Fair Isaac Corp (FICO) 2012 Q1 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 first-quarter 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).

Mr.

Steve Weber, Vice President of Investor Relations, you may begin your conference call.

Thank you.

Good afternoon.

Thank you for joining FICO's first-quarter earnings call.

I'm Steve Weber, Vice President of Investor Relations.

I'm joined today by our CEO, Mark Greene, CFO Mike Pung, and Will Lansing, our newly appointed CEO.

You'll 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 in order 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 February 27, 2012.

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

Thanks Steve.

Good afternoon.

Today, we announced results for our fiscal first quarter 2012.

In addition, we announce that I'm retiring as CEO but will remain with FICO in an advisory role.

Will Lansing has been named Chief Executive Officer and will assume those duties effective tomorrow, January 27.

Will has a 30-year track record in the technology industry and has been a member of the FICO Board for the past six years.

Will is joining us on today's call and will have some remarks in a few moments.

I look forward to working with him through a seamless transition.

We'll take your questions after our prepared remarks, but first I'll summarize the quarterly results and Mike Pung will then provide financial details.

I am pleased to report that we had a strong start our fiscal year 2012.

Our revenue of $170 million was the highest since the fourth quarter of 2008 and was an increase of 9% over the same period last year.

We delivered $30 million of net income, versus $16 million last year, and earnings of $0.81 per share versus $0.40 per share last year.

We also continued to produce strong free cash flows, $33 million this quarter versus $31 million last year.

All three segments of our Decision Management portfolio grew in the quarter.

The first segment is our Decision Management Applications, or business software used by clients to understand and predict consumer behavior in order to make smart decisions over a customer lifecycle.

Revenue from these applications was solid this quarter, up 13%, both sequentially and year-over-year.

This was a particularly strong quarter in our Fraud Management Application business which saw a year-over-year revenue growth more than 50% due to several large term license renewals.

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

Overall Scores revenue was up 4% from the prior year.

We track two sub segments here, business-to-business, or B2B, which are scores sold to financial institutions, and business-to-consumer, or B2C, which is scores sold directly to consumers at myFICO.com on a direct basis, or as scores sold indirectly to consumers through bureau partners.

The B2B score sub segment performed well, up 6% from the same quarter last year, making it our best first quarter since 2009.

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

Highlights for the quarter include the following -- revenues from scores sold across all parts of the lifecycle, acquisitions, originations, and account management, were up year-over-year.

Scores sold for acquisition or marketing purposes to solicit new customers were up 14% year-over-year.

Second, market adoption of FICO 8, which is the latest vintage of our classic score, continues to grow.

7500 lenders are now standardized on FICO 8, accounting for over half of our revenues.

Thirdly, we are gaining good traction on two recent score innovations, particularly the FICO Medication Adherence core for the healthcare industry, and our Strategic Default Solution for the mortgage industry.

The B2C score sub segment saw a small revenue decline in the quarter of 1% versus the prior year.

This week, we announced the introduction of a Spanish-language website as part of our ongoing efforts to expand credit literacy and empowerment all US consumers.

This website, which is the Spanish version of myFICO.com, is the first website where some 34 million Spanish-speaking consumers in the US can obtain their personal credit report, FICO score, and analysis, all in Spanish.

We are committed to serving this consumer marketplace and are continually looking for innovative ways to grow this business.

Our third business segment is Decision Management Tools, which consists of role management, modeling and optimization products, both embedded within our applications and also sold standalone to clients building their own applications.

Revenue in this Tools segment was up 1% versus the prior year and the prior quarter.

During the quarter, we announced an upgrade to our Business rule management called Blaze 7 with a groundbreaking visualization capability that makes it easier to understand and manage complex rule sets.

This visualization feature of Blaze 7 is helping financial institutions to explain their complex lending and risk management policies to bank examiners.

Turning finally to our performance by geography, all three of our regions grew during the quarter on a year-over-year basis.

Europe, Middle East, and Africa was up by 25%, Asia-Pacific was up by 11%, and the Americas grew 6% over last year.

While we continue to be wary of macroeconomic challenges, especially in Europe, we are encouraged that we have been able to deliver strong results even in these volatile and uncertain times.

In summary, we're pleased with our first-quarter results.

We are well on track to meeting our fiscal 2012 guidance, and we believe this quarter demonstrates the considerable operating leverage that our Company can deliver when we achieve topline revenue growth.

Now let me pass the call to Mike Pung for further financial details.

Good afternoon everyone.

We had a very good first quarter and demonstrated what we have been saying since we restructured a year ago, that our business model provides significant operating leverage.

This quarter, we delivered $170 million of revenue, a 9% increase over the same period last year.

This translated into an 87% increase in net income and a 105% increase in earnings per share as we realize the benefit from our share repurchase program.

