Fair Isaac Corp (FICO) 2015 Q2 法說會逐字稿

Good afternoon.

My name is Sharlin 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.

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)

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

Please go ahead, sir.

Thank you, Sharlin.

Good afternoon and thank you for joining today's second 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.

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 also includes statements regarding certain non-GAAP financial measures.

Please refer to the Company's earnings release and a Regulation G schedule issued today for a reconciliation of each 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 website at sec.gov.

A replay of this webcast will be available through April 23, 2016.

And with that, I'll turn the call over to Will Lansing.

Thanks, Steve.

And thank you everyone for joining us for our second quarter earnings call.

Today, I'll briefly summarize our financial results for this quarter and then I'll talk about where we stand halfway through our fiscal year and why we're so confident about our strategy and our execution of it.

In our second quarter, we reported revenues of $207 million, an increase of 12% over the same period last year; we delivered $19 million of GAAP net income and GAAP earnings of $0.58 per share.

We delivered $30 million of non-GAAP net income, up 3% from last year and non-GAAP EPS of $0.91 per share, an increase of 12% from the same period last year.

Our Applications segment was up 16% over the same period last year.

The results included our TONBELLER acquisition, but we also drove growth across our portfolio, specifically in product solutions, marketing solutions and customer communications solutions.

The margins in Applications were negatively affected this quarter by a non-recurring charge that Mike will explain in a few minutes.

Year-to-date, Applications revenue are up 10% over the previous year.

Our Tools segment was up 4% over last year, driven primarily by recurring transactional and maintenance increases.

Year-to-date, Tool revenues were up 12% over last year.

Our Scores segment was up 4% compared to last year.

Our B2C business was up 24%, our B2B business was down 2% versus last year.

But after adjusting out a royalty true-up in the prior period, our B2B revenues were up 7%, because of increases in originations.

I'm pleased with the revenue growth we're now driving across our business.

We believe we can continue and even accelerate that growth, while managing our expenses and expanding our margins.

We're doing this by carefully executing the strategies we've outlined in each of our segments.

In our Applications segment, we've invested over the past 18 months to deliver cloud-based versions of our solutions.

We've had early success selling our originations and collections and recovery products.

Just last week, we introduced TRIAD Cloud Edition.

This new offering gives smaller and specialty lenders the ability to use advanced customer focused analytics and strategies to increase revenues, share of wallet and customer satisfaction.

The addition of TONBELLER in January gives us entry into the financial crime and compliance solution space and combined with our strong product management franchise, makes our offerings more valuable to financial institutions, as they view risks across their enterprise.

In our Tools business, we've been working on ways to expand our distribution to a much larger market.

In a world that's increasingly looking for ways to extract value through analytics, we have IP and expertise to help make better decisions.

When we introduced our Decision Management Suite last year, we put that IP in the cloud and greatly expanded our addressable market.

The pipeline over the cloud now includes all the building blocks needed to build, deploy and manage predictive analytics for growth, profitability and competitive advantage.

It's beginning to open eyes in the analytics community and while it's still early, we believe it can become a significant growth driver in the years to come.

In our Scores segment, we're now beginning to see the results of the strategic initiatives we've been working on for the last two years.

We had a good quarter, and in fact, the highest revenue quarter since Q4 of 2008.

But more importantly, we're positioned to drive significant revenue and earnings growth well into the future.

The FICO Score Open Access Program continues to expand.

This program is good for consumers, good for financial institutions, and addresses consumer confusion between educational scores and FICO scores.

This week, we announced the expansion of the program to provide FICO scores to approximately 1 million consumers annually who are in need of credit and financial guidance through qualified non-profit credit counselors and participating government entities.

In B2B scores, we're beginning to see increased volumes, particularly in originations, which will provide a nice tailwind if the trend continues.

Finally, our Consumer Scores business is on a strong growth trajectory that we believe will continue.

We're driving growth at myFICO.com.

Also, this quarter, we have started to see the impact of our partnership with Experian, which has been migrating subscribers to products with the FICO Score.

That conversion will continue over the next few months and we expect the subscriber base to grow as more and more consumers look to Experian for genuine FICO scores.

As I've said before, we're particularly pleased to partner with Experian to provide a premier financial monitoring product to American consumers, and we believe that as we continue our efforts to inform consumers, they will ultimately choose products that include the same analytic overwhelmingly used by financial institutions, the FICO Score.

