Fair Isaac Corp (FICO) 2009 Q3 法說會逐字稿

Good afternoon.

I will be your conference operator.

At this time, I would like to welcome everyone to the FICO third 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.

Emerick, you may begin your conference.

Thank you, Bernice and good afternoon, everyone.

Thank you for joining FICO's third quarter earnings call.

I'm John Emerick, VP of Investor Relations, and I am joined today by CEO Mark Greene, CFO Tom Bradley, and COO Mike Campbell.

You will find on the Investor Relations portion of the FICO website a copy of today's press release, our Reg G disclosure schedule, and a new financial highlights presentation.

A replay of this webcast will be available through August 22, 2009.

Certain statements made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995.

Those statements involve many uncertainties that could cause actual results to differ materially.

Information concerning these uncertainties is contained in the company's filings with the SEC, in particular in the risk factors and forward-looking statements portions of such filings.

Copies are available from the SEC, from the FICO website or from our Investor Relations team.

In order to provide additional information to investors, we will use certain non-GAAP financial measures on this call including pretax flow, adjusted EBITDA, and operating expenses excluding restructuring charges.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures entitled Reg G Disclosure is available on the Investment page of our website under the Presentation tab.

Now I will turn the call over to Mark Greene.

Thanks, John.

We'll proceed today in three parts.

First, I'll summarize the quarterly results and assess our business in light of current market conditions.

Then Tom Bradley will provide further financial details.

Finally, I'll discuss our strategy and business outlook for the quarter ahead before we take your questions.

Revenue in the third quarter of fiscal 2009 was $156 million, down 15% from the prior year but only 2% from the prior quarter.

GAAP earnings per share from the continuing operations in the quarter were $0.37, flat with the prior quarter and down 3% from the prior year.

After adjusting for an $0.08 per share loss from the sale of product line assets and restructuring charges, this equates to non-GAAP earnings per share from continuing operations of $0.45, which compares favorably with the $0.42 reported a year ago.

That $0.08 charge booked in the quarter resulted from the June sale of two applications specific to the telecom industry as part of our previously announced strategic refocusing.

Those two sales complete the divestitures of all nonstrategic products and now allow us to focus full attention on our four core industries -- banking, insurance, healthcare, and retail.

For the past year, we've emphasized stringent cost containment to protect earnings in the face of challenging revenue environment and this quarter was no exception.

These efforts have paid off in improved non-GAAP operating margins, which increased from 23% a year ago to 25% last quarter to 28% this quarter.

Thus, we've nearly hit the 30% non-GAAP operating margin target set forth in our business model.

Importantly, this improvement in profitability is taking place even as we maintain significant investments in sales, delivery, and in research and development, which reached almost 12% of revenue this quarter.

Let me discuss the quarter's results according to the segments of our decision management portfolio, namely scoring, which are the analytics used to assess the risk of various transactions and entities; applications, which use these scores to help businesses make smarter decisions over customer life cycles; and software tools, such as rules and optimization engines on which these applications are based.

Starting with scoring, scoring revenue increased 11% over the prior quarter.

This increase is generally consistent with normal seasonality and did not necessarily indicate a turning point in the market.

Scoring revenues grew principally from credit bureau risk scores, which were up 12%, partially benefiting from a surge in refinance volumes as mortgage interest rates fell below 5% early in the quarter.

We had three positive developments in our scoring business this quarter.

First, the latest version of the classic FICO score, known as FICO 08, is available this month at all three US credit bureaus.

Over 400 lenders are now using or testing FICO 08, which provides up to twice the improvement in predictive power compared to previous FICO editions.

Second, to enhance consumers' access to their personal FICO scores, we launched a new score view service which makes FICO scores available online at internet banking sites.

During the quarter, we were pleased to sign a major US credit card issuer to this service.

Millions of their consumers will soon have free access to their individual FICO scores when they bank online.

These consumers will also be provided free educational offerings on credit literacy and the opportunity to purchase credit monitoring services from our MyFICO website.

And third, conditioning our emphasis on innovation, we announced with our partner Equifax the availability of a new credit capacity index, which is the first forward-looking risk management tool that rank orders consumers based on their ability to take on future debt.

We already have seen considerable interest in this credit capacity index, which will help lenders to strengthen their account acquisition and account management strategies while minimizing exposure to potential losses by not burdening consumers with too much debt.

The credit capacity index coupled with the classic FICO score now provides a multidimensional view of consumer risk.

Turning to our next segment, applications, applications revenue fell by $5 million or 6% in the prior quarter.

