Fair Isaac Corp (FICO) 2010 Q2 法說會逐字稿

Good afternoon.

I'll be your conference operator today.

At this time, I would like to welcome everyone to the Fico second quarter 2010 earnings conference call.

The line has been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions) Thank you, [Mike Pun], you may begin your conference.

Thank you, Chrissy.

Good afternoon thank you for joining FICO's second quarter earnings call.

This is Mike Pun, Vice President of Finance and Investor Relations.

I'm joined today by CEO, Mark Green, and CFO, Tom Bradley.

You'll find on the investor relations portion of the FICO website a copy of today's press release, our reg G disclosure schedule and our financial highlights.

A replay of this webcast will be will be available through May 28, 2010.

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 filing with the SEC, in particular, in the risk factor and forward-looking statements portions of those 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.

A reconciliation of these non-GAAP financial measures for the most directly comparable GAAP financial measures entitled reg G disclosure is available on the investor page of our website under the presentations tab.

With that, I'll turn the calm over to Mark Green, our CEO.

Thanks, Mike, and good afternoon.

We'll proceed today in three parts.

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

Tom Bradley will then provide further financial details.

Finally, I'll discuss our priorities and business outlook for the remainder of the year before we take questions.

For the second quarter fiscal 2010, revenue was $144 million, down 5% from the prior quarter.

Bookings, an indicator of future revenue, totaled $54 million down 9% sequentially.

Overall, these are disappointing results with varied performance across the three business segments.

In our applications and tool segment revenue was down significantly as a sales process for new deals remain difficult.

Customers continue to manage capital expenditures and, as a result, buying decisions remain long and arduous, requiring better sale execution on our side.

Conversely, revenue in our score segment grew 2% sequentially, suggesting a continuation of stabilization first noted last quarter.

We attribute this to a slowly improving economy with increasing levels of transaction activity such a credit card marketing and automobile purchases which in turn drive scores volumes.

GAAP earnings per share in the quarter were $0.28, down both sequentially and year over year.

This EPS result was driven entirely by lower revenues as we continue to manage expenses tightly and held operating expenses flat with the prior quarter.

Now let me provide greater detail on this quarterly performance of the three segments of our decision management portfolio.

Beginning with the applications segment which consists of business software used by clients to help make smarter decisions over customer live cycles.

Revenue from such applications was $87 million, down 6% sequentially.

This decline resulted in reduced software license sales and related implementation services mainly in our customer management unit where we had several large license sales and transactions in the prior quarter that were not repeated.

On the product front, our flagship customer management product is TRIAD, a widely deployed and highly regarded application in the credit card industry.

We recently released TRIAD version 8.5 which introduces decision graph, an innovative strategy design and vision tool that makes it easier for lenders to develop, analyze and compare complex customer treatment strategies.

This new capability addresses client's need for greater agility, transparency and regulatory compliance so we anticipate growing demand for TRIAD 8.5 in the months ahead.

On the distribution front, we announced in the quarter a significant agreement with the data services unit of China Union Pay, or CUP, the leader for outsource payment services in China.

Beginning in fiscal 2011, CUP will provide a hosted version of TRIAD together with Fico Analytics for risk and collections for Chinese banks and credit card issuers.

Still within the applications segment, our fraud management business showed continued strength this quarter with revenue growing 3% sequentially and new bookings totaling $11 million.

Here we're also progressing on both product and distribution initiatives.

On the product front, this past quarter we began shipping Insurance Fraud Manager versus 3.1 which offers healthcare providers predictive analytics to avoid fraud losses while accelerating the processing of legitimate claims.

In marketing partnerships, we announced an agreement with Emdeon, a leading provided of healthcare revenue and payment cycle management solutions to incorporate our insurance fraud manager product in their payment solutions used by 1,200 payors across the US beginning later this year.

We're leveraging our knowledge of fraud honed from years of experience in the banking experience, to help Emdeon attack the problem with fraud, waste and abuse in the healthcare industry, a problem estimated by the FBI to exceed $200 billion a year.

Moving now to our scoring segment.

Scores consist of the predictive analytics that are used in our applications to assess risk.

Revenue in this store segment was $43 million, up 2% from the prior quarter.

This score segment has two components.

B2B, which are scores sold to financial institutions, and B2C which are scores sold to consumers at myFico.com.

B2B score revenue was down 2% sequentially or essentially flat when adjusted for normal seasonality.

We have two updates in this arena.

First, we are seeing increased market adoption of latest version of the classic FICO score known as FICO 8, with over 2,300 lenders now using FICO 8 as the foundation for their risk management practices.

