Fair Isaac Corporation (FICO) Q1 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Fair Isaac Corporation Quarterly Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, January 30, 2019. I would now like to turn the conference over to Steve Weber. Please go ahead, sir.

Thank you. Good afternoon and thank you for joining FICO's First Quarter Earnings Call. I'm Steve Weber, Vice President of Investor Relations and I'm joined today by our CEO, Will Lansing and our CFO, Mike Pung. Will is dialing-in from India, where he is attending a company event, so we apologize in advance, if we have any technical issues with his connection. 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. FICO adopted the new accounting standard Topic 606 as of October 1, 2018. We have also adjusted our FY18 results under this standard and posted that on our website. Today, all comparisons will be made using the adjusted numbers. 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 the 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 the 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 January 30, 2020. And with that, we'll turn the call over to Will Lansing.

Thank you, everyone for joining us for our first quarter earnings call. Before I get started today, we also announced that Mike is planning to retire at the end of the year. Mike has been an integral part of the great story we have here at FICO. For the last 14 years, he has dedicated himself to creating shareholder value and he will be sorely missed. We are fortunate to have a strong finance team in place. Mike will continue to serve the company through the year, while we search for his replacement. With that, let's move on to the quarter. We're off to a good start this fiscal year with continued bookings and revenue growth and we're well positioned for 2019. In our first quarter, we reported revenues of 262 million, an increase of 13% over the same period last year. We delivered 40 million of GAAP net income and GAAP earnings of $1.32 per share, up 22% and 27% from the same period last year. We delivered 44 million of non-GAAP net income and non-GAAP EPS of $1.45 per share. On the software side of our business, we continue to grow our revenues even as we build to our recurring revenue base. Our application segment was up 5% over last year and our decision management segment was up over 22%. We had another strong bookings quarter with more than 100 million in new deals for the fourth consecutive quarter. I'm particularly pleased with the progress we're making in Latin America, where we've signed four deals valued at more than 3 million and another three deals valued at more than 1 million. We have a strong team in Latin America and our acquisition last quarter of GoOn, the credit risk management consulting firm based in Brazil will bolster our efforts in that rapidly growing region. Overall, our cloud-based revenues were up 14%, and our cloud-based bookings were up 134% over the same period last year. This quarter included two large Falcon cloud deals and a large Strategy Director deal. In the Scores business, we continue to drive significant growth. Revenues this quarter were up 25% from the same period last year. On the B2C side, revenues were up 9% over the previous year, with most of the growth [Technical Difficulty].

