Fair Isaac Corp (FICO) 2011 Q4 法說會逐字稿

Good afternoon, my name is Rob, and I will be your conference operator today.

At this time, I would like to welcome everyone to the FICO fourth-quarter 2011 earnings 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.

Steve Weber, you may begin your call.

Thank you, Rob.

Good afternoon and thank you for joining FICO's fourth-quarter earnings call.

I am Steve Weber, Head of Investor Relations, and I'm joined today by CEO Mark Greene and CFO Mike Pung.

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

While our press release describes financial results compared to the prior year, today Management will also discuss results in comparison to the prior quarter to facilitate 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, 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.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, entitled Regulation G Disclosure, is available on the Investor page of our website, under the Presentations tab.

A replay of this webcast will be available through December 2, 2011.

Now, I will turn the call over to Mark Greene.

Thanks, Steve, and good afternoon.

We will proceed as usual in 3 parts.

First, I will summarize the quarterly results and discuss the state of our business as we ended our fiscal year in September.

Mike Pung will then provide financial details and discuss the effects of the structural changes we made over the past year.

Finally, I will discuss our business outlook and financial guidance for the new fiscal year before we take your questions.

I'm pleased to report that we finished fiscal 2011 on a solid note, meeting the metrics we guided to.

This quarter we delivered $25 million of net income or $0.64 per share on $160 million of revenue.

We delivered $106 million of bookings, the largest total in 5 years.

For the full year, we delivered non-GAAP net income of $80 million on revenues of $620 million and bookings of $298 million, while producing free cash flows of $119 million.

MIke will guide into these numbers in a few moments.

But I 'd like to emphasize that we are very much on the path that we laid out when we announced our restructuring back in February.

We've made it a priority to allocate resources towards product innovation, client service and revenue-producing activities; and we are now seeing the fruits of those efforts.

Let me break out our quarterly performance according to the 3 segments of our Decision Management portfolio.

First, the Decision Management applications segment consists of business software used by clients to better understand and predict consumer behavior in order to make smarter decisions over a customer lifecycle.

Revenue from these applications was solid this quarter, up both sequentially and year-over-year, as we saw good results throughout the portfolio.

Our strongest performers continue to be in the Fraud Management business, where we saw year-over-year revenue growth of 14% in Banking Fraud Management and 36% in Insurance Fraud Management.

In Banking Fraud, full year revenues were up nearly 16% as we continue to migrate customers to the latest version of our Falcon Fraud Manager.

And on the insurance side, we've now signed 8 customers, including 1 large, multi-million dollar Insurance Fraud Manager customer to our previously announced partnership with Emdeon.

Also in Applications, our Marketing Solutions business continues to grow.

This quarter we signed more than $40 million in bookings for our Retail Action Manager product as we added a third client and sold additional software and services to an existing client.

In addition, we've seen demand for our Marketing Solutions outside of the retail industry particularly in the banking sector where demand is increasing for sophisticated, precision-marketing capabilities for retail banks.

Our second reporting segment is our Scores business, which consists of predictive analytics used to assess risk.

Overall, Scores revenue was up 8% from the prior quarter and also up 8% from the prior year.

We track 2 sub-segments here.

Business-to-business, which are Scores sold to financial institutions, and business-to-consumer, which are Scores sold directly to consumers at myFICO.com, as well as Scores sold indirectly to customers through our bureau partners.

The B2B Scores sub-segment was particularly strong, up 11% from last quarter and also up 11% from the same quarter in the prior year.

In fact, revenues for the quarter were higher than any of the previous 5 quarters.

We continue to invest in this B2B Scores business and are beginning to see the results in both our core business as well as some of our new innovations that will provide new revenue streams.

Highlights for the quarter include the following.

Scores sold for marketing purposes to solicit new customers were up 26% over the year, year-over-year.

With the highest growth in our pre-Score service, which are Scores that we sell directly to customers for marketing.

Market adoption of our latest Score, FICO 8, continues to grow with over 7,000 lenders now using FICO 8 within their risk management practices.

That is up from 6,000 reported last quarter.

We announced during the quarter that we have predictive analytics engagements now with 4 of the country's top 10 mortgage servicers to identify borrowers at the greatest risk of strategic default.

We estimate that, while still at an early stage, the strategic default problem will exceed $20 billion annually.