This leverage enabled us to post a non-GAAP operating margin of 34% this quarter, a 500 basis points increase from Quarter 4.

While we believe margins for the rest of the year will be closer to 30%, this quarter's results show what is possible when we have spikes in revenue.

As we've stated in the past, we are actively pursuing and winning larger deals, and the timing of those deals can cause lumpiness in our license revenues from quarter to quarter.

This quarter, we signed some very large deals which carried very little incremental cost.

Now I'll discuss the quarter in more detail.

Revenue was $170 million, a $10 million increase over the prior quarter, and a $14 million increase over the prior-year period.

Applications revenue was $110 million, up 13% over the prior quarter and the prior year.

Scores revenue was $43 million, down 5% over the prior quarter, but up 4% over the prior year.

Tools revenue was $18 million, essentially flat when compared to both the prior quarter and the prior-year period.

By region this quarter, 74% of total revenue was derived from our Americas region compared to 75% in the prior quarter.

Our EMEA region generated 20% versus 18% in the prior quarter.

The remainder of 6% was from Asia-Pacific compared to 7% in the prior quarter.

By revenue type, recurring revenue, which is derived from transactional and maintenance sources, represented 67% of total revenues, versus 72% in the prior quarter.

Consulting and implementation revenues were 17% of total versus 20% in the prior quarter.

License revenues were 16% of total revenue versus 8% in the prior quarter.

The year-over-year increase in license revenue was primarily due to two very large term license deals for our Falcon Fraud Manager product.

As I've mentioned in the past, our customers will occasionally request a term license rather than a usage-based fee.

In these instances, we recognize the revenue when the license is signed and paid.

Although our guidance does not assume similar deals of this size, we expect license revenues as a percent of total revenue to increase during the year.

We generated $13 million of current-period revenue on bookings of $59 million, or a 22% yield.

This compares with $15 million of revenue on bookings of $112 million, for a 13% yield last quarter.

The weighted average term for our bookings was 22 months compared to 27 months in the prior quarter.

Of the $59 million in bookings, 26% related to fraud solutions, as our Falcon Fraud Manager maintains its dominant market position.

18% was related to Decision Management tools, and 15% related to customer management solutions.

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

Transactional and maintenance bookings were 33% of total this quarter versus 43% in the prior quarter.

Professional service bookings were 46% this quarter versus 34%.

Finally, license bookings were 21% this quarter versus 23% in the prior quarter.

Operating expenses totaled $118 million this quarter, down $1 million from Quarter 4.

As you can see in our Reg.

G schedule, non-GAAP operating margin, which is before amortization and stock-based compensation, was 34% for the first quarter compared to 29% in the prior quarter.

GAAP net income was $30 million.

The effective tax rate was about 31% for the quarter, slightly higher than we expected due to the expiration of the R&D credit last month.

As a result, we expect the effective tax rate to be around 31% to 32% for our fiscal 2012.

Free cash flow, which we define as cash flow from operations, less capital expenditures and dividends, was $33 million or 19% of revenue compared to $25 million or 15% of revenue in the prior quarter.

Moving on quickly to the balance sheet, we had $232 million in cash and marketable securities.

This is down about $10 million from last quarter due to share repurchases offset by the strong cash flow from operations.

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

Our cost of debt is fairly fixed at about $8 million per quarter.

The ratio of our total net debt to adjusted EBITDA is 1.7 times, below the covenant level of 3 times, and our total fixed-charge coverage ratio is at 4.2 times, well above the covenant level of 2.5.

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

We repurchased 1.9 million shares in our first quarter at a total cost of $50.9 million, or about $26.96 per share.

We have $134 million yet remaining under our current board authorization.

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.

Finally, I'd like to take a few moments to thank Mark, on behalf of our shareholders and our employees, for his leadership these past five years.

He approached every day with amazing passion and conviction and certainly has positioned us for continued success.

Thanks Mark.

I'll now turn the call back.

In this concluding section, I'd like that summarize the current state of our business, and then turn the call over to Will for his comments.

As you look ahead to the balance of the fiscal year, we are reiterating the guidance that we gave last quarter, but with increasing confidence that we can achieve the high end of that guidance range.

As a reminder, our guidance is as follows -- revenues between $640 million and $645 million, of roughly a 3% to 4% increase for the year, compared to the $620 million of revenue generated last year; net income between $86 million and $89 million on a GAAP basis, up 19% to 24% from the $72 million of net income last year; and GAAP earnings per share between $2.45 and $2.55 based on 35 million shares outstanding, an increase of between 37% and 42% versus the prior year.

We're off to a strong start for this year, but we understand there are macroeconomic uncertainties that may impact our business, especially in Europe.

While we are increasingly confident, we remain cautious in our guidance for the remainder of the year.