We're proud of our latest innovations, which came out of several different areas of the business.

We recently announced the launch of a FICO Score based on alternative data to identify creditworthy Americans who are not able to be scored with traditional credit bureau data alone.

FICO, in partnership with Equifax and LexisNexis Risk Solutions has launched a pilot program with 12 of the largest credit card issuers.

The new FICO Score has been well received by the media, consumer advocacy groups, regulators and large and small lenders.

This quarter, we released an enhancement on myFICO.com, which for the first time provides consumers with the 19 most widely used FICO Scores, continuing our efforts to provide an unprecedented level of transparency and help consumers navigate a complex credit environment in which lenders use different versions of the FICO Score for different types of lending decisions.

Last month, we announced that 11 of China's leading alternative lending companies have signed on to the new FICO Alternative Lending Platform as part of industry-wide efforts to upgrade risk management across China's booming peer to peer and micro loan sector.

The 11 companies represent an estimated $10 billion in P2P and micro loans.

By using the FICO platform, these lenders will be more stable, viable and profitable than ever before.

In February, we announced availability of the FICO Data Management Integration Platform, a streaming analytics and real-time distributed processing platform that ingests, normalizes, correlates and distill big data as it is being generated.

The platform collects, filters and aggregates batch and streaming data from hundreds of sources and analyzes it on the fly, providing applications with greater agility and responsiveness to deliver high impact decisions.

We also rolled out the FICO Big Data Analyzer, a purpose-built analytics environment for a new generation of data professionals.

Big Data Analyzer empowers a broad range of users to collaboratively explore data and discover new insights from any type and size of data on Hadoop.

Built on technology acquired from Karmasphere last year, Big Data Analyzer equips teams of business users, analysts and data scientists with access to their organizations' new frontier of competitiveness, data and analytics.

Finally, shortly before participating in the White House Summit on Cyber Security, we announced the availability of the FICO Cyber Security Analytics Solution.

This solution leverages decades of research and streaming analytics technologies, as well as new advances in self-learning models to detect emerging and evolving cyber threats in real-time.

As a leading provider of fraud detection solutions for financial institutions worldwide, we see first-hand how today's cyber security breaches become tomorrow's payment card fraud and account compromise headlines.

We have adapted our real-time streaming analytics technologies to provide a unique analytic layer of event detection and monitoring.

Our solution can help organizations of all kinds protect their data assets and stop damaging data breaches and theft attempts in their tracks.

These innovations are just the latest examples of ways in which we're unlocking the value of our core IP, developed from decades of analyst research and development, to efficiently and effectively meet the burgeoning market demand for better decisions through analytics.

At the same time, we continue to carefully evaluate uses of cash.

In our second quarter, we repurchased 540,000 shares.

In April, we repurchased another 327,000 shares, bringing our total to around 1.7 million shares repurchased so far this fiscal year.

We remain confident in our strategic business model, focused on growth and profitability, while giving shareholders an even greater return by reducing shares outstanding.

I'll share some final thoughts later, but now I'll turn the call over to Mike for further financial details.

Thanks, Will.

Good afternoon everyone.

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

First, we delivered $207 million of revenue, up 12% from the same period last year with growth in all three segments.

This quarter includes initial revenue generated from our Experian partnership.

We expect revenue from this partnership to ramp up as the program is rolled out across the various Experian platforms.

Second, we delivered $19 million of net income, which was negatively impacted by a non-recurring pre-tax charge related to a lost contract, and the TONBELLER acquisition costs, both of which totaled $4 million in the aggregate.

Finally, we funded the acquisition of TONBELLER and also repurchased 540,000 shares in quarter two and another 327,000 shares in April.

I'll begin by breaking the revenue down into our three reporting segments.

Starting with Applications, revenues were $134 million, up 16% versus the same period last year.

This included about $3 million in revenues from our TONBELLER acquisition.

The biggest gains came in our fraud and marketing solutions.

License revenue was particularly strong at $23 million this quarter, more than double the prior year.

In the Tools segment, revenues were $23 million, up 4% versus the prior year.

The growth this quarter was driven by our optimization products and our Data Management Platform.

And finally, in our Scores segment, revenues were $50 million, up 4% from the same period last year, which included a royalty true-up.

Adjusting for that true-up, B2B was up about 7%, primarily due to increased originations.

