Fair Isaac Corp (FICO) 2009 Q1 法說會逐字稿

Good afternoon.

At this time, I would like to welcome everyone to the Fair Isaac's first quarter 2009 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.

John Emerick, you may begin your conference.

Thank you, Bernice, and good afternoon, everyone.

This is John Emerick of Fair Issac, and thank you for joining us for a review of our fiscal first quarter 2009 results.

A replay of this call will be available on our website through February 28th, 2009.

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

These statements represent our guidance and outlook as of today and are subject to risk and uncertainties which could cause actual results to differ materially.

These statements may include statements concerning our business strategies, and reengineering plan and the actual expense, revenue and net income impact associated therewith.

We assume no obligation to update the forward-looking statements including on this call and our news release, whether as a result of new developments or otherwise.

Fair Issac's product road maps and similar marketing materials should also be considered forward looking and subject to change.

You may obtain additional information concerning various factors and risks that could cause actual results to differ materially from today's forward-looking statements by referring to our annual report on Form 10K for the year ended September 30th, 2008, which is filed with the Securities and Exchange Commission and in other reports we file from time to time with the commission.

Please refer to those sections in our Form 10K and Form 10Q reports entitled forward-looking statements and risk factors.

These reports are available on SEC.gov and on fairisaac.com.

Now I'll turn the call over to Mark Greene, our Chief Executive Officer.

Thanks, John, and good afternoon.

We'll proceed today in three parts.

First, I'll present the results of our fiscal first quarter, and assess our business in view of current market conditions.

Then our CFO, Chuck Osborne, will provide further financial details.

Finally, I'll discuss our strategy and business outlook for the balance of the fiscal year.

As always, we'll then be happy to take your questions.

Starting with the results for our fiscal first quarter ended December 31st, 2008, revenue was $163 million, a decrease of 8% from the prior quarter and 14% from the same period a year ago.

GAAP earnings per diluted share were $0.25.

When adjusted for restructuring charges of $0.12, this equates to $0.37 of non-GAAP earnings per diluted share.

These results reflect the very difficult markets in which we operate.

Let me comment on this performance in terms of the four segments of our decision management portfolio, mainly: analytics, which are the scores used to assess the risk of various transactions or entities; applications he which use these analytics to help businesses make smarter decisions throughout a customer life cycle; tools, such as our rules engine on which applications are based; and finally, the services segment, consisting of consulting and system integration work around our products.

Starting the analytics.

Analytics revenue fell by $3 million or 8% from the prior quarter, mainly due to fewer scores consumed at credit bureaus.

We saw score volumes fall dramatically in September and then stabilize during this quarter.

Given the high margins of the the analytics business, this fall-off contributed significantly to the decline in earnings.

In recent weeks receive seen a slight recovery in scoring to mortgage refinancing activity, but this has not been enough to offset continued weakness in the credit card segment.

Turning to applications.

Application revenue fell by $7 million or 7% from the prior quarter.

Two factors are at work here.

On the one hand, the recession causes clients to conserve cash, restricting investments in large technology projects and subjecting business cases to greater scrutiny.

This lengthens our sales cycle.

On the other hand these same economic forces lead clients to a greater appreciation of our decision management strategy since it provides a way for them to manage customers relationships more profitably, across multiple product lines and channels.

As a results, we're seeing a growing number of enterprise-wide RFPs for applications to originate and manage customer accounts, improve collections, and prevent fraud.

The net is significant pressure on our applications revenue in the near term, but good prospects longer term for revenue growth once clients resume their technology investments.

Turning to tools.

Tools revenue grew by $1 million or 5% over the prior quarter.

We see many clients, especially banks, using tools such as Blaze rules engine and model builder products for quick hit, do it yourself decision management projects.

We're helped in this segment by the fact that Blaze remains the leading rules management product, both in market share and functionality.

Finally, services revenue decreased by $5 million or 16% over the prior quarter.

This is partially a result of several clients requesting that we slow down previously contracted implementation engagements in order to lighten their operating expenses.

