Fair Isaac Corporation
Q2 2021 Earnings Call Transcript

Published: 5 May 2021

[Operator:]

Greetings. And welcome to the Fair Isaac Quarterly Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. . As a reminder, this conference is being recorded today, Wednesday May 5, 2021. I would now like to turn the conference over to Steve Weber, Vice President, Investor Relations and Treasurer. Please go ahead.

[Steve Weber:]

Thank you. Good afternoon. And thank you for joining FICO’s second 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 us for our second quarter earnings call. I'd like to start by saying that I hope you are all safe and healthy. And I want to thank our dedicated FICO employees who have done an exceptional job meeting the challenges in the last year and never wavering in their commitment to FICO or their colleagues and our customers. We've tremendous team, a great culture at FICO and I'm really honored to report that FICO was ranked number one on Forbes' annual list of America's best midsize employers. On the investor relations section of our website we posted some slides that offer financial highlights of our second quarter. Today, I'll talk about this quarter's results and how we do our business at the midpoint of our fiscal year. And I'll discuss how we continue to refine our strategy to optimize our Scores asset and sharpen our focus on our world-class decision management platform. We reported revenues of $331 million, an increase of 8% over the same period last year. We delivered $69 million of GAAP net income and GAAP earnings of $2.33 per share, up 18% and 20%, respectively. On a non-GAAP basis, net income was $90 million, up 40%, and earnings per share of $3.06 was up 42%. from last year. We continue to deliver very strong free cash flow growth as well.

[Mike McLaughlin:]

Thanks Will, and good afternoon, everyone. Today I'll walk you through our second quarter results in more detail and provide some information on the impact of the divestiture of the collection and recovery products that we announced today. Revenue for the quarter was $331 million and increase of 8% over the prior year. Our applications revenues were $130 million, down 8% versus the same period last year. The quarterly decrease in revenue was primarily driven by a decrease in upfront on-prem license revenue and professional services revenue. In our decision management software segment, Q2 revenues were $33 million, down 14% over the same period last year. We had an increase of 34% in SaaS subscription revenue in the DMS segment, but that was offset by decreases in upfront on-prem license and services rep.

[Will Lansing:]

Thank you Mike. As I said in my opening remarks, we remain focused on our strategy and committed to taking our decision management platform to growing number of interested customers. At the same time, we are innovating and providing a cornerstone value in Scores in both B2B and B2C. Finally, as you know, we haven't provided guidance for this fiscal year, we still see a lot of volatility, as we see the global economy begin to open back up. We have tremendous confidence in our business model that are far more focused on providing long term value than hitting specific numbers for the next few quarters. It's those values that drive us to favor ratable subscription revenue over upfront license revenue. So for now, we're not providing any formal guidance until we see how the credit markets stabilize and we understand the full year impact of our recognition of license revenues. Now, I'll turn the call back to Steve, so that we can do some 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. . And the first question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.

[Unidentified Analyst:]

Hey. This is actually Greg on for Manav. I think the divestitures you've made so far make a lot of sense when you explain them. Just wondering if there's any smaller products left out there that could be candidates for similar treatment? Or from here, it's more about being selective in the contract going forward?

[Will Lansing:]

I would say that this is pretty much the end of the reprioritization of our resources. So we don't see any significant divestitures in our immediate future.

[Unidentified Analyst:]

Okay. And historically, M&A hasn't been a big part of the story. As you go through this process of reprioritization and thinking about capital allocation, is there potential for M&A to be a bigger part of the story going forward?

[Will Lansing:]

I'd say that the potential in the future is about the same as the potential in the past, it's always been there. And we've always had trouble finding anything that we find as attractive as investing in ourselves. Our current plan is to deploy all of the proceeds from this transaction in stock repurchase.

[Unidentified Analyst:]

Okay. And maybe last one for me. Just on the sales pipeline for the software business, I think you said, you're pretty bullish about what you're seeing. Any color by geography as we see different fits and starts and reopening by geography. If there's any areas that you're seeing more traction. Any color, that would be helpful? Thanks.

[Will Lansing:]

I'd say that South America is strong. But we're seeing signs of the economy waking up kind of across the board. Mike, I don't know if you want to add anything to that.

[Mike McLaughlin:]

I guess what I would add is the nature of our sales on the software side are lumpy and long sales cycle for the most part. And so, month-to-month, even quarter-to-quarter changes in the ability of our customers to have people in the office, to meet face-to-face due to the pandemic and other things, it doesn't necessarily show up with the same frequency to might for a company that had, a shorter sales cycle and more higher frequency, lower ticket sales. So, the pipeline that we see in the major regions we serve looks healthy, all things considered in all regions. And I wouldn't be able to identify anything specific that would make one region or another standout.

[Operator:]

And the next question comes from the line of Kyle Peterson with Needham. Please proceed with your question.

