Fair Isaac Corp (FICO) 2013 Q1 法說會逐字稿

Good afternoon and good evening.

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

At this time, I would like to welcome everyone to the Fair Isaac Corporation 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)

Thank you.

Mr. Steve Weber, you may begin your conference, sir.

Thank you.

Good afternoon, and thank you for joining FICO's first-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.

Today, we issued a press release that 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.

This call will also include statements regarding certain non-GAAP financial measures.

Please refer to the Company's earnings release and Regulation G schedule issued today for a reconciliation of these non-GAAP financial measures to the most comparable GAAP measure.

The earnings release and Regulation G schedule are available on the Investor Relations page of the Company's website at FICO.com, or on the SEC's website at SEC.gov.

A replay of this webcast will be available through March 1, 2013.

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

Thanks, Steve.

Today, we announced the results of our first quarter of fiscal 2013.

I will briefly discuss those results, and then discuss the progress we're making with the acquisitions we made in 2012, and how those acquisitions are helping us reach our strategic goals.

First, I'm happy to report that we had another good quarter.

Our revenue of $190 million was an increase of 12% over the same period last year, and 2% over the previous quarter.

We delivered $23 million of net income, and earnings of $0.65 for the quarter, which includes $0.06 per share of one-time charges taken in the quarter.

As it did last quarter, our revenues grew across our entire portfolio.

Our Applications business was up 13% versus the same quarter last year.

Scores was up 2% versus the same quarter last year, and Tools was up 24% versus the previous year.

These results included about one month of contributions from our acquisition of CR Software at the end of November.

Mike will provide more detail, but first I would like to talk about what CR Software brings us, and how, along with Entiera and Adeptra, it is helping us realize our strategic vision and accelerate our growth.

When I moved from the Board to the CEO position a year ago, I said this was a highly attractive business with bright prospects.

We have a strong brand, and are viewed broadly as a pioneer and leader in using analytics to help businesses make better decisions.

We also have a terrific set of products that are highly valued by our customers, and deeply embedded into their business processes.

However, the maturity of our products and the deep market penetration has also meant modest organic growth.

So, I also said that we would be looking at complementing our organic growth with some carefully considered M&A activity.

We have a talented team of people who are attuned to the opportunities presented by the rise of big data, and are excited about helping our customers understand and leverage its potential.

So, over the past year, we've made internal investments and acquisitions to expand our addressable market.

Specifically, we are pursuing three strategic initiatives.

First, we are diversifying into industries where we can bring our core analytic competencies to bear in the same ways we've done for decades in financial services.

We are paying particular attention to industries that are in the early stages of using analytics to generate value, and our extensive IT portfolio puts us several steps ahead of our competitors.

Our acquisitions of Entiera, Adeptra, and CR Software have helped us with this diversification strategy.

They bring customer bases in retail, telecom, government, healthcare and other industries, while at the same time, providing product extension cross-sell opportunities for our current customer base.

Our second area of focus is to provide innovative software-as-a-service offerings of our solutions.

Getting this right will provide us with a significant growth opportunity, again, by expanding our addressable market.

Many of our current solutions appeal to large institutions with the infrastructure and resources to implement them.

By offering SaaS-based products, we will be able to efficiently serve smaller organizations and those in emerging markets with lower cost, less complex implementations.

Both Adeptra and Entiera have boosted our SaaS capabilities, and CR Software features a technology platform that offers many of these benefits as well.

Our final area of focus is big data.

As I said, I'm convinced we're in a great position to capitalize on the opportunities inherent in big data, in particular because our unparalleled analytics expertise makes us uniquely qualified to extract value from the explosion of data that is becoming available.

In many ways, this focus goes hand-in-hand with the first two, as it is critical that we view this play across verticals and provide SaaS-based solutions to give customers agile and efficient delivery of analytics.

As an example of the results we're seeing from this strategic approach, I would like to talk for a moment about our latest acquisition, CR Software.

This company provides a natural complement to our existing collections and recovery product line.

CR's flagship product, Titanium, gives us the ability to offer analytics-based C&R solutions FICO's known for, to industries beyond banking, as well as to smaller businesses and institutions that couldn't otherwise afford the benefits of our debt manager product.

Titanium also accelerates the delivery of robust, differentiated capabilities that are increasingly important and valuable to our customers.

For example, the System of Record capability is a true extension of the user's host system, simplifying, automating and coordinating collections and recovery operations across the enterprise, leading to higher returns.

Integration, while only one month in, is going extremely well and meeting expectations.

We're happy with the enthusiastic feedback we are getting from our customers and prospects.

I'm also pleased to report that Adeptra continues to exceed expectations.

We had a great quarter with the product line, with $4.3 million of bookings, a nice pipeline of recurring ratable revenue that will come online as implementations are completed over the next several months.

Finally, we had another good quarter with Entiera, with more than $3 million of bookings this quarter, which further demonstrates marketplace acceptance of the benefits this SaaS-based solution can provide.