The decline was also partly caused by our strategic decision to stop pursuing low margin consulting projects.

Now, let me turn the call over to Chuck for further financial details, after which I'll return to discuss our strategy going forward.

Chuck?

Thank you, Mark.

As Mark reported, revenue from continuing operations in the quarter was $163 million, an 8% decrease from the prior quarter.

While it's disappointing to see revenue slip, we think this is a respectable result given the significant pressures that our clients are under.

Indeed, these results underscore the resilience of our business model which benefits from a high percentage of recurring revenue.

Our transactional or recurring revenue for the quarter represented 77% of total revenues, an increase of 75% from the same period of the rear year.

Consulting and implementation revenues decreased to 17% of total revenues this quarter from 19% in the same period last year.

Finally, one-time or license revenues were 6% of total revenue, essentially flat from the same period last year.

This quarter, 31% of total revenue came from outside the United States, compared with 32% for last year during the same period.

Since we report in US dollars, our year-over-year revenues suffered a loss of roughly $6 million on a constant exchange rate basis.

Adjusting for the currency exchange, the percentage of revenues from international actually rose by one percentage point to 27%.

Looking at bookings.

Bookings from continuing operations for the fourth quarter were $53 million, from which we generated roughly $15 million of current period revenue, producing a 28% yield.

This quarter's bookings decreased by 43% compared to bookings from the same period last year of $93 million.

We experienced reduced levels of bookings as financial institutions slowed their investments in new projects.

Looking at expenses.

Total operating expenses in the quarter were $143 million, a decrease of 8% against the year-ago period.

Our management team has worked diligently over the past year to reduce operating expenses, ongoing cost reengineering program, we booked severance and facilities closing charges of $8 million in the quarter to reflect the actions announced on January 7th which will reduce annual operating expenses by $40 million.

Excluding restructuring charges, operating expenses declined by 13% versus the prior year.

Together with prior cost initiatives introduced last year, this means we're reducing annual operating expenses, excluding restructuring charges from $612 million in fiscal 2008, to approximately $535 million in fiscal 2009 or $77 million.

These savings cut across all of our major expense categories.

Costs of revenues was $59 million for the quarter, compared to $67 million in the same quarter last year.

Research and development costs were $18.1 million for the quarter, compared to $19.5 million in the same quarter last year.

Selling, general and administrative costs were $54.8 million for the first quarter, compared to $66.8 million for the same quarter last year.

And amortization expenses were $3.3 million in the first quarter, compared to $3.1 million for the same period last year.

This 6% increase is attributed to the acquisition of Dash.

Net income from continuing operations in the quarter was $12.1 million, a 49% decrease from last quarter, and a $9 million or 42% decrease from the same period last year.

The first quarter net income from continuing operations was impacted by the $8 million or $5.7 million after tax restructuring charge.

The effective tax rate this quarter was helped by a $700,000 discrete net benefit primarily associated with the research tax credit.

Fully diluted GAAP earnings per share from continuing operations for the quarter were $0.25, a 39% decrease from the same period last year.

After adjusting for the $0.12 after tax restructuring charge our non-GAAP EPS was $0.37, or a decline of only 8% compared with the period year.

We think this is a tangible evidence of the significant efforts we have undertaken to deliver the highest possible profitability in this environment.

Furthermore, these cost reductions stem from reengineering programs which will provide us with greater operating leverage when volumes and revenue rebound.

Looking at our free cash flow.

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

Free cash flow for the current quarter was $30 million or 18% of revenue, compared to $40 million or 21% of revenue the same period last year.

We're very focused on maintaining strong cash flow and expect this figure to grow once overall market conditions improve.

One of Fair Issac's key financial strengths is our balance sheet.

We're using our significant cash flow from operations to further bolster our cash on hand.

This cash conservation approach reduces our net debt and positions us well for maximum flexibility.

A few points to highlight are good liquidity and ability to weather economic storms.

We have $527 million in global liquidity, consisting of $287 million in cash and marketable securities plus $240 million available against our resuming credit facility.

