Fair Isaac Corporation
Q1 2021 Earnings Call Transcript

Published: 28 Jan 2021

[Operator:]

Greetings. And welcome to the Fair Isaac Corporation Quarterly Earnings Call. During the presentation, all participants will be in a listen-only mode and afterwards we will conduct a question-and-answer session. The conference is being recorded Thursday, January 28, 2021. And now, I’d like to turn the conference over to Steve Weber. Please go ahead.

[Steve Weber:]

Thank you. Good afternoon. And thank you for joining FICO’s first quarter earnings call. I am Steve Weber, Vice President of Investor Relations, and I am joined today by our CEO, Will Lansing; and our CFO, Mike McLaughlin.

[Will Lansing:]

Thanks, Steve, and thank you, everyone, for joining our first quarter earnings call. As we continue to deal with the effects of the pandemic, we remain focused on the health and safety of our employees. We are still primarily working from home and most of our offices remain closed. I am grateful to our dedicated employees who every day show their commitment to FICO and to our customers. On the Investor Relations section of our website we have posted some slides that offer financial highlights of our first quarter. I am pleased to say, we started 2021 well, as we continue to make progress on our strategic initiatives. We have reported revenues of $312 million, an increase of 5% over the same period last year. We are pleased with that result because we knew we would have headwinds on the software side as we transition toward more ratable recognition of our subscription software license revenues and our first fiscal quarter is typically our slowest software new business quarter. We delivered $86 million of GAAP net income and GAAP earnings of $2.90 per share, up 57% and 59%, respectively. On a non-GAAP basis net income was $82 million, up 51% and earnings per share of $2.74 was up 52% from last year, as we reap the benefits of the cost reductions we put in place last year.

[Mike McLaughlin:]

Thanks, Will, and good afternoon, everyone. Today, I will walk you through our first quarter results in more detail and briefly discuss the impact we are seeing from the restructuring and impairment charges we took in the fall and the revenue recognition assumptions we talked about last quarter. Revenue for the quarter was $312 million, an increase of 5% over the prior year. Our applications revenues were $135 million, down 11% versus the same period last year. This quarterly decrease in revenue was primarily driven by decreased term license revenues. In our Decision Management Software segment, Q1 revenues were $32 million, up 4% over the same period last year. The revenue increase was due to increased SaaS subscription revenue partially offset by lower license revenues. As Will mentioned, our license revenues are down as we transition to a more ratable subscription revenue model. Last quarter we explained how we would be recognizing less of our on-premise software deals upfront license revenue and recognizing more revenue ratably over the term of the deal. In addition to this change we are also selling more SaaS deals which further reduces the upfront revenues. Finally, we are also deemphasizing a low margin of non-strategic professional services engagement, which will likely have a negative near-term impact on professional services bookings and revenues. This is driven by our core strategic goal of selling more high value recurring revenue software. Turning to our Score segment, revenues were $145 million, up 26% from the same period last year. B2B revenues were up 20% over the same period last year, driven by high volumes in mortgage originations, as well as some unit price increases across our Score categories. B2C revenues were up 40% from the same period last year. Both myFICO.com and B2C partner revenues grew significantly. Score’s revenue was down 5% sequentially from Q4, but as a reminder, last quarter we had a material onetime royalty true-up that increased reporting revenue. This quarter 80% of total revenues were derived from our Americas region, our EMEA region generated 14% and then the remaining 6% was from Asia-Pacific.

[Will Lansing:]

Thanks, Mike. As I said in my opening remarks, we remain focused on building out our platform and taking it to an ever expanding marketplace. We will continue to invest at levels we think are appropriate to make the most of our incredible opportunity, and of course, we will continue to innovate and make the most of our incredible Scores asset. I am now turning the call over to Steve for Q&A.

[Steve Weber:]

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

[Operator:]

Thank you. Our first question is from Surinder Thind from Jefferies. Please go ahead. Your line is open.

[Surinder Thind:]

Good afternoon, gentlemen. My first question is actually on the Scores business. If we were to look at the B2C revenues, if my math is correct, they were roughly flat quarter-over-quarter. Can you provide a little bit of color there, because if we look back over the past few quarters there been a significant acceleration each quarter in the revenues and I thought that was a bit of a subscription based business. So if you can just help me understand what appears to be a sudden slowdown in new signings or if there is an offset -- where there’s new signings offset by certain individuals canceling subscriptions?

[Will Lansing:]

I am not sure I follow the question.

[Surinder Thind:]

So, for your B2B revenues, they -- if my math is correct, they were unchanged quarter-over-quarter. Can you provide a little bit of color, because if we look at the previous quarters, there was significant acceleration each quarter on a sequential basis and that doesn’t -- it didn’t appear to occur this quarter?

