Fair Isaac Corporation (FICO)

FICO 
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Fair Isaac Corporation (FICO)

Morgan Stanley Technology, Media & Telecom Conference

February 27, 2013 7:50 pm ET

Executives

William J. Lansing - Chief Executive Officer, President and Director

Michael J. Pung - Chief Financial Officer, Chief Investor Relations and Executive Vice President

Analysts

Michael McLaughlin

Presentation

Michael McLaughlin

Good afternoon, everybody. Thanks for joining us. My name is Mike McLaughlin with Morgan Stanley's Technology Investment Banking Group. I'm pleased to host today's session with FICO. Before we get started, I would encourage you to refer to the disclosures and cautionary statements on Morgan Stanley's website regarding forward-looking statements and the like. With me here today is Michael Pung, Chief Financial Officer of FICO; and Will Lansing, Chief Executive Officer. This will be interactive, of course. Please ask questions as we go. But why don't we start, Will, if you would offer for these folks a roadmap or schematic of FICO. It's a company that maybe is less well understood than it could be. And how do you think about the basic framework that helps understand the business?

William J. Lansing

So we call ourselves a predictive analytics software company. We're probably best known for FICO Scores, which banks use to evaluate consumer propensity to repay debt. We're about a $750 million business. We've got 3 major chunks of business. The first is the Scores business, which is, as I said, what we're known for. And that breaks into 2 pieces. One piece is selling Scores to credit bureaus who then turn around and sell it to banks, where they apply it to their data and sell it to banks to make origination decisions and then we have the consumer scores business where we sell scores and credit reports directly to consumers. The second big piece of our business is our Applications software business. It's about $0.5 billion business. And that business is primarily, although not exclusively, aimed at financial institutions. We have software that helps with originations. We have software that helps with collections and recovery of debt. We have software that is used in detecting fraud, credit card fraud in transactions in real-time. And we have customer management software into the banks. Then we also have some software that's more in the retail space marketing solutions. We've done a couple of additional acquisitions in the customer contact management space. And then the third big chunk of our business is we refer to it as the Tools business. And that consists of a rules engine, some optimization tools, and typically, that's used in custom analytics solutions where we'll take our tools and then wrap them with some professional services and solve problems, analytic problems for customers in various industries, but mostly financial services on a custom basis. So that's a thumbnail sketch.

Michael McLaughlin

And how would you describe the unifying theme across those 3 buckets and what it is that makes them work together as a whole as opposed to 3 separate businesses?

William J. Lansing

What we're really good at is analytics. So we grew -- our reputation started with this realization 40 or 50 years ago by the founders of the company that instead of having the old-time banker make the credit decisions on the basis of personal knowledge, personal familiarity with the customer, the bank customer, we could reduce some of the creditworthiness judgment to things that could be done with algorithms and analytics and then have much lower cost people make those decisions. And that was really what allowed a lot of the credit industry to develop the way it has in this country. So the analytics scientists are our strength. And from that, we've branched out into these other areas. We've picked up tools and then wrap professional services around analytics. And then the applications are all very analytics-heavy. They're designed to leverage our analytics. We have a lot of patents around it, and we'll talk about the future in a moment. But basically, where we think we're taking the company is leveraging these analytics on top of Big Data and into areas beyond financial services.

Michael McLaughlin

And when you think about that portfolio of businesses, I think it's fair to say that one of those businesses is a highly cash-generative, but GDP-like business. And the other 2 have the potential to grow faster than that and use some of that cash flow in a positive way in terms of investment and new product development. Is that the right way to think of that?

William J. Lansing

That is right. So our Scores business, which is the cash generator, is a very, very high-margin business. It's deeply embedded into the systems of the bank customers who use it. It doesn't grow quickly. It kind of moves with the economy because it's a function of volume, of originations in the credit business with consumer debt. The other 2 businesses are more like software -- more software-business oriented and has lots of growth potential.

Michael McLaughlin

So let's shift to the future then. You've done a couple of acquisitions since you've taken over the CEO role. There's been a good trajectory in terms of performance in stock price. How do you think about starting from this base, this ability to have a lot of free cash flow to use to invest for growth? Do you think about it more in terms of verticals products, delivery mechanisms?

William J. Lansing

It's probably worth taking a step back and looking at the business a couple of years ago. We took a hard look at our business a few years back, and particularly in the wake of the financial downturn when a lot of our business dried up with our bank customers and where originations volume and our Scores business went down. And we made the decision then to focus on a lot of financial engineering frankly around building value for shareholders during tough times for our company. And so we did a few things. We cut cost dramatically and improved margins, and then we took a massive free cash flow and used it to buy back stock. And then we went further and borrowed a lot of money to buy back even more stock. And so over the last 5 or 6 years, we've gone from 60 million shares outstanding to 35 million shares outstanding. We borrowed $500 million to buy back stock at an average of $24 and we sit at $44 today. The -- if you look at last year 2012, we did 9% revenue growth, 29% net income growth and 42% EPS growth. And so we had operating leverage through and margin improvement through cost-cutting and execution, and then we had this extra juice for EPS through stock buyback. We're proud of that record. I mean, I think we've made investors happy over the last couple of years. And at the same time, we feel like that's not a sustainable path for value creation. And so where we're pointed now is to use some of that free cash flow for acquisitions. And frankly, instead of just pressing on margins and net income leverage, we're actually reinvesting in the business in a pretty dramatic way because we're at this point where Big Data, an overused term, but Big Data is opening up all kinds of new opportunities and the ability to do analytics on top of Big Data which ought to be a natural place for us to be a dominant player, is a great big opportunity. And so we're investing in our Applications business, in our Tools business to be well positioned for that. So we have an M&A program on and we have a lot of investment for organic growth.

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