To sum up, we are pleased with the results of the quarter, which demonstrate that our business model is tracking solid earnings growth and margin expansion.

We expect to continue generating healthy earnings for our shareholders as we stay focused on driving topline revenue growth.

Now, before I turn the call over to Will, I'd like to offer a few comments as I reflect on my five-year tenure as FICO's CEO.

I'm proud of what we've accomplished over that time, especially given the turbulence of the financial markets.

During my tenure, we streamlined and simplified the business, exiting non-core areas so that we could focus on leadership products in four industries -- banking, insurance, retail, and healthcare.

We rebranded the Company under the FICO logo, sharpening and raising our market profile and our reputation.

We made good on the promise of connected decisions, delivering industry-leading solutions that truly allow clients to make every decision count.

Finally, we instilled greater operational and fiscal discipline across the Company.

These efforts have borne fruit, as reflected in the Company's current good financial health.

As a result, I'm very optimistic about FICO's prospects and the outlook for sustained growth under Will Lansing, who succeeds me as CEO starting tomorrow.

With that, I'm happy to turn the call over to Will for introductory comments.

Thanks Mark.

Good afternoon.

I am delighted to become FICO CEO and to get more involved with a company that I've known and respected for many years.

I served on the Board of Directors for the last six years, so I have some knowledge and perspective on FICO, including all the good work that's been done under Mark's leadership over the past five years.

So I start with a thank you to Mark for turning over to me a company in such fine shape and with such excellent future prospects.

I've also been around long enough to know that I have more to learn.

That's what I aim to do in the weeks ahead, learn as much as I can about our customers, about our partners, and about our competitors.

We've just reported an impressive start to the fiscal year.

As you heard earlier, the team feels good about our direction.

We have some interesting growth opportunities before us, but those are tempered by a bit of uncertainty, for example the debt crisis in Europe.

You're probably wondering what to expect with this transition.

I don't think that you should expect large directional shifts.

As a Board member, I have supported the strategy and approach that has taken us to where we are now.

Given our current trajectory, I do not anticipate dramatic change.

We have a strong, confident team here at FICO and I've worked with this executive team for years.

You'll see in my background that I've been involved in deals and M&A.

Should you expect more of that a FICO in the future?

Well, FICO has had some wonderful acquisitions in the past, for example our acquisition of HNC, and we have from time to time made acquisitions of smaller companies where we thought it would be helpful.

I believe that we can complement our organic growth with M&A growth, but I think we have a very high bar.

Our own business is highly attractive and our prospects are bright, so any acquisition would have to be at least as attractive as investing in ourselves, and that is truly a high bar.

As you know, we've had a successful value-creating stock buyback program over the last few years and I have fully supported that.

Buying back FICO (technical difficulty) has served us well and our intention is to continue with the buyback program.

I am about to dive into meetings with our employees, customers, and partners all over the world and certainly plan to meet with investors too.

I look forward to meeting with you.

Thanks.

Mark?

Will, thank you for your kind comments.

Now let me turn the call back over to Steve for a question-and-answer period.

Thanks Mark.

This concludes our prepared remarks.

We're ready now to take your questions.

Rob, please open the lines.

(Operator Instructions).

Manav Patnaik, Barclays Capital.

Thank you.

Good evening gentlemen.

I just wanted to congratulate Mark and William, I guess, on the transition going on.

I'm looking forward to meeting you, William.

I have one quick question on the two Fraud Management license bookings I guess that you mentioned.

Is there any way -- I know you mentioned there was very little incremental cost, but is there any way to quantify that in terms of what EPS benefit that had in the quarter, if basically those were not signed, what the number might've looked like?

We aren't in the practice of or would I be in the practice of pulling out any specific transaction or sets of transactions to do an EPS calculation.

I think looking at the face of the income statement and seeing the growth in our license revenue can give you an indication of how important those deals were to us, but we don't do any what-if calculations on specific transactions.

Okay.

Fair enough.

Then related to that, I think you had mentioned that you would expect license revenue as a percentage of total revenue to creep up, so I just want to clarify.

That was about 16% I think of revenues this quarter, so you expect that 16% number to either stay there or continue to rise for the rest of the three quarters?

No.

What I meant to say is I expect for the full year the percentage of revenue coming from license sales will be larger than it was last year.

It won't creep up from the 16%

Got it, so it was on a yearly basis.

On a yearly basis, yes.

Okay, fair enough.

Then if I could ask just on the Scores business, Mark, you mentioned that all forms, the acquisition, origination, and account management were up.

I was just hoping if you could maybe give a little more sort of macro color on those three different things, and how you might see that trending, given the economic environment we are in right now.

Happy to do so, and thanks for the question.

We are seeing what I've been hoping to see for several quarters, which is the monkey flowing through the snake as it were.