While FICO 8 adoption generally does not produce incremental revenue for us, it does provide market value addition for continued leadership in this space.

Second, together with Equifax and Moody's, we recently announced a new analytic solution to help lenders model expected changes no one act and portfolio risks under various economic scenarios.

Dubbed the Fico Economic Impact Index Service, initially available exclusively from Equifax.

This offering helps lenders understand how future economic fluctuations can affect credit scores.

Within the scoring segment for consumers, B2C revenues increased 18% sequentially thanks to increased traffic at our myFico.com website.

New rules from the Federal Trade Commission took effect at the beginning of this month designed to prevent deceptive marketing of free credit reports.

We are encouraged by the FDC's efforts to bring trust, transparency and common sense to the advertising of consumer credit reports as we feel that consumer understanding and marketplace fairness can only benefit our business.

We continue to offer fee based credit reports and FICO scores at our myFico website in the same manner that we have in the past and we saw increased purchasing activity by consumers during the quarter.

Turning thirdly to our tool segment.

Tools consist of the rules management, modeling and optimization products used in both our applications and sold stand alone to clients looking to build their own systems.

Revenue in this tool segment was $14 million during the quarter, a sequential decrease of 16% primarily driven from a decline in license sales.

Market conditions and the competitive landscape remain challenging here.

In this area, again, we're pursuing product and distribution efforts designed to improve revenues going forward.

First, we announced two significant tool product releases, Blaze Advisor version 6.9 for business rules management, and Model Builder version 7.0.

These two releases give users greater flexibility and control in developing, deploying and managing connect decisions across their organizations.

Second, we announced an expanded strategic partnership with Software AG to deliver an integrated decision and business process management solution to customers around the globe.

Software AG will now offer FICO's Blaze Advisor as part of its web methods business process management suite providing clients with a single seemless platform for maximizing the power and value they derive from business process automation systems.

So, to summarize the quarter, we saw continued signs of stabilization and scores and improving results in our fraud business, but significant declines in license and service revenue elsewhere in the applications and tools segment.

We will continue to tightly manage expenses until we side broader signs of stabilization and recovery.

I'll discuss the steps that we have underway to sharpen sales execution in my concluding remarks, but first let me pass the call to Tom Bradley for further financial details.

Tom.

Thank you, Mark.

Mark has already discussed our revenue results by segment so I will provide some additional comments as they relate to specific aspects of our business.

Revenue for the quarter was $144 million, down 5% when compared to last quarter.

This quarter, 77% of total revenue was derived from our America's region, which includes both North and South America.

Our EMEA region generated 17% of our revenue and the remaining 6% was from Asia Pacific.

All percentages are consistent with last quarter.

Recurring revenue derived from transactional and maintenance sources for the quarter represented 79% of total revenues versus 76% in the prior quarter.

Consulting and implementation revenues were 17% of total, same as last quarter.

Finally, licensed revenues were 4% of total versus 7% last quarter.

Bookings of $54 million created $9 million of current period revenue, a 17% yield.

Of the $54 million in bookings, 21% related to fraud management products and another 21% related to our marketing solutions.

We had a 11 booking deals in excess of $1 million of which two exceeded $3 million.

Moving to expenses.

We continue to manage expenses tightly with operating expenses equal to $121 million, up only slightly for the prior quarter.

As you can see in our reg G schedule, non-GAAP operating margin of [four] amortization and stock based comp was 22% for the second quarter compared to 26% in the first quarter, a decline primarily driven by the decrease in revenue this quarter.

Net income for the quarter was $13 million, down 27% from last quarter with an effective tax rate of about 32%.

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

The free cash flow for this quarter was $34 million or 24% of revenue compared to $26 million or 17% of revenue last quarter.

Year to date, we've generated $60 million of free cash flow.

This ongoing cash flow continues to strengthen FICO's liquidity position.

We have $382 million in cash and marketable securities on the balance sheet.

This is a slight increase over last quarter as most of the free cash flow was utilized for share re-purchases.

Additionally, we have $264 million available against our revolving credit facility which provides $646 million in total available liquidity.

Our debt remains unchanged consisting of a $295 million balance outstanding on our revolver with and all-in interest rate of 84 basis points and $275 million in outstanding notes.

The ratio of our total net debt to adjusted EBITDA is now 1.6 times, well below the covenant level of three times, and our total fixed charge coverage ratio is 4.1 times, well above the covenant level of 2.5 times.

We do not have my matures of this debt until October 2011 when the revolving credit facility expires.

