Fair Isaac Corp (FICO) 2012 Q4 法說會逐字稿

Good evening.

My name is Latisha and I would like to welcome everyone to the Fair Isaac Corporation fourth quarter earnings call.

All lines have been placed on mute to prevent any background noise.

(Operator Instructions)

I would now like to turn the call over to today's host, Mr. Steve Weber.

Mr. Weber, you may begin your conference.

Thank you, Latisha.

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

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

Before we begin today, we'd like to offer our best wishes to those impacted by the recent hurricane.

We know many of our employees, customers and partners have been directly impacted and our thoughts are with you.

Today we posted, on the investor relations portion of the FICO website, a copy of our 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 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 December 1, 2012.

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

Thanks, Steve.

Today we announced the results for our fourth quarter of fiscal 2012.

I'll briefly summarize those results and then discuss some of the exciting things we've been working on and what they mean for the growth of the business.

I'm pleased to report we had a very strong finish to our fiscal year.

Our revenue of $186 million was an increase of 16% over both the same period last year and the previous quarter.

For the full fiscal year revenues were $676 million, up 9% from the previous year.

We delivered $21 million of net income and earnings of $0.60 for the quarter, which include $0.09 per share of one time charges taken in the quarter and $92 million of net income and $2.55 of EPS for the year.

We saw revenue growth throughout our portfolio and across all regions, both in the fourth quarter and for the fiscal year in total.

Our Applications business was up 23% versus the same quarter last year and full year revenue was up 11% over the previous year.

Tools were up 9% versus the same quarter last year and full revenue was up 12% over the previous year.

Scores also had a good year with both the quarter and full year up 4% versus the previous year.

Geographically, our America's region was up 13% this quarter versus prior year quarter and 8% for the full year.

APAC was up 12% this quarter versus the prior year and 9% for the full year, and we're very pleased with our EMEA region where this quarter's revenues were 33% higher than the same quarter last year and the full year revenues were 13% higher this year than last.

These numbers are a testament not only to our strong execution, but also the resiliency of our products even in unsure economic times.

I would add these results included about one month of contributions from our acquisition of Adeptra during the quarter.

Mike will provide more details as he looks at the numbers, but I'd like to first talk about how well that integration and how we are building a strong growth engine at FICO.

I'm delighted with the progress that's already been made in bringing Adeptra and FICO together.

This has been an easy integration as both cultures and technologies have come together well.

We are putting several members of our Adeptra senior management team into key roles at FICO where they are helping not only with the integration, but adding valuable leadership.

And I'm hearing great things from the field that reinforce the beliefs we've had when we were evaluating the transaction.

At the recent annual sales meeting there was a genuine buzz about the pipeline of opportunities for Adeptra.

I heard again and again how customers are excited with what many view as a natural existing to our existing product set, and how our sales people have another best in class product available to sell immediately.

Both the Adeptra and Entiera acquisitions help us in two strategically important areas.

First, we believe Adeptra gives us valuable opportunities to diversify from our base in financial services by taking our core competencies to other vertical industries.

Entiera strengthens our position in the retail place and Adeptra, in addition to its application in financial services, helps us in telecom, retail and other industries looking to improve customer engagement.

These are industries where analytics-based products can generate great value and we aim to build our business in them as a complement to our strong financial services foundation.

Second, these two acquisitions both provide extensions to our line of SaaS-enabled offerings.

As we've said, we're committed to providing innovative Software-as-a-Service solutions to our customers and both Entiera and Adeptra are helping us immediately to expand those offerings.

Before I turn things over to Mike, I'd like to highlight a deal we signed this quarter with People's Bank of China, the Central Bank of the People's Republic of China, which controls monetary policy and regulates financial institutions in mainland China.

Our Scores division is working with PBOC to help it develop an industry standard score and will participate in the validations of the score across major banks in China going forward.

This project is a start of new initiatives in China for using analytics to manage consumer credit risk on a broader and more standardized basis.

The relationship will allow PBOC to lever FICO's industry leading analytics capabilities for credit risk management, understand and incorporate the national regulatory standards associated with credit risk into a standardized score, and scale the score into China's banks as a common credit risk scoring standard.

China's score division is also helping PBOC to understand and manage the privacy implications associated with consumer information, as well as helping to broaden the foundational structures of consumer credit education across the China financial services marketplace.

FICO is the only foreign company working with PBOC on these strategic initiatives.

These are exciting times at FICO.

As I've said before, we're in a unique position to extract value from data and ultimately help our customers make smarter business decisions.

As we look ahead, we're excited about the future.

With the new growth opportunities we're pursuing, both through internal investments and through the complementary acquisitions we've made, we're building our business for sustainable growth.

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

Thanks, Will, and good afternoon, everyone.

Today I'll emphasize three points in my prepared comments.

First, we had a solid fourth quarter, delivering $186 million of revenue, a 16% increase over the same period last year.

For the year we delivered $676 million, an increase of 9% over fiscal '11.

More importantly, as Will said, we saw growth across all product portfolio and throughout all geographies.

We have set the bar extremely high for fiscal 2013.

