Fair Isaac Corp (FICO) 2015 Q4 法說會逐字稿

Good afternoon. My name is Courtney and I will be your conference operator. At this time, I would like to welcome everyone to the Fair Isaac Corporation's Quarterly Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Weber, you may begin your conference.

Thank you, Courtney. Good afternoon everyone and thank you for joining FICO's fourth quarter earnings call. I'm Steve Weber, Vice President of Investor Relations and I'm joined today by our CEO, Will Lansing and our CFO, Mike Pung.

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 an understanding of the run-rate of our business. Certain statements made in this presentation maybe 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 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. The replay of this webcast will be available through November 5, 2016. Now I'll turn the call over to Will Lansing.

Thanks, Steve and thank you everyone for joining us for our fourth quarter earnings call. I'll briefly summarize our financial results for the quarter and full fiscal year and then talk about the progress we made this fiscal year on our strategic initiatives. Finally, I'll discuss our outlook for 2016. In our fourth quarter, we reported revenues of $233 million, the largest ever in Company history and an increase of 5% over the same period last year. We delivered $33 million of GAAP net income and GAAP earnings of $1.03 per share, which included restructuring and tax adjustments, which Mike will walk through.

We delivered $51 million of non-GAAP net income, up 15% from last year and non-GAAP EPS of $1.57 per share, an increase of 18% from the same period last year. It's another great finish to a fiscal year. Our full-year revenue growth of 6% beat our guidance and adjusting for the restructuring and tax benefit, we were within the guided range for net income and EPS. Our applications business was up 2% for the quarter and 4% for the full year over last year. We are encouraged by the reception for the cloud-based versions of our applications.

In fact, our cloud-based products overall were up 13% in fiscal 2015, much of which was due to growth in cloud applications. Our tool segment was down 9% versus the same quarter last year due to lighter license sales this quarter but was up 7% for the full year. More importantly, recurring revenue in our tool segment was up 19% in fiscal year 2015 versus the prior year. As more of this business is sold in the cloud, we will see recurring revenues grow resulting in a more predictable business model. Finally, our scores business was up 24% this quarter versus the prior year quarter and 11% for the full year versus the prior year. Much of this was on the consumer side where full year revenues were up 45% over the prior year but we also continue to see positive trends on the B2B side as credit markets continued to thaw.

I'd like to take a step back and focus on a few of the initiatives we've been working on in fiscal year 2015 and explain why I'm so excited about our prospects. Our Decision Management Suite, DMS as we call it, is set to build on the momentum of 2015.

We added 25 new customer logos during the year. Furthermore, all existing decision management platform customers have contracted for additional projects resulting in repeat business from each and every customer. Hundreds of new opportunities have been added to the pipeline and we are winning a significant number of the deals. Additionally, we are winning in less than 90 days with an average of $500,000 per opportunity. Rate and pace that fortify the confidence we have in our DMS strategy. Given the strength of our product portfolio, our theme for 2016 is to focus on expanding distribution, which will contribute to accelerating growth. We'll be adding more sales people to supplement those already added in 2015 and our sales team under the strong leadership of Wayne Huyard is focused on execution and boosting productivity.

During 2015, Wayne built a strong leadership team that is now focusing on identifying key stakeholders, buyers, and influencers. They're zeroing in places where our decisioning technology is most valuable and communicating FICO's unique ability to provide that value. Supported by field marketing, our sales team will target new logos and continue to expand the portion of our business coming from beyond financial services. On the scores side, we delivered strong growth in fiscal 2015 and we have several more growth initiatives on the way.

We continued to make huge strides with our Open Access program. Just last month, we announced that we had crossed a new milestone. 100 million consumer accounts now have regular access to FICO's Scores for free and we'll be adding many more in 2016. This program has proven beneficial for both consumers and lenders. Lenders have reported that consumers viewing their FICO Score demonstrate higher engagement, more visits to bank websites, lower attrition, lower delinquencies, and higher FICO Scores. In fact, in a new report published by the Federal Reserve Bank of Philadelphia's payment card center, based on data from the Barclaycard participation, some of those benefits were outlined. 84% of enrolled cardholders checked their FICO Scores every month. Credit card utilization by the riskiest card holders generally declined after they enroll in the program and delinquency rates of the people enrolled in the program remain below those of their non-participating peers for up to nine months after enrollment.