Before I turn the call over to Mike to provide more detail on the numbers, I would like to take a few moments to discuss our headquarters move to San Jose.

With worldwide demand for analytic solutions surging, it is critical that we expand our presence and visibility in Silicon Valley, the epicenter of software innovation, and home to a vast technology ecosystem that we will leverage to accelerate our growth.

By establishing our headquarters in San Jose, we will be in close proximity to many potential partners, industry leaders, as well as fast-rising start-ups in big data, cloud computing, mobility and social networking.

We will have ready access to the world's deepest pool of analytic, engineering and software development talent.

Our headquarters move to Silicon Valley is also a homecoming.

FICO was founded by Bill Fair and Earl Isaac in 1956 after they met and collaborated at the renowned Stanford Research Institute.

The innovative spirit of the valley has always been in our DNA, and we are just beginning to see the full expression of it.

So with that, I will now pass the call to Mike for further financial details.

Thanks, Will, and good afternoon, everyone.

Today, I will emphasize three points in my comments.

First, we had a solid first quarter, delivering $190 million of revenue, a 12% increase over the same period last year, and 2% over the prior quarter.

Second, for the first quarter, we delivered $23 million in net income, and $0.65 of EPS, increases over the prior quarter of 10% and 8%, respectively.

Finally, beginning this quarter, we will begin discussing additional non-GAAP metrics -- non-GAAP net income and non-GAAP earnings per share, in addition to the non-GAAP operating margin and free cash flow, which we've talked about in the past.

Non-GAAP net income, EPS, and operating margins all exclude the impact of amortization expense, share-based comp, and restructuring- and acquisition-related items.

These non-GAAP financial measures provide meaningful supplemental information regarding our performance and liquidity by excluding significant non-cash expenses and other items that may not be indicative of recurring business results.

They are used by management in operational decision making.

While our current guidance is on a GAAP basis, we expect to add non-GAAP guidance in a future quarter.

With that, let's talk about revenue.

Revenue for the quarter was $190 million, or 12% over the prior year.

Approximately 9% of the growth is related to our M&A activity, with the remaining 3% organic.

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

First, in Applications.

Revenue from Applications was $125 million, up 13% versus the same period last year, and up 4% from last quarter.

Much of the increase is due to the acquisition of Adeptra, which accounted for about $13 million of revenue this quarter.

The rest of the portfolio performed well, and compares favorably to the same period last year, when we had an unusually high amount of license revenue.

The second segment, Scoring.

Overall, Scores revenue was $43 million, an increase of 2% from the same quarter last year, and down 7% from the prior quarter.

This growth was driven by the B2B Scores sold to financial institutions.

We continue to see strength on the origination side, particularly driven from mortgage and auto financing.

The third segment is Tools.

Revenue in this segment was $22 million, up 24% versus the prior year, and up 13% versus the prior quarter.

The increase was driven primarily from several large sales of FICO Blaze Advisor, and the resale of some third-party products.

Looking at our revenue by region, this quarter's 76% of total revenue was derived from the Americas region.

Our EMEA region generated 17%, and the remaining 7% was from Asia-Pacific.

Recurring revenue, derived from transactional and maintenance sources for the quarter, represented 68% of total revenues versus 66% in the prior quarter.

Consulting and implementation revenues were 17% of total revenues versus 18% in the prior quarter, and license revenues were 15% of total revenue, the same as last quarter.

During the quarter, we recorded $28 million of license revenue, about the same as the prior quarter.

Now turning to bookings.

We generated $27 million of current-period revenue on bookings of $82 million, a 33% yield.

This compares with $31 million of revenue on bookings of $99 million, a 32% yield in the prior quarter.

The weighted average term for our bookings was 28 months, compared to 29 months in the prior quarter.

Of the $82 million in bookings, 23% relates to customer management, 20% to decision management tools, and 11% to fraud.

Bookings related to our Adeptra Mobility Product line totaled just over $4 million, or 5% of total bookings.

We had 10 booking deals in excess of $1 million, 5 of which exceeded $3 million.

Transactional and maintenance bookings were 33% of total bookings this quarter versus 40% in the prior quarter.

Professional service bookings were 34% this quarter, the same as the prior quarter.

And finally, license bookings were 33% in this quarter versus 26% in the prior quarter.

Turning to expenses, total operating expenses were $147 million this quarter, compared to $145 million in the prior quarter, or up $2 million.

The increase is primarily due to increased amortization and operating expenses related to our acquisitions.

We expect operating expenses to increase next quarter as we absorb a full quarter of expense from CR Software.

As you can see in our Reg G schedule, non-GAAP operating margin was 29% for the first quarter, the same as in the prior quarter.

While margins associated with the acquired product lines are initially lower than historical FICO margins, we expect operating leverage to improve as we fully realize expense synergies and grow these businesses.