We have manageable indebtedness consisting of $295 million balance outstanding on our revolver at 3% interest and $275 million in outstanding notes at 6.5% interest.

The ratio of our total net debt to EBITDA is now 1.8 times, comfortably below the covenant level of three times.

Thanks to refinancing work completed last year we have no significant debts maturing until 2012.

In keeping with this conservative fiscal stance, we did not repurchase any shares in the open market last quarter.

Our fully diluted share count is essentially unchanged at 48.5 million shares.

We remain committed to returning capital to shareholders through stock repurchases over the long term and have $148 million remaining under our existing share repurchase authorization.

Let me now turn the call back to Mark to discuss our strategy going forward.

Mark?

Thanks.

During the quarter we saw the recession spreading from North America and Europe to Latin America and Asia, and cascading from mortgages to credit cards, auto loans and other financial products.

This prompted a thorough review of our strategy and financial plans.

We began our strategy refresh by interviewing senior executives at 40 of our top clients.

During the month of November we met with Chief Risk Officers and other C level executives at these firms, seeking to understand their business prospects and strategies, and the likely impact on our own business.

Several messages came through clearly from these interviews.

First, our clients are beginning to get their hands around this financial crisis.

They don't expect it to end soon, but they are beginning to be able to model and assess what they're dealing with.

In the words of one client, the " fog of war" is beginning to lift, although the war itself will go on for some time.

Second, most of our clients expect this crisis to last throughout 2009 and believe that we have yet to reach the peak of mortgage foreclosures and card delinquencies.

They do see a gradual recovery starting in early 2010, but not to the level of business activities seen prior to the recession.

Third, in response to this, our clients expect to decrease their technology budgets this year by about 10% while increasing the proportion spent on the types of technology featured in our decision management portfolio, namely, solutions for managing risk, reducing fraud, and improving collections efficiency.

Finally, we heard that many clients expressed a desire for precisely the kind of capabilities that we're building, an integrated set of applications that allow them to manage risk at the customer level, not just per transaction.

We are actually very reassured by this unprompted validation of our decision management strategy.

These findings led us to several conclusions.

First, our three-pronged strategy of decision management analytics, applications and tools is very much on target with the market's needs.

Second, the opportunity for these offerings will be strong once the global economy recovers.

But third, until that recovery occurs, we needed to tighten our belt by reducing expenses and pacing investment in a decision management product road map.

With these insights in hand, we reassessed our corporate strategy and financial posture to determine how best to deliver value to shareholders.

In this review we sought to balance the desire to maximize cash flow and protect earnings in the near term, with the needs to sustain investment in decision management products for longer term growth.

After carefully considering various alternatives we have recommitted ourselves to our original three-pronged strategy but with sharper focus.

We're still committed to providing best-in-class analytics, applications and tools to help clients manage their financial relationships over customer life cycles, from marketing to originations, on to account management, collections and fraud prevention.

But we also recognize the need to pare our costs in the face of difficult market conditions, so we announced on January 7th four ways in which we are narrowing our strategy.

First, we're sharpening our focus on the banking and insurance industries.

This is the financial segment where we have greatest expertise and enjoy the best momentum.

We're reducing go-to-market efforts outside of these two industries, and restructuring our sales and professional services organizations to reflect the recent consolidation in US financial services.

Second, we're pruning our product portfolio.

Legacy offerings with few customers or below average profit margins are being weeded out of our lineup.

Products outside of our core financial services applications footprints will be sold off or otherwise eliminated as market conditions allow.

Third, we're pacing our development work on decision management applications.

We are not changing the initial phases of our product time line, including the first two products to implement our new integrated architecture.

Those are a new collections and recovery application known as Debt Manager VII, which is shipped on schedule last month with very timely support for receivables management in the mortgage and home equity loan markets.

And secondly, a new fraud application known as Falcon VI, which is now in early release with general availability set for April.

