Fair Isaac Corp (FICO) 2012 Q2 法說會逐字稿

Ladies and gentlemen, this is the operator.

I would like to welcome everyone to the FICO Second Quarter earnings call.

Thank you, Mr.

Steve Weber.

You may begin.

Thank you.

Good afternoon and thank you for joining FICO's Second Quarter earnings call.

I'm Steve Weber, VP of Investor Relations, and I'm joined today by our CEO, Will Lansing, and our CFO, Mike Pung.

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 may involve many uncertainties that 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 those 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 May 25, 2012.

Now I'll turn the call over to Will Lansing.

Thanks, Steve.

Today we announced the results of our Second Quarter of fiscal 2012.

I'd like to start by briefly summarizing those results and then offer my observations for my first 90 days at FICO.

I am pleased to report we had a solid Second Quarter.

Our revenue of $160 million was an increase of 4% over the same period last year.

We delivered $20 million of net income versus $8 million last year and earnings of $0.55 per share versus $0.19 last year.

We also continued to produce strong free cash flows -- $36 million this quarter versus $22 million in the same quarter last year.

Mike will get into the numbers in more detail in a few minutes, but first I'd like to share my thoughts on where we currently stand and where we are going.

Over the past three months, I've had the opportunity to travel our offices around the world.

We have an exceptionally, smart dedicated team of people who foresee exciting opportunities ahead for our business.

I've also met with customers and have found a deeper understanding of the value they get from FICO solutions and how they want to partner with us to tackle their toughest challenges.

And I have come away very impressed with the strength of the company, its people, its products, and its prospects for even greater success.

We have a strong set of products in IT, with high barriers to entry.

Products like the FICO Score, Falcon Fraud Manager, and TRIAD are deeply embedded into the financial services industry and are recurring, high margin businesses.

FICO Retail Action Manager studies oceans of transaction data to determine not only what customers are most likely to buy, but when -- insight that our customers find extremely valuable.

So we are looking closely at ways to offer this kind of value to an even broader number of retailers.

The product rationalization and restructuring that the company has undertaken in recent years has resulted in a business model that provides strong margins and operating levers that propels earnings with even modest revenue growth.

In a global marketplace, talent is the ultimate competitive advantage.

And as I mentioned earlier, FICO has an exceptionally talented, dedicated workforce.

We have over 200 analytic scientists on staff, with analytic centers of excellence in the US, the UK, and India.

Our analysts work with dozens of proprietary and innovative modeling technologies, from genetic algorithms in neural network to Bayesian algorithms in experimental design.

In contrast to many players, new and old, that are entering the analytic space, we specialize in real-word analytic solutions that solve specific real-world business problems.

That's why, in our discussions with clients, FICO always leads with the business problem, not with the technology.

What makes us very different from others is that we have great technology with a proven track record.

We have developed proprietary technology for analyzing large data sets to develop predictive models.

The resultant analytic products transform entire industries.

Our analytics that predict individual behavior protect two-thirds of the world's credit cards and drive more than $10 billion in lending decisions a year in the US alone.

New entrants into the predictive analytics marketplace are jumping on the big data bandwagon, announcing that it is now possible to express human behavior mathematically.

FICO has been pioneering and perfecting this science since 1956.

With the explosion of data available today, I'm convinced we are in a great position to make the most of the opportunities inherent in big data.

In summary, FICO is well positioned for growth.

We will continue to refine our strategy and execute against that strategy better and faster than our competitors.

In the meantime, we continue to operate profitably and generate significant cash flows.

This quarter, we repurchased 2.5 million shares, as we continue to return value to our shareholders.

We continue to view repurchases as a good use of excess cash and will evaluate other opportunities as appropriate.

Finally, we made a separate announcement today regarding some changes to the executive management team, and I'd like to take a minute to recap that announcement.

I mentioned earlier how impressed I've been by the depth and breadth of talent at FICO.

I also mentioned the growing demand for big data analytics, an opportunity that FICO is extremely well-positioned to pursue.

So naturally, I have been thinking about how to develop the management team so we can seize these exciting opportunities in the months ahead.

I am therefore pleased to announce several successions that I believe will enable us to accelerate our movement in that direction.

First, Stuart Wells, who has been consulting with FICO for the last 2 years, is assuming the role of EVP and Chief Technology Officer, effective immediately.

Stuart has a very impressive background driving innovation and commercializing technologies for Sun Microsystems, Avaya, and other technology businesses.

In his work with FICO, he's been instrumental in the turnaround of our professional services business.