While the program has raised consumer understanding and awareness of FICO Scores, many consumers remain confused about the various credit scores provided to consumers by others. A recent study found that a majority of consumers, 62% who have received non-FICO credit scores online believe they have in fact received actual FICO Scores. Further, 82% think these non-FICO credit scores are also widely used by lenders. Formulas used by others to create credit scores for the same consumers that are often significantly different from their FICO Scores sometimes 100 points or more. Consumers who know their actual FICO Scores have an accurate understanding of how lenders will evaluate them when they apply for a loan. We will continue to work for consumer credit education and transparency. Over time, we expect the consumer awareness about FICO Scores will reduce confusion.

Marketers selling non-FICO credit scores will be unable to leave their customers with the impression that they're receiving FICO Scores when they are not. This transparency and brand awareness will also help us as we move forward to pursue other opportunities in the consumer space. We are currently pursuing innovative ways to further grow our business in the consumer space including through partners. The affinity market is one we've spoken about in the past and we continue to expect to participate significantly in this market. While we don't have any revenue expectations built into our 2016 numbers due to uncertainties around timing, we do expect to be making announcements in this space in the coming months. We also announced this year a pilot of our new alternative data score called FICO Score XD.

This product is a great example of how we leverage our technology and expertise to support our banking clients by bringing new products to market. This new FICO Score is focused on expanding access to credit, not simply scoring more people. We've created a way to provide a FICO Score for millions of additional consumers, many of them credit-worthy. Based on the results of the pilot program, the new FICO Score XD can be a lifeline for millions of previously unscorable people. Validations of actual application show better than expected results. We can score nearly 60% of in-the-door applications. We expect that FICO Score XD will be available for commercial use in fiscal 2016.

Looking ahead to 2016, we continue to invest in areas of our business where we see the greatest growth potential. As we said last quarter, 2015 has been a year of significant product innovation and 2016 will be a year where we expand our distribution to leverage that innovation. Obviously, it's not either or. We will continue to build innovative product. That said, we see significant opportunities in the market today for expanding distribution for the products and capabilities available for the customers today. As always, we're diligent in how we deploy our strong cash flow. We made one acquisition in fiscal 2015, TONBELLER, which gave us critical risk-based financial crime prevention and compliance capabilities that we expect will be increasingly important to our clients. And we continued our stock repurchases.

In fiscal 2015, we repurchased 1.7 million shares and in the last five years we've repurchased nearly 16 million shares. We are strong believers in our own prospects and view investing in repurchases as an excellent use for the cash we generate. In short, we're very excited about our future. There may be bumps in the road as we continue to experience quarterly lumpiness due to uneven license sales and it's difficult to determine the timing of revenues from many of our new initiatives, but we are in a unique position in the marketplace on both the analytic side and the score side, we have products and capabilities that the world needs and those needs are growing. It's up to us to execute on our plans to serve those needs and expand our scope and I'm confident we have the team in place to succeed. I'll talk more about our outlook for 2016, but first I'll turn in 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 $233 million of revenue this quarter, up 5% versus last year and a total of $839 million for the year, up 6% from the prior year. Our fourth quarter included $43 million in license revenue. Second, we delivered $33 million of net income this quarter, which included restructuring expenses, net of tax of $11.5 million and a reduction to tax expense of $5.4 million. Finally, we delivered $39 million of free cash flow in the quarter, which we used to pay down our revolver. We repurchased 1.7 million shares during the year or 5% of our outstanding shares.