$3 million of this drop occurred in our consumer scoring business, which has historically been reported as part of applications, although that will likely change as we move into our next fiscal year.

This decline was mostly due to experienced withdrawal from the MyFICO website.

$2 million of the drop in applications occurred in our traditional decision management portfolio, with varied results across different phases of the life cycle.

At the front end of the life cycle, we saw growth in precision marketing solutions.

This was offset by weakness in account management, where revenues declined slightly due to consolidation and account closing activity among banks.

We're encouraged by the strong pipelines developing for many of our applications, including our new fraud products for credit, debit, and EDA known as Falcon 6 and a fraud product for insurance known as Insurance Fraud Manager.

We expect these pipelines to convert into bookings and revenue in the quarters ahead, recognizing that it often takes at least six months of deployment before such applications start to generate new transactional revenues.

Our third category is tools.

Tools revenue increased by 15% over the prior quarter and 4% over last year.

This segment consists of our rules management, modeling, and optimization tools.

This quarter we secured several wins for our Xpress Optimization and Blaze rules management tools, including an enterprise agreement with a large credit card organization which has adopted Blaze as its global platform for rules based applications.

Now we support the scoring application and tools offerings with services, chiefly consisting of consulting and systems integration work.

After accounting for a one-time deferred revenue adjustment last quarter, our services revenue has remained essentially flat over the last three quarters.

We're maintaining a healthy roster of service professionals in the belief that their skills will be in demand as we sign and begin deploying the [engagements] we now see in our applications pipeline.

To summarize the quarter, I'm proud of these results overall.

The modest revenue declines suggest that we're beginning to stabilize the business.

More importantly, we've made dramatic changes to the cost structure of the business, reducing expenses by over $80 million year to date -- allowing us to deliver a strong bottom line result despite these hard times positioning us for even stronger profitability when the economy recovers.

Let me now pass the call over to Tom Bradley for further financial details.

Thank you.

I'll start with revenue, and as Mark mentioned, revenue for the quarter was $156 million, a modest 2% decline from the prior quarter.

Recurring revenue for the quarter represented 77% of total revenue, an increase from the 74% for the same quarter last year and a 1% increase from last quarter.

This high percentage of recurring revenue is a testament to the strength of both our Falcon and TRIAD brands as well as the retention rate on our maintenance revenue.

Consulting and implementation revenues were 18% of total this quarter versus 21% in the same period last year.

One time license revenues were 5% of the total basically consistent with last quarter and in the prior year quarter.

Our mix of international business this quarter was 30% of the total for $47 million, compared to 32% and $51 million last quarter and 31% and $58 million from a year-ago period.

At constant exchange rates, roughly $5 million of the $11 million year-over-year decrease was caused by a stronger US dollar.

Regarding bookings, we had total bookings at $49 million this quarter, which created $11 million of current period revenue, a 22% yield.

We believe our pipeline is strong for the new Falcon and IFM products as well as from stabilizing market conditions.

This should tend us towards larger and longer term contract bookings in the future quarters.

Moving to expenses, third quarter continued to benefit from our expense reengineering effort, with operating expenses before restructuring and asset sale charges equal to $120 million, a 6% decline over last quarter and 21% lower than last year.

As we've noted in past calls, these savings cut across most categories, but we are intentionally maintaining investments in sales, delivery, and R&D.

Regarding the asset sales that were mentioned, we have previously announced that we divested two product lines this quarter, LiquidCredit for Telecom and [Bromex].

These products generated $5 million of revenue during the third quarter.

We recorded a $2.9 million noncash pretax charge on these divestitures due to the reduction of goodwill associated with the products.

Because the goodwill is not deductible for tax purposes, our after-tax loss was $3.9 million or $0.08 per share.

Looking to the bottom line, income from continuing operations this quarter was $18 million, essentially flat with last quarter and a 4% decrease from the same period last year.

These amounts reflect the after-tax impact of the previously discussed restructuring charges and asset sales.

This results in earnings per share from continuing operations of $0.37 this quarter, which compares to $0.37 last quarter and $0.39 the same quarter last year.

The effective tax rate was about 36.5% for the quarter, an increase from the prior quarter as the level of income from the United States increased relative to the other geographies.

Additionally, the provision for income tax includes a discrete tax expense associated with the sale of the telecom product lines.

This increased our tax rate by 3% for the quarter.

Our year to date effective rate is 30.5%.

I think the fact that our revenue declined by only 2% and the operating expenses declined by more than 6% is good evidence of the efforts we've undertaken to deliver the highest possible profitability in this environment.