And we further estimate that the collective benefit of our solution for the 4 services that we are working with could reach $2 billion in the first year.

We announced a new partnership with CoreLogic to develop an enhanced FICO Mortgage Score solution for the US mortgage industry, leveraging CoreLogic's data assets with our own analytic expertise to provide lenders increased visibility into borrower credit behavior and future credit risks.

In a different part of our Scores business, the FICO Medication Adherent Score launched previously represents an advance in our application of predictive analytics to solve health care problems.

Non-adherence to medication accounts for nearly $300 billion in annual health care expenditures in the US and can have serious consequences for patient health.

Our clients are seeking new ways to address such problems and we believe that FICO can provide valuable solutions here.

Finally, we announced an agreement with Equifax involving new analytics for the UK market.

These Scores will assess the capacity of consumers to handle additional credit and show how individual's risk would change under different macroeconomic conditions.

These offerings are an extension of the partnership we previously announced with Equifax in May.

In the consumer or B2C segment of our Score business, we saw a small revenue decline in the fourth quarter of 3% versus the prior quarter.

I'm pleased to announce the appointment of Amber Minson to lead our Consumer Scores business.

Amber has a strong track record of delivering results in consumer online businesses and I'm confident in her ability to grow this unit.

Our third and final business segment is Decision Management tools, which consists of (audio difficulty) tools management, modeling and optimization products embedded within our applications and also sold stand-alone to clients who wish to build their own applications.

Revenue in this Tool segment was up 6% from last quarter and up 3% from the prior year.

Because these products are generally sold as licenses, there tends to be more fluctuation in revenue trends.

To summarize our fourth quarter results, we're pleased with how we ended the fiscal year.

We met our guidance and the re-engineering efforts we implemented earlier in the year have positioned us well to deliver sustainable value to our shareholders as we now move into fiscal 2012.

Let me pass the call now to Mike Pung for further financial details.

We had a solid fourth quarter and delivered against both our revenue and net income guidance for fiscal 2011.

We also made significant financial structural improvements during this past year.

Today I will summarize how we improved our operating performance and strengthened our balance sheet and explain why we are confident in our position as we enter fiscal 2012.

First, our operating leverage increased 600 basis points since the beginning of the year, driven by modest top line growth and the restructuring efforts announced earlier in the year.

Non-GAAP operating margins were 26% for the full fiscal 2011, compared to 24% last year.

And we anticipate our margin in fiscal 2012 to approximate our quarter-four exit rate.

Second, we generated $119 million of free cash flow during the year, an increase of 40% from last year.

We believe share repurchases are a responsible use of our cash, and this year we repurchased 3.6 million shares of our stock, reducing our share count by 9% from last year.

All the while, we strengthened our balance sheet.

We have $242 million in cash at the end of the year.

We refinanced our revolving line of credit.

Second our leverage is 1.8 times, also a significant improvement from last year.

We repurchased an additional 1.4 million shares of our stock in the month of October, further reducing our share count to about 35.6 million shares outstanding.

And today our Board authorized a new repurchase plan for another $150 million.

Finally, we are providing 2012 guidance at a level that reflects a confident, yet cautious, view of our business in light of ongoing, economic uncertainty in the world markets.

Now I'll discuss the quarterly results in more detail.

Revenue for the quarter was $160 million, a $10 million increase over the prior quarter and a $5 million increase over the prior year.

The increase was seen throughout all our segments.

Applications revenue was $97 million, up 6% over the prior quarter and 1% over the prior year.

Scores revenue was $45 million, up 8% over the prior quarter and 8% over the prior year.

And Tools revenue was $18 million, up 6% over the prior quarter and 3% over the prior year.

By region, this quarter 75% of total revenue was derived from the Americas region, the same as last quarter.

Our EMEA region generated 18% in this quarter and in the prior; and the remaining 7% was from Asia-Pacific.

By type of revenue, recurring revenue derived from transactional and maintenance sources for the quarter represented 72% of total revenues, versus 74% in the prior quarter.

Consulting and Implementation revenues were 20% of total revenues, same as last quarter.

And License revenues were 8% of total revenue, compared to 6% in the prior quarter.

We expect License revenues as a percent of total revenue to increase in our first quarter next year.

In terms of bookings, we generated $15 million of current period revenue on bookings of $106 million, a 14% yield.

This compares with $12 million of revenue on bookings of $50 million, a 24% yield last quarter.