This is a particularly exciting application since it uses an innovative adoptive analytics approach to open help financial institutions spot and stem new forms of fraud in real time, much as modern anti-virus software products adapt to new PC viruses over time.

So those two parts of our application road map remain on track, but we are extending later phases of the road map to reflect delays in clients buying intentions.

We're pushing out by several months the delivery of applications for new account origination and new account management.

We believe that we'll still be able to capture those markets when they become hot, but we're slowing our development burn rate in the meantime.

But make no mistake, we remain very focused on the entire decision management suite and still have over 200 developers building in these next generation products.

Fourth and finally, we have reduced our corporate service functions, such as finance, legal, human resources and marketing.

We're fortunate to have done quite a bit of cost reengineering in the recent months, having already trimmed our workforce to 2,800 to 2,500 employees during the last year.

The further announcement -- the further actions announced earlier this month removed an additional 250 positions.

These reductions together with careful management of expected attrition will leave our workforce at roughly 2,100 employees, or about 25% smaller than the year-ago level.

We expect these reductions will have minimal impact on our current revenue run rate.

The net result of these latest actions is to pare $40 million from our annual operating expense run rate.

They're painful measures to take since they mean separating scores of talented professionals, many of whom have given years of loyal service to the Company, but we're blessed with intelligent, creative workforce, people who care deeply about decision management and our mission to help clients make smarter decisions.

So it's hard to say good-bye to so many of them.

Yet difficult as this is, it's the right thing for us to do given the unprecedented market challenges we face.

The measures we've taken will allow us to protect near-term profitability and cash flow, while staying the course on our longer-term decision management growth strategy.

Let me turn now to our outlook for the balance of this fiscal year.

Visibility into our future prospects is beginning to improve, but it remains difficult in this financial climate to forecast revenue with any precision.

So while we are not in a position today to provide quantitative revenue or earnings per share guidance, we have provided a point estimate of $535 million for operating expenses in fiscal '09.

Let me conclude with several observations about our Company.

First, despite revenue erosion, Fair Issac remains in sound financial condition.

We continue to enjoy good margins, strong free cash flow and healthy balance sheet.

We'll continue our disciplined and conservative approach to financial management, maintaining ample cash on hand and assuming only manageable levels of net debt.

Second, we're making good strategic progress in all elements of our decision management portfolio.

In analytics, our partnership with Equifax is proceeding well despite market pressures, with several new products planned in coming months.

And our consumer scoring business enjoyed double-digit revenue growth, with itsmyFICO.com website continuing to win industry accolades as a top site for financial education.

In applications, our next generation products are bringing significant innovations to the marketplace.

As we deliver a growing number of these integrated decision management applications, clients will enjoy the benefits of connected decisions, allowing business decisions and insights to flow from one stage of a consumer life cycle to another.

We're confident that products such as Falcon, which has long been the market leader in fraud prevention, will continue to revolutionize this market especially when the new version is delivered in April.

Likewise in tools, our Blaze rules engine continues to be the market leader.

Thanks to ongoing innovation, Blaze remains the most effective solution for organizations seeking to ensure consistent decision making across an enterprise.

We've recently added powerful rule visualization capabilities that make it much easier for business executives to manage complex rule sets, and we've integrated optimization capabilities, obtained in last year's acquisition of Dash optimization, a very successful acquisition that has made Fair Issac a leader in mathematical and pricing optimization, strengthening the value proposition of our tools portfolio.

Third, I observed that we have a strong management team with seasoned professionals instilling proper disciplines in our sales, marketing and development functions.

We're making good progress in our search for a new CFO to replace Chuck Osborne, who announced last November his intention to retire by next August.

In addition, I'm delighted to announce today the appointment of our newest executive, Ms.

Deborah Kerr, who will join Fair Isaac on February 2nd, as our Executive Vice President and Chief Technology and Products Officer.

Deborah will be responsible for leading both global product development and product management functions for our decision management offerings.

She joins us from EDS, an HP Company, where she spent the past four years as Chief Technology Officer, most recently leading the integration of EDS into HP.

We're very excited to welcome Deborah to the Fair Issac executive team.