Stuart replaces Deborah Kerr, who will serve in a consultative capacity until her departure from the company at the end of the year.

Charlie Ill, who has transformed our sales services and marketing organization and rekindled top-line growth since he joined us in 2010, has announced his intention to retire at the end of this fiscal year.

Charlie has built a very strong organization and from it emerges a natural successor, Mike Gordon, who has been running our EMEA business for the last three years.

Mike has been with FICO since 2005, during which time he has demonstrated his ability to lead sales and services teams to meet or exceed their targets, despite significant macroeconomic obstacles.

This summer, he will come back from London to our New York office in preparation for assuming responsibility for global sales, beginning on October 1.

I am pleased to announce that Charlie has agreed to stay actively involved with the business through February 2013 to help ensure a smooth transition.

In addition to these two changes, I'm happy to announce that Mike Pung has been promoted to Executive Vice President.

Mike has reintroduced a high degree of rigor to our financial operations since he was named SVP and CFO in November of 2010, and I'm pleased to recognize his contributions to the business with this latest promotion.

Finally, as announced earlier this month, Jim Wehmann has joined FICO as EVP and head of our Scores business.

Jim brings a body of experience as an accomplished senior executive in financial services, retail, and technology businesses.

And he rounds out what I believe to be an exceptionally strong executive management team that will lead us to new levels of profitable growth in the months and years to come.

With that, I'll now pass the call to Mike for further financial details.

Thanks, Will, and good afternoon everyone.

Today I will emphasize three key points in my prepared comments.

First, we had a solid second quarter, delivering $160 million of revenue, a 4% increase over the same period last year.

The pipeline in our software businesses is strong, and we are executing against these opportunities.

And our Scores business is improving with the US economy.

Second, this translated into a 158% increase in net income over last year's second quarter, which included a restructuring charge, and a 63% improvement in free cash flow.

Since our restructuring last year, our financial performance has improved dramatically.

Finally, we are reiterating our annual guidance today.

While we are feeling better about delivering the high end of guidance, we maintain a conservative outlook in light of the economic uncertainties in Europe.

As I said, revenue for the quarter was $160 million, a $7 million increase over prior year and an $11 million decrease over the prior quarter.

I will break down the revenue into our three reporting segments.

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

Revenue from these applications was $96 million, down 13% from last quarter, when we had some large license renewals, and flat versus the same period in the prior year.

This quarter included four Debt Manager 8 deals.

The second segment, Scores, which consists of predictive analytics used to assess risk, revenue was up 8% from the prior year and 4% from the prior quarter.

As you know, we track two sub-segments here -- B2B scores, sold to financial institutions, and B2C scores, sold directly to consumers.

The B2B scores sub-segment performed well, up 12% from the same quarter last year, as we continue to see the health of business improve with the easing of credit markets.

This quarter's revenue included a large project we conducted with a major US customer.

In partnership with the credit bureau, we delivered historical scores that aided our customer in performing economic modeling and analysis of its various portfolios.

While this project is the first of its kind, we believe it's an example of finding a significant new market for our flagship product and are looking for new ways to offer the same value to other customers who may have similar needs.

Other highlights include a very strong originations trend, with revenue in North America up 14% over prior year, driven primarily by auto and mortgage.

Continued interest and adoption of FICO 8, which is now being used by more than 7,600 lenders, and our latest innovation, Strategic Default for the mortgage industry and the FICO Medication Adherence for the healthcare industry, are gaining traction in the market with validations underway.

The third segment is Decision Management Tools, which consists of rules management, modeling, and optimization products [implemented] within our applications and also sold standalone to our clients.

Revenue in this Tools segment was $19 million, up 19% versus the prior year and up 8% versus the prior quarter.

The increase was driven primarily by several large sales of FICO Blaze Advisor and an increase in related implementation services.

Looking at our revenue by region, this quarter 75% of total revenue was derived from our Americas region, compared to 74% in the prior quarter; our EMEA region generated 18%, compared to 20% percent in the prior quarter; and the remaining 7% was from Asia-Pacific, compared to 6% in the prior quarter.

By type of revenue, recurring revenue, which is derived from transactional and maintenance sources, for the quarter represented 72% of total revenue versus 67% in the prior quarter; consulting and implementation revenues were 19% of total versus 17% in the prior quarter; and license revenues were 9% of total revenue versus 16% last quarter.

Now turning to bookings.

We generated $18 million of current period revenue on bookings of $78 million, or a 24% yield.

