Fair Isaac Corp (FICO) 2013 Q4 法說會逐字稿

Good afternoon ladies and gentlemen.

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

At this time, I would like to welcome everyone to the Fair Isaac Corporation fourth-quarter earnings call.

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

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions).

I would now like to turn the call over to Steve Weber.

You may begin.

Thank you, Ryan.

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 on our CEO Will Lansing and our CFO, Mike Pung.

Today we issued a press release that describes financial release compared to the prior year.

On this call 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 each of these non-GAAP financial measures to the most comparable GAAP measures.

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 November 29, 2013.

Now I will turn the call over to Will Lansing.

Thanks Steve.

Today we announce results for fourth quarter of fiscal 2013.

I'll briefly recap those results and summarize our entire fiscal year of 2013, then I'll discuss our outlook for 2014.

In our fourth quarter call we reported revenue of $190 million, an increase of 2% over the same period last year.

On a GAAP basis, we delivered $29 million of net income and earnings $0.79 per share for the quarter, up 38% and 32%, respectively, from the same period last year.

We delivered $35 million of non-GAAP net income and non-GAAP EPS of $0.98 per share, increases of 17% from the same period last year.

Recurring revenues throughout our business were strong again this quarter, up 4% over the same quarter last year.

Services revenue were 8% higher than last year.

We were disappointed this quarter with license sales which were 12% lower than the same period last year.

Our customers continue to face uncertainties that have lengthened purchasing decisions for large license transactions.

We had several very large deals that, had we closed them because September 30, would have yielded a different result for the quarter.

While these deals are still in play we have learned that in today's environment it is difficult to forecast the timing of large deals approvals at North American banks.

Mike will provide more detail on the numbers, but first I'd like to summarize what we accomplished in fiscal 2013 particularly since our Q4 results do not tell the whole story.

A year ago I said we viewed fiscal 2013 as a year in which we would continue to invest in long-term growth initiatives.

First we would diversify beyond our strong foundation in financial services where analytics have generated great value.

Second, we would expand our SaaS offerings with cloud enabled FICO applications, analytics and solutions.

Third, we would help our clients leverage big data to make better decisions and change the way they do business.

We have made great strides toward these goals in the past year.

We have successfully integrated the IP in talent we gained when we acquired Adeptra.

We closed the year with several large wins as a direct result of our new mobile customer engagement capability.

We acquired and integrated CR Software giving our debt manager product the functionality it needed to regain its position as the most advanced offering in a growing market, and at the same time giving us firm footing in several new industries.

Both of these acquisitions boosted our revenue, accounting for much of our growth this year and also our bookings.

And they helped us diversify beyond financial services, particularly in government and insurance bookings this year.

We will see the benefits of these investments in the months and years ahead.

We have also worked hard internally on innovation.

We stepped our development efforts in the area of enterprise fraud prevention, which is a growing problem for our customers and we expect will be a significant growth driver for the business.

We focused significant resources on the specific market problems of application fraud, online fraud, and merchant monitoring fraud.

In addition, we continue to deliver solid performance from our scores franchise.

Our B2C business grew 16% from prior year as we introduced new product offerings.

And perhaps most significantly this year we began the rollout of the FICO Analytic Cloud, a game-changing offering enabling businesses of any size to access the industry's most powerful big-data analytics and decision management technology.

The cloud will deliver a wide range of benefits, one of which is cutting analytic application development time from months to days.

It is an exciting offering and will have more specific announcements on this within a matter of weeks.

But 2013 has not been without bumps in the road.

We're still heavily concentrated in the financial services industry and therefore subject to the uncertainties of that industry as it recovers and contends with new levels of regulation.

We continue to see fluctuations in our revenues that are linked to the signing of large license deals.

As we move towards more subscription-based agreements with our customers we expect license volatility to diminish as it represents a smaller portion of our total revenues.

But in the meantime we are mindful of the realities our customers are facing and of the short-term effects on our own revenues.

That said, we remain very confident about future.