Second, for the fiscal year we delivered $92 million in net income and $2.55 of GAAP earnings per share, increases over the prior year of 29% and 43% respectively.

Finally, our adjusted operating margins increased 400 basis points to 30% from the prior year.

We had a number of non-recurring expenses that impacted our margins this quarter and I'll walk through those, their total impact and what you should expect going forward.

Now to speak more to revenue, revenue for the quarter was $186 million, a $26 million increase over the prior year, and a $26 million increase over the prior quarter.

Full year revenue of $676 million was an increase of $57 million over last year.

I'll break down the revenue into our three operating segments.

The first segment, decision management applications, revenue from these applications was $120 million, up 22% from last quarter and up 23% versus the same period last year.

While we saw strength across most of the portfolio, we achieved our particularly strong results in our TRIAD and Falcon products driven by software license sales and related implementation services.

In addition, we recorded $4 million of revenue related to our acquisition of Adeptra, which closed in early September.

The second segment is Scores.

Overall Scores revenue was $47 million, an increase of 4% from the same quarter last year and up 11% from the prior quarter.

This increase is driven by the B2B scores sold to financial institutions.

The third segment is decision management tools.

Revenue in this segment was $19 million, up 9% versus the prior year and down 4% versus the prior quarter.

The increase from last year was driven primarily by several large sales of FICO Blaze Advisor and our optimization products.

Looking at our revenue by region, this quarter's 73% of total revenue was derived from our Americas region.

Our EMEA region generated 20% and the remaining 7% was from Asia-Pacific.

Recurring revenue, derived from transactional and maintenance sources for the quarter, represented 66% of total revenues versus 71% in the prior quarter.

Consulting and implementation revenues were 18% of total revenues versus 20% in the prior quarter and license revenues were 15% of total revenue, as compared to 9% in the prior quarter.

During this quarter we recorded $29 million of license revenue, compared to $15 million in the last quarter.

This increase was driven by six large deals we signed in the quarter.

As we've stated in the past, the timing of these large transactions is often difficult to predict.

In this quarter we closed more sizable transactions than any quarter in recent history.

Now turning to bookings, we generated $31 million of current period revenue on bookings of $99 million, a 32% yield.

This compares with $17 million of revenue on bookings of $58 million, a 29% yield in the prior quarter.

The weighted average term for our bookings was 29 months this quarter, compared to 16 months last quarter.

Of the $99 million in bookings, 28% related to fraud solutions, 21% to customer management solutions and 15% was related to decision management tools.

We had 19 booking deals in excess of $1 million, 7 of which exceeded $3 million.

Transactional and maintenance bookings were 40% of total bookings this quarter versus 28% in the prior quarter.

Professional services bookings were 34% this quarter versus 52% in the prior quarter and finally, licensed bookings were 26% in this quarter versus 20% in the prior quarter.

Now turning to expenses, operating expenses totaled $145 million this quarter, compared to $123 million in the prior quarter, up $22 million.

Let me take you through this increase in depth.

First the acquisition of Adeptra, which was completed in early September, added about $4.5 million of costs broken down between one month of ongoing operating expenses of $4 million and amortization expense of $500,000.

We expect our total amortization expense to be about $12 million for the full fiscal year 2013.

Second, we recorded restructuring and acquisition related expenses of $5 million during the quarter.

These one time items relate to severance expense associated with realigning our resources, mainly within the product and technology organization, and the costs related to the acquisition of Adeptra.

Third, we incurred incremental costs of $8 million related to the revenue growth during the quarter, spread evenly between third-party software costs, billable third-party consultants and additional incentives we accrued for sales commissions in our general bonus pool.

Finally, the remaining $4.5 million is broken down between additional depreciation on our data center, which was recently put into service, and headcount related to costs associated with additional investments we are making to grow the business.

Going forward, we expect operating costs in quarter one to be slightly lower than quarter four as we will take on the full quarter costs associated with the acquisition of Adeptra.

As you can see in our Reg G schedule, non-GAAP operating margin before amortization, stock-based compensation and restructuring and acquisition activities, was 29% for the fourth quarter and 30% for the entire fiscal year, in line with our guidance and up from the 26% we reported in fiscal year '11.

GAAP net income this quarter was $21 million and we delivered $92 million for the full fiscal year.

The effective tax rate was about 35% this quarter and about 33% for the full year.

We expect the rate to be about 31% to 32% next year depending on whether the R&D tax credit is reinstated.

Free cash flow, which we define as cash flow from operations less capital expenditures and dividends paid, was $17 million, or 9% of revenue, compared to $16 million, or 10% of revenue in the prior quarter.

Free cash flow this quarter was impacted by the timing of receipts and payments, as well as the payment of Adeptra accounts payable around the time the acquisition closed.

Moving on to the balance sheet, we have $94 million of cash and marketable securities on the balance sheet.

This is down from $151 million last quarter mainly due to the acquisition of Adeptra.

Our total debt is $504 million with a weighted average interest rate of 6.1%, and the cost of our debt remains fairly fixed at about $8 million per quarter.

The ratio of our total net debt to adjusted EBITDA is 2.2 times, below the covenant level of 3 times.