This compares to $13 million of revenue on bookings of $59 million, a 22% yield last quarter.

The weighted average term for our bookings was 23 months, compared to 22 months in the prior quarter.

Of the $78 million in bookings, 22% was related to our collections and recovery solutions, 18% was related to decision management tools, and 15% related to each -- each to customer management and fraud solutions.

We had 13 booking deals in excess of $1 million, three of which exceeded $3 million.

Transactional and maintenance bookings were 37% of total this quarter versus 33% in the prior quarter.

Professional services bookings were 44% this quarter versus 46% last quarter.

And finally, license bookings were 19% in this quarter versus 21% in the prior quarter.

Turning to our expenses, operating expenses totaled $121 million this quarter, up about $3 million from the prior quarter.

This quarter includes the full impact of our wage increases that took effect in December, along with the additional payroll benefit costs.

As you can see in our Reg G schedule, non-GAAP operating margin, which is before amortization and stock-based comp, was 28% for the second quarter and is 31% year-to-date.

GAAP net income this quarter was $20 million, with an effective tax rate of about 33%, which increased from the prior quarters due to both the expiration of the R&D credit and some additional foreign tax expense.

We expect the effective tax rate to be around 32% to 33% in fiscal year 2012, slightly higher than we previously communicated, primarily due to the foreign tax item.

In terms of free cash flow -- we define it as cash flow from operations minus capital expenditures and dividends paid.

Free cash flow for the quarter was $36 million, or 23% of revenue, compared to $33 million, or 19% of revenue, in the prior quarter.

Moving on to the balance sheet, we have $191 million in cash and marketable securities, down $41 million from last quarter, mainly due to share repurchases bought by the cash flow we generated.

Our total debt remains at $512 million, with a weighted average interest rate of 6.1%, and our cost of debt is fairly fixed at about $8 million per quarter.

The ratio of our total net debt to adjusted EBITDA is 1.8 times, well below the covenant level of 3 times, and our total fixed charge coverage ratio is 4.4 times, well above our covenant level of 2.5 times.

We have continued to have no borrowings under our line of credit facility.

We repurchased 2.5 million shares of our stock in Quarter 2, at a total cost of $99.4 million, or $40.34 per share.

Our basic shares outstanding were 34 million at the end of the quarter, down from about 37 million at the beginning of the year.

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.

We are reiterating our guidance that we gave at the beginning of the year.

And based on our current view of our business momentum, we have growing confidence that we can meet the high end of that guidance.

As a reminder, our guidance is as follows -- revenues of $640 million to $645 million, or a 3% to 4% increase for the year compared to fiscal year 2011; net income of $86 million to $89 million on a GAAP basis, up 19% to 24% from the $72 million of net income in fiscal 2011; and GAAP earnings per share of $2.45 to $2.55, which was based on 35 million shares outstanding, an increase of 37% to 42% versus prior year.

On this last point, let me take a moment to discuss our share count.

In Quarter 2, our fully diluted shares outstanding, for the purposes of computing earnings per share, was about $2 million higher -- or 2 million shares higher than our actual ending basic share count.

Much of this difference is due to the increase in our share price over the past six months, which, in turn, drives dilution related to end the money options.

These additional shares, which are 1.2 million in total, are added into the total diluted share count when computing EPS, making our average share count for the year harder to estimate.

However, because we believe we will end up closer to the high end of guidance on revenue and net income, we are confident we will still be able to deliver on our EPS guidance with the additional dilution.

I will now turn the call back to Steve for Q&A.

Thanks, Mike.

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

( Operator Instructions) Manav Patnaik of Barclays Capital.

One question on the scores business.

You talked about how originations are good, obviously driven by autos and mortgages.

Can you give a little color on what you're seeing on the credit card side, which I believe is the biggest part of your business?

It is, Manav.

Credit card is the biggest side.

We did see most of the volume increases last quarter derived from auto and mortgage originations, as we described.

Credit cards is hanging in there.

It's not growing quite at the same rate that it was growing in the prior quarter, but basically it's remaining about flat on a quarter-over-quarter basis.

Maybe another way to ask the question -- is there any reason -- nobody is seeing growth really there -- but is there any reason to believe there could be a falloff relative to what you are seeing today?

No.

There's no reason to believe that.

The credit card business does drive a large part of the volumes and, overall, it continues to drive a large part.

It is simply a matter of when some of the marketing activities find their way into the origination cycle, as we talked about historically.

Can you give us the size or a way to quantify what the large project was that you mentioned with the B-to-B customer?