When I became CEO nearly two years ago, I said what makes FICO different from other companies as we have great technology with a proven track record and in many ways the market for that technology is just getting warmed up.

FICO Analytic products transformed entire industries.

In the era of big-data there are many industries left to transform.

I'll talk more about what I see for us in 2014, but first I'll turn the call over to Mike for further financial details.

Thanks Will, and good afternoon, everyone.

Today I will emphasize three points in my prepared comments.

First, our revenue this quarter was $190 million, an increase from last year that was primarily driven by our acquisitions.

Second we delivered $29 million of GAAP net income this quarter and $90 million for the year.

We delivered $35 million of non-GAAP net income and $122 million for the year.

Free cash flow was $32 million for the quarter and $109 million for the full-year.

Finally, we repurchased about $35 million of stock this quarter for a total of $85 million for the full-year and ended the quarter with $83 million of cash and improved leverage from last year.

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

Starting with Applications, revenue was $119 million, down 1% versus the same period last year, but up 4% from last quarter.

Much of the increase from the prior year was due to the acquisitions of Adeptra and CR Software, which accounted for about $23 million of revenue this quarter.

The rest of the portfolio declined over the same period last year primarily due to decreases in our marketing solutions business where we experienced some customer attrition this year, and in customer management which had some very large license sales in the prior year.

For the year applications revenue was $476 million, up 12% from the prior year.

In the second segment, Tools, revenue was $25 million, up 29% versus the prior year and 16% versus the prior quarter.

For the year, Tools revenue was $87 million, up 14% from last year.

This segment has been a particular area of strength for us and this is the second straight year we have driven double-digit growth.

Third in our Score segment, revenue was $46 million, down 1% from the same period last year when we had a large one-time project and down 2% from last quarter.

On the B2C side we were up 27% versus the same period a year ago and 3% versus last quarter.

On the B2B side revenues were down 8% from the same quarter last year, with the decline mainly due to the large project.

B2B revenue was down 4% compared to the last quarter.

For the year Scores revenue was $181 million, up 3% from last year.

Looking at our revenue by region, this quarter cost 71% of total revenue was derived from our Americas region, our EMEA region generated 20%, and the remaining 9% was from Asia-Pacific.

Recurring revenue, which is derived from transactional and maintenance sources for the quarter represented 68% of total revenues, consulting and implementation revenues were 19% of total, and license revenues were 13% of total.

During the quarter we recorded $25 million of license revenue versus $22 million in the prior quarter, with the increase driven by the Tools business.

Turning now to bookings, we generated $26 million of current-period revenue on bookings of $91 million, a 29% yield.

The weighted-average term for our bookings was 22 months this quarter.

For the year we generated $328 million of bookings, up 12% from the previous year.

Of the $91 million in bookings this quarter 16% related to collections and recovery, 14% to banking fraud solutions and 12% to customer management solutions.

We had 18 booking deals in excess of a million dollars, three of which exceeded $3 million.

Transactional and maintenance bookings were 40% of total this quarter.

Services bookings were 41% this quarter.

Finally license bookings were19% of the total.

Turning now to expenses, operating expenses totaled $140 million this quarter, compared to $149 million in the prior quarter, or down $9 million.

The decline is primarily related to a decrease in performance based incentives.

We expect operating expenses to increase modestly over the next several quarters.

As you can see in our Reg-G schedule, non-GAAP operating margin was 32% for the fourth quarter versus 25% in the prior quarter.

Non-GAAP operating margin was 28% for the year compared to 38% last year.

The initial margins associated with the acquired product lines are lower than historical FICO margins.

However, as we expected, we're beginning to see those margins improve as we fully realized expense synergies and grow these businesses.

GAAP net income this quarter was $29 million versus $20 million in the prior quarter.

Non-GAAP net income was $35 million versus $29 million in the prior quarter.

The effective tax rate was about 33% this quarter, up slightly due to the geographical mix of profits.

We expect the effective tax rate to be about 31% for the full-year 2014.

Free cash flow for the quarter was $32 million or 17% of revenue, compared to $27 million or 15% of revenue in the prior quarter.

