Fair Isaac Corp (FICO) 2010 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the FICO Third Quarter 2010 Earnings Conference Call.

(Operator Instructions)

Mr.

Pung, you may begin your conference.

Thank you, Simon.

Good afternoon, and thank you for joining FICO's Third Quarter Earnings Call.

I'm Mike Pung, Vice President of Finance and Investor Relations, and I'm joined today by CEO, Mark Greene, and CFO, Tom Bradley.

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

While our press release describes financial results compared to the prior year, today management will discuss results in comparison to our prior quarter in order to facilitate an understanding of the run-rate of our business.

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 and particular in the risk factors and forward-looking statement 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 to the most directly comparable GAAP financial measures entitled Reg G disclosure is available on the investor page of our website under the presentations tab.

Also, a replay of this webcast will be available through August 20.

Now, I'll turn the call over to Mark Greene, our CEO.

Thanks, Mike, and good afternoon.

We'll proceed as usual in three parts today.

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

Tom Bradley will then provide further financial details.

And, finally, I'll discuss our business outlook for the remainder of the year before we take your questions

For the third quarter of fiscal 2010, revenue was $155 million, up 8% from the prior quarter.

Bookings, one indicator of future revenue, totaled $64 million, up 17% sequentially.

We see continued signs of stability across our markets, and are pleased to report solid performance across all three business segments.

In addition, we've made good progress in improving our sales execution from last quarter with our previously announced new sales leadership team now firmly in place.

Revenue in the applications, tools, and scores segments were all up sequentially, returning to levels comparable to what we observed at the beginning of the year.

GAAP earnings per share in the quarter were $0.40, up both sequentially and year-over-year, driven by a combination of increased revenues, expense management, and share repurchases.

Let me now break out the quarterly performance according to the three segments of our decision management portfolio.

First, the Application segment consists of business software used by clients to help make smarter decisions over a customer life cycle.

Revenue from these applications was $91 million in the quarter, up 5% sequentially.

We saw improved performance across most of our applications, with impressive results from our fraud, and collections, and recovery products.

In Fraud, we signed a large, multi-year deal for our insurance fraud manager, or IFM, with a leading Health Care IT provider.

This is a second set steal this year for IFM, following a similar partnership announced last quarter with Emdeon, a leading provider of healthcare revenue and payment cycle management solutions.

We also saw continued success with our banking fraud management product, Falcon, with a significant booking in Europe.

In the collections recovery area, we released Debt Manager Version 8 in June.

This updated version of Debt Manager delivers business functionality that's unmatched in the industry, setting a new standard for collections and recovery.

It's a clear example of our decision management strategy enabling connected decisions on a unified architecture.

In the few weeks since its release, we've already sold DM8 to two large banking customers.

Turning now to the Scores segment, Scores consist of predictive analytics that are used to assess risk.

Revenue in the Scores segment was $47 million, up 9% from the prior quarter.

This segment has two components, B2B scores, which are those that we sell to financial institution, and B2C scores, which we sell to consumers at myfico.com.

B2B scores revenue was up 11% sequentially, aided by a true-up of several million dollars in credit bureau royalties.

I have two updates in the B2B arena.

First, we saw slight volume increases in acquisition and origination scores this quarter, but in a corresponding decline in account management volumes.

The overall volume picture is mixed, as consumer lending remains tempered.

Though many banks began credit card marketing programs earlier this year, consumer response rates have been low.

We anticipate the pace will remain sluggish until we see improvement in the US economy, especially in unemployment.

Second update is that with continue to see increased marketed option of the latest version of the classic FICO score, known as FICO 8, with over 2,500 lenders now using FICO 8 as the foundation for their risk management practices.

This widespread market adoption occurs as lenders see the benefit of the enhanced predictive analytics in our new score.

Many clients are now completing their validation of FICO 8 and are moving towards implementation to enhance risk management practices and to assist in segmenting customers for cross selling opportunities.

While FICO 8 adoption does not produce incremental revenue for us.

It does provide market validation of our longstanding leadership in the space.

Turning to the consumer part of the scoring business, B2C score revenue grew 4% sequentially thanks to increased traffic at our myfico.com website.