It sounds like something where I would've thought a lot of people were using your scores before.

How is this different?

The way it is different, I'll start with that.

The way it is different is it was a project that was done to evaluate some broader economic models across a historical set of portfolios within a large bank, as opposed to using the score in its historical form to render credit.

It was a somewhat of a one-time project that might be recurring in nature, but it was a very major undertaking for our customer.

And that required our customer to pull a significant number of scores and compare the results over a year-to-year period.

The size of the deal -- why we don't quantify any specific deals for any client -- it was a seven-figure deal, and it did drive a majority of the growth on a year-over-year basis in our B-to-B business.

A question for William.

You gave us your take on what you see in the three months since you took helm.

Just to understand the context of all the different management changes that are going on -- and I think even before you came, there was a lot of different hires and some people retiring.

Maybe, some way to try to frame what the employee situation -- are you done with a lot of these hires and retires, or is there more to come?

It's a good question and a fair question.

I think you have to take a hard look at what we've done here, and it's really -- if you look at it, what we are really doing is a lot of internal succession.

Mike Gordon, who is taking over the revenue operation from Charlie Ill at the end of the year, is an internal guy who's done a fabulous job for us.

He's been with us since 2005.

So that's a very smooth transition.

And Charlie will be with us through the end of the year.

On the technology side -- technology and product -- we have a good fortune to put Stuart Wells into that role.

Besides his very impressive external credentials, he has been helping us internally for the last two years over on the professional services side.

But his real background is on the product and technology side.

So we are pretty fortunate to be able to promote from within.

I would say that I am very proud of the team that we have, and I'm really excited about the way it's coming together and coalescing.

I think we've got the people we need to go get some of the opportunity ahead of us.

I can't say that there will never be another change, but we are pretty happy with the team that we have.

Tom Ernst with Deutsche Bank.

This is (inaudible) on behalf of Tom.

A couple of questions.

Last quarter you talked about the new insurance fraud product.

Can you characterize what percentage of bookings or any other quantification of how that product is doing and how the pipeline is looking?

Sure.

If you're talking about the Insurance Fraud Manager application, from the -- about a year ago, when we delivered it, we are gaining good traction with it.

We are up and live at our largest processor, [MBN].

They are starting to sign up new customers.

We are starting to see some revenue flow in from MBN.

And, of course, we have about six or seven direct customers from it.

During the quarter, there were no particularly large deals that we signed on the IFM side, but we have a very strong pipeline, and I would expect to see something come through in the back half of the year.

And one follow-up.

Your buyback authorization announced in November was for $150 million.

It looks like you have completed that, based on what you've done in the first and the second quarter.

Any plans for further buyback?

You didn't make mention of that your script.

We actually still have $34 million remaining under that buyback plan.

Some of the shares we bought back this quarter were under an old authorization, so there's still $34 million left under the current board plan.

And our board discusses allocation of capital, including our buyback plan, at all of their meetings.

And we have an upcoming board meeting, and I imagine that will be a topic.

Carter Malloy with Stephens Inc.

Will, maybe you could talk a little bit more about your experience there at the company since you've been here.

Clearly, some leadership changes in place.

But, operationally, what, if any, will change from your predecessor's strategy?

I don't think you should look for big changes.

I think what we have is, if you go through our -- the portfolio of things that we have, on the score side, we have new leadership with Jim Wehmann, and we have an existing scores team that is very strong.

I think the combination of the two -- the fresh leadership with Jim, as well as the very strong people we already have, sets us up for growth in that business.

We are optimistic -- cautiously optimistic about growth in that business.

On the application side, I am sure you know the status of our products.

We have a bunch of new products in the market that are -- after years of work are finally ready for primetime and are now being deployed and being sold into big customers.

Operationally, what we have to do is continue to work them up there, get them implemented, and we are pretty optimistic about the way that's all going.

Falcon was the introduction last year.

This year, we are on Originations Manager and Debt Manager.

We have new products.

IFM is, in a sense, a new product and Retail Action Manager, again, in a sense, a new product and gaining traction.

Action Manager is getting a lot of traction, actually.

Again, operationally, how do we organize ourselves internally to deliver to the market what it really wants -- what there is clearly an appetite for?

And we are working on those things.

But I don't anticipate any dramatic changes operationally.

Back on score side of the business.

You have got a seven-figure deal in B-to-B, so that puts your growth closer to flattish there.

And clearly I think there is some client B-to-C, but what happened in the rest of B-to-B as well, if origination through auto and mortgage was up 14%?

