Fair Isaac Corporation (FICO)

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Fair Isaac (FICO)

Q3 2011 Earnings Call

August 03, 2011 5:00 pm ET

Executives

Michael Pung - Chief Financial Officer, Chief Accounting Officer, Head of Investor Relations and Senior Vice President

Steve Weber - Head IR

Mark Greene - Chief Executive Officer and Director

Analysts

Carter Malloy - Stephens Inc.

Nandan Amladi - Deutsche Bank AG

Presentation

Operator

Good afternoon. My name is Wesley, and I will be your conference operator today. At this time, I would like to welcome everyone to the FICO Third Quarter Earnings Call. [Operator Instructions] I'd now like to turn the conference over to Steve Weber to begin. Please go ahead, sir.

Steve Weber

Thank you, Wesley. Good afternoon, and thank you for joining FICO's Third Quarter Earnings Call. I'm Steve Weber, Head of Investor Relations, and I'm joined today by CEO, Mark Greene; and CFO, Mike Pung.

You'll find on the Investor Relations portion of the FICO website a copy of today's news release, our Regulation G Disclosure schedule and our financial highlights.

While our press release 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 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.

In order to provide additional information to investors, we will use certain non-GAAP financial measures on this call. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, entitled Regulation G Disclosure, is available on the Investors page of our website under the Presentations tab.

A replay of this webcast will be available through September 3, 2011.

Now I'll turn the call over to Mark Greene.

Mark Greene

Thanks, Steve, and good afternoon. We'll proceed today as usual in 3 parts. First, I'll summarize the quarterly results and assess our business in light of current market conditions. Mike Pung will then provide further financial details. Finally, I'll discuss our business outlook for the balance of fiscal 2011 before we take your questions.

For the third quarter of fiscal 2011, we had mixed results, with revenue down when compared to the prior year and prior quarter, but net income up significantly compared to the same periods. Third quarter revenue was $151 million, down $2 million over the prior quarter and down $5 million year-over-year. Non-GAAP earnings per share in the quarter were $0.58, up 49% from last quarter and up 41% year-over-year.

Bookings were $50 million compared to $58 million last quarter and $64 million in the third quarter of 2010. Year-to-date, revenue and bookings have grown 2% and 8%, respectively, from the prior year. Our transactional and service revenues remain strong during the quarter. However, our license revenue declined by about $5 million versus the prior quarter. This is almost disappointing as we had several large deals in the pipeline that we expected to sign by the end of the quarter that did not. I've noted in prior calls that we expect some variation in framing around revenues associated with the large license deals. And we believe the lower license revenue this quarter is an example of that. The deals that failed to close in time were not losses, but pushed into the current quarter, and we still expect them to come good.

On the expense side, this quarter, we realized the full benefit of the restructuring that we did last quarter. Our operating expenses are down $9 million from last quarter and down $11 million from the prior year. Despite the decline in license revenue, our adjusted operating margin grew to 28% this quarter compared to 24% last year. Let me now break down the performance into the 3 segments of our Decision Management portfolio.

Beginning first with the Decision Management Applications segment, which consists of business software used by clients to better understand and predict consumer behavior to help them make smarter decisions over customer life cycles.

Revenue from these applications was $92 million, down 4% sequentially due to a drop in license sales and up 1% versus the same period last year. Within this Applications segment, we had another solid quarter in our Fraud Management business, which consists of Insurance Fraud Manager and Falcon Fraud Manager for banking. Fraud Management bookings were nearly $18 million for the quarter, up 24% from the previous quarter and up 52% from the previous year, while revenues grew 2% and 9% on a sequential and year-over-year basis.

We remain very pleased with the performance of our strong Fraud Management franchise. Turning next to our Scores segment, which consists of predictive analytics to use risk -- to assess risk. Overall Scores revenue was $42 million, up 2% from the prior quarter. We tracked 2 subsegments here. B2B, which are scores sold to financial institutions and B2C, which are scores sold directly to consumers at myfico.com, as well as scores sold indirectly to consumers through bureau partners.

The first of these, the B2B Scores segment, continues to track with the economy, as B2B Scores revenue were up slightly from last quarter, although down 10% from the same period last year due primarily to a true-up in royalty fees last year. We continue to focus on maintaining our market leadership in this area, and we look for opportunities to provide new revenue streams.

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