So we continue to see increased (technical difficulty) end of the lifecycle in applications, that's the 14% number I mentioned.

But now we're also seeing an uptake in subsequent originations and account management.

So that's a good thing.

I would only temper that by saying one quarter does not a trend line make yet, so let's see several more quarters of that before we really feel good about this growing business.

But it is nice to finally see growth occurring across the spectrum here; we have not seen that since the downturn.

So, I'm cautiously optimistic that we've turned the corner.

We see tentative signs of recovery in the US, but we'll probably see another quarter or two of that kind of behavior before we conclude that we've actually really turned the corner.

Got it.

One final question on R&D.

The $13 million, any color on what we should expect that number trending for the rest of the quarters?

Because it seems like, for the last five quarters, you guys have cut that number lower and lower.

Maybe you can comment on why it just keeps going down as opposed to maybe throwing that into developing stuff?

Sure.

So R&D this quarter was roughly the same as it was in our fourth quarter, which has been our run rate.

Last quarter, I think I gave guidance that I was expecting the R&D expense to be somewhere around 9% to 10% of total revenue and that's still where I expect it to be by the end of the year.

And so I would not expect the trend to drift downward from where we are.

We are at a spend level now that we are very comfortable with in terms of investment against the road map we are operating under.

All right, fair enough.

Thank you guys.

Carter Malloy, Stephens.

Thanks guys.

Thanks for taking my questions and Will, Mark, congratulations to both you guys and the rest of the team there as well for a great quarter and what appears to be a great trajectory coming into the year here.

I do want to go back to the questions on Fraud Management there and the license revenues.

You said license was 16% this quarter versus 9% year-over-year, so we are looking at an incremental $15 million in license revenue, give or take.

Should I assume that most license revenues are concentrated within fraud?

Is that one way to look at it without having to have you call it out specifically?

No, the increment -- the increment is within fraud, but most of the other license revenue is really derived from our Blaze or our Tools product and a couple of other parts of the applications.

But the increment this quarter is the fraud products that I described.

Got it.

So if we back that up, or back that out of our models, we are sort of looking at returning to a more normalized call it $155 million, maybe $160 million run rate for the rest of the year.

That's how you build out the guidance?

We built out the guidance a little bit differently, but let me get to that in a second.

We wouldn't advise you to back out anything in terms of looking at our revenue.

In fact, every quarter, we have license revenue, whether it be perpetual or term, that come and go depending upon the timing of a deal.

It just so happens we had two very large ones this quarter, and in future quarters I expect us to have other license deals that will flow in and out as the timing occurs.

So I don't think it's safe just to back those out and say that is the new run rate.

If you follow the math around the guidance that we gave for revenue, at the top end $645 million of revenue minus what we did in the first quarter would suggest something around $158 million of revenue going forward for the rest of the year.

Right.

That would be a way for you to back into how we constructed our guidance.

Got you.

But effectively, if we look at $158 million, if you have other Falcon-type deals that are this big, then we could have another quarter or two throughout the year that looks something like this, where we are surprised with the upside by a whale contract that comes through?

There's always the possibility of a whale contract coming through and we have not built any of that into our guidance.

We have not made an assumption, in other words, that there would be another whale.

But certainly, as you saw last quarter in our bookings, we had three very large booking deals.

This quarter, we had two very large term license revenue deals.

It is possible that, from time to time, we'll see larger transactions, though the ones we saw this year are much larger than normal.

They also can come, by the way, Carter, in areas outside of Falcon, for example Blaze.

Okay, that's very helpful there.

Then also, your EPS guidance for the year, which appears equally if not more so conservative, I'm assuming, on your end, there is no more buyback built into your guidance.

Is that a safe assumption?

We do have a little bit of guidance built into our plan.

As you remember, it's not much, but as you remember we took a large amount of shares in the month of October when we were trading in the low $20s.

Our stock price has drifted upwards and the pace by which we've been buying shares back was changed based upon the way the market has been on our stock recently.

Sure.

We noticed that.

That's great.

Then lastly on CapEx, decent-sized tick-up this quarter.

Is that a fair run rate or is there some one-time stuff in there?

Last quarter I had mentioned that we -- the fourth-quarter CapEx was a little light because we've been building out data center.

Right.

-- and that some of the spend we thought would come in in the fourth quarter actually hit in our first quarter.

We are fundamentally done with equipping the data center, and so it's not a run rate.

It's a little bit of spillover I'll call it from the fourth quarter.

I would say our CapEx is probably trending more to the $20 million range as a result of that rather than the $16 million to $18 million that we have historically done.

Very helpful.

Thanks so much guys.

(Operator Instructions).

There are no further questions in the queue.

Thanks.

This concludes our call.

Thank you all for joining.

This concludes today's conference call.

You may now disconnect.