[Kyle Peterson:]

Hey. Good afternoon, guys. Thanks for taking the question. Just want to talk a little bit about the expense trajectory. I know, you guys said that, you expect those to go up a little bit next quarter, given some investments pick in the DMS side? Does that outlook include the transition of some of the costs associated with the debt collection business? Or how should we think about kind of the expense trajectory and what transition costs and stuff you guys expect to occur?

[Mike McLaughlin:]

We'll be able to provide more. Can you hear me?

[Kyle Peterson:]

Yes.

[Mike McLaughlin:]

Sure. So we'll be able to provide a little bit more detail on that when we get to the closing. So stay tuned next quarter for any more specifics we're able to share. In general, as we said in our remarks, we don't expect it to have material impact on profitability, which means that the expenses that we expect to remove, we're in the ballpark of the revenues that we are selling. And furthermore, we do continue to believe that our expenses for the year relative to last year will be about the same if not down little bit. So all the trends that we saw in our expenses, not including the impact of collection and recovery, divestiture, continue to play out and we still feel good about the full year.

[Kyle Peterson:]

Okay. That's helpful. And then, I guess just on the scores business. Quarter came in very strong. Is there any additional color you guys could give us on, what drove some of that strength between some of the recent pricing initiatives that you guys have taken versus just volume with some of the -- with healthy credit markets and the strong B2C business?

[Will Lansing:]

I'd say, it's more on the volume than on the pricing, although the pricing is trying to feather in as card and some of the places where we put price increases in last year start to pick up in volume. So its both. But I tip to volume. And then, I think the real strength, mortgage continues to be strong and the real strength I think is B2C is just remarkable.

[Kyle Peterson:]

Got it. That's helpful. Thanks guys. Nice quarter.

[Operator:]

And the next question comes from the line of Surinder Thind with Jefferies. Please proceed with your question.

[Surinder Thind:]

Good afternoon. Question on the B2C. Can you provide a little bit of additional color, obviously you provided some metrics, but the revenue growth sequentially was really strong after there was a temporary pause. Any color in kind of what drove that? Was there additional marketing with your partners that we should be thinking about maybe some seasonality? In any outlook, you can provide that would be helpful?

[Will Lansing:]

No. I would I would put it in two categories, because the strongest part of it was myFICO. And I'd say it's attributable to very strong execution. There's some seasonality, of course, but I attribute some of the strength to very strong execution. And to consumer and consumers increasingly interested.

[Surinder Thind:]

Got it. And what is the current mix between myfico.com and your partner at this point in terms of the B2C revenues?

[Will Lansing:]

Here, I'm not sure we break that out. Mike, I don't know that we disclose that. Do we?

[Mike McLaughlin:]

Yes. We don't disclose that. Sorry.

[Surinder Thind:]

Got it. And then in terms of the special price increases that went into effect. If I believe I heard you correctly, you talked about them feathering in at this point. So how should we think about? Are they currently at the full run rate in this -- maybe at the full run rate in this quarter? Or maybe did half of them hit last quarter, two-thirds of them? How should we think about that mix?

[Will Lansing:]

Well, I think you shouldn't think in terms of fully in except that the volumes that they were applied -- the kinds of scores they were applied to had lower volumes. And so as those volumes returned, you'll see a little more impact. But at this point volume going forward.

[Surinder Thind:]

Got it. And if I understand correctly, it was mostly on the card and auto side for the impact?

[Will Lansing:]

It was spread around, there was card -- there were card increases.

[Surinder Thind:]

Got it. And how far below normalized levels is card volumes at this point? Obviously, auto volumes have fully recovered. We can pretty much track mortgage volumes on a daily basis, but there's less inside into card volume. Any additional color you can provide there?

[Will Lansing:]

I really can't. I will say, that we have seen sequential increases in cards, which you can also see from the results this quarter of the card issuers and the bureaus. So we're seeing the same trends they see, and overall across our categories. So whether its cards, autos or mortgage volume trends that we've seen are not inconsistent with what you can see from or some others who are in those businesses.

[Surinder Thind:]

Got it. That's its on my part. Thank you.

[Operator:]

And the next question comes from the line of Caroline Conway with AllianceBernstein. Please proceed with your question.

[Caroline Conway:]

Great. Thank you for taking my question. I'm curious about the implications of the divestiture on customer retention. And the strategy for expansion into new service areas with existing customers. What seem to me to be beneficial to keep a relatively full suite of financial services products available, especially as we look to drive DMS adoption, but that may be overestimating the role of this product line. So it would be great to get your thoughts on that strategically?

[Will Lansing:]

No. You're absolutely right that our customers -- we have many customers who are customers of the collections and recovery product line as well as many other solutions that we provide. And we've always believed that, the broader suite of capabilities has high utility for our customers. This is really -- and our customers won't suffer from this. So our customers are going to wind up with continued tremendous support and innovation and investment in this product line from Jonas. And we have a close relationship with Jonas. We'll be doing coverage together. And so, I don't worry very much about whether our customers to well taken care of, because I'm confident that they will be well taken care of. What it does do is it frees up the resources and investment for us to focus on the platform side of the solutions that we provide to our customers. So no question that, that's the right place for us to be focused.