In fact, as Mark mentioned and as you can see in our Reg G schedule, non-GAAP operating margin before restructuring and related charges, amortization, and stock-based comp, increased 28% this quarter, continuing the improving trend.

I'll finish with cash flow and the balance sheet.

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

The free cash flow for the quarter was $34 million or 22% of revenue, compared to $38 million or 21% of revenue in the same period last year.

Our year to date free cash flow was $110 million or 23% of revenue, compared with $93 million or 16% of revenue from the prior year period.

This improvement is driven by our previously discussed expense reductions and from effectively managing our accounts receivable.

This ongoing cash flow further strengthens our liquidity position.

We now have $372 million in cash and marketable securities on the balance sheet, plus $260 million available against our revolving credit facility.

This means we have a total of $632 million in immediately available liquidity.

Our debt remains unchanged from last quarter, consisting of a $295 million balance outstanding on our revolver which carries an all in interest rate of 1.74% and $275 million in outstanding notes.

The ratio of our total net debt to adjusted EBITDA is now down to 1.4 times, well below the covenant level of 3 times.

We did not repurchase any shares in the open market this quarter, and our fully diluted share count remains essentially unchanged at 48.9 million shares.

We have $148 million remaining under our existing share repurchase authorization.

In light of the increasing cash position and our ongoing ability to generate free cash flow, we are now evaluating how to best deploy accumulated cash to maximize shareholder value.

I'll turn the call back to Mark.

All right.

In this concluding section, I'd like to update you on the health of our business and prospects going forward to the end of the fiscal year.

Let me begin with scoring.

Scoring revenue continues to be hard to predict.

Our bureau partners report a slowing rate of decline in scoring values, but not a recovery.

We are beginning to see the effects of deterioration in the credit card space, which cuts both ways for us.

Banks are consolidating or closing card holder accounts, which hurts our transactional revenue, but they're also looking for more help in places like share of wallet growth, credit line management, and predelinquency management.

We continue to view the scoring segment as a decent proxy for the health of the US economy and our scoring revenues as an indicator of the business cycle.

We believe that our scoring volumes, revenues, and margins will recover as the general economy does, but we are pursuing additional tactics now to increase scoring usage even in this environment.

In applications, we're pleased with the market's favorable reception to our latest fraud offerings and to our new retail action manager product, which significantly advances the use of marketing analytics in retailing.

We're already making good progress in converting a pipeline of over $200 million for these products into new signed business.

Application sales cycles remain long and new deployments take several months before they generate new transactional revenue.

Our revenue from these applications will be gradual.

In tools, we're optimistic about our prospects because of the strength in our product lineup and a growing set of distribution channels.

The latest versions of our Blaze rules engine and Xpress Optimization tools lead the industry in terms of performance and functionality and we're building solid distribution relationships with OEM and system integration partners for these tools.

In summary, the overall market and our own business both appear to be moving sideways.

Now to guidance going forward.

Although we're encouraged by clients' positive reactions to our new products, our visibility into their spending intentions remains limited, so we are not yet able to provide revenue guidance.

Given our focus on managing costs to protect earnings, we are able to continue providing guidance on expenses.

We previously guided that fiscal 2009 operating expenses would total $525 million, excluding restructuring charges.

In light of the sale of our telecom product lines and our ongoing reengineering initiatives, we are revising that operating expense guidance to $505 million, an improvement of $20 million.

This implies operating expenses of $122 million in the current fourth quarter.

Let me conclude with a perspective on FICO standing at this critical time in the financial services industry.

I believe that FICO is uniquely positioned at the corner of Main Street and Wall Street, if you will.

Our consumer offerings play well on Main street in these challenging times -- as one example, our MortgageReliefOnline.com website has drawn 130,000 visits from homeowners seeking assistance with loan modification, with 4,000 modifications completed so far and another 10,000 in process.

At the same time, our decision management scores, applications, and tools are more relevant than ever to Wall Street -- that is, to the banks trying to manage risks and improve profitability.

This is demonstrated by the strong pipelines referred to earlier.

So we see plenty of evidence that our offerings are relevant to both consumers and businesses.

We also value the trust that we've earned through decades of providing objective, analytical insight into credit and risk management issues.

The FICO brand is the gold standard in this regard and we work hard to be good stewards of that brand.

Part of that stewardship was rebranding the entire company earlier this year from Fair Isaac Corporation to FICO, the name by which we are best known in the market.

We'll be extending that next month as we change our New York stock exchange ticker at the close of trading on August 17 from our current three character ticker, FIC, to a new four character ticker of FICO.