Hey, Will. Are you still on the line? We dropped your voice. Let me pick up where Will has left off here and Will will join us hopefully in progress. On the B2C side, revenues were up 9% over the previous year with most of the growth coming through our partnerships. We also signed a new customer, which converted their consumer education programs from an educational score to the FICO score in January. On the B2B side, revenues were up 36% over the previous year, due primarily to the 2018 price adjustments. Scores revenue were down sequentially, but that was primarily due to our seasonality. We anticipate we will continue to have strong Scores growth in fiscal year ‘19, as new pricing adjustments took place in January. We continue to be excited about the long-term prospects of our Scores business where we have many growth opportunities. In China for instance, we continue to gain traction as banks are increasing their volumes and new banks are testing the FICO score. It's still very early stage, but we will continue to provide updates in coming quarters, as the revenues become meaningful. Our Open Access program hit another milestone in December, when we announced that 300 million consumer accounts now have free access to the FICO score that is used by the lenders to manage accounts. More than 170 financial institutions are now participating in the FICO Score Open Access program. Before I start my prepared remarks, I want to just spend a couple of minutes about my impending retirement. I've spent literally a quarter of my life at FICO, and I'm very proud of what we have accomplished. For those that know me, you won't be surprised to know that I expect to spend much of my time in retirement, traveling and seeking some new personal adventures, but until then, I will continue to contribute my best to the success of the company. Now, let me move on to my prepared remarks. First, I'd like to remind everyone that this is our first quarter reporting under the new accounting standard Topic 606, and all comparisons will be made to previous quarters as they've been adjusted under that standard. Today, I'll emphasize three points in my prepared comments. First, we delivered 262 million of revenue, an increase of $30 million or 13% over prior year. Recurring revenue grew 14% and totaled 194 million. Second, we delivered 40 million of GAAP net income and $1.32 of GAAP EPS, up 22% and 27% versus last year. And finally, we generated $42 million of free cash flow this quarter and we used $83 million to repurchase shares in our first quarter. Let me break the revenue down now into our three reporting segments. Starting with applications, revenues were $148 million, up 5% versus the same period last year. Recurring revenue grew 7% over last year and accounts for about two-thirds of all applications revenue. We had particularly strong quarters in fraud banking solutions and in our compliance solutions. And our application bookings of 59 million were down slightly from the $62 million in the prior year. In decision management software segments, revenue were 29 million or up 22% versus the prior year, due to increases in upfront license and an 8% increase in recurring revenue. We had our largest DMS bookings quarter ever with $31 million of new deals, which is up 169% from last year. And finally in our Scores segment, revenues were $86 million, up 25% from the same period last year. On the B2B side, we’re up 36% versus the same period a year ago. B2C revenues were up 9% from the same quarter last year. In B2C, revenues from our partners were up double-digit, while our myFICO revenues were relatively flat. Looking at revenue by region, this quarter 77% of total revenues were derived from the Americas. Our EMEA region generated 15% and the remaining 8% was from Asia Pacific. Recurring revenues, which are derived from transactional and maintenance sources remained very strong and this quarter represented 74% of total revenue. License revenues were 10% of total and consulting and implementation revenues were 16% of total. The lower percentage of services revenue was primarily caused by some implementation delays over the holidays. Bookings this quarter were $107 million, up 30% from the prior year quarter. Total bookings for the trailing four quarters is $462 million. We generated $16 million of current period revenues on those bookings for a yield of 15% and the weighted average term for our bookings was 31 months this quarter. This quarter, we had 16 deals between $1 million and $3 million and we booked seven deals over 3 million. Cloud bookings represented $44 million of the total, which is up 134% from last year. In addition for the first time, the cloud deals represented a majority of our deals in excess of the $1 million I noted above. Operating expenses were 213 million this quarter, compared to 209 million in the fourth quarter and this quarter included our annual salary and benefit increases. As you can see in our Reg G schedule, our non-GAAP operating margin was 28% for the first quarter versus 24% last year. We expect that net operating margin to be between 26.5% and 28.5% for the full year. GAAP net income this quarter was 40 million. We had a reduction to income tax of 13.2 million or $0.44 per share associated with the excess tax benefits and had an effective tax rate of negative 8%. Tax reform guidance continues to evolve, but as we have said last quarter, we expect our effective tax rate to be around 14% for the fiscal year. Non-GAAP net income was 44 million, which is up 13% from last year. Our free cash flow for the quarter was 42 million versus 25 million last year and free cash flow for the trailing four quarters is about 209 million. Now turning to the balance sheet, we had $80 million of cash on hand at the end of the quarter. Our total debt is 838 million with a weighted average interest rate of 4.7%. The ratio of our total debt to adjusted EBITDA this quarter is 2.7 times, which is below our covenant level of 3 times. The increase from prior quarter is a result of additional borrowings plus the fiscal 2018 impact related to the new accounting standards. During the quarter, we returned $83 million in excess cash to our investors and repurchased 425,000 shares at an average price of about $195. We have about 117 million remaining on our 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. And finally, we're confirming our previously issued full year guidance. With that, I'll turn the call back to Steve for Q&A.

Thanks, Mike. This concludes our prepared remarks and we're now ready to take your questions. Operator, please open the lines.

[Operator Instructions] Our first question will come from the line of Manav Patnaik from Barclays.

Hi. Good evening, gentlemen. And Mike, before we begin, just congratulations on your retirement.

Thanks, Manav.