GAAP net income this quarter was $23 million versus $21 million in the prior quarter, and non-GAAP net income was $32 million versus $30 million in the prior quarter.

Our effective tax rate was about 33.2% this quarter, and we expect the effective rate to be about 31% to 32% in fiscal-year '13, a reduction due to the reinstatement of the R&D tax credit.

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

The free cash flow for the quarter was $19 million, or 10% of revenue, compared to $17 million, or 9% of revenue in the prior quarter.

Free cash flow this quarter was impacted by the payout of our annual incentive awards and year-end commissions.

Moving to the balance sheet, we have $91 million in cash and marketable securities.

This is down $3 million from last quarter, mainly due to the acquisition of CR Software, which was partially offset by increases from operations.

Our total debt is $504 million, with a weighted average interest rate of 6%, and the cost of our debt is 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.

And our total fixed charge coverage ratio is at 4.4 times, well above the covenant level of 2.5 times.

We had no borrowings under our credit facility.

We did not repurchase any shares during the first quarter, as we delevered our balance sheet after recent acquisitions.

We still have $150 million remaining on the current Board authorization, and evaluate both share repurchases, and opportunities to acquire relevant technologies and products that advance our strategy or strengthen our portfolio and competitive position.

Moving to guidance, we are updating our annual guidance today to reflect our acquisition of CR Software.

Our previous guidance was for $740 million to $750 million of revenue, $100 million of GAAP net income, and GAAP EPS of $2.80.

Our new guidance is for revenue of $760 million to $770 million.

Even though we will have a full quarter of CR Software in quarter two, we expect the total quarter-two revenue to be lower than quarter one due to seasonality in other parts of the business.

While we expect CR Software to contribute $2 million of EBITDA this year, we are projecting it to be GAAP break-even.

Therefore, we are continuing to guide GAAP net income of $100 million and GAAP EPS of $2.80.

In addition, this guidance assumes full-year amortization expense of $13.5 million.

I'll now turn the call back to Steve for question-and-answer.

Thanks, Mike.

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

Operator, please open the lines.

(Operator Instructions)

We'll pause for just a moment to compile the Q&A roster.

Manav Patnaik.

The first question is, maybe it's housekeeping, but you said $13 million was the contribution from Adeptra.

What was the contribution from the other two acquisitions?

The other two acquisitions, Manav, contribute just about $2.5 million worth of revenue.

Would that be all in the Applications segment?

Yes, so all of the M&A work we have done so far is rolling up in the Applications line.

All right, fine.

Then just in terms of the big picture strategy that, Will, you laid out.

Obviously, you said these three acquisitions obviously helped you build in that.

I was wondering, looking over the next 12 to 24 months, how would you break out the opportunity between making more such acquisitions which is organically investing and internally trying to get to some of those targets?

Well, we have a plan with a substantial amount of internal organic investment and that happens with or without additional M&A activity.

We are committed to leveraging our resources internally to advance our strategy.

The M&A piece, I would say, is a little bit more opportunistic.

We try to be systematic about evaluating things out there, but as you know, it has everything to do with the prices at which these things are available and whether a deal can be had.

So I would say that the part that's certain in working against our strategy is the organic part, and the part that is opportunistic is the M&A part.

Okay, and Mike, could you just repeat -- I think you had given guidance on the tax rate.

I missed that.

What was the range?

31% to 32%, based upon the reinstatement of the R&D credit which we will be able to claim here in quarter two.

Carter Malloy.

This is actually Ben on for Carter.

First, in looking at Adeptra, we expected it to be accretive this quarter.

Was it accretive as expected and can you break out how much you have in guidance from Adeptra this year?

Yes, when we guide -- let's start with your first question.

It was accretive this quarter, both on a GAAP and on a non-GAAP basis.

The EBITDA margin was roughly in the low teens and it was roughly breakeven, slightly positive on a GAAP basis.

As a reminder, this was the first full quarter that we have had Adeptra rolling into our numbers.

For the year, we gave guidance of roughly around $55 million for the Adeptra business and we are tracking to either meet or beat that.

Okay, and can you help us understand how much of overall guidance is from acquisitions outside of Adeptra, obviously, and how much of that is coming from organic growth?

Yes, we guided about 2% to 3% of organic growth embedded in our numbers, with the remainder coming from M&A.

We basically guided on assumption that assumed that our Scoring business would continue to run flat with a little bit greater lift on the software side, similar to last year.

Okay, and then lastly on the Blaze product, how much of that upside came from one-time license sales?

A lot of the Blaze deals are either perpetual or term license, and so most of the deals, the bigger deals this quarter were perpetual licenses.

The list, therefore, would be a result of the two big transactions that we did this quarter in addition to a standard book of business we do.

(Operator Instructions)

There are currently no questions in queue.

I will turn the call back over to the presenters.

Thank you very much.

This concludes our call.

Thank you all for joining.

This concludes today's conference call.

You may now disconnect.