[Will Lansing:]

That’s right. It didn’t appear this quarter. Mike, go ahead.

[Mike McLaughlin:]

Yeah. I can jump in with some specific. So B2C revenues were up quarter-over-quarter, but not a lot, call it, $1 million. If you look back to Q4 to Q1, a year ago, it was kind of the same factor. So there is some seasonality Q4 to Q1 and the year-over-year compare continues to be very strong. But you are right, the quarter over quarter additions just were not as large as they were in the last two quarters particularly.

[Will Lansing:]

And it’s worth adding that there was a settlement in the prior quarter.

[Surinder Thind:]

Understood. On the Score -- on the B2B part. Understood. In terms of the -- and then maybe as my follow-up question, on the software side of the business, it seems like there’s a -- unless I -- it seemed like there’s a change in strategy to maybe focus more on the sales of SaaS products versus on-premise. Is that a little bit of a change from our previous discussions or the way because I thought the margins in the two businesses were relatively the same and that the thought was is that, from a plan perspective, that it was going to be a significant amount of time before the transition in your business occurred in that. Are you guys looking to accelerate…

[Will Lansing:]

I would say, from a strategy standpoint, the way -- we don’t emphasize the one business over the other. We really try to do what’s appropriate for the customer. And so, while we love the characteristics of the SaaS business, where appropriate, we will absolutely do license on-prem deals and we don’t favor -- we don’t really favor one over the other.

[Surinder Thind:]

Okay. Thank you.

[Operator:]

We have a question from Manav Patnaik with Barclays. Please go ahead. Your line is open.

[Manav Patnaik:]

Yeah. Good afternoon. Good evening, I guess. So just on the software piece, so firstly the fraud licenses I guess the decline there. It sounds like most of that is because you are not renewing lower margin services. I was just hoping to get an example of what that is, because I would imagine anything enforced is probably valuable and worth sticking with. So maybe you can just help us how that decision works.

[Will Lansing:]

Mike, do you have a view on that?

[Mike McLaughlin:]

Yeah. Sure. So…

[Manav Patnaik:]

Hi, Mike.

[Mike McLaughlin:]

…if you look at the license -- yeah. Manav, if you look at the license itself. As we said, it’s -- and I am not just address fraud because probably the bigger question is that we are down about $15 million year-over-year from license sales. As we said about $9 million of that was purely related to the revenue recognition sale. It was also a quarter where we had less license renewals available to renew. If you followed us long enough then you know that that can be very lumpy. In Q3 we had another low quarter of last year, but Q2 was high. It just goes up and down. We can only renew that which is available. So it was a low renewal quarter. Not that we missed renewals or people didn’t renew, they just didn’t came up for renewal. And then the rest of it is just normal volatility and Q1 is particularly volatile, because it’s typically our smallest quarter. It can have the highest standard deviation. The services per se wouldn’t hit that fraud license line. It wouldn’t hit the total fraud business. An example of a services engagement that we would deemphasize would be some managed services that we perform for some of our customers, where we are helping them run the application on an ongoing basis. We do it well. It’s a good service. But it’s not strategic and so we are not emphasizing that. We are also engineering our products to be less professional services intensive when they are installed. So they can reduce the total dollars that our customers need to spend to install the product. So those are two examples of how and why professional services are -- we expect to be trending downward over time.

[Manav Patnaik:]

Got it. Will, your comments around early signs of card, marketing, prospecting, et cetera, picking up. I was hoping you could elaborate a little bit there on which particular areas perhaps and how we should, I guess, that probably just ties to the reopening, just curious to what you think there?

[Will Lansing:]

Well, I think, it is just that. I mean, we -- what we are seeing is the decline from a year earlier is not as great as it was. And so, while we clearly have a long way to go to kind of recover former volumes, the trend is in the right direction. So it’s -- we are seeing early signs of life.

[Manav Patnaik:]

Got it. And just one last one for me, myFICO.com, I mean, I think, I understand why that’s doing so well because of the market macro out there. But are you guys doing anything really differently in that business to push them grow to at least over 69% this quarter or…

[Will Lansing:]

I think I…

[Manav Patnaik:]

… will set up for a big fall basically somewhere down the road.

[Mike McLaughlin:]

Hard to say. I would say that it’s a combination of us doing things differently, because we are always trying to do things that run the business better. And we have got a crack team there that is constantly experimenting and innovating to improve the business. But that said, obviously, we are benefiting from the fact that we have so many consumers who are increasingly focused on their Scores and their FICO credit scores. And they come to myFICO to where an obvious place to come. We don’t promote it nearly as much as partners like experience. But consumers find us and we do some -- someone marketing ourselves. And so I’d say it’s both things. It’s -- we are benefiting from the environment we are in where consumers are more focused than ever and I don’t know how long that lasts. I think it could last a long time, but we don’t know. And then we are also benefiting from an excellent execution from the team.