The weighted average term of our bookings was 27 months this quarter, compared to 19 months in the prior quarter.

Of the $106 million in bookings, 44% related to Marketing Solutions, 14% related to Originations Products and 13% related to our Tools business.

We had 14 booking deals in excess of $1 million, 3 of which exceeded $3 million.

Transactional and Maintenance bookings were 40% of total bookings this quarter versus 34% in the prior quarter.

Professional Service bookings were 36% this quarter versus 46% in the prior quarter.

License bookings were 24% this quarter versus 20% in the prior quarter.

Operating expenses totaled $119 million this quarter, up $6 million from the prior quarter.

The increase was related to several year-end expenses, including incentives, as well as expenses associated with higher revenue.

As you can see from our Reg G schedule, non-GAAP operating margin before amortization and stock-based compensation was 29% for the fourth quarter compared to 28% in the prior quarter.

GAAP net income was $25 million and the effective tax rate was about 26% for the quarter.

For the full fiscal year, our GAAP net income was $72 million, while our non-GAAP net income, adjusted for the restructuring charges taken earlier this year, was $80 million.

We expect the effective tax rate to be about 30% in fiscal 2012.

Free cash flow.

We define free cash flow as cash flow from operations, (audio difficulty) CapEx and dividends paid.

Free cash flow for the quarter was $25 million or 15% of revenue, compared to $41 million or 27% of revenue in the prior quarter.

For the full year, free cash flow was $119 million versus $85 million last year.

Moving to the balance sheet.

We have $242 million of cash and marketable securities, down about $17 million from last quarter mainly due to the share repurchase program.

Our total debt is at $512 million with a weighted average interest rate of 6.1%.

And the cost of our debt is fairly fixed at $8 million per quarter.

The ratio of our total net debt to adjusted EBITDA is 1.8 times, well below the covenant level of 3 times.

Our total fixed charge coverage ratio is at 3.8 times, well above the covenant level of 2.5 times.

We had no borrowings under our line of credit facility which we refinanced in September.

We repurchased 1.7 million shares in the fourth quarter at a total cost of $43.7 million or about $25.16 per share.

In addition we purchased another $1.4 million in the month of October.

We ha utilized the bulk of the Board's share repurchase authorization, so today we are announcing that the Board replace that authorization with a new plan to purchase up to $150 million of additional stock.

We continually evaluate the best way to deploy excess cash to maximize shareholder value and consider our share repurchase plan a very attractive use of our cash flow.

We also regularly evaluate and consider opportunities to acquire relevant technologies and products that advance our strategy or strengthen our portfolio and competitive position.

I'll now turn the call back to Mark.

In this concluding section, I'll discuss our prospects and guidance for fiscal 2012.

In our Applications and Tools businesses, we continue to see signs of improved spending on technology, especially this class of software, along with a strong pipeline of opportunities worldwide.

Considering prospects for our Scores business, I've said before that our B2B Scores business is closely tied to the US economic growth outlook.

While we had very good volumes in revenues in the fourth quarter, we are not yet ready to call this a trend.

With the current high unemployment rate and sluggishness in the housing market, we remain cautious about our B2B Scores outlook until we can see sustained economic growth in United States.

For our B2C business, Scores revenue growth continue to be tied to the success of our marketing efforts due to myFICO.com; and we expect that our leadership in that part of the business will have favorable impact in the months ahead.

Now to guidance for FY12.

We expect revenues between $640 million and $645 million, or roughly a 3% to 4% increase for the year, compared with the $620 million of revenue generated in fiscal 2011.

We expect net income between $86 million and $89 million on a GAAP basis or up 19% to 24% from the $72 million of net income generated last year.

This translates to GAAP earnings-per-share of between $2.45 and $2.55 based on 35 million shares outstanding or an increase between 37% and 42% versus the prior year.

In summary, we are pleased with the results of this quarter and the fiscal year.

We are now realizing the benefits of our restructuring efforts in the form of earnings growth and margin expansion.

Our business model now delivers strong operating leverage and we expect to continue generating healthy earnings for our shareholders as we follow through and deliver more top line revenue growth.

As we move into the new fiscal year, we continue to pursue larger, more complex, solution deals.

Because of their size and complexity, these deals are difficult to time, so we expect to see more revenue volatility, particularly in our License revenues.

