Fair Isaac Corp (FICO) 2014 Q1 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Fair Isaac Corporation quarterly earnings conference call.

(Operator Instructions)

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

You may begin.

Thank you, Jeremy.

Good morning, and thank you for joining FICO's first-quarter earnings call.

I am Steve Weber, Vice President of Investor Relations.

I am joined today by our CEO, Will Lancing; and our CFO, Mike Pung.

Yesterday we issued a press release that described financial results compared to the prior year.

On this call, Management will also discuss results in comparison to the prior quarter in order to facilitate an 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 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 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 able through February 23, 2014.

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

Thanks, Steve.

First, I'd like to thank everyone for joining us this morning.

We're holding our call this morning due to travel schedules.

We do expect to conduct our call next quarter at our typical time of 5 PM Eastern.

Today we announce the results for our first quarter of fiscal 2014.

I'll briefly recap those results and then talk about some of the exciting things we have been working on and how we are measuring our progress.

In our first quarter, we reported revenue of $184 million, a decrease of 3% over the same period last year.

On a GAAP basis, we delivered $17 million of net income and earnings of $0.47 per share for the quarter versus $23 million and $0.66 per share from the same period last year.

We delivered $26 million of non-GAAP income, and non-GAAP EPS of $0.73 per share, decreases of 18% and 17% respectively from the same period last year.

These results are in line with our expectations.

As we had an exceptionally strong comparison with our fiscal 2013 first quarter.

Mike will provide more detail on the numbers.

First, I would like to update you on the progress we are making in a number of areas.

We made significant progress with our cloud initiatives in the last quarter.

The first part of our cloud efforts has been focused on making our applications available on a SaaS basis.

We now have new software-to-service versions of our key products.

This quarter we sold our first two Origination Manager SaaS deals and a large Debt Manager SaaS deal.

While SaaS deals don't generate up revenue in the quarter they are signed, they add recurring revenue to future periods.

Importantly, these deals did not cannibalize our legacy products.

They were new customers that required SaaS delivery, providing early validation of our strategy of growth by exploiting new delivery channels.

Mobility has been an important component of our SaaS applications and represents a growth opportunity beyond our core applications.

Our Mobility offerings, built around our Adeptra acquisition, have expanded the utility of on-premise and new cloud offerings.

We have deployed new SaaS delivery infrastructure domestically and internationally and we'll add to our infrastructure as demanded by the market.

The second thrust in our cloud efforts is to make our analytics IP available on a platform-as-a-service.

Where traditionally our analytic tools were available only for on-premise use, today we can offer the most sophisticated analytic tools in a cloud environment.

We call this the Decision Management platform, which includes, among other things, components for developing analytic models, optimization algorithms and decision services.

We also sold our first Retail Fraud Manager solution.

Retail Fraud Manager is a new FICO application that we developed in house.

It's targeted at retailers and key outsourcers for the retail industry protecting them from the costly problems of returns fraud, waste and abuse.

I am also happy to report on several developments in our Scores business.

First, we announced in November a renewed multi-year agreement with Equifax, which will continue reselling FICO scores and provide FICO access to its consumer data, so we can develop and market new analytics.

As part of the new agreement, FICO will now be able to sell FICO scores directly to lenders and third-party resellers.

Consumers will continue to have access to their FICO score based on Equifax credit data at myFICO.com and on Equifax's consumer site.

FICO scores based on Equifax credit data will now also be made available to consumers through third parties.

We also introduced our FICO Open Access program, which allows any lender to share the FICO score with their consumers at no additional score fee, the same FICO scores used by participating banks to manage their accounts.

In addition to their FICO score, the standard measure of US consumer credit risk, these customers will see the two most important factors affecting their score as well as FICO educational materials to help them better understand credit scoring and what behavior impacts their FICO score.

Currently, we have commitments from Barclaycard US, First National Bank of Omaha, Discover, and others to roll the program out to more than 35 million US consumers.