As of August 18, we'll continue to trade on the NYSE with this new four-character FICO ticker.

And now for our long term prospects.

I remain confident that FICO has the products, talent, and market opportunity to be a strong growth company.

We do need to see an end to this recession and a resumption in IT spending in order to fully realize this growth potential.

Since such a recovery is not yet apparent, in the interim we're managing expenses to protect earnings while still investing in our scoring, applications, and tools businesses.

We'll provide further updates on those investments and on our growth prospects on our next call in November, which occurs shortly after the start of our fiscal 2010 period.

John, back to you now for a Q&A period.

Thanks, Mark.

This concludes our prepared remarks.

We are now ready to take your questions.

Bernice, can you please open the lines?

Thank you.

(Operator Instructions).

Our first question comes from Carter Malloy, Stephens Incorporated.

On your scoring revenues, I'm just trying to get a sense for exactly what it was in the quarter that I know you've talked a little around it.

But more specifically what it was in the quarter that pushed it up sequentially, as I'm not really -- with the weakness in the credit card industry and your competitors are not -- rather your data sources are not doing that well, I want to get more color on that.

Two primary drivers.

One, a lot of that is normal seasonality.

The quarter just ended is typically stronger than the quarter before.

Second, within that, we saw more than the usual improvement in the mortgage space due to refi activity as interest rates fell below 5%.

There was a spike in refi activity in that time.

And your expectations are that that could -- at least you'll hold the line there, assuming a steady economy?

Yes, that last part on the mortgage refi is up to your guess.

We see very strong indications that 5% is a magic threshold.

When rates are above that, the refi activity stays the way as it did for the last couple weeks of the quarter.

Your guess as to where the rates are going, that'll tell you where the mortgage part of our business went.

It's not a huge driver -- mortgage is between 10% and 15% of our scoring business.

We're much more based in the credit card segments, where there are ongoing challenges.

Okay.

And so with card issuance down where it is now and a little bit of the lag effect there, I would kind of expect it to continue having an impact on that segment going forward, correct?

I think that's right, although there are puts and takes there.

The diminished level of business activity is a negative.

What's our modest positive in the card space is movement by many banks to more frequently pull FICO scores to assess either -- closer in real time to help (inaudible).

And have you identified how big of an opportunity you think it is, the direct to consumer piece within the banking sites?

Early days.

We have big hopes, but I'd rather not comment on those hopes until we see some traction as the product rolls out.

It's a significant market opportunity.

We need to get a couple months experience under our belt to see what kind of penetration we get against that opportunity.

Okay.

And lastly, I know this is kind of a tough question or a strange one, but it's strange to me that you're -- with, in mind with you said with the credit card companies checking more.

It's strange that the collections and recovery was down and yet your precision marketing was up.

That seems kind of the opposite of what everyone else was experiencing.

Carter, I'm going to ask Mike Campbell, our COO, to answer that question.

The main driver was a very large deal, a comparable in the same period last year.

So our collections and recovery business and pipeline continues to be strong for obvious reasons.

It was a difficult compare, I think is the short answer.

And on the flip side of that, the precision marketing being up, what was the driver of that?

We're starting to have customers come online from a transaction perspective on some of these new products, so that's driving revenue up.

Okay.

Thanks, Mike.

Thank you.

Thank you.

(Operator Instructions).

Our next question comes from Mike Lattimore, Northland.

Hi, good afternoon.

On the MyFICO.com, do you feel like that's at a normalized or stabilized rate now after the quarter post Experian change?

I think that's right.

On the Experian matter, we would love to see them return to that business.

We continue to believe that consumers are best served if they have the ability to access all three forms of their FICO score on one site, which is what MyFICO was designed to do.

So we're hopeful that we can get that back in groove.

Until that time, I think we're operating at about the right level of business equity.

And then in terms of the change in cost outlook for the year, $20 million difference from last quarter, how much of that relates to the telecom sales?

A small part, actually.

It's more -- just having more visibility on where our expense efforts are coming and based on our actual third quarter experience.

Okay.

There's some impact there that's rolled in, but it's not a huge number.

So I guess I mean it was --just a quarter ago when you were at [525] for the year, I mean what -- you have some color, but what is the major change over the past few months here that would cause you to want to lower expense outlook a little bit?

We just kept real good traction on all the expense efforts.

There's less people around, less travel, and less people buying flights -- travel costs in general have been down, both airfares and hotels.

We've been able to renegotiate our adjudication and some of our infrastructure contracts, which not only provide ongoing benefit, but impact even our accruals going forward.

Less outside consulting fees, it's just almost good news everywhere we turned around when it came to expenses this quarter.