At the same time, we believe these deals bring exceptional value to our clients and shareholders and ensure long-term growth and financial sustainability.

In closing, I'd like to share with you some of what I'm seeing this week at our FICO World Conference, our global customer event, taking place this week in New York.

Over 700 attendees, mostly in the banking and insurance industries, senior executives, are here seeking game-changing strategies and solutions for profitable growth.

These executives face severe stresses in their businesses, from economic, regulatory and political stress in Europe and the United States, to the very real stress of hypergrowth and competition in markets such as China, Brazil and Russia.

Yet amid those conditions, they've made time to come talk to FICO.

Why?

For the same reason I believe we are able to report strong financial results here today.

The value of FICO solutions is increasingly apparent in the marketplace.

And thanks to the structural improvements we've made to our business over the past years, we are well-positioned to deliver that strong value to our shareholders as well.

With that, I'll turn the call back to Steve for questions and answers, Steve.

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

Rob, please open the line.

(Operator Instructions) Thomas Ernst, Deutsche Bank.

This is Nandan Amladi on behalf of Tom.

On the bookings front, clearly you had a decent quarter, seasonally up, but year-on-year basis a fairly modest increase.

But the number of large deals, both the $2 million and greater and $1 million and greater dropped.

How much of this was macro-related versus anything that's Company-specific?

I wouldn't say any of them are really macro conditions.

We just frankly had several very, very large deals this quarter that drove a lot of the bookings growth that you see in the numbers.

And we also had a lot of exceptionally midsized deals, if you will.

So overall volume of deals is roughly the same.

The big whales were really more limited to several that are very large in size.

How about your efforts to expand geographically?

Clearly there is economic opportunity in the BRIC countries?

And I know you had spent some resources expanding into China, Russia, Brazil.

How are those efforts going?

We had 18% growth in our Asia business, so they had a record quarter last quarter and China is an important part of that growth story.

So I think predictably our China expansion is going well.

We are in the early stages of a similar expansion in Russia where I expect to be able to report similar progress in the near future.

Manav Patnaik, Barclays Capital.

On the Scores front, the growth -- the 5 negatives quarters.

Finally, growth.

I know you guys said it's a little too early for you guys to make a call.

But you provided the pre-Score growth.

Can you give a little color on the Originations Score growth?

Previously you talked about the lag of 6 to 8 months before you see the pre-Scores congruent.

What is your thought process there from what you see today?

We like what we are still seeing, especially at the front end of the life cycle.

So you are correct that the pre-Score, what we sometimes call acquisitions Scores, continues to have healthy growth there.

We saw 18% growth in that part of the business.

Originations is also growing and that's the next phase although not as strongly.

It was a 2% growth.

We have not yet seen that translate on a year-over-year basis into growth on Account Management.

Although in the last couple of quarters, Account Management, which is the next phase, has begun to come up as well.

So there is some early evidence that, if you will, that pig is moving through the python in the fashion that we hoped to see it.

There remains quite a bit of livelihood and activity at the front end of the life cycle, which is encouraging.

If that is sustained, I'm feeling increasingly confident about what will happen later in the life cycle.

The caveat in my remarks about fiscal '12 is that when I look out at the macro environment, I still see a lot of risk (audio difficulty) factors in housing and unemployment.

While our Scoring business is holding up well and showing signs of life, it will require a sustained economic recovery that we don't quite yet see before I will feel more bullish about the prospects for B2B Scores.

Is it right to assume that the 3% to 4% growth that you're projecting on the top line, seems to be, going to be driven more by the Applications and Tools business?

That's correct.

We've taken what I hope will prove to be a conservative view that our Scores business will be essentially flat overall for the coming year.

I hope that's the floor on what actually happens, and I hope I can report upside progress against that.

But you're exactly right, the 3% to 4% growth that we are projecting is substantially driven from Apps and Tools.

Thank you for all the guidance for 2012, the clarity.

On the free cash flow front, though, should we still assume it is the $25 million a quarter run rate or do you guys have other projections in mind?

I would say we're expecting free cash flow to grow somewhere between 5% to 10% next year.

First quarter, we have some CapEx expenditures that I was expecting to have in the fourth quarter that will probably hit in the first quarter for a data center rebuild.

Overall that puts free cash flow for the year, next year, to be somewhere around the $125 million to $130 million range thinking about those numbers.

And the total CapEx embedded in that?

