Fair Isaac Corporation (FICO)

FICO 
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Fair Isaac (FICO)

Q2 2013 Earnings Call

April 24, 2013 5:00 pm ET

Executives

Steven P. Weber - Vice President of Investor Relations and Treasurer

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

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

Analysts

Carter Malloy - Stephens Inc., Research Division

Manav Patnaik - Barclays Capital, Research Division

Matthew Galinko - Sidoti & Company, LLC

Nandan Amladi - Deutsche Bank AG, Research Division

Presentation

Operator

Good afternoon. My name is Charlene, I will be your conference operator today. At this time, I would like to welcome everyone to the Fair Isaac Corporation Second Quarter Earnings Conference Call. [Operator Instructions] Thank you. Mr. Steve Weber, you may begin your conference, sir.

Steven P. Weber

Thank you, Charlene. Good afternoon, and thank you for joining FICO's second quarter earnings call. And 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. Today, 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 the actual results to differ materially. Information concerning these uncertainties is contained in the company's filings with the SEC, in particular, 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 measures. 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. A replay of this webcast will be available through May 24, 2013. Now I'll turn the call over to Will Lansing.

William J. Lansing

Thanks, Steve. Today, we announced the results for our second quarter of fiscal 2013. I'll briefly discuss those results, update you on our progress with the acquisitions we've made in the last year and discuss some of the internal investments we've been making to generate greater value from our product portfolio.

In our second quarter, we reported revenue of $179 million, an increase of 12% over the same period last year. We delivered $25 million of non-GAAP net income and non-GAAP EPS of $0.69 per share, an increase of 5% from the same period last year. On a GAAP basis, we delivered $18.5 million of net income and earnings of $0.51 per share for the quarter, down 8% and 7%, respectively, from the same period last year. The reduced margin is primarily due to soft license sales this quarter as well as implementation expenses as we ramp up applications to drive future recurring revenue. Mike will delve into the numbers in a few minutes and discuss how we expect to deliver the full year results we've guided. But first, let me tell you a bit about our acquisitions and internal investments we've undertaken that are advancing our growth strategy.

This quarter, we announced the acquisition of Infoglide, a leading provider of entity resolution and social network analytics. This tuck-in acquisition brings critical link analysis functionality that we've been licensing from them for our fraud prediction products. The technology is state-of-the-art at finding suspicious information in an insurance claim or financial transaction and then making links with other transactions to expose otherwise invisible patterns. And in this era of Big Data analytics, it has applications to other areas that interest our clients, social networks, for example, that extend well beyond fraud management. Watch the space for some exciting developments in the months ahead.

This is the first full quarter of results from our acquisition of CR Software. The added functionality from CR makes our debt collection and recovery solutions best-in-class and greatly expands our addressable market. Initial response from customers has been very encouraging. We have developed a significant pipeline and we're working hard to convert it into revenue in the coming quarters. With Entiera, we continue to migrate current clients onto that platform as they renew their contracts. The customer dialogue technology we obtained from this acquisition has quickly become a cornerstone of our marketing solutions.

I'm very pleased with the progress we're making with the Adeptra product that we acquired last year. We signed more than 10 deals this quarter, including 2 large deals in Asia, which will deliver significant recurring subscription revenue as they go live over the next few quarters. We are convinced that this customer engagement technology will increasingly become mission-critical infrastructure as companies strive to improve their customers' experience. We've had discussions with several large companies that are interested in partnering with us, to use FICO Adeptra customer engagement technology in their applications outside of the markets we currently serve. This product has excellent growth potential and it validates our strategy to invest in robust products with revenue opportunities beyond the financial services sector.

Finally, I'd like to talk about innovation. We've stepped up our development efforts in the area of enterprise fraud prevention, which is proving to be a significant growth driver for the business. We focused significant resources on the specific areas of application fraud, online fraud and merchant monitoring. This quarter, we introduced FICO application Fraud Manager, the first solution combining advanced decision management and investigated workflow capabilities with analytics for both first-party and third-party application fraud. The solution helps private companies and public agencies across multiple markets and sectors reduce losses while improving customer service. And this solution is addressing a significant problem, application fraud is estimated to cause credit grantors more than $6.7 billion a year in the U.S. alone and polished figures may not account for the full scope of the problem. That's because most reported application fraud is third-party fraud, which involves identity theft. Yet many industry experts believe the bigger problem is first-party fraud, in which the criminal is the customer, who obtains credit often by falsifying information without intending to pay it back. Historically, this kind of fraud has been difficult to detect and often the losses are characterized as bad debt rather than fraud. One industry analyst group estimates that first-party fraud in credit cards costs $18.5 billion worldwide in 2012 and will rise to $28.6 billion by 2016. It's this much larger problem that FICO is tackling and we think the potential for widespread adoption of our product is significant.

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