Fair Isaac Corporation (FICO)

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Fair Isaac Corporation (FICO)

Credit Suisse 15th Annual Global Services Conference

March 13, 2013 12:30 pm ET


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


Michael J. Pung

[Audio Gap]

on EBITDA margins of roughly 28% to 30%. We feel very good about where we're heading with the business. As I mentioned, our business is growing at a 9% clip. During the recession, we saw some significant declines as volumes were declining. And we saw a reversal of that 2 years ago, where we began to grow at a 2% rate, last year at 9% rate and this year at 12% to 14%. So we believe we're on the right course with the product offering that we have in the market and with our business model.

Our Scoring business, which, in particular, generates some very significant margins and cash flow to the company, is also beginning to get healthy again. Scoring is very much tied to the U.S. economic cycle. And as consumer lending began to pick up last year and continues to grow and pick up, so does our Scoring business. Scoring revenue generates over 90% margins for us on an incremental basis, so it's a very important lever to the shareholders of the company.

We've made some very important strategic acquisitions over the past 12 months that I'll talk about it a minute. Three of them, Entiera, Adeptra and CR Software, has allowed us to extend our addressable markets into areas that are aggregate and supplement to the existing lines of business that we have and are driving a significant amount of growth this year.

So in summary, we believe we have the right operating plan in place. We're focusing on our markets, which are banking, insurance, retail and health care. We're innovating and spending a lot of money internally in addition to the M&A that we're doing. And we're executing against our plans and have been for the past couple of years.

Real briefly, a snapshot of the company. We're in the business of predictive analytics. We use our analytic scientist community and the applications that we've created in order to assist our clients in mining their data and information, either in real time or in batch mode. And we use that to help them do many critical things, including pricing and credit risk management, things that are core to their businesses. We've been in business well over 50 years, and we've been doing this for a balance of that 56 years. Our revenue last year was $676 million, 9% growth over the prior year, and we have numerous patents across much of our portfolio. The way we typically describe our businesses is in Scores, which are Scores sold through the credit bureaus to the banks and Scores sold to consumers on myFICO.com. It's about 25% of the total revenue of the company. The remaining 75% or $600 million of our business are in a combination of pre-configured applications that are aimed at the industries that I described earlier or tools that are software components that are used by FICO and our clients to create our own set of applications.

We're ranked very highly in a number of criteria and by a number of third-party agencies. We do business across the world. We go to market in the Americas and EMEA and Asia Pacific. About 60% of our business is driven out of the United States, the other 40% is driven outside the United States. If I put Scoring on the side, which is very U.S.-centric, about half our business is in the U.S. and the other half is not.

As I mentioned, our primary industry focus is banking where 75% of our business is aligned around, and that's where our main domain knowledge exists. But we use the analytic capabilities that we've established over the years in banking to serve several other industries that are listed on the page.

2,400 employees, over 5,000 clients, 20 offices worldwide with our corporate headquarter being in San Jose, California.

In terms of understanding our business, we typically describe 4 products, the key 4 products that have been market leaders for many years. The main one most people recognize Fair Isaac around is the FICO Credit Score, which is the #1 credit risk score in the United States with over 90% market share. Last year, over 10.5 billion scores were pulled by U.S. banks for doing everything from underwriting mortgages to managing credit card portfolios. Every time a score is pulled, FICO gets paid a royalty fee with nominal fixed costs associated with this line of business and virtually no variable costs. So it's an important driver even with modest revenue growth to seeing some significant operating leverage on the bottom line.

That being said, we also have 3 other marquee products that any company would admire and we value very highly on our business, the largest of which in our software side is our Falcon Fraud Manager product. Falcon is the #1 credit card and debit card fraud solution detection system in the world. 50% of our revenue from fraud, Falcon Fraud, is driven in the U.S. and the other half is driven outside of the U.S.

We protect 2.5 billion cards a year from instances or compromises of fraud activity. And essentially, we're the guys behind the scene that are monitoring every transaction that happens at point of sale or at retail. And if that transaction on the credit card appears to be fraudulent, we notify the bank and the bank likely will notify you as a consumer that your card may have been compromised. In essence, what we do is we help protect not only our bank customers but also their end customers from the expanding fraud issues that exist around the world.

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