We expect more banks to follow in the coming months.

The program has been widely praised by consumer advocacy groups and regulators as a means to offer transparency to consumers looking to understand their credit situation.

Participating banks have used it as a significant value add it their consumer.

The FICO score is being used to drive higher consumer engagement, higher perceived value in the banking relationship and perhaps even better consumer management behavior.

We believe consumers benefit first by better understanding how lenders perceive them and second through the extensive educational materials available to them through the open access program.

We think consumers also benefit by understanding how the FICO score, the score that lenders use, differs from education scores that sometimes appear in the market.

We expect all of our initiatives to bear fruit as we move through 2014.

We are laying a framework with these long-term programs for FICO to grow and flourish in the years ahead.

We will continue to update you in the coming quarters.

We'll be reporting new metrics to measure our progress, particularly as we see more SaaS customers coming on board.

I will now turn the call over to Mike for further financial details.

Thanks, Will.

Good morning, everyone.

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

First, our revenue this quarter was $184 million, a 3% decrease from last year.

Our Scores business grew 9%.

Our Tools business, were we signed several large license deals that slipped from our fourth quarter, grew 15% from the prior year.

Second, we delivered $17 million of GAAP net income this quarter and $26 million of non-GAAP net income.

Our free cash flow was $26 million for the quarter.

Finally, we repurchased $25 million of stock this quarter, and ended the quarter with $97 million of cash with ample liquidity to pursue our investment strategy.

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

Starting with Applications, revenue was $112 million, down 10% versus the same period last year.

Much of our Applications growth was due to the acquisition of Adeptra, which grew 23% from last year, and CR Software, which grew 4% from last year.

Declines in our Marketing Solutions business, where we experienced some customer attrition earlier in fiscal 2013, and in Customer Management and Fraud Banking, which had some large license sales in the previous year, offset the increase from our acquisitions.

Finally, we signed several license deals that slipped in our fourth quarter with several other large deals from that period still in play.

In our second segment, Tools, revenue was $25 million, up 15% versus the prior year and flat with the prior quarter.

This segment continues to be an area of strength for us, which grew a double-digit rate in 2013.

Finally, in our Scores segment revenue was $47 million, up 9% from the same period last year and up 2% from last quarter.

On the B2C side, we're up 22% versus the same period a year ago, and down 3% versus last quarter.

The B2B revenues were up 5% from the same quarter last year and up 4% compared with last quarter.

The increase was primarily due to a global FICO Score deal we signed with a large customer in Latin America.

Looking at our revenue by region, this quarter 74% of total revenue was derived from our Americas region.

Our EMEA region generated 19%, and the remaining 7% was from Asia-Pacific.

Recurring revenue derived from transactional and maintenance sections for the quarter represented 70% of total revenues.

Consulting and implementation revenues were 19% of total revenue.

License revenues were 11% of total revenue.

Turning now to bookings.

We generated $20 million of current period revenue on bookings of $84 million, a 24% yield.

The weighted-average term for our bookings was 23 months this quarter.

Of the $84 million in booking, 15% relates to Collections and Recovery, 14% to Origination Solutions, and 11% to Banking Fraud Solutions.

We had 16 deals in excess of $1 million, four of which exceeded $3 million.

Transactional and Maintenance bookings were 29% of total this quarter.

Professional Service bookings were 55% this quarter.

Finally, licensed bookings were 16% in the quarter.

Turning to expenses, operating expenses totalled $149 million this quarter compared to $140 million in the prior quarter, or up $9 million.

The increase relates to our performance-based incentives.

We also incurred a restructuring charge this quarter related to eliminating some headcount focused on lower-priority areas and plan to reinvest the savings towards higher-priority investments during the year.

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 27% for the first quarter versus 28% in the fiscal 2013.

GAAP net income this quarter was $17 million versus $29 million in the prior quarter, and non-GAAP net income was $26 million versus $35 million in the prior quarter.