I'll begin by breaking the revenue down into our three reporting segments. Starting with applications, revenues were $149 million, up 17% from last quarter and 2% from the same period last year. The increase over the prior year was primarily driven by increases in customer communications solutions, collections and recovery solutions, and revenues from the TONBELLER acquisition and included a large license renewal. Full year revenues for applications were $526 million, up 4% from last year. In the tools segment, revenues were $26 million, flat with last quarter and down 9% from the prior year. The year-over-year decline was due to fewer Blaze and Decision Optimizer license sales this quarter. Full year tools revenue were $106 million, up 7% from last year. And finally, in our scores segment revenues were $57 million, up 3% from last quarter and 24% from the same period last year. B2B was up 5% over the prior period driven by strong originations and B2C revenues were up 86% from the same quarter last year. For the full year, scores revenues were $207 million, up 11% from last year.

Looking at our revenues by region. This quarter, 65% of total revenues were derived from our Americas region, our EMEA region generated 27%, and the remaining 8% was from Asia-Pacific. Recurring revenues derived from transactional and maintenance sources for the quarter represented 64% of total revenue. Consulting and implementation revenues were 18% of total and license revenues were 18% of total revenue. We generated $23 million of current period revenue on bookings of $105 million, a 21% yield. The weighted average term for our bookings was 18 months this quarter. For the full year, bookings were [$315 million], down 13% from the prior year. Our operating expenses totaled $192 million this quarter, up $19 million from the prior quarter. This quarter included a $16 million restructuring charge, which was driven primarily from the write-down of several facilities as well as the reduction of some headcount that will we be redeployed to distribution roles.

As you can see in our Reg G schedule, non-GAAP operating margin was 32% for the quarter and 26% for the year. We expect that non-GAAP operating margin will be between 26% to 28% in 2016. GAAP net income this quarter was $33 million, down 9% from the prior year due to this quarter's restructuring charge of $11.5 million, which is net of tax or $0.35 per share. In addition, we had a positive tax adjustment of $5.4 million or $0.17 per share. Our non-GAAP net income was $51 million for the quarter, up 15% from the same quarter last year.

The effective tax rate for the full year was 21%, below our previous guidance due to the favorable tax resolution of a state tax audit and an increase in earnings in lower tax jurisdictions. We expect the effective tax rate to be between 29% to 30% for the full year of fiscal 2016. Free cash flow for the quarter was $39 million compared to $65 million in the prior year. For the full year, free cash flow was $105 million compared to $160 million in the prior year.

Moving on to the balance sheet, we had $86 million in cash at the end of the quarter, which is up $2 million from last quarter due to the cash we generated from operations partially offset by the payments on the revolver. Our total debt is $608 million with a weighted average interest rate of 4.3%. The ratio of our total net debt-to-adjusted EBITDA is 2.5 times, below the covenant level of three times. We did not repurchase any shares in the fourth quarter, but we bought back 226,000 shares in October at an average price of $88.41.

In fiscal 2015, we repurchased a total of 1.7 million shares at an average price of $76.39 for a total of $131 million. We still have $99 million remaining on the latest Board authorization and continue to view share repurchases as an attractive use of 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. With that, I'll turn it back over to Will for his thoughts on 2016.

Thanks, Mike. As I said in my opening remarks, 2015 was a pivotal year for us. We made significant strides in improving our products and capabilities and expanding the delivery options. Our applications are now available to customers to either run on-premise or access in the cloud and we now offer customers through our Decision Management Suite, an easy way to evaluate, customize, deploy, and scale state-of-the-art analytics and decision management solutions.

Finally, we found new ways to leverage our scores assets and will continue to expand usage of the industry standard FICO Score among consumers. We've laid the foundation and are confident we have multiple paths to grow in our future. The difficulty is predicting the timing of these initiatives. In the near-term, we do still face some uncertainty in the marketplace. Many of our financial services customers are working in a difficult interest rate and regulatory environment and in some cases it's affecting our sales cycle and lower bookings in 2015 caused some headwind as we head into 2016.