We've seen two sequential quarters of growth in this B2C business and are pleased that our myFICO website has won, for the second year in a row, Kiplinger's award as the best place for consumers to receive credit product and advice information.

In addition, the latest banking leader to adopt our FICO score view service is a large private label card issuer, which will make the service available to millions of customers.

We believe every American can benefit from their understanding of the FICO score, which we also make available at myFICO.com, and we applaud lenders who are proactively helping their customers to understand and manage credit effectively.

The final of our three segments is our Tool segment, which consists of rules management, modeling and optimization products, used both in our applications and sold-stand alone to clients looking to build their own systems.

Revenue in this tool segment was $17 million during the quarter, a sequential increase of 22% and consistent with a level achieved in our first fiscal quarter.

So, to summarize results, we reported solid revenue across all three segments with continued signs of stabilization and scores.

Bookings likewise improved.

We delivered solid earnings and managed expenses wisely while investing in critical sales and development efforts.

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

Thanks, Mark.

You've already provided some revenue results by segment, so I'll provide some additional comments as they relate to other aspects of the business.

Revenue for the quarter was $155 million, up 8% compared to the prior quarter.

This quarter 78% of the total revenue was derived from our Americas region, which includes both North and South America.

Our EMEA region generated 16% of our revenue and the remaining 6% was from Asia-Pacific.

All percentages are consistent with the prior quarter.

Recurring revenue derived from transactional and maintenance sources for the quarter represented 75% of the total revenue versus 79% in the prior quarter.

Consulting implementation revenues were 16% of the total versus 17% in the prior quarter, and license revenues were 9% of the total versus 4% in the prior quarter.

Bookings of $64 million yielded $18 million of current period revenue, a 29% yield.

This compares with bookings of $54 million and 17% yield last quarter.

The weighted average term for our bookings was 28 months, compared to 22 months last quarter.

Of the $64 million in bookings, 18% related to our tools products and another 18% to the fraud management products.

We had 12 booking deals in excess of $1 million, of which two exceeded $3 million.

Operating expenses for the quarter were $124 million, up $4 million from the prior quarter due to increased sales commissions and incentive expenses.

As you can see in our Reg G schedule, non-GAAP operating margin, before amortization and stock-based compensation, was 24% for the third quarter, compared to 22% last quarter.

Net income for the quarter was $18 million, up 38% from last quarter and the effective tax rate was about 33%, consistent with the year-to-date rate.

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

The free cash flow for the quarter was $8 million or 5% of revenue, compared to $34 million or 24% of revenue you in the prior quarter.

Our free cash flow was diminished by an increase in Accounts Receivable and a payment of interest on our debt, which is made semiannually.

Year-to-date we have generated $69 million of free cash flow.

We have $261 million in cash and marketable securities on the balance sheet.

This declined from $382 million last quarter, due to share repurchases and debt reduction.

Earlier this month, we announced the issuance of $245 million of senior notes in a private placement.

These new notes have maturity ranges of six to ten years with a weighted average interest rate of 5.2% and have similar covenants to the previously issued notes.

All of the proceeds were used to pay off the existing revolving credit facility.

This refinancing takes advantage of the current favorable debt market conditions and eliminates the risk of the large revolver maturity in October of 2011.

We now have a very balanced debt maturity profile with no significant maturities until fiscal 2013.

Combined with our previously issued senior notes, our total debt now stands at $520 million with a weighted average interest rate of 6.1%.

Compared with recent quarters, the new quarterly interest expense will increase by approximately $0.03 to $0.04 per share on a go forward basis.

Over the next year, we'll look to opportunistically renew the $600 million revolving credit facility at a much lower level.

The ratio of our total net debt to adjusted EBITDA is now 1.9 times, well below the coveted level of three times, and our fixed charge coverage ratio is at 4.4 times, well above the covenant level of 2.5 times.

During the third quarter, we repurchased 3.604 million shares in the open market at a total cost of $82 million or an average cost of $22.75 per share, bringing our basic share count outstanding at June 30 to 42.3 million shares.

Since June 30, we have repurchased an additional 570,000 shares at a total cost of $13 million or $23.33 per share.