Origination and account management were both up on a year-over-year basis.

And that was somewhat of an offset on the pre-screened side, which can come in more lumpy forms when marketing initiatives are done.

And so when you net all that out, the baseline scores business is up slightly.

And it was furthered by some of the project work I described.

Brett Horn with Morningstar.

You talked about this in your comments, but I just wanted to see if I can get some color on this.

You mentioned that repurchases -- you still see that as a good use of cash.

But with the progress you have made in restructuring the business, would you say that there's increased willingness to consider acquisitions today than, say, a year or two ago?

I would say that a year or two ago, we made acquisitions -- small technology tuck-in acquisitions.

We absolutely remain interested in doing that -- wherever we can find technology that we can acquire at a fair price that advances a bigger strategic initiative, we do it.

We tend to do it.

We did it to support our tools business with Dash not long ago.

And I can foresee doing that in the future.

That said, we are really in love with our own prospects.

We're quite -- we like where we are positioned.

So in terms of investing in ourselves, relative to investing in others, that is a hard call -- to take the money and put it into -- meaningful money into acquisitions.

That's not to say we will never do it, it just has to meet a high threshold.

So are we more interested in doing it than in the past?

Where there are opportunities, we are going to do it.

And we are going to continue to hold them to this high standard of -- it has got to be at least as good as investing in ourselves.

( Operator Instructions) Ty Lilja from Feltl & Company.

First question.

I think you had a third customer coming online with Retail Action Manager.

I was wondering how that was going?

We do.

We have a third client, and we expect them to be on live towards the latter part of this quarter.

Implementation is well under way; it's going very well.

We are scheduled to go live with them this quarter, as we had planned in the beginning.

And you were talking about the traction you were getting in that business.

Any new customer wins or prospects, or are you gaining more share at your existing customers?

One of the things that happened this last quarter is we had -- actually at the end of the year we had a cross-sell to an existing customer -- to a broader part of their portfolio, and that went live towards the latter part of our second quarter -- starting to gain additional volumes, if you will, from that effort.

So the product is coming along very well.

It's working very well for the customers that we have it installed for, and our pipeline remains pretty good for it as well.

And I think you guys had a little weakness in the customer manager products last quarter.

Did that continue this quarter?

TRIAD volumes had declined historically through the recession, as credit card accounts were being closed, and we're starting to -- the volume levels were getting smaller.

We had a couple of very large deals that we signed in the second quarter with end users for TRIAD, and they are signed under license arrangements.

We actually had a very strong TRIAD quarter, and we have a lot of interest in TRIAD in markets outside the US right now in our pipeline.

Then, thinking about some of these new product you are working on, particularly ones that fall in different industries, like insurance fraud, medication adherence, some of the other stuff you're working on.

When you look at that from potential financial impact prospective over the next -- call it 12 to 18 months, what is the -- which products do you think could have the biggest financial impact on your results?

Our ability to scale on the score side is more challenging because of the distribution footprint we have for scores.

But once we begin to even scale modestly on scores products like Strategic Default or Medication Adherence, they carry very high margins.

So even small amounts of revenue can drive a lot of leverage from those products.

But right now, within our current guidance numbers, we don't have any dramatic shifts in the revenue related to those new products.

As it relates to the application side, Retail Action Manager tends to drive very strong revenue, and when we have our third client go live in the third quarter, I think we will see some noticeable increase in revenue, probably at lower margins than you would in scores, but we will see some revenue growth on that end.

And the Insurance Fraud Manager, to some degree, is tightly tied to our partner's ability to market and sell those products into their own customer base.

So, I would say, in terms of rank order, Retail Action Manager will see more immediate lift in revenue, and behind that will come the other products.

Just a quick question about the strategic default product.

Are you getting any sense from your customers that they might have a bit of a sense of urgency around strategic defaults?

It just feels like that's a pretty immediate problem they have.

It is a very immediate problem.

In fact, we've issued a press release, I think over the course of the last quarter, that quantified the number of potential homes that are under water and risk strategic default.

And the number is greater than 10 million -- I don't remember exactly what, but it's greater than 10 million mortgages out there.

We are working with over a handful of customers right now, validating the quality of the score and ensuring that proof of value meets the criteria that they are looking for.

We would anticipate, sometime in the future, that banks will begin to adopt this score.

But right now we are going through the validation cycle.

There are no further questions at this time.

Ladies and gentlemen, thank you for your participation.

This does conclude today's conference.

You may now disconnect.