The first question I had was just on the B2B Scores side, the plus 36%. I was hoping you could just help us flesh out what the pricing versus volume component of that was?

Yes. Absolutely, Manav. So our fourth quarter or our first quarter, which ends December tends to be a lighter quarter for us in terms of volume. Volume levels were up in the low single-digits for the quarter with the remainder of the increase made up primarily from pricing in the US as well as B2B Scores that we sold outside of the US, primarily in China.

Okay. And if I heard you correctly, did you say you put in new pricing in January of, like this year?

That's correct. Similar to last year, when we put our pricing sheets forward, they effectively take effect as of January 1, though they obviously feather in over the course of the year as our resellers reset their price sheets as well.

And could you give just any color on where those price increase are? And I guess it sounds like you haven't baked that into your guidance. Is that correct?

That's correct. When we built the guidance in November and communicated it to all of you, we were fairly clear that we had built in general increases in our pricing and any special pricing increases that would take effect have not been included in any of the guidance, simply because it's very hard to predict the timing of when those price sheets will become applicable through our reseller networks.

Okay. Got it. And then just maybe just some general color, whether it's on your software or maybe in the Scores, everyone's obviously a little shaky on where the economy is, just any data points you're seeing that makes you think differently than when we last spoke.

No. We don't really have any clear signals despite the fact that the last 30 to 40 days have been relatively choppy, especially with the shutdown of the government. Our pipeline remains strong, our ability to convert still exists. We haven't frankly seen any changes in customer behavior. And so things are quite similar to what they were in November when we last had these formal discussions.

Our next question comes from the line of Bill Warmington from Wells Fargo.

So Mike, I'm happy for you personally, but I think, I'm going to miss you professionally, so that’s sad news there. So I have to conclude that it was the 606 Topic that pushed you over the edge.

That's been known to take down many, much greater than me, Bill. Thank you.

A couple of things. First is, you mentioned a couple of the big Falcon contracts that you landed in the quarter and that was a little surprising to me, because I know you've got Falcon X coming out later in the year. So were these actually Falcon X sales, were these like the legacy Falcon product and is there some backward compatibility, are you sort of selling in advance on that? I almost would expect to be some slowdown in Falcon in advance with the Falcon X coming out?

No. That's a great question, Bill. Falcon X has still not been released. We're still in development and we will be over the next quarter or so. The deals that I referred to are existing Falcon product and they were in the cloud. As you know, we released a cloud version of Falcon a few quarters back and two of our deals this quarter in Latin America were Falcon cloud and as a matter of fact, one of the deals in addition to those were with our new Strategy Director in the cloud also. And so, that product, Falcon and Strategy Director are ready for prime time. There's obviously upgrade paths down the road, but these deals have been in the works for a while and they got converted here this quarter.

Okay. Now you mentioned that new B2C contract, we happened to notice that USAA put out a blurb to their customer base about offering that score, so we're concluding that those are the players. Is that revenue then going to be effective this quarter, the January quarter or is it, was there some in the December quarter?

Yeah, that's exactly right, Bill. USAA has been a long and an important user of the FICO score for their credit risk management, and they announced in January that they would be distributing that score in multiple programs to their end customer, similar to what our open access, educational programs and lead generation programs are. They are paid to FICO and our partner Experian as a result of that and we'll start to see some of that revenue begin to flow here in January, when they launch their service.

Okay. And then Experian on their update that they gave earlier in the month mentioned a couple of things. They talked about their Boost program and they also talked about their credit match program and those seemed like both like programs that you guys are participating in, maybe you could give us some update on those, and how you fit into each one of those?

Yeah. I'll be happy to. Their credit match program is obviously their lead generation program here that they launched over prior year and a half ago with us in partnership. They're beginning to build, as I understand, through their call, a lot of momentum around building their pre-subscriber base. And some of the growth that you see coming through our consumer channel is frankly coming through that channel as well. The Boost program is a program that they’ve launched, I believe it's this month and it works in coordination with the announcement that we made several quarters ago on UltraFICO, I guess it was last quarter. And we're also working in coordination with Experian under our joint program.