[Manav Patnaik:]

All right. Thank you.

[Operator:]

We have a question from Kyle Peterson from Needham. Please go ahead, your line is open.

[Kyle Peterson:]

Hey. Good afternoon, guys. Thanks for taking the question. So I just wanted to touch a little bit on the expense and margin trajectory. Appreciate some of the color you guys mentioned on kind of reinvesting some of that as we go here. I mean, is it fair to think that some of the labor costs and savings you guys had this quarter will eventually be redeployed and maybe some of the savings of the facilities are kind of more permanent or how should we think about the cadence and level of this reinvestment?

[Will Lansing:]

Maybe I will just take a quick stab at that, and Mike, you can give your view. Some of those labor savings will absolutely be redeployed into areas that are more strategic. So we are -- we have very healthy investment in our decision management platform and so some of those savings will be redeployed there. I think that on the facilities and some of the travel reduction expenses that are COVID related, some of that’s going to persist. I think some of that becomes permanent. Obviously travel, some amount of travel will resume, but I think we have all learned how to do business with less travel than we had before. And I mean, I am sure our experience is not unique. We have become a Zoom Video company, I mean we had it before COVID outbreak, but now it’s a way of doing business. And so I would think that even when everything comes back, we won’t see our travel expense at the same kind of level.

[Mike McLaughlin:]

I add to that, Kyle, that we also, when everything comes back, won’t see our real estate facilities expense go back to the same model. Those restructuring actions and footprint reductions are -- we consider them to be permanent. On the labor side, yes, we are redeploying as we have talked about some of the savings back into particularly engineering talent from our platform products and we are not guiding particularly exactly how that’s going to move. But we did say last quarter and I continue to feel comfortable with, if you look at the full fiscal year, we expect our operating expenses to be flat to up a little bit, call it low single-digit percentages, we are still comfortable with that directionally.

[Kyle Peterson:]

Got it. That’s helpful. And then I guess just a little bit a follow up on the gross margins. It seems like you guys are kind of strategically exiting some lower margin businesses especially in the services side. I mean should that lead to maybe a slight upward bias to gross margins over time? I realize that some of that will be kind of mix driven between Scores and software. But all is equal I just want to get any color that you guys could provide on the gross margin impact on deemphasizing services and some of these other businesses?

[Mike McLaughlin:]

All else equal…

[Will Lansing:]

I don’t think we have a lot of color -- go ahead, Mike.

[Mike McLaughlin:]

Yeah. I was just going to say your math directionally is right. All else equal, if we deliver less professional services, it’s going to have a positive impact on gross margin, no question. The mix matters, for sure. But our professional services margins, gross margins are in line with what you would see at other well-run enterprise software companies that have in-house professional services and those margins are a lot lower than what typical software margins are.

[Kyle Peterson:]

Okay. That’s helpful. Thanks guys. Good quarter.

[Operator:]

Our next question is from Ashish Sabadra with Deutsche Bank. Please go ahead. Your line is open.

[Ashish Sabadra:]

Thanks for taking my question. I just wanted to ask a broader question about the platform strategy. Last quarter you talked about some good traction on that front. I was just wondering if you could provide any update on any other customer conversations and how should we think about the FICO Studio, how’s that coming along in the open API strategy? Thanks.

[Will Lansing:]

The FICO Studio strategy is coming along just fine. We are on track. We have a quarterly release cycle and every quarter we make improvements. The API strategy is very much in place. We are very focused on that. We are also using the APIs internally today and we are in the process of turning those outward and documenting them so that others can use them. I actually think that the bigger hurdle for us will be around building a partner ecosystem that can leverage those APIs. So the -- getting the APIs out there is not something that we worry about. I think building the ecosystem takes a bit more work.

[Ashish Sabadra:]

That’s very helpful color. And maybe just a follow-up question on the fraud piece -- the fraud solution piece. With this work-from-home, there’s definitely increased traction for fraud and digital identity solutions. You are seeing increased demand in the marketplace. TransUnion and Equifax also announced certain products and Equifax announced Kount acquisition as well. I was just wondering if you can just talk about the demand that you are seeing in the marketplace, but also talk about the competitive environment for Falcon, obviously Falcon is the market you there on the financial side, but any change in the competitive environment there? Thanks.