Sequentially, B2B is up 5%.

The B2C revenues were up 24% from the same quarter last year and 40% sequentially due to increased sales at myFICO.com and to the first revenues from the Experian partnership.

We expect B2C revenues will continue to grow this year, while Experian converts its existing subscribers to the FICO Score end with new subscribers being added through the ongoing marketing efforts.

Looking at our revenues by region, this quarter 73% of total revenues were derived from our Americas region.

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

Recurring revenues derived from transactional and maintenance sources for the quarter represented 67% of total revenues.

Consulting and implementation revenues were 18% of total and license revenues were 15% of total revenue.

We generated $24 million of current period revenues on bookings of $80 million, a 30% yield.

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

Our operating expenses totaled $173 million this quarter, compared to $165 million in the prior quarter, or up 8 million.

This was higher than the $165 million to $170 million we guided last quarter, due to a non-recurring $3.2 million charge from a cost overrun on a large implementation project, and about $500,000 in legal and tax charges related to the TONBELLER acquisition.

For quarter three and quarter four, we expect our operating expenses to be approximately $170 million per quarter, including amortization expense.

As you can see in our Reg G schedule, our non-GAAP operating margin was 24% for the quarter.

We expect the full year that operating margin will be between 26% to 28%.

GAAP net income this quarter was $19 million, down 9% from the prior quarter, but non-GAAP net income was $30 million for the quarter, up 3% from the same quarter last year.

The effective tax rate was about 28% this quarter.

We expect the effective tax rate to be about 29% to 30% for the full year fiscal 2015, slightly lower than we previously estimated.

Free cash flow for the quarter was $37 million compared to $44 million in the prior year.

Moving on to the balance sheet, we had $87 million in cash on the balance sheet at the end of the quarter.

This was down $8 million from last quarter, due to the purchase of TONBELLER and repurchases of our shares, partially offset by cash generated from operations and draws on our revolving line of credit.

Our total debt is $658 million, with a weighted average interest rate of 4.6%.

The ratio of our total net debt to adjusted EBITDA is 2.8 times, which is below the covenant level of 3 times.

During the quarter, we returned $40 million in cash to our investors, repurchasing 540,000 shares at an average price of $74.30.

Additionally, we repurchased 327,000 shares in April.

We still have $119 million remaining on the latest Board authorization and continue to view share repurchases as an attractive use of our cash.

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

Finally, we are reiterating our previously provided guidance for the fiscal year.

With that, I'll turn the call back to Will for some final comments.

Thanks, Mike.

As I said last quarter, it's a special time in the history of FICO.

After refining our strategy and investing in our future, we're now beginning to see signs of sustainable growth returning to the business.

Our Scores segment is poised to unlock the value that's been built over 25 years of leadership in the financial services system.

Our applications remain industry leaders and we have the opportunity to reach new markets by offering these solutions in the cloud.

And our Decision Management Suite takes the proven value of IP we've built and delivers it to markets that are just now looking to use data to make better decisions.

We need to remain focused on execution.

We will invest carefully in opportunities for growth and ensure that we deliver high quality products and technology on time and we'll continually look for ways to monetize our IP and expertise and to provide value to our shareholders.

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

Thanks, Bill.

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

Operator, please open the lines.

(Operator Instructions) Manav Patnaik, Barclays.

[Greg] calling on for Manav.

So the B2B scores looks like it came in pretty strong at the 7% and you talked about some mix benefit from origination scores.

I was wondering if you could just touch on which markets you're seeing that strength, whether it be in mortgage, credit cards, etc?

Greg, it was virtually across the board this quarter on the origination side, led by cards and followed by mortgage and auto, which were both strong as well.

And then looking at B2C, I was wondering if you could -- to the extent you can help us parse out how much of that growth is coming from the core myFICO versus the Experian deal, and even if there is anything coming from the indirect market, which you guys have talked about a little bit?

So, Greg, we saw growth as we mentioned, both across myFICO and across Experian, coming from the Experian.com rollout that happened on December 29.

We're not going to break down the numbers further between one or the other.

We're just saying that, overall, we're starting to see some of the acceleration on the consumer side that we've been talking about here since November.

And the indirect, I guess, at this point, you guys are attacking that, but haven't seen anything flow through to revenue?

Yes.