For the year our free cash flow was $109 million, compared with $101 million in the prior year.

Moving onto the balance sheet, we had $83 million in cash and marketable securities.

This is down $10 million from last quarter due to share repurchases and debt retirement and offset by increases in the cash we generated from our operations.

Our total debt is at $470 million with a weighted-average interest rate of 5.9%.

We now have $15 million balance on our $200 million revolving credit facility.

The ratio of our total of net debt to adjusted EBITDA is two times, below the covenant level of three times, and our total fixed charge coverage ratio is at 4.7 times, well above the covenant level of 2.5 times.

During the quarter, we returned a $35 million in access cash to our investors through our stock repurchase plan.

During October, we repurchased an additional $15 million, for a total of about 1 million shares at an average price of $53.35.

We still have about $50 million remaining on the current board authorization and continue to view share repurchases as an attractive use of cash.

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

With that, I'll turn the call back to Will for his thoughts on fiscal 2014.

Thanks Mike.

As I said earlier, I'm pleased with where we positioned ourselves for the future.

We have a solid install base with good recurring revenue.

Our scores business continues to perform very well in a slow growth economy.

Our acquisitions are fully integrated and performing well.

We are rolling out innovations, including cloud enabled applications and we believe we our highly competitive and well-suited to meeting the needs of our customers.

At the same time we recognize the uncertainties in the markets we serve, particularly in financial services sector.

With all this in mind we're opting to be caution to the guidance were offering for fiscal 2014.

We expect revenue to be between $763 million and $773 million, an increase of 3% to 4% versus fiscal 2013.

We expect net income to be $91 million to $94 million, up 1% to 4% over fiscal 2013, and non-GAAP net income to be $125 million to $128 million, up 3% to 5% over fiscal 2013.

Finally we expect GAAP earnings per share of $2.50 to $2.60 up 1% to 5% over fiscal 2013 and non-GAAP EPS of $3.46 to $3.56.

up 3% to 6% over fiscal 2013.

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

Thanks Will.

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

Ryan, please open the line.

(Operator Instructions)

Your first question comes from the line of Manav Patnaik from Barclays.

Thank you.

Good evening guys.

Could you give us the acquisition contribution on the top line this quarter?

And then how much is incorporated into the 2014 guidance?

I know it should be minimal, but just wanted to ask?

Yes, Manav, this is Mike, so in the fourth quarter we had about $22.5 million of revenue coming from CR Software and Adeptra that's in the fiscal 2013 numbers.

Next year, we're not breaking out the numbers for either of those two business lines, but we're expecting to grow them at about the same pace we grew them this year, which is double-digit for CR Software and around 20% some for Adeptra.

Okay.

Maybe if you can elaborate a little bit more.

Will, you mentioned around your guidance incorporating some of the prudency in the context of the market.

How do you realistically see that shaping up?

Maybe how much of a discount you guys have taken for that?

Well, I think we are being prudent because we just came off a quarter where we did not meet expectations in terms of our guidance.

I think it is natural for us to be prudent under those circumstances.

We are feeling really good about our business and about the appetite of bank customers and non-financial institution customers for the analytics products that we have.

We feel good about what we think we will be increasing up-tick for our applications when they are offered on a SaaS basis as well as on premise versions.

We feel good about the product portfolio and where we're going.

I think we have the uncertainty in the marketplace that comes with the financial services industry.

Your guess is as good as anyone's guess as to where that takes us.

I think things are getting better, but we are being cautious.

Okay.

And then the last one for me.

In terms of the M&A pipeline, you guys weren't as active this quarter in the buyback front, but curious on M&A pipeline and your thoughts around it?

You obviously did quite a bit the last 12 months, but slowed down recently.

Just wanted to get your views there.

Sure.

We think about using our shareholders cash for multiple things.

We think about it first and foremost for stock buyback, which is a wonderful return to the shareholders and has the virtue of tremendous certainty.

It competes -- that share buyback competes with M&A opportunity.

We have a lot of M&A opportunity.