Fiscal year to date, we have repurchased 6.868 million shares at a total cost of $153 million or $22.24 per share.

In June, the Board of Directors approved a new $250 million share repurchase program, and we have $220 million remaining under that authorization.

We continually evaluate the best way to deploy excess cash to maximize shareholder value, and we expect to continue shareholder repurchases during the fourth quarter.

I will now turn the call back to Mark.

In this concluding section, I'll discuss the outlook for FICO over the balance of this fiscal year.

Following disappointing results in the prior quarter, it's satisfying to report that our third quarter revenues recovered to the levels we've seen earlier in the year.

Looking ahead, we see growth prospects in Asia and selectively in Europe and Latin America, but the overall macroeconomic picture remains mixed.

We're cautious about the US as high unemployment and depressed consumer sentiment dampen the outlook for consumer lending and thus the near-term growth prospects for scores.

That said, I'm confident about the longer term outlook for scores for three reasons.

First, scores volume continued to grow at the front end of the life cycle, namely in the acquisitions and origination spaces.

This will eventually convert into improved volumes in the account management phase as consumers sign up for and use new credit facilities, although this conversion may take several quarters if the economic recovery remains tepid.

While we're not sitting still waiting for this recovery, on the B2B side we continue to drive score volumes by advancing the adoption of FICO 8 scores and by encouraging lenders to pull scores more frequently as a prudent risk management practice.

And on the consumer side, we're sharpening our digital marketing to improve traffic attraction and conversion rates.

Second reason for optimism is that FICO scores continue to occupy a prominent place in the fabric of American commerce.

I have two cases in point, one being the recent press attention paid to the latest FICO score trend figures that were issued by our FICO lab, and second, the widespread dissemination of credit scores that's called for on the recently passed Wall Street Reform and Consumer Protection Act.

We maintain our thought leadership efforts to underscore the relevance and value of FICO score solution in areas such as credit line management and mortgage loan loss mitigation.

And thirdly, we're growing our talent pool in the scores business.

We announced today the appointment of Jordan Graham as Executive Vice President of scores and President of FICO Consumer Services.

Jordan is a veteran financial technology executive with the experience both in consumer markets as the former CEO of Match.com and in B2B commerce including senior roles at Cisco, Sun Microsystems, and most recently as Managing Director in Citigroup's Global Transaction Services unit.

Jordan will build on our scores team's turnaround with the aim of placing that business on a sharper growth trajectory, particularly pursuing the growth opportunities that we see in our consumer business.

I'm similarly pleased with the progress being made in our sales execution, an effort being led by Charlie Hill, who joined us in February as the EDP for Sales and Marketing.

Charlie has moved quickly to re-tool our sales leadership in the Americas and Asia-Pacific, and he has strengthened our sales management systems and disciplines across the globe.

The early results are encouraging.

I expect Charlie's efforts to continue to bear fruit in the quarters ahead.

This brings me finally to guidance.

We're now in the midst of our fiscal fourth quarter and we remain on track to achieve high single-digit percentage growth in earnings per share this fiscal year, compared to last, chiefly as a result of previously completed stock repurchases and cost controls.

With that, I think we're ready for question-and-answer period.

Mike?

Thanks, Mark.

This concludes our prepared remarks and we're ready now to take your questions.

Simon, please open the lines.

(Operator Instructions)

Your first question comes from the line of Carter Malloy with Stephens.

Your line is open.

Hello, guys.

Congratulations on the quarter.

Looking at back to the myFico piece of the business, Mark you said how much it grew earlier, and I'm sorry I missed that.

Can you give us that?

And also, what size that business is and what the specific driver for this quarter.

Specifically I'm wondering if the brand or strategy change with Experian had any impact for you guys.

Carter, the sequential growth in the consumer business was 4% last quarter, and that translates into about a 9% year-over-year growth.

And I suspect there are a couple reasons for this.

Three come to mind.

One, there's heightened awareness, generally, in the marketplace of consumer scores, partially as a result of deliberations in Washington.

Two, you may be right that there are some transitions from some competitive sites that may have benefited us.