We re-purchased 958,000 shares in the open market during the quarter at a total cost of $24 million or an average cost of $25.20 per share bringing our basic share count at March 31 to 45.9 million shares outstanding.

Since March 31 we have re-purchased an additional 211,000 shares at a total cost of $5 billion or $25.80 per share.

Fiscal year to date, we have re-purchased 2,905,000 shares at a total cost of $63 million, an average cost of $21.68 per share.

As a result, we have 67 million remaining under our existing share re-purchase authorization.

We continually evaluate the best way to deploy accumulated cash to maximize shareholder value and we expect to continue share re-purchases during the third quarter.

I'll turn the call back to Mark.

Thank Tom.

In this concluding section I'll discuss the priorities and outlook for our Company over the balance of this it fiscal year.

For the last few quarters, we've been seeking proof that our business has stabilized as market conditions improve.

While the scores business is exhibiting signs of such stability, we took a step backwards last quarter if applications and tools businesses mainly due to poor sales execution.

As I look at the deals that we might have closed last quarter and the deals which remain in our pipeline going forward, I believe that we can and must do a better job of selling.

As I announced on last quarter's call, we were pleased to welcome Charlie Ill as our new EVP of Sale and Marketing back in February.

Charlie's a highly qualified sales leader and proven track record of growing revenue at such successful firms as [Avia], EEA Systems and IBM.

Having arrived in the middle of our quarter, Charlie's already made a number of changes in organizational structure, leadership, compensation incentives and sales process disciplined to boost revenues.

Some of these changes will take several quarters to yield through while we also expect some near-term improvements in revenue as this team works to sharpen our sales execution.

I'm confident that the improvements Charlie's bringing to our sales team will smooth spark growth in our top line.

Much as we've seen prior executive appointments and re-engineering initiatives reinvigorate our product management, development and professional services teams.

This brings me finally to guidance.

We're updating the previously issued guidance to incorporate the reduction in net income not second quarter.

We do continue to expect to grow GAAP earnings per share by single digit percentage in fiscal 2010 compared to fiscal 2009 primarily as a result of previously completed stock re-purchases and ongoing cost controls rather than through revenue growth.

Let me close by saying that in spite of the disappointing results this quarter, I remain confident in our business model for two reasons noted on last quarter's call.

First, there's growing interest among executives in using analytics to improve business performance.

And, second, risk management has achieved greatest stature across our client base.

Both of these factors should bode well for our Company.

We talked about these trends when we met a few weeks ago with 650 of our clients at the annual FICO World Customer Conference.

There was a lot of excitement at that event about the relevance and value of FICO's decision management products and about the strategic direction of our Company, but given the disappointing performance last quarter, it's clear that we have more work to do, especially in sales, to convert that promise and into solid revenue growth.

I think we're ready for Q and A.

Mike?

Thanks, Mark.

This conclude our prepared remarks and we are ready to now take your questions.

Chrissy, please open the lines.

(Operator Instructions) Your first question comes from the line of Tom Ernst, Deutsche Bank.

Your line is open.

Good afternoon and thank you for taking my question.

Sure, Tom.

Sure.

So you've got an action plan to drive high single digit growth.

Quick math would suggest that, that I would expect that we would should look for much higher earnings in Q4 than Q3 based on a driven by cost controls and share re-purchase, is that a fair assumption?

I think that's right.

I think you'll see it pick up in Q4.

Okay.

And, just perhaps, Mark, you said sales execution was the disconnect between the software tools business and the fraud and scoring business.

What drove that execution challenge and what gives you confidence that there's not something more structural happening with that side of the business?

That's a fair question, Tom.

There are some signs that there's still sluggish spending in the marketplace and that sale cycles remain long for us and the competitive landscape is challenging.

But, I think what that really mean is that we need to be particularly sharp in our sales execution and last quarter we really weren't.

In fact, we had some stumbles at the finish line so I look there much more so than to any product or market explanation for our performance last quarter.

So maybe if I can put words in your mouth or don't want to, but late funnel deals are there, you haven't lost them, you just didn't get them across the goal line?

That's correct.

Okay.

Thanks.

I'll let others ask.

Okay.

Your next question comes from the line of Carter Malloy of Stephens.

Your line is open.

Hi guys, thank for taking questions.

If I look at the guidance here again, touch back on the last point there, we've got a pretty significant step up even sequentially for both quarters without revenue growth, should we expect to see that COGS line or OpEx line on actual basis dom down materially or the buy back accelerate I'm trying to get a sense from where the earnings power will come from.