So I don't think all of that plays directly through in the run rate, but a big part of it plus a couple of million dollars on the telco assets leads us to the new guidance.

Okay.

You mentioned some optimism around the fraud management product and the insurance management product.

Does that give you -- should we kind of expect the bookings to be stable or even grow a little bit based on that?

I think we feel very good about the bookings future.

There is a question of timing on that.

When you're sitting as we are with $200 million of opportunity and very quality stuff there and fairly significant transaction sizes, quite a few number of $5 million, $10 million, and $50 million transactions, we're optimistic that as those things come good, bookings will take off and so will revenue.

But I am cautious still on timing.

In this environment, it's very difficult to assess how quickly we can address those opportunities.

Our clients are all going through additional rounds of budget reviews and approval cycles, so it's difficult to say how quickly that pipeline will convert into accrual bookings and revenue.

Lastly, the tax rate for the fourth quarter should be closer to that 30% to 31% range, is that right?

It should be closer to the year to date range, that's correct.

Okay, thank you.

Thanks, Mike.

Our next question comes from Michael [Nimwas] of Wedbush.

Hey, guys, thanks.

Couple of questions.

Did you mention headcount?

I think I missed that if you did.

We did not mention it, but it's 2,150, I believe, right about that number.

And that compares to what last quarter and the previous Q3?

One second, I'll get the numbers for you.

Okay.

And then also while you're getting that, do you guys still have a buyback program in place and what's still left on that if there is one?

There is a buyback program still in place with 140 million plus --

148 million is our outstanding authorization.

We haven't repurchased any shares in over a year, but we were active prior to that, but that authorization remains intact.

Right.

And then just a question -- you're selling off a bunch of the different assets and I think that and it makes sense.

You're getting back down to the core.

Could you give us a sense, Mark, of what the organic growth rate was of the businesses that remained when things were good, so what kind of a normalized growth rate should we maybe expect out of the units and the business lines that remain currently versus what they were a couple of years ago?

Well, so there is a question about whether the history that I'm about to cite is reflective of the reality that we're in now -- so you all can answer the question, Michael, whether we have a new reality here, whether we have a temporary detour from the old reality.

But we used to believe that the organic business -- organic growth rate of our four core industries was on the order of 7% to 10%.

That still feels right to me at some point in the future, but clearly not today.

So I guess I would have you model as the steady state version of our business that we're meant to grow in that range, but I wouldn't want to give you a date for that yet.

Okay.

The question on headcount.

I can read three numbers for you on headcount.

Fourth quarter 2008 number was 2,480.

Second quarter of 2009 was 2,183.

Okay.

And third quarter of 2009 was 2,142.

2,142.

Okay.

And then just one last one.

Of the $49 million of the new bookings, how much of that were brand new bookings and how much of that were renewal of existing -- of contracts?

$49 million is the net new bookings number.

I know it's net new, but -- and I assume that renewals count as a new booking -- ?

No.

-- when you resign it, no?

No.

Renewals do not count as new bookings.

Okay.

And just one last one, if I may.

The break -- the revenue and expense breakdown of the LiquidCredit and Bromex businesses, you said $5 million a quarter for both of them -- is it about evenly split on the revenue?

And then what was it doing in expenses and was it a profitable business, both of them?

It did generate a profit.

The revenue was roughly split.

It did generate a profit on a direct basis expenses in the $2 million to $3 million area for the quarter.

Okay.

Thank you very much for taking my questions.

Thank you, Michael.

Thank you.

(Operator Instructions).

We have an addition pal question from Carter Malloy from Stephens Incorporated.

Hello again, Carter.

Thanks.

I asked about strategy, machines, and scoring, so I may ask about tools as well.

I guess last quarter, the lumpiness of that business bit us a little bit.

Now you're in the sweet spot of $12 million to $13 million run rate on revenues.

Do you feel comfortable with the pipeline on Blaze and the Xpress Optimization that you guys will be able to maintain that $12 million to $13 million type range?

Or just maintain revenues as they are as opposed to the lumpiness we saw last quarter?

We are confident in our pipeline at this stage.

We're also making some very strong moves in the channels as well.

So we're working to sign up additional people around the globe to help push those products.

So we're confident in those numbers.

Okay.

Great.

Thank you.

Thank you.

Thank you.

This concludes the questions.

If you have any additional questions, you may do so now, or I'm turning the call back over to Mr.

Emerick.

Great, everyone, thanks very much and we'll look forward to our call in November.

Thank you.

Thank you.

This concludes today's conference.

You may now hang up.