Finally, I'm encouraged by what we've heard from our top clients during the recent market research interviews.

They like our existing products and our new product road map.

They understand the relevance and benefits of our solutions for making smarter decisions in managing customer relationships, and they intend to buy our decision management solutions as budget constraints allow.

Most importantly, they increasingly view Fair Issac as a trusted business partner, one whose support and expertise they seek as they navigate through these difficult times.

The punch line here is that although we expect to see pressure on our top line throughout fiscal '09, we're positioning ourselves for solid growth once markets recover.

In the meantime, we're focused on protecting profitability and cash flows.

Before I close, let me invite you to join us at the New York Sheraton for an analyst date at 3:00 PM eastern on Tuesday, March 10th, and to attend our Interact '09 conference, which begins immediately afterward.

At the analyst day we'll provide further updates on our strategy, delve deeper into our financial models, demonstrate several new decision management products, and provide client case studies showcasing the business benefits of smarter decisions.

The interact conference which follows will be a wonderful opportunity to learn about our products and services and to hear about the latest analytics approaches for effective risk management.

It will feature three key notes from industry leaders and 80 timely sessions covering topical issues for these turbulent times.

We hope you can join us for both events starting on March 10th.

John?

Thank you very much.

Bernice, please open up the line for questions right now.

Thank you.

(Operator Instructions).

At this time, our first question comes from Mr.

Michael Nemeroff from Wedbush.

Hi, guys.

Thanks for taking my questions.

Mark, I think in your prepared remarks you had mentioned that point estimate of, was that $535 million in operating expenses in fiscal '09?

That's correct.

Okay.

So you said that some clients are saying that the fog of war seems to be lifted.

If that fog of war seems to lift a little bit and sales cycles start to begin in earnest, would you imagine that maybe you would see a bottom to the declines in the total revenue, maybe by the fourth quarter of this year?

And we would see more declines like we saw in the first fiscal quarter going on for the next couple of quarters?

Is that fair to say?

I think you got the right logic.

It's difficult to get the timing right.

We see puts and takes there, Michael.

On the one hand, for instance, our scoring business shows some early signs of recovery.

I think I mentioned a pickup in the mortgage re-fi area as an indicator of good things possibly happening there.

On the other hand when we talk to our customers in these interviews we conducted a month or two ago, they don't think we've hit bottom yet and they don't think we will for a couple of months.

So you put those factors together and we see our business sort of largely bumping around at current levels plus or minus, and I'm not yet in a position to have the confidence to call a bottom.

But we know what a bottom will look like and we know what indicators we'll see in terms of a restoration of the credit card segment, a pickup in the mortgage segment, lending activity beginning to improve generally at banks.

There's a couple of those macrophenomenon, that when you see them will be good signs for our business.

We're among the first types of business to get sick, in this economic down cycle we'll probably be one of the early recoveries, but we can't time that yet.

And then one follow-up if I may for Chuck.

The cash flow during the quarter, down about 20% on the operating cash flow.

Is that the kind of -- or the magnitude of reduction you're trying to protect for the full year relative to last fiscal year?

No, I think that's a fair way of saying it.

We are -- similar to Mark's comments, our free cash flow is generally going to track along with the revenue impact, and so similar with his comments, I think that we feel like we may be sort of operating at this level for a period of time.

As Mark said, we haven't yet called this the bottom, so we can't give you guidance, but we think we're taking all the right steps to protect that cash flow.

And then just one more, Mark, if I may.

The scoring business, extremely weak this quarter, continued to be extremely weak.

Looks to anniversary, the weakness of down 20% or so, seems to anniversary next quarter or in the next quarter or two.

Do you expect that kind of weakness to continue in the scoring business throughout the year?

Thanks.

Thank you, Michael.

What we've seen and we compare notes, as you might guess, very regularly with the bureaus is, we think we saw during the quarter the business sort of flatten out at the lower level that we achieved, sort of in step function at the end of September.

I think you know that in the end of September there was a big down step in the volume we saw in scoring.