The effective tax rate was about 37.5% this quarter, higher than the 31% we guided due to the expiration of the R&D credit, a one-time state audit adjustment, and a one-time tax adjustment related to our foreign operations.

We expect the effective rate to be in about the 33% to 34% for the full year unless the R&D credit is reinstated before the end of our fiscal year.

Free cash flow for the quarter was $26 million, or 14% of revenue, compared to $19 million or 10% of revenue in the prior year.

Moving to the balance sheet.

We have $96 million in cash on the balance sheet.

This is up $13 million from last quarter, due to increases in cash generated from our operations as well as proceeds from options that were exercised, somewhat offset by share repurchases.

Our total debt is $478 million with a weighted-average interest rate of 5.8%.

We now have a $23 million balance on our $200 million revolving credit facility.

The ratio of our total net debt-to-adjusted EBITDA is at 2 times, which is below the covenant level of 3 times.

Our total fixed-charge-coverage ratio is at 4.7 times, which is well above the covenant level of 2.5 times.

During the quarter we returned $25 million in excess cash to our investors by repurchasing about 440,000 shares at an average price of $57.06 per share.

We still have about $40 million remaining on our current Board authorization and continue to view share repurchases as an attractive use of our cash.

We also evaluate opportunities to acquire relevant technologies and products that advance our strategy, our strength in our portfolio and competitive position.

Finally, we are reiterating our previous guidance as follows: revenue range from $763 million to $773 million.

GAAP net income of $91 million to $94 million and corresponding non-GAAP net income of $125 million to $128 million.

GAAP EPS of $2.50 to $2.60 per share, and corresponding non-GAAP EPS of $3.46 to $3.56 per share.

With that, I'll turn the call back to Steve for questions and answers.

Thanks, Mike.

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

Jeremy, please open the line.

(Operator Instructions)

Manav Patnaik, Barclays.

Good morning.

This is actually Greg calling on for Manav.

I would like to start with Scores, which you saw a nice quarter.

You said a lot came from the large LATAM contract.

Can you just talk to the momentum you have seen in credit cards, and if your expectations have changed for the rest of 2014?

Yes.

Thanks, Greg, and good morning.

We did have a large deal in Latin America.

The first in the country that we signed a deal in.

As it relates to the ongoing flow of the Business, we had a strong pre screen or acquisition score quarter, almost across-the-board, compared to the prior quarter.

So, we're continuing to see momentum now on acquisition scores that are being used for marketing purposes.

That was somewhat offset by our higher-valued online or origination score where fewer accounts were originated during the quarter.

As a result, the ongoing momentum of the Business was down slightly from the prior quarter.

Okay.

Thank you.

Maybe a little bit on the M&A environment here.

You're about a year into integrating both CR Software and Adeptra.

What you're seeing?

If there is any particular niches of interest that you're focusing on?

Yes.

First with respect to the acquisitions that we made, those are all fully integrated and running very smoothly.

We're happy with all of them, have retained the management from those companies and are really pleased about the way that's all gone.

If terms of M&A going forward, we're always evaluating M&A opportunity.

We would love to complement our organic growth efforts with acquired growth.

That said, we continue to be value conscious.

Markets are, frothy is probably too strong a word, but valuations are high.

We remain very disciplined in the way we evaluate these things.

We're absolutely active in evaluating.

The strategy has not changed.

We focus on tuck-ins that extend our current core franchises.

We're always open to adding a franchise, if we can get it at the right value and with the right kind of growth prospects.

Those are the screens that we use.

Occasionally, we will do a technology tuck-in, like the Infoglide acquisition that we did.

In general, we are pretty happy with our organic technology efforts.

We really have a very, very strong development team, strong engineering team.

I just announced the factory of innovation going on here.

That winds up not being in quite as much a focus for M&A.

That makes sense.

