiday seasons when it was stressed to levels we hadn't seen before because there was a lot of card activity over the holidays and a lot of testing of fraud.

And we saw some record values being pumped through Falcon systems and it worked quite well.

So customers have taken note of that and I expect that as we talk to them about the new version coming, which will do at least as well, there will be a lot of interest.

Your next question comes from the line of Chris Walters.

Hi.

I was wondering if you could comment on what you think Fair Isaac's long term business model looks like in terms of top line growth and larger potential and when you think that might be achieved.

Yeah, I think, Chris, we've spoken that over time we think this model still -- we can still see a path to a growth rate of 7% to 10% in revenue.

We're obviously a ways from that now.

It'll come in a variety of ways.

I think in the current environment with financial institutions and some of what's happening in North America in our markets, that's difficult to see certainly this year.

But as they recover and as we serve them, we expect to share in that.

I think we'll probably provide some more color on that in the call on the 22nd.

Okay.

Thanks a lot.

And at this time there are no further questions.

Thank you very much, Operator.

And thank you, everyone.

We'll look forward to speaking again on the 22nd.

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

At this time, you may disconnect.