Our total fixed charge coverage ratio is at 4.5 times, well above the covenant level of 2.5 times.

We had no borrowing under our line of credit facility.

In our fiscal year 2012 we repurchased 5.2 million shares of our stock at a total cost of $184 million, or about $35.53 per share.

We did not repurchase any shares during our fourth quarter as we delevered our balance sheet after the acquisition of Adeptra.

Since the recession began in September of 2008, we have reduced our share count from 49 million shares down to 35 million shares, or a reduction of 28%.

While we still have $150 million remaining on our current board authorization, we continue to evaluate and consider opportunities to acquire relevant technologies and products that advance our strategy or strengthen our portfolio and competitive position.

I'll turn the call back now to Will to provide a view into fiscal 2013.

Let me take a few minutes to discuss where we've been and where we're headed.

Over the past two years we focused on growing our software businesses organically while managing our expenses tightly, driving significantly improved operating results.

We've also seen improvement in our Scores franchise, in step with the modestly improving US economy.

Our free cash flow was invested wisely in an aggressive share repurchase plan while we looked for opportunities that made good strategic sense.

During this past year we identified opportunities to grow and diversify our business and we are investing some of the margin expansion toward those areas where we see the highest potential.

We made two important acquisitions that will drive revenue growth in fiscal 2013 and additional marginal improvement as we deliver the expected synergies.

In short, we view fiscal 2013 as a year in which we will continue to put into place long term growth initiatives.

We're focused especially in three areas.

First, we're diversifying beyond our strong foundation of financial services into other industries where analytics can generate great value.

Second, we've acquired SaaS offerings, while we're cloud enabling FICO applications, analytics and decisions.

Together, these solve important customer problems in ways that are relatively quick, inexpensive and painless for our clients to implement, and easy for to us sell.

And third, we're advising and serving our clients as they grapple with the implications of big data, the vast new streams of information that are changing the way business is done around the world.

Finally, we're providing guidance today for what we expect in our fiscal year 2013.

We expect revenues to be in the $740 million to $750 million range, an increase of 9% to 11% versus fiscal '12.

Of that, we expect the revenue from Adeptra products to be $55 million to $58 million.

We expect net income to be at least $100 million on a GAAP basis, an increase of about 9%.

Finally, we expect GAAP earnings per share of $2.80, an increase of 10%.

This is based on our current diluted share count of around 36 million shares outstanding.

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

Thanks, Will.

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

Latisha, please open the lines.

(Operator Instructions)

Carter Malloy, Stephens, Inc.

Hi, guys, congratulations on the quarter, by the way.

Can you remind us what your expectations are for Adeptra's contribution to the model for 2013 in terms of revenue and expenses?

Yes, Carter.

So this is Mike.

We're expecting Adeptra revenues to be on a full year basis next year around $55 million to $58 million.

We expect it to be GAAP accretive of around $0.02 to $0.03 per quarter, so about $0.09 to $0.10 for the full year.

That includes about $6 million of incremental amortization expense related to the intangible assets.

Got it.

So then externally of that, then, where are the other incremental investments coming next year in terms of your P&L?

So we're planning to -- and we have begun to put some dollars into our R&D function, in particular adding some features and functionalities around our business on the mobility side, which is an extension of what we're doing with Adeptra.

We're also planning to invest and we have started to invest in some areas around our fraud products by expanding the capabilities within that offering set.

Okay.

Thanks so much for the color.

Ty Lilja, Feltl & Company.

Hi, guys, thanks for taking my questions, nice looking quarter.

I was wondering if perhaps you could have some color on the impact to hire mortgage origination during the quarter and how that affected your various lines of business, was wondering if that was part of the reason for the bump in the B2B scores?

Yes, Ty, great question.

So we did see a nice increase on the origination side of our scoring business, similar to what we saw last quarter.

Most of the revenue growth, frankly, on the score side were driven from additional originations.

Much of it was tied on the mortgage side and so that continues to be a big strength for the Scores business.

And did you give that any kind of lift in origination solutions revenue and applications?

A slight lift, most of that frankly is driven from new license sales, but we saw modest increase on the origination side on a sequential basis.

Okay.

And also wanted to ask, I think your press release referred to the pre-configured decision management solutions.

I think you guys were kind of talking about some versions of those solutions aimed at smaller financial institutions.

Where are you on that?

We are -- we're very focused on taking our products and offerings and making them easier to implement and offering them on a SaaS basis.

So we're working our way through SaaS, enabling our product line.

All right.

And finally, I was just wondering if you could provide an update on what happened in your marketing solutions business this quarter.

Yes.

Marketing solutions revenue was up.

I can give you a percentage.

It was up in a mid single digit as we rolled on our new customer for the first full quarter, the third large retail action manager deal we did.

Let me look and find the exact number.

It's up roughly about 7% on a year-over-year basis, 4% sequentially.

All right.

Thanks.

I'll get back in queue.

(Operator Instructions)

And there are no further questions at this time.

Do you have any closing remarks?

Thank you.

This concludes today's call.

Thank you all for joining.

Ladies and gentlemen, you may now disconnect.