Maybe along those lines, as you're expanding your SaaS offerings and building out the Analytic Cloud, how much more investing do you think needs to be done there?

Are there specific areas where there is additional focus that needs to be made?

We will continue to focus there.

I mean, we have been focusing there.

You see it in the fact that our net income is not growing as fast as it has in prior years because we're taking that money and redeploying it into investments in our Business.

That's almost entirely a function of the opportunity set that we've got.

We like investing in stock buyback, but when we see the opportunities that we have in developing products and services organically, they are really attractive.

So, we continue to invest there.

I don't see that stopping in the near future.

At the same time, we don't see it ramping up dramatically.

I think that we are trying to strike a balance between continuing stock repurchase, a lot of fiscal discipline, some level of investment in the business.

Could we invest more in the business than we do today?

We could, but it would be at the expense of net income.

It would have a P&L impact that we're not happy about, so we don't do that.

We are disciplined about how much we invest.

It's not going to stop, either.

This isn't a one-time shot and then we're done.

You can expect continued investment.

We are building a business for the long haul here.

Great.

That's it for me.

Thanks, guys.

Brett Howe, Stephens, Inc.

It's John Campbell in for Brett Hough.

Just for the EPS guide, are you guys going with a particular tax rate?

Does the low end of that range assume that 44% tax rate, and then just the high end assume the 33%?

No.

We're using about right down the middle of it, between 33% and 34%, now that the R&D credit was not renewed by the Congress.

Okay.

Thanks for that.

Are you guys able to break out what percent of rev currently is categorized as SaaS?

Then, maybe if you could just talk about how that trends over time?

Yes.

We typically haven't broken out what percent is SaaS, but let me give you a little context around our Business.

Over the years we've had lines of business that we have offered on a hosted basis for our customers.

We are now supplementing those hosted long-term deals with new cloud offerings.

If you lump both you our hosted business and our cloud business together, on an annual basis last year we had just over $150 million of revenue of that nature.

It's concentrated in a couple of areas, particularly in our marketing solutions business where we host for almost all of our customers and in our Adeptra business, which of course is a SaaS offering for all of our customers.

Outside of those two, then we have several smaller product lines where we host or provide a SaaS offering.

Outside of our environment, of course, we have long had the national processors host and run our Triad and Fraud products for us.

There is another $80 million or so of business that's being hosted in a cloud not by FICO for our customers but by our partners, the processors.

We have a fairly extensive experience in this area through our legacy hosted businesses.

Okay.

Great.

Then, just last one for us.

The CapEx came in relatively light this quarter.

Is that anything to read into the rest of the year?

No, not really.

Our CapEx is typically around $20 million to $25 million a year.

It ebbs and flows with the investments that we make internally into technology.

We would anticipate our full-year CapEx to be pretty similar to what it was last year.

It was more of timing.

Okay.

Thanks for taking our questions.

(Operator Instructions)

Kevin O'Keefe, Brown Advisory.

Just to follow up on the SaaS points that the previous caller was making, is there any way you can quantify what the dollar impact you anticipate going forward from the deals that you signed this quarter?

Yes.

Kevin, thanks for calling in.

This is Mike.

We haven't been, right now, quantifying our SaaS deals separately.

This is the first quarter we signed deals both on the Origination side and the Debt Manager side.

They basically are compiled as part of the bookings right now and rolled forward in the guidance that we have provided.

The size of these deals are in the $1 million plus range over a multi-year period of time.

We don't expect us to have a material impact, these three deals, to have a material impact for us.

We would anticipate as we start to grow the book of business that is SaaS, as the market starts to migrate for us into that direction, that we will be providing more specific information on the legacy business in comparison to the SaaS business.

Right now it's not large enough for us to break out, and not meaningful enough for the investors to trend forward.

Got you.

We'll all appreciate that additional breakout.

Thanks for doing that.

The reason I ask is, on the Application side, two of your three businesses did outstanding this quarter.