And then I guess one more from me, just on the kind of under-banked FICO Score.

Just wondering how you guys are thinking about that.

Is it more of a public goodwill initiative or is it really something that you think could start to generate revenue and what your strategy is there?

Yeah, I would say it's both.

I mean there is a pretty large group of customers that are (inaudible) and hard to score with traditional bureau data.

And in a world where we can start to use other kinds of data to make these decisions, it makes all the sense in the world to produce scores on it.

And we've been working with Equifax and LexisNexis for some time on putting this thing together.

We're really pleased with the results.

It took a while to bring it to market, because we wanted to maintain the integrity of what this score represents and so we feel pretty good about the decisioning that gets wrapped around these new scores.

You know , do we think we're generating goodwill with it?

I hope so.

I mean, we're helping to open up credit markets for the under-banked.

How big a market will this be, time will tell.

I think that there is definitely an appetite from lenders to reach these consumers and we'll just see how long it takes.

But I think there's definitely a business there.

Bill Warmington, Wells Fargo.

So, a question for you on the B2B score side, you did about 11 billion scores last year, if I remember correctly.

What's the run rate currently, based on this quarter?

Bill, the overall volumes are up modestly.

They are up higher on originations and a little bit lower on acquisition scores, primarily due to a large client or two that have pared back on some of their marketing activities, but overall, we're running up about 3% to 4% volume wise.

And then I wanted to ask about the -- on the application side and the SaaS offerings there, if you would give us a sense for about how much revenue is actually being generated on a SaaS basis and then also a sense for your success selling into the small and mid-sized clients in the US and then also internationally?

So I don't have the exact number on the SaaS revenue this quarter, but I will tell you our SaaS business, the revenue that we are claiming is growing at around a 5% clip, so mid-single digits.

The backlog is growing at a rate slightly faster than that.

In terms of kind of market penetration and market acceptance, we are continuing to work pipeline opportunities.

We're seeing a lot of larger opportunities, as well as smaller market opportunities come across our plate, but it's kind of slow as you go in terms of being able to get those deals in place, get them signed, and then obviously convert them over to revenue.

And then to jump back to the Scores business, on the B2C side, with the Experian implementation, the direct subscribers, I wanted to ask, what inning are we in, in terms of that process currently?

Well, for the quarter we just ended, our quarter two, the revenue there is a component of our B2C from Experian, came exclusively off of Experian.com, which was launched on the December 26.

Since the end of the quarter, other properties are beginning to convert over, and it's Experian's game, they haven't reported any of those crossover numbers, subscriber numbers to us yet.

That reporting will start coming across probably in about a month from now.

But just for the knowledge here, we reported the numbers exclusively for Experian.com.

And then, as you look down the road, I know that currently the arrangement is for solely the FICO Score.

What do you think about the opportunity of being able to sell other products into that subscriber base over time, things like the multiple scores that you'd mentioned or maybe the score simulator or maybe something else that you're in the process of developing?

Yes, Bill, I think those are all good examples.

We very much have the intention of continuing to enrich the offering to the consumer.

And those are all good candidates.

With the multiple scores we have them up on myFICO.com today, I guess that would put us in the forefront of sharing multiple scores with consumers, but we're certainly willing and happy to have other partners share multiple scores with the consumers.

And from our standpoint, we hope the market goes there, it would be a great thing.

In terms of the simulator, absolutely, that's another natural.

And we've also talked about consumer card control as a potential offering.

So there is a handful of things that are in the works.

And then one housekeeping item, on the buyback you mentioned -- for the April buyback, what was the actual dollar amount on that?

It was $30 million that we spent on the shares we bought back in April.

(Operator Instructions) Brett Huff, Stephens Inc.

Wanted to ask -- nice work on the apps growth.

That was obviously a really strong number.

I think you had mentioned last quarter that you expected some renewals to happen maybe in the back half of the year and you talked about sort of how the margin might go up as a result of some of those renewals in the back half, I think is you how described it.

Is that still going to happen in the back half, was the app strength this quarter related to that or was this something from the pipeline, just kind of give us a sense of kind of what was the nature of the app win this quarter?

No, we had -- in terms of the win this quarter, we had one renewal that happened this quarter and then we had several other pretty healthy deals that we signed.

That renewal happened in the second quarter and we had anticipated that in our guidance.