Total CapEx embedded for next year roughly $15 million to $17 million.

(Operator Instructions) Carter Malloy, Stephens, Inc.

Congrats on the bottom line controls and the good outlook for next year.

My questions both center around that.

In light of the big EPS guidance for '12, what is your approach towards the buyback right now?

Are you going at it opportunistically or methodically?

It sounded like there was not much of that built in your guidance.

I just wanted to make sure that's correct.

Yes, you are correct.

We were quite aggressive in the month of October.

Our stock price took a dip and we went in and picked up 1.4 million shares.

So we started the year quite aggressive.

We are just over 35.5 million shares as we sit today.

We've modeled in, at least for now, some modest buyback over the remaining course of the quarter.

That is why we have guided shares at roughly $35 million.

We will continue to buy opportunistically as the year goes on, but we started out with a bang.

On the R&D line, last quarter we were talking about that coming down to 10% or being around 10% long term.

This quarter we did way under that, guidance applies, you're keeping a cap on the OpEx going forward.

How should we be thinking about modeling that line and also how should we be thinking about any potential business impacts or where you are actually making those cuts in R&D?

We are not making any further cuts in R&D.

We have basically brought our R&D spend down to roughly 8% in the 4th quarter.

For the year, we were somewhere around 9% to 10%.

I think it's pretty safe to say on a go-forward basis, that 9% to 10% is where we are continuing to run the R&D line.

We are not cutting back on any of our investment.

In fact we think we are investing in all the right areas across the portfolio to drive our growth for next year.

I would suggest you model it out around 9% or 10%.

We are far enough into the build-out of our next-generation applications, that we are in some sense over a hump that we climbed over in the past year.

I agree with Mike's comment that 9% or 10% is probably the right number.

But you would be surprised how much we can get done with that level of spend given the infrastructure we've already poured and the retooling of most of our major applications that's already taken place.

Can you talk about your conversations recently with clients and potential clients?

Everyone is looking over their shoulders at volatile markets and volatile CapEx spend.

Are you seeing any lengthening of deal timelines?

What are the conversations like there?

We haven't yet seen lengthening of deal times.

I would say that in the last 30, 45 days we've seen, especially in Europe, increased skittishness from consumers.

No deals have been pulled.

All deals continue to progress through the pipeline, but as we get down to the short straws, deal signing and so on, they are checking their [textbooks] twice.

They're running through extra review processes or they may be poised to do so.

So we stay in close contact especially in certain European countries where we have big ambitions over the next couple of months, because the nervousness in Europe is growing and that could be a risk factor to worry about on a go-forward basis here.

The risk profile here in the States is also elevated but not distinctly more so than it has been earlier this year.

It remains a nervous environment, but I wouldn't say it is more so than it was 2 or 3 quarters ago.

Europe is a different story.

Europe has become more nervous.

How much of your revenues is EU specifically?

And I assume that most of that is with the big banks.

Can you talk about the recurring nature of some of that revenue and how much of it is potentially affected by a slowdown, especially with those banks?

We have 28% to 30% of our revenue coming out of the EMEA region.

Most of it coming out of Western Europe.

We have a fair amount of recurring revenue that has been driven from Falcon and Triad installations that have been in our baseline business for many years.

I would say where probably the biggest risk is in signing new deals, license deals.

In our view, the baseline seems pretty solid, but the timing in new deals in particular is probably less clear than it was 3 months ago.

I think Mike is right.

It's timing -- it's when, not if, in our discussions with those customers.

They are very committed to going forward with the projects, some of them quite substantial, that we have been tracking for some months.

But will it close in December or January or March?

There is a little bit of wait and see taking place, but nobody has suggested to us that they are taking deals off the table.

And if those deals get pushed by a couple of quarters, are we talking about impacts to the top -- I'm just trying to gauge the variable revenue there.

Are we talking about impacts to the top line in your European business of $1 million or $2 million, or $10 million?

Net new revenue in any particular quarter for our EMEA region can run anywhere $5 million to $8 million plus or minus, so that is the sort of variability we would be talking about.

Some percentage of that number.

There are no further questions at this time.

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

Thank you, Rob.

As a reminder, we will be holding an Investor Day tomorrow in conjunction with our FICO World Conference.

That event will also be webcast.

And the Investor page on our website has more information on that.

Thank you all for joining today's call.

This concludes today's conference call.

You may now disconnect.