[Operator Instructions] Our next question comes from the line of Adam Klauber from William Blair.

Couple of different questions. Follow-up on the Scores price increases. What products are those on? And if you can give us some idea of the -- are they in the magnitude of what we saw on the mortgage product?

Yeah. Great question, Adam. So we've done two different kind of pricing actions this year, similar to what we did last year. The first was a more general CPI, I would call it price increase that touches on a number of different parts of the portfolio. That takes effect essentially in January. And then, we have done another special pricing increase to an area, not mortgage, we did the mortgage catch-up, if you will last year and we're touching another area within the portfolio that we have not done any pricing increases on for decades, beginning in January as well. We've not specified yet what part of the portfolio that's in and we likely won't speak to it until we start to see some of the revenue be generated from that. We purposely have left that off to the side of our internal plans and in our guidance, because any special pricing that we do through the re-seller channel we have with the bureaus has to be implemented by the bureaus to their end-customer and their re-seller channels. And the timing of how that all flows through is often a bit uncertain depending upon their existing agreements in place. And as a reminder when our bureau partners have a deal in place that is locked in a pricing deal, we honor that price and we grandfather it. So, we'll start to see reports that will come back for all of these pricing decisions, probably beginning sometime in February and March and we should have a better handle on how it's all rolling out on our next call.

Okay. That's actually very helpful. Then, I think you mentioned in applications, there are some implementations pushed. Can you give us an idea of how big or how much revenue that would be? And can we expect that to flow into the next quarter?

Yeah. So good question, so when you step back and look at our results, the one thing you may notice when you look at it by type of revenue stream, you'll see that our services revenue went down slightly, compared to last year in the first quarter, which is a bit unusual, because we've booked a significant amount of services business over the course of the last 12 months. Because of the holidays and because of other situations at some of our customers, the pace at which some of these programs are beginning the implementation process have just simply gotten slowed down. And that's really why the services revenue was a little bit below what we'd seen in the past. In terms of giving you an order of magnitude of size, I would say it's probably in the range of something around $5 million of revenue that we typically would have seen had these deals kind of gone up and running in the holiday seasons. And so because they haven't, it just simply gets pushed out into quarter two and possibly some will push into quarter three.

Great, great. And then Brazil seems like it's beginning to take off. How big is that business and how should we think about that growing and emerging over the next couple of years?

Yeah. So that's a great question, we don't often talk about the activity that we have down in Brazil and frankly in all of Latin America, it gets blended into our North America book of business typically. But we do close to $80 million to $90 million worth of business in Latin America on an annual basis. Actually, I take that back, it's about 50 million of annual business down in Latin America. This quarter, we had a tremendous quarter, primarily in the bookings area where we signed a lot of business. What we've seen from the team down there, I would say they're almost the poster child of software sales people, who are very good at selling our decision management platform and all the solutions that are tied and associated to that. And that's what's really been driving a lot of the success. The challenge in Latin America for us is that there are a lot of kind of boutique players down there and so it's very competitive country by country. But we're beginning to find a very nice niche for ourselves with a couple of our products. Falcon is one that has been selling for a while very nicely there and then more importantly to us, the DMP -- or equally important, the DMP has been selling well in part because of the talent we have there on the ground.

Okay, okay. And then last question the FICO Ultra, will revenue from that be incremental this year, is that just building for maybe down the road?

Yeah, I would call UltraFICO something more down the road. As we mentioned in the last call, it's a new initiative that we are partnering with Experian on. There's a lot of work ahead of us still to operationalize it. We've made some progress this quarter. And with the holidays, it's actually gone fairly well, but we don't have anything baked into any of our numbers in fiscal ‘19 related to UltraFICO. We'll see how the implementation and the product development work concludes before we get more specific on that one.

There are no further questions at this time.

All right. That concludes today's call. Thank you all for joining us and we'll talk to you again next quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.