To be clear, this guidance it's based on share buy backs we've already done to date and which I've described in my comments.

While we may do additional re-purchases in the future, it's not incorporated into this guidance, so it will be a matter of seeing where this revenue comes in the next two quarters while very closely managing the expenses.

And can we expect to see, I know our COGS line went up OpEx went down, can we expect to see those lines stay stagnant or should they actually roll back a little bit here?

It's really tough for me to get from the math on the existing buy back to get EPS to go up $0.05 or $0.10 a quarter for the next two quarters.

I think if you think about, revenue that's more like it was the prior two quarters as opposed to the second quarter, I think we're thinking that's more of a number run rate.

I do think we'll see some expenses drop down in the fourth quarter.

Okay.

Great.

And then also on just the bookings, what was the duration there?

22 months.

Okay.

We saw some bigger but shorter deals, some of which were updates on previously executed deals.

Okay.

Great and FX in the quarter?

Not material.

Not material.

My guys are confirming.

Okay.

And then lastly just on the myFico very, very impressive sequential uptick there, should we continue to see that at these levels or is that just kind of - a one time --?

As you noted the consumer revenues, the myFico revenues were up about 18%.

I guess it's a little early to tell how much of this was because of heightened consumer interest around things such as the FDC versus how much of our own efforts.

We have been working to improve traffic and boost revenue and conversion rates, so there are probably both sets of factors at work, better execution on our side and at least temporarily heightened marketplace interest.

Okay.

Great.

So you're actually seeing improved conversions and turn and whatnot in that business?

That's right, yes.

Okay.

Thank you.

Thank you.

Your next question comes from the line the Mike Latimore, Northland Securities.

Your line is open.

Yes.

Hi.

Just question on the, you said a couple deals at the end of the quarter didn't close.

Have they closed so far this quarter?

Some of the ones you were expecting last quarter?

Yes.

A couple of them have.

I guess the way we should think about the impacts of those deals flopping over from one quarter and the next and view of pipeline going forward, we don't view last quarter's revenue as a new normal for us.

We think instead we're moving back to something closer to the range of revenue that you saw the prior two quarters.

Okay.

And will that, that recovery to those levels is that largely driven by license deals or seasonality in your B2B scoring as well?

We expect a firm out of that growth or to pick up to be from license deals.

Okay.

Got it.

How about on the -- there's been an increase credit card marketing, any early signs on whether that marketing is turning into new accounts, new origination business?

Yes, there is some early evidence of that.

Our volumes in the B2B portion of scoring were up all together about 15% from the prior quarter and 4% or 5% from the prior year.

And a good portion of that uptick in volumes was what we call the front end of the lifecycle or otherwise known as the pre-screen scores which are the scores that are used for marketing, and that observation jives with what we hear from talking to our customers about their getting back into the marketing business both for credit cards and other financial products as well.

Right.

I temper that by saying they're not going back to the old days, this is a climb up from a very low low, but not back to the old high.

Yes.

And just last question.

Interest expense, what, what do you expect this to be on a quarterly basis next couple of quarters?

Well we haven't changed our financing profile.

We talked last quarter that we may look into that given we have this refinancing due in 2011, but I think for now it's the profile that we have.

So, so this quarter was $3.9 million expense?

Net?

Right.

It's just a million or so lower than the prior quarter that's all.

Was there some one-time events?

There was nothing one-time, it was just the revolving credit facilities on a floating rate and just follows the market.

Okay.

Thank you.

Thank.

Mike.

(Operator Instructions) I have another question from the line of Carter Malloy from Stephens.

Hello again, Carter

Hi, welcome back.

On the pre-screen side, if that was up 15%, what was the offsetting factor inside of your scoring business?

B2B specifically.

No growth, in fact, some decline in account management.

The on-line scores.

And also Mark mentioned that the pre-screen scores were up, it was the driver of these volumes and they are the lowest price score.

Right.

So within the mix as opposed to an origination score which would be a substantially higher price point.

That's right but as we saw on the downside, we may be seeing the same thing on the upside, and that is the analogy of the snake swallowing the monkey.

Something happens in the early stage of life it flows through.

If we see a couple more quarters of this kind of growth in pre-screen, that will be encouraging for what happens in later lifecycle.

And so far into April, you'd say that's pre-screen volumes have stayed high?

Correct.

No, no change so far.

Okay.

Great.

Thanks, guys.

There are no further questions in queue.

I'll turn the call back over to the presenters.

Thank you, Chrissy, and thank you, everyone.

That ends this call for the second quarter of our results.

This conclude today's conference call.

You may now disconnect.