We evaluate acquisition targets with a very high bar because we are pretty bullish on our own prospects.

It really takes very compelling story for us to be interested in acquiring another business.

And so, our pipeline is full, there is lots of things to evaluate and consider, and it should not surprise anyone if in the course of 2014 we do additional acquisitions.

At the same time one could easily imagine us going through 2014 and not buying a single company.

I think it's all circumstances dependent and we continue to evaluate these acquisitions against a very high bar.

We also have the benefit of a tremendously strong product development organization at FICO.

We are often faced with situations where we see interesting acquisitions that have an immediate revenue benefit, sometimes are accretive relatively quickly, but they are costly.

We have set those against building it ourselves and we have tremendous bench strength in terms of building our own product and we did a lot of it this year.

When you look at FICO Analytic cloud and decision management platform, some of the things that we've announced, some of the things that are coming into the market right now, these are things we chose to build rather than buy.

They do compete for P&L dollars.

We're comfortable with that.

We try to balance it.

There's a point where we -- we invest to a point and no further, but we're making fairly significant organic investments in the business right now.

A large part of that is because we can build so much more cost effectively than buy.

That's a very long way of saying we have lots of acquisition opportunity, but held to a very high bar.

All right.

Thanks guys.

Your next question comes from the line of Matthew Galinko Sidoti & Company.

Your line is open.

Thank you for taking my question.

I guess first if you could expand a little bit, I know you mentioned you expect OpEx to come up a little bit in the coming quarters.

Can you highlight some areas of focus there, headcounts can be coming up, if it's going to be focused mostly on R&D and any specific products we should be focusing on?

We are expecting our OpEx on a run-rate basis to come up modestly from quarter four.

Quarter four included or actually excluded some of the performance based incentives that had been in our run-rate up for the first nine months.

It was a light quarter simply because our bonus and commission accruals are lighter than what they had been in previous quarters.

We expect that to get reset in the first of this year.

Headcount is remaining fairly flat on a quarter-to-quarter basis.

In fact most of the headcount increase over last year came from the acquisitions that we had done.

I would expect, Matt, to see a little bit of increase across each of the three line items on our P&L for commissions and incentives, and probably a little bit more materials costs in our cost of revenue as we see further growth of the Adepter product and that comes along with a little higher cost to it.

Great, thanks.

And then one other one.

On B2C obviously very strong quarter, I'm just curious how much of that was a result of bringing Experian in and how much of that was the business growing on its own?

It was a combination.

I would say it was a little bit more of our ability to sell the three-in-one product then other factors.

There were a lot of other factors.

That businesses performing very nicely today.

There is market appetite.

Our marketing efforts have gotten a lot stronger.

Our product continues to improve every day and it's generally becoming a much more competitive offering, so I would say it is a combination.

Great.

Thanks.

(Operator Instructions)

Your next question comes from Brent Horn from Morningstar.

Your line is open.

I was wondering in the scores area, I was wondering if you could give me some color on how sensitive that area potentially is to residual mortgage volumes?

Was the drop-off in refi's a driver at all in the fourth quarter and do you see that as any kind of headwind going into the next year?

Yes, Brett thanks for the question.

Most of our scores businesses is tied to the volumes associated with credit cards.

Though a very important component of it are mortgages, including refinancing, as well is the auto industry.

Throughout most of the year, we have seen strength continue on the mortgage side, though it has certainly tapered off from where it was earlier on in the year.

Auto seems to continue to be performing, actually quite strong, though, it is a smaller part of our B2B business.

Credit cards was generally pretty consistent and flat with last year, I'm sorry last quarter which had been in a growth area over the first three quarters of the year.

Mortgages is an important piece, it has dropped maybe slightly, it has been offset by auto.

In overall the net of it is our scores business is performing at a pretty high level.

Okay, good.

Thank you.

You are welcome.

(Operator Instructions)

We have no further questions on the line.

All right.

Thank you.

Thank you all for joining and we will talk to you again next quarter.

This concludes today's conference call.

You may now disconnect.