And three, I think we helped our own luck by some work we've done in recent months to improve the navigation, the traffic attraction, the conversion rates on the website.

We're getting smarter about how to run that business.

And do you expect that where you guys are at that website now will continue or even accelerate growth from here?

Yes, we like where we're going, and the addition of this new executive who will feed both parts of the scoring business but be particularly focused on the consumer side, Jordan Graham.

I think that will position us well to exploit some opportunities that we see for further growth.

Great.

And did you guys give FX for the quarter?

Not material.

Not material, okay.

And then on Blaze, it looks like there were several larger wins this quarter.

Are we going to return back to a normal type run-rate for that business, or --

Yes.

I previously described the second quarter as hopefully at the time an anomaly.

I think this quarter that just ended suggests it was an anomaly and so I think most parts of the business, including the tools of ways are feeling like they're back on the trajectory we saw earlier in the year.

So, I don't make greater claims than that, but I think we had a fluke in the second quarter that we've demonstrated our ability to correct from in the third quarter.

Absolutely, okay.

The last one and I'll jump back in the queue.

But I'm just curious looking at Debt Manager 8, which looks like a great product.

When you said you sold two to large bank customers, I assume those were existing customers.

If so, what type of upside do you get from the sales?

It can be high, high six-digit, low seven-digit type deals.

Incremental high six low seven digit?

Yes.

Okay, great.

And Carter, one of the things to know about this, this is actually the second product following the Falcon product for fraud that we rolled out under our new architecture.

And without getting too geeky, these products talk to each other.

So, you can now link your collection capability with your fraud detection capability, which allows you, for instance, to figure out the receivables that you're not going to be able to collect because they were fraudulent.

You write them off, and you become more efficient during collections as a result.

And this notion of collected decisions will be expanded in the months ahead as we roll out additional products that use the same new architecture.

And do you guys feel you're accelerating ahead of your competition in those environments or are you seeing them become more rational or irrational with you.

Going up head-to-head?

I don't think the competitive landscape is changing that much.

What's changing is the customers are looking forward to the day when they can start spending again.

So, we're having a larger number of RFPs.

We have pretty good pipe lines in the areas I just mentioned, and we're seeing increasing signs of market demand.

We have to be cautious about how quickly that converts into actual business.

Okay, great.

Thank you.

Thank you.

Your next question comes from the line of Michael Nemeroff with Wedbush.

Your line is open.

Thank you.

Thanks for taking my questions, guys.

Good afternoon.

Just a couple of -- you mentioned in your prepared remarks in the scoring business, you saw a little bit of a true-up on the B2B side, which drove the plus 11%.

Could you tell us how much that true-up was and whether that is something that you expect to continue going forward?

First, the nature of it, we have such strokes from time to time.

They're not predictable or regular, but they do occur.

This wasn't an unprecedented event.

We characterize it as several million dollars.

Do I expect another several million in the current quarter?

No, but I wouldn't be surprised if there was a similar event down the road a piece.

But several million would be the way I'd characterize it.

Several million as in $4 million or $5 million?

I'm just trying --

You're a little on the high side.

I'd look at it as we'd be a lot closer to flat without something like this.

Flat from Q1, from the original guidance.

From the prior quarter.

Okay, great.

Thanks.

And then, just looking at the cash flow.

It was a little bit lower than what I was expecting on the operating side this quarter.

I was just wondering if you could tell us what you expect the free cash flow would be for the year or just give us what you expect the operating cash flow should be in Q4?

The growth this quarter off the low revenue last quarter of $12 million pretty much all went into receivables, so we took it in on the working capital going forward.

I think we could still target the fourth quarter about a $25 million range, which is close to our year-to-date actual, which is at $69 million.

Going back, first quarter was about $25 million, second quarter was $34 million, which actually benefited from having the low revenue with receivables going down.

And we're seeing that being reversed this quarter.

I'm sorry, go ahead.

I'd look for $25 million in the fourth quarter.

That's on free cash side, right?

Free cash flow.

And then going forward for fiscal 2011, how should we think about the cash flow as it relates to either revenue or income?

I don't see it going up, as we grow the business, we'll have working capital go into Accounts Receivable.