With all this in mind, we're providing the following guidance for fiscal 2016. We are guiding revenues between $860 million and $870 million, an increase of about 3% to 4% versus fiscal 2015. We are guiding GAAP net income between $94 million and $98 million, GAAP earnings per share between $2.89 and $3.02, non-GAAP net income between $144 million and $148 million, and non-GAAP earnings per share $4.43 to $4.55. The EPS guidance assumes current share counts although as Mike said, we continue to view repurchases as an attractive use of our cash. I'll now turn the call back to Steve for Q&A.

Thanks, Will. This concludes our prepared remarks and we're ready now to take your questions. Courtney, please open the line.

(Operator Instructions) Bill Warmington.

Congratulations on a strong finish to the year. So I wanted to start off by asking about the build out of the sales force for this past year and next year, if you just talk a little bit about how many sales people were actually added in 2015, how many you plan to add in 2016?

I'll give you the actual number. So we started to shift internal dollars that we were spending primarily in development into our distribution channels in around the third and the fourth quarter. So for the last quarter and a half, we probably added about 30 people and onboarded 30 sales people and in the meantime, we have reduced our headcount in other areas by just over 100.

We expect between now and the next month or two to probably add at least another 30 to 40 people in the sales capacity and all-in, we're expecting to bring our sales team up by roughly 60 people, most of which are higher from the outside, but some we actually have redeployed from areas like product management into our sales force. So to some degree, we are re-shifting already existing spend as supposed to adding new spend to the organization.

Okay, and then if you could talk about the -- you mentioned the affinity market being a source of potential opportunity for you. Talk a little bit about the pipeline that you see in terms of the number of transactions that you're considering participating in, what types of industries they're in, and then maybe even talk about what such a potential deal might look like?

Well, so we're in conversations with probably half a dozen potential affinity customers and we're looking at it in a couple ways. One is, directly where we would be for lack of a better word, the general contractor and also in other situations where we provide the FICO Score to a partner participating in that space who would serve the band or the retailer or whoever it is providing the affinity services to their customers and that is kind of the range, it is very typically banks, it's retailers. It's anyone who has a large customer base that are good candidates for credit report monitoring services. In terms of the timing, these things take a long time to negotiate and they take quite a while also measured in quite a few months to implement and turn on and so, although we have conversations that are quite far along right now, it's not clear that the revenue will flow in 2016. We'll just have to see how that plays out.

Got it. And then I wanted to ask on the topline guidance, looks like it's about roughly 2.5 to 3.5, if you could talk a little bit about the growth assumptions within each of the three segments applications, scores and tools?

Sure, I think that we expect continued growth in scores, strong growth in scores. We expect continued strong growth in tools although as some of that shifts to cloud and recurring revenue, it may not appear quite as strong in the revenue as it has historically when it was license sales. So we are seeing a shift from tools being predominantly licensed to being more of a mix with SaaS and our DMS offering and then applications is clearly the slowest growing of our major business segments.

I do think it's probably worth pausing on this for a moment and talking a little bit more about the relationship between tools and applications. The fact is that the IP that underlies our applications and the IP that underlies our tools is the same IP and we solve the same kinds of problems, whether it's originations or questions on recovery or any other kind of decisioning and at some level the way we've gotten to where we are is you tools were more flexible and a more custom solution and when there were enough customers who had the same kind of a problem, we would build an application, which was somewhat standardized solution for a group of customers sharing the same kind of a problem and so the distinction between tools and applications is a little bit of a fuzzy one because you can use either tools or applications to address the same problem.

What we're seeing today is much more fuzziness between the two. Our sales people are not compensated to sell one over the other. We are really focused on selling the right solution to the customer, whatever that may be and as tools have become more easy to use as our DMS suite has developed more functionality, more features, it's become more of an alternative to some of our applications and I think what we're seeing is in certain situations, customers opt for a tool solution where they might previously have opted for an application solution. So this is a case of some amount of cannibalization of our applications business by our tools business and it is not a bad thing. You have to look at it holistically and look at the two on a combined basis to have an accurate picture of how our business is doing.

Manav Patnaik.

So just on the revenue growth and I guess the margins, so we're still in this low-single digit range in revenue growth, margins still look like they will be flattish and I guess you've talked about your long-term targets for quite some time now to do well beyond that. So I just wondering in the context of that like when is that breakout year in your view where we start getting close to those ambitions?