It seems to be operating more or less consistently at that lower level now, which means in the quarter just reported, the way the math works there was a climb down quarter-over-quarter mathematically.

We now think we're operating in more or less a horizontal trajectory there, right.

So the bleed-off will appear less the further out you go, mathematically.

But this is a situation that you have to watch week by week because the variability here seems to be much greater than historically we've seen in the past.

Thanks for taking my questions.

Thank you, Michael.

(Operator Instructions).

Our next question comes from Carter Malloy from Stephens.

Hi, guys, thanks for taking my questions.

Within the scoring segment, continuing on the last question, can you give us some more detail around prescreening volumes and then also maybe an update about the margin profile in that segment?

I'm refer this to our Chief Operating Officer, Mike Campbell, who is closest to the scoring segments.

We're still seeing very low prescore volumes.

When you start seeing the credit card offers coming back in your mailbox, you're going to start to see that those numbers are improving.

That's still staying at a fairly low level.

There are a couple of companies now that are getting ahead of the curve and have reported some overages to what we expected, but they're very isolated cases right now and certainly not a wave.

Would you say it's still down 20% plus?

Yes.

Within just that prescore?

Yes.

Also, margin profile for the business.

Remains about the same.

Okay.

And then second, I understand the need to maintain a healthy balance sheet, but if the operating environment stays the same, do you have plans to resume buyback activity any time soon, or maybe what's the target debt to EBITDA before you can get back out and buy back shares again?

We talked about the fact that operating right now 1.8 times, we're comfortably below the covenant.

The notion of liquidity for us is one making sure we're in a position to weather any further downturn in this economy, so we didn't -- maintaining healthy cash positions, we're also remaining drawn on our lines.

And then our notes to the bank, to the insurance companies actually have positions where, penalties for prepayment, we wouldn't want to prepay those at this time.

But no, I think if we saw this operating environment improve, yes, we would be back in the market, and looking at our stock, it is as a very low level.

We think that would be a good use of our cash going forward, as results and the economy improve and we do, as we indicated, have remaining authorization from our Board of up to almost another $150 million in share repurchase.

So you would expect to see us back in the market.

Okay.

But it's safe to assume that if the environment stays the same that I could expect not to see you in the market?

Not currently.

Okay.

And then quickly, and I'm get back in the queue, can you give us an update on the competitive landscape, specifically for Falcon and Blaze, as it relates to fraud product and maybe on if you've seen [ilog] more now that they're a part of IBM.

Well, first of all, the part of the market that's comparatively hot is not those areas at the moment.

The majority of the buying over the last quarter, and I think that is true for our competitors as well, has been in the recovery space, which is sort of what you would guess given the kind of economic climate that we have.

I would say that with respect to Falcon product and fraud, we are holding our own.

We do see competition out there, for sure.

But especially with the new version coming out in April which is sort of in prerelease now, so clients have their hands on it, they're testing it, we feel very good about our competitive positioning.

And we do see in our pipeline a growing number of large scale RFPs, particularly in the fraud area.

So we're optimistic going forward, but also cautious because we're not sure of the speed at which those opportunities will actually progress in the pipeline.

But in terms of feature function, we like our positioning versus competition.

Okay.

And then also on ilog, have you seen them any more in the market now that they've become a part of IBM.

We certainly see ilog, which as you know is now part of the IBM company, in the marketplace.

Very near term this has been modestly positive for our business as customers are trying to understand the ramifications of that acquisition and a few of them are disaffected by the new owners, etc.

So near term, we've actually seen our Blaze fortunes slightly improve.

Longer term, we acknowledge that the sales power that IBM can bring to the marketplace will be a challenge for us, and so our strategy there will be to reach out to a broader network of distributors and partners, but near term it has not been a negative.

Okay.

Great.

Thank you.

Thank you.

Mr.

Emerick, this concludes our conference for today.

We have no further questions.

Great.

Thank you, operator, and hopefully we'll get to see everybody in March.

Thank you, all.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.