We'll have maybe some better guidance on that when we come back at year end.

But I don't see it rising, moving into fiscal '11.

Okay, and then the last question, I guess, is for Mark.

You guys are buying back a lot of stock.

You spent a lot of money over the last couple of quarters.

Are there any investments that you see outside of share repurchases that may drive shareholder value maybe, start to re-invest it back --

So, as we prepare a plan for next year, we are looking at two things.

One is organic investment in the business.

We mentioned previously that we are doing some hiring particularly in sales and services, revenue generating roles.

We'll see whether we can do more of that or invest elsewhere organically.

We're also looking at a smallish number of what I would characterize as tuck-in type acquisitions.

We're not of a mind to do anything large here.

But where there's functionality that's better bought off the shelf than developed, we're receptive to small and moderate sized acquisitions, and we're looking at a few of those as well.

Okay.

Thanks for taking my --

Again, I have more to say about both those topics when we return next quarter with thinking about FY '11.

Okay, thank you very much, guys.

Thank you.

Your next question comes from the line of Mike Latimore with Northland Capital.

Your line is open.

Great, thanks a lot.

Yes, good evening.

On the Insurance Fraud Manager, you said you had another deal on the healthcare space.

Does that roll out in a similar fashion that the way the Emdeon deal is?

Yes.

It'll be installed at this provider, and they will in essence become the distributor of this to their customers.

There'll be a lag time while they turn around and sell it to their customers over the course of the next 12, 18 months after installation.

The general distribution model here of the business strategy, if you will, is to find partners in the healthcare payment space who have the touch points that are needed to be wired into the whole healthcare system, much like we work with credit card processors to reach in customers and banks.

We're doing something similar here.

Mike, just going to add the other difference in this model is the prior version we talked about with Emdeon, we sold on a straight usage base.

And with this latest deal we've done it on a license basis with some limits built into it.

So, it's a slightly different model.

But it gives us different ways to go to market with this product.

And then you mentioned you had a couple Debt Manager 8 wins already.

Were those in June or July?

One each.

One each.

Okay.

And, the -- you talked a little bit about account management demand on the scoring side being a little bit slower.

What do you attribute that to?

I guess you expect a couple quarters maybe will pick up again as the flow-through from the other segments come in (inaudible- multiple speakers)

As we discussed in prior calls, there's a foreseeable linkage across different phases of the life cycle.

If you have a period where you weren't priming a pump with a lot of new acquisition and origination activity, that eventually shows up as reduced account management activity.

That's what we saw in account management last quarter.

On the other hand, what we've seen now for a couple quarters is improving front end volumes, and those will flow through over time.

It's the famous monkey pulling through the snake analogy here.

It's just a question of what the delay time is.

And I think things are moving a little bit more sluggishly in that pipeline today than we sometimes have seen under more robust economic conditions.

You guys have a new product release every quarter or so.

When should we expect another new product release, and what category would it be in?

The place that we've been working that we've indicated in the marketplace is likely our next deliverable is in the origination space, and we're on track to have something there in the next couple months.

The next few months.

Okay, great.

Thanks a lot.

Thank you.

(Operator Instructions)

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

Your line is open.

Hello, guys.

Just returning back to the guidance, if I looked sequentially taking into account the true-up and especially taking into account to debt refi.

You're low on your guidance supplies flat sequential EPS but those two things are probably -- call it $0.04 to $0.06 in headwinds.

Is that made up from new business in your other segments, or is it buyback?

Help me explain you guys' thinking behind the guidance.

I think your math is about right.

So, we have got additional expenses, mostly for the interest expense on the new debt.

We've got continued tailwind from the share repurchases we've already made.

So, I bet that's most of the balance between where we expect fourth quarter to come versus the third quarter.

Markets previously indicated a revenue level more like beginning of the year, more like we have now.

This is actually even a little better than we had guided.

So, something along that range probably gets you a similar EPS for the fourth quarter.

Okay, that helps.

Thanks.

Thank you.

There are no other questions at this time.

I now turn the call back over to our presenters.

Thank you, Simon, and thank you everyone.

That concludes today's call.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.