[Will Lansing:]

We are not seeing tremendous changes. I mean Falcon is very much still the market leader and we are still selling Falcon in all its forms. So, we are not really seeing a difference there. I wouldn’t say that demand is way up nor is it down for Falcon. What we are doing in the fraud spaces is also looking at some, I would call it less traditional fraud opportunities for us and leveraging the decision management platform for them. So some of the lower cost not as heavy duty as Falcon, but some of the other clients of Falcon -- some of the other kinds of fraud solutions will be coming on the platform.

[Ashish Sabadra:]

That’s very helpful. Thanks.

[Operator:]

Our next question is from Jeff Meuler with Baird. Please go ahead. Your line is open.

[Jeff Meuler:]

Yeah. Thank you. Hello, everyone. Will, I know that you said you are going to give us more detail next quarter on how the calendar ‘21 special pricing and B2B scores is feathering in. But just hoping you can confirm that four weeks in the execution of the special pricing implementation is going smoothly and as planned?

[Will Lansing:]

Everything is going as smoothly as expected. Everything is going as planned. It really -- it happens later and so we will talk about it later.

[Jeff Meuler:]

Fair enough. And then on software, any more perspective you can provide on license and maintenance? And I understand what’s going on from -- or I am sorry, for transaction and maintenance. And I understand what’s going on from a license perspective, but for transaction and maintenance, applications down year-over-year and I know that’s not usually a huge area of growth but it was down. And in DMS, it was, I guess, modest growth by DMS standards against what mathematically looks like not too tough of a comp.

[Mike McLaughlin:]

Yeah. There is not…

[Will Lansing:]

Mike, do you want to take that?

[Mike McLaughlin:]

Yeah. A lot of the -- that is a category that is more usage-driven than fixed minimum-driven. It’s not entirely usage, by any means. And we did see some usage fluctuations this quarter in some of our products, some of which would be -- seem to be related to the macro, like, we saw less usage of our origination solutions in a couple of spots and then there’s normal variability in usage of things like fraud. Again some of that may be macro related and is less to credit card transactions or being processed so quickly. There is not a big story there. Again, I think, the big -- the bigger swing was just the license number overall, which was impacted, as described by the rev rec change and just the normal Q1 combined with just lower renewal paying as well.

[Jeff Meuler:]

Got it. And then, Will, sorry to ask you to repeat yourself. But the mortgage comment in your prepared remarks, was it just that mortgage is seasonally a smaller percentage of the mix this quarter?

[Will Lansing:]

The mortgage…

[Mike McLaughlin:]

I think. Yeah. Go ahead, Will.

[Will Lansing:]

Well, I am just going it’s -- mortgage holding up fine actually and so it’s -- for now it looks right.

[Jeff Meuler:]

Right. I guess Equifax reported a mortgage inquiry should actually accelerate a little bit this quarter and I thought you had a comment that something related to mortgage. It almost like it was a lesser benefit than I just didn’t know if that was just seasonal mix or what you were saying and maybe I just misheard you?

[Will Lansing:]

No. I don’t -- maybe I need to go consult my notes. I think that we don’t really opine on the future mortgage. You are better off looking to the bureaus and their forecasts than to us, because we are kind of a lagging indicator on that. But what we see and at least what we are seeing right now is strong mortgage.

[Jeff Meuler:]

Yeah. Got you. Thank you.

[Operator:]

We have a question from Brett Huff with Stephens, Inc. Please go ahead. Your line is open.

[Brett Huff:]

Good afternoon, Will, Mike, and Steve. I hope you are all safe. Thanks for taking the question. Two big -- two bigger picture ones. We have been watching DMS for a long time and still think it’s a really important long-term strategic product. And I think, Will, you have talked about your commitment to that. And last quarter we had I think a big Brazilian bank that kind of win an enterprise on that. Anything in the pipeline similar to that or conversation that you can give us anecdotally, any sort of signs that this is -- this wave is starting to build a little bit?

[Will Lansing:]

Yeah. I think it’s too early to talk about specifics, but we have a lot of DMS opportunities in the pipeline and various interests from large financial institutions. And so without being able get into specifics right now, I would say, that it is consuming a lot of our sales activity.

[Brett Huff:]

Okay. That’s helpful. And then the second question is on margins, I know that we have been working through sort of enhancing our tech kind of infrastructure and then spending a lot of money on DMS and some of the SaaS application if you will, the platform solution. I know that we have talked about the potential margin benefit from that. But I know we are kind of running in a little bit to the rev rec change and some other things maybe exiting some businesses. Can you sort of give us a sense this year and next year, not numbers but just how we should think about margin benefits and headwinds as we look to see the business start expanding margins maybe a little more rapidly? Thanks.