Manav, I think that is a very fair question and I think that 2016 is on our way to a breakout year in 2017. I think that the only reason you see the caution that you see today is we really do have uncertainty about when some of the stuff hits, but I don't think it's three to five years out, I think it's the next couple of years and so what doesn't happen towards the end of 2016, I think we will start to see happening in 2017. We fully expect that 2017 will be a year of stronger revenue growth and expanding margins.

In the context of this quarter probably being the first full quarter ramp of the Experian deal, we were hoping you guys can provide a little bit more color on what the baked in assumptions are for the scores and maybe that segment in 2016 to try and sort of gauge what the moving parts really are?

So Manav, embedded in the guidance that we provided for scores is high-single digit growth and what we did not try to bake into the guidance for scores is any incremental revenue that would run through the Experian channel as we have it today, the direct to consumer channel beyond the run rate that we are starting the year with. There are other opportunities and other products that could get added along the way if Experian chooses to do that and if the customer demand exists for it. And that could provide something beyond what we have built in to our guidance and as Will mentioned in his comments, the affinity programs in any revenue that could come through a partner like Experian or directly through the customer has not been built into any of the guidance as it also is quite uncertain as to when a customer is ready to launch a program like that.

I guess I'd lastly say that we also very purposefully have left to the side the alternative Score XD and not included any of that in our plan for fiscal 2016 though from the latest feedback we've gotten from the test group, there certainly is a high degree of interest to bring that into their credit risk management processes and those things also take a little bit of time and so in order to be prudent, we thought we would hold that off to the side and see how that plays out. So we think there is some upside opportunities along the way in our scores business that provide some of the tailwind, if you will, that may offset some of the headwind we saw this year in our software businesses in the light bookings.

Okay and then just one more from me. So just on the tool side obviously, historically you've shown it and you always guided to sort of low-double digit growth, seems like I guess momentum didn't carry on in the last quarter here but should we still see low-double digits in 2016?

Yes, inherent in our guidance is much higher growth in tools along with high-single digit in scores and then relatively low-single digit in the biggest part of our business, applications.

And for that applications, would it be fair to say that if it's conservative it's because you just don't know when those license deals hit?

That's very true with applications. We also have some tough comps in the fraud area where the last two years, we've had some pretty large fraud revenue quarters because of the timing of license revenue and so with that being harder to predict, we think you blend it all together and this is a reasonable range to operate from and set our cost structure around.

Brett Huff.

One thing that looked really good in the quarter was the bookings. They really turned around, is that just a typical seasonality or was there some things in the works that finally came through or is there any color there that you can give us and then maybe anything, any thoughts as you move into 2016?

Yes, there was no real seasonality in it. It was more some things that had been in the works for a while that finally came through. The bright spot embedded within the bookings numbers, the $105 million of bookings is that a larger percentage of those bookings than we've seen in recent quarters relates to transactional volume revenue and so that's part of the recurring revenue stream that once they go live, we'll start seeing that revenue quarter-after-quarter. There's less of a beginning and end point, if you will like there is in license and services. So not only was it a larger number, I would say from my perspective, the quality of those bookings were better than we've seen certainly over the last few quarters.

It's helpful and then on the affinity you were talking about, I just want to make sure, have you signed any of the affinity programs to the new FICO Scores either directly or through partners or are these the ones that are still in discussion?

No, these are still in discussion.

Okay. And then last question from me is given the success of the Experian reseller agreement or partnership, how do we feel about the other credit bureaus or even other ways to distribute that FICO Score, not the Open Access but through another similar credit bureau or other similar partner?

We continue to look for other ways to take the FICO Score to market. I'm not in a position to comment on the specifics of our discussions with the other credit bureaus, but we're always interested in expanding the use of FICO Scores.

(Operator Instructions) There are no further questions at this time.

Thank you. This concludes today's call. Thank you all for joining.

This concludes today's conference call. You may now disconnect.