The renewals we talked about in the back half of the year are still scheduled and we expect them to come through as a component in the guidance that we've given for the full year.

And then a question on the B2C direct-to-consumer agreement with Experian.

It sounds like that's potentially a really nice channel.

What does the pipeline look for you all in terms of other outlets where other partners you might be able to distribute through or work with in a similar nature?

I can't speak to partnership discussions that are in the works.

But I will say that it's our fervent hope that the entire industry adopts FICO scores instead of education scores, because as you know, FICO scores are the scores that lenders use and so many of the education scores that are being given to consumers are really not being used for credit decisioning purposes.

So our goal is to see FICO scores, wherever consumers interested in, and how their credit worthiness is being evaluated, we want the FICO scores shared with them and we're exploring all channels to make that happen, including the most successful one so far, which is Open Access.

And then last one for me, I think somebody asked this about SaaS before and I'm not sure that this question was asked.

The percentage of rev that is composed of SaaS products, did we get that number or a percentage and I forgot I may have just missed that?

No, I didn't have the number directly in front of me.

I said the SaaS revenue is growing about 5% year-over-year, that's a claimable revenue.

In general, I would have to look it up.

And our SaaS revenue was roughly 20% of our overall total revenue on an annual basis.

Okay.

That would include hosted and SaaS, by the way.

Mathew Galinko, Sidoti.

I guess last quarter you talked about the TONBELLER acquisition making -- sort of the combination making FICO more strategic to other vendors for compliance.

I'm just curious where you are on technical integrations now around that acquisition and what the timeframe is that we might see the benefits of becoming more strategic?

The technology that we acquired with the TONBELLER acquisition is being held intact.

We haven't done a lot of work to try to merge that with our products, because it's not necessary.

What we are doing is focusing on the sales and distribution piece and what we've seen is that the way anti-money laundering products are increasingly being bought is in connection with the Chief Risk Officer with a broader view of the risks facing the financial institution.

And so, we're lining up our TONBELLER capabilities along with our Falcon product capabilities and our Infoglide and so on to bring it to the same decision-maker.

So it's really on the sales and distribution side more than on the technology integration.

And then I guess one other quick one, just curious how -- if you could talk a little bit more also about the go-to-market plan with the cyber security technology.

Good question.

The interesting thing that's going on with cyber security and how we play in that market is that our Cyber Solutions, which are a direct outgrowth of our Falcon Fraud capabilities, address cyber issues in real time, which is not typical for the industry and are able to score a degree of threat in a way that's not typical for the industry.

Usually the alerts are binary.

And so we think we have some fairly distinctive capabilities in cyber.

What we do not have is a strong sales and distribution built there.

And so, right now, we're working on more of an OEM basis with some of the major players to bring our technology to market alongside theirs.

A decision for us remains in the future whether it makes any sense to go direct, but right now, our plan is to go through partners and channels.

And do you have any kind of time frame we could think about on when we might start seeing -- not necessarily meaningful, but any sort of revenue contribution from that?

I think this is certainly not before next year.

Brett Huff, Stephens Inc.

Just one quick follow-up.

Did you guys -- in your guidance, it didn't change I know.

Have your perceptions or your assumptions in your guidance changed since last quarter on the piece of guidance in revenue that is Experian driven, based on kind of the early returns or has it kind of come in as you guys expected and it's just going to take some time to get these conversions done?

No, it's coming in as we expected.

We didn't make any kind of re-swizzle of our guidance, based upon the first three months worth of activity from Experian.

And then in terms of the [after-tech], or the charge, I think you said was $4 million, you guys called out.

Did that end up being -- just from how it's taxed, is that about an $0.08 hit to the reported numbers, Is that about right?

Yes, it's between $0.08 and $0.09 a share and it's related to the two pieces; the contract write-off, and then just the cost of the acquisition of TONBELLER.

And the contract write-off, just describe that again for me.

I know you mentioned it, but I'm not sure I understand kind of what that is?

We're working on a large program outside the US with a customer of ours, who are consolidating a number of legacy platforms and systems into a vital platform, and the complexity of the project is driving some cost overruns and the accounts require us to take any loss on -- any estimated loss on a program like that when we know about it and that's why we booked it this quarter.

And at this time there are no further questions.

Thank you.

This concludes our call.

Thank you all for joining.

Thank you for your participation.

This concludes today's conference.

You may now disconnect.