[Will Lansing:]

The margins -- it -- we have pulling and pushing in two directions. The margins are improving because we are getting better on expenses. W are -- our mix is changing with less PS. We are reviewing our products and identifying the ones that really aren’t contributing enough and are not strategic and so we talked about the China and ESS for example. But set against that is this incredible opportunity that we see with DMP or the Decision Management Platform. And we work through year-by-year what we can afford to spend on investing in it, but it’s not trivial. And given the market opportunity we are not going to shortchange it. So I think some of the margin improvement will be consumed by that incremental investment. Now, which way that goes? I know you are looking for a direction. Are margins getting better? Are they getting worse? Are they going sideways? We are just not prepared to say it yet. Flat is probably a good way to think about it. But I wouldn’t put a lot of stock in that because it could move. It really is a constant press internally for us to improve margins from an operating standpoint with cost reduction with getting better on pods all those kinds of things, while at the same time, recognizing that we are not going to miss this opportunity within the platform.

[Brett Huff:]

That’s really helpful. Thank you, guys.

[Operator:]

And we have a follow up question from Surinder Thind with Jefferies. Please go ahead. Your line is open.

[Surinder Thind:]

Thank you for the follow-up question. A quick question on kind of the M&A front, you talked a little bit earlier about kind of fine tuning some of the businesses that you are in and being a little bit more focused. Is there an opportunity for M&A within that or has anything potentially changed there that we can think about or any needs that you might have?

[Will Lansing:]

I don’t think a lot has changed. You know that our stance on M&A is we are always open and looking and we rarely find anything significant that makes sense for us. And the issue -- especially given our platform strategy, the issue is that, introducing business, other businesses with other code bases that we just have to be put on a path to be brought into our platform. It is a -- it’s just a little bit complicated and potentially our strategy. So while we are always looking, it makes more sense for us at this time to continue to invest organically and build organically. Now that said, we are always doing small acquisitions, typically talent acquisition, sometimes small technology acquisitions that fill little gaps. But in terms of large acquisitions, I wouldn’t hold my breath, but never say never it could happen, but it’s not imminent.

[Surinder Thind:]

That’s very helpful. And then one other quick question. There were a lot of questions in kind of the bookings numbers and you guys provided some color on the seasonality component and how the first fiscal quarter is generally the weakest. Is there anything else, I mean, when I look back that number was actually the lowest that I have on record for you guys in the past three plus years. And so is there anything there to read into other than just the lumpiness in the sense that maybe clients are hesitating a little bit, is there maybe a little bit of uncertainty? What are those client dialogues or is it just clients are waiting for more of the DMS platform and maybe if you can talk about the roadmap for the DMS platform over the next year?

[Will Lansing:]

I will take a stab and Mike can chime in. I think that the bookings, there is -- there are other changes going on. So for example, term length has shrunk a bit. That’s by design. It’s because we would rather have a renewal sooner than have it pushed way out, because we think there will be opportunities to do better down the line. So -- and that’s reflected in the sales compensation. It’s reflected in the fact that, meaning that our sales people are now compensated on kind of the annual recurring revenue as opposed to the full bookings value and that has a natural impact on internally. So I would say that’s one factor. I would also say, I am not sure it’s the right. I mean obviously we have been promoting it as a metric for ourselves for a long time and we are not going to stop sharing it. But I do think that over time we have to really start to focus on our business on this kind of annual recurring basis. Mike, do you want to add anything to that?

[Mike McLaughlin:]

Yeah. I’d say that it does, look, it doesn’t feel like there is a COIVD or otherwise systemic hesitancy on the part of customers. You never can tell for sure. But the pipeline is still feels good. As we said, we still feel good about the full year on a new business basis and we came off of the highest ever booking quarter as you know in Q4 into what is seasonally the slowest quarter. So it’s -- again we don’t think that what you are thinking about is the case, time will tell. But the indicators we see is that the pipeline continues to look good for the year.

[Surinder Thind:]

That’s very helpful. And then one kind of final question here, just the roadmap for the DMS platform over the next year?

[Will Lansing:]

Yeah. I am not sure what we are prepared to disclose about the roadmap. We continue to make progress on Studio and we continue to work hard against getting the APIs turned outward, and I would say, those are the big points.

[Surinder Thind:]

Okay. Thank you so much, guys. Thanks a lot.

[Operator:]

And there are no further questions at this time.

[Will Lansing:]

Thank you. This includes today’s call. Thank you all for joining and we look forward to speaking with you again soon. Thank you and have a good day.

[Operator:]

That concludes today’s call. Participant please -- thank you for your participation and please disconnect your line.