The App side, I feel like we have been waiting a few quarters for a large number of deferred contract revenue.

I think following the CR and the Adeptra acquisitions we would have expected higher revs flowing through on the App side.

Since your guidance is unchanged, it seems like that is still in the cards.

I'd love to hear what's driving lower revs right now and what the outlook is moving forward?

I think that it still is in the cards.

I think it's safe to assume that Applications business will look a little bit stronger.

The deals on that side, they are licensed deals, they tend to be lumpier.

The timing is a little bit trickier.

The sales cycle is long.

I wouldn't read it too much into one quarter.

So, you anticipate the deals that have been on hold dating back to last summer are still in the pipeline?

It's not that they haven't closed, or they have close and are other businesses deteriorated?

The sales cycle has been extended?

Yes, I think that's a fair summary.

Okay.

And just one more, if you don't mind?

We're really pleased to see you guys back in the market buying your stock back.

I think prior indications have been in the absence of acquisitions your preference is to use cash flow to buy in your stock.

I'm just curious how much capacity you have if you did happen to see an acquisition that you found attractive, could you do it?

Or, do you need to replenish your cash on your balance sheet before you think about other acquisitions?

We could do it.

We have capacity with our line and with cash on hand and with cash from operations to do a reasonably significant acquisition.

I would say never say never to using paper, although, you know how we feel about it.

We value it so much, we are busy buying it in.

It would have to be something reasonably remarkable for us to issue paper to do.

We have the capacity without -- to do a pretty meaningful acquisition without issuing any stock, several hundred million dollars.

That's great to hear.

If I think about your thoughts on capital management, is it safe to say that you think about free cash flow as the engine to purchase in stock and then you have the flexibility at this point to do a deal and lever up modestly if you have to?

That's exactly right.

Okay.

Thanks, guys.

Appreciate it.

(Operator Instructions)

Matthew Galinko, Sidoti.

I was just curious if you could share any more color around the cloud bookings in terms of the duration of those?

Could you say if it's greater than the overall booking's term or less?

It's slightly greater, Matthew.

The overall booking term was about two years.

The SaaS offerings in here were slightly longer than that.

Okay.

Thanks.

Can we read into that being moving up then in the future, or not necessarily the case?

Well, our objectives as we're taking these products to market is to line up a multi-year deal, much like we do with our other on-premise products, and be able to build in the ratable revenue streams that come along with these product lines.

Customers may react differently, but because of the nature of a lot of our products we don't believe it will be unusual for pane of them to have multi-year periods.

Though, I'm quite certain there will be customers who will go by year to year.

The market will begin to dictate that for us as we further penetrate it.

Okay.

Thanks.

My other question is around the Open Access move.

How do you sort of view that in terms of opportunity versus cannibalization of the B2C Scores business?

We see it as -- we have not seen any cannibalization.

We don't anticipate cannibalization there.

We think there is a lot of opportunity.

Obviously, it raises consumer awareness of the FICO score.

As you all know, there are a lot of non-FICO scores with similar score ranges that are being sold out in the marketplace that are that most typically not the scores being used by lenders to make their credit decisions.

It causes confusion and, frankly, it's not great for the FICO brand.

So, the Open Access program lets us really put the FICO brand front and center in front of the consumer.

It lets the banks use the same score that they're using to make a credit decision.

It lets them disclose that with no additional cost to the consumer.

We think that raising that awareness has long-term benefits for us.

One, it keeps the banks happier with using FICO scores.

That's kind of the obvious one.

We also think that, in the long run, it's going to create opportunities for us in our Consumer Scores business.

We do hope over time to capitalize on the broader consumer awareness.

Great.

Thanks.

We have no further questions at this time.

I would like to turn the call back over to Mr. Weber.

Thanks, Jeremy.

This concludes our call today.

Thank you all for joining.

This concludes today's conference call.

You may now disconnect.