[Caroline Conway:]

Great. And just as a follow up to that, are there any other components of the relationship with Jonas that you're expecting to emerge? Are there any products that you're expecting to leverage from their side?

[Will Lansing:]

No. It's really a collection -- around collections and recovery. But then we have some parts of our FICO that will continue to operate in and near and around the collection space. So for example, FICO advisors will continue to provide consulting, advice around collections. But the generally speaking, the business is turned over to Jonas, and we'll make sure that the transition is seamless.

[Caroline Conway:]

Okay. Thank you.

[Operator:]

The next question is from the line of Jeff Mueler with Baird. Please proceed with your question.

[Jeff Mueler:]

Thank you. Good afternoon, on myFICO, so recognize your brand strength, recognize that part of the market is doing well in terms of the branded paid channel. I guess the indirect and some lead gen players pulled back. I'm not talking about your partners, I'm talking about alternatives in the market pulled back at points over the last year, which I think benefits the myFICO channel. Anything further you can say about execution, if it's changes in how you're going about marketing or changes in product? What I'm trying to get comfort with this some sustainability of myFICO strength, if some of those lead gen partners start to lean back into the market?

[Will Lansing:]

Yes. It's a good question. And I it's hard for us to say whether the impact is from them pulling back or from our own excellent execution. What seems to be happening is there's a lot -- at least in my mind, is that there's a lot of appetite and interest in monitoring credit, particularly times like these. And it's a very natural place to go is myFICO.com. And as you know, we do actually relatively modest marketing around it. But the brand is very strong. We have over 90% aided awareness to the FICO brand in the U.S. And so it's not surprising that we got a lot of attention there. I think we will always be positioned -- we'll always position ourselves as an innovation leader and having really robust and fully featured products. And the premium -- we try to be the premium product in the marketplace, as well as a bit of a lab for experimenting with offerings that we then turn over to our partners, encourage them to replicate.

[Jeff Mueler:]

Okay. And then just maybe any update on the uptake or usage of the resilience score index?

[Will Lansing:]

It continues to be used, and it's in test with essentially. We have -- we actually have quite a number of lenders were using it now. And so far, the feedback is very positive. And we're not charging for it. It doesn't have any revenue impact.

[Jeff Mueler:]

Right. Okay. And then last. I get that we're going to get the new, more typical software assess reporting financial metrics later in the year, but just -- can you help us ring fence like, what is on strategy revenue, like you talk about it, it feels to me like in several different ways you have I think, DMS, DMP there's, the SaaS versions of different products, you gave us a metric ex professional services. So can you just help us ring fence what you're viewing? It's kind of like core on strategy and where it sits today?

[Will Lansing:]

Let me turn this over to Mike in just a minute to answer that question more fully. But what I would say is, everything that we have left in our portfolio is what we want to have in our portfolio. And it's a combination of legacy products and our platform products. We've been in a process of migrating and moving the capabilities from legacy products to the platform. And so increasingly, the new sales happen on the platform, we consider that to be truly strategic. So platform sales are where we want to be lend to South wells to land and expand, lets our customers who leverage a platform for small incremental investments get a lot incremental benefit. I mean, there's benefits for FICO and for our customers on the platform. That said, we have a really large business of FICO Solutions that are in place, on-prem, some in the cloud, but mostly on-prem. And we anticipate that those will be in use by our customers for many years to come. And so we continue to invest in those. We will continue to maintain those. We'll continue to make sure that our customers getting the full benefit of the investment that they made over past years. And as they're ready to migrate to the platform, we'll be ready to take them there. But the business really has both sides. And what you'll see is that the -- call it legacy solutions, the off platform solutions, we're not selling nearly as much of that going forward. And the energy is going into selling platform. But we'll be supporting both. Mike, if you want to add anything.

[Mike McLaughlin:]

Sure. Hey, Jeff. Look, as we think about how to recast our reporting to be more helpful to you and our shareholders. The principles are, the focuses on recurring software revenue, hence are beginning to shine more of a spotlight on the services revenue, because those are declining. We're trying to make them decline, but we're just trying to focus on the services that really add value and let them reach their natural level in terms of revenue. The margin profile is not such that we generate a whole lot of value out of the services directly value to our customers and increase the stickiness and all that. But PS revenue for PS revenue sake is not something we're seeking. So our focus is on recurring software. And so our metrics will help you see that more clearly. Second, is the apps versus DMS distinction is less and less relevant. It's been in place for a long time in our disclosure, but it's outlived its usefulness. So we're likely to simplify and talk more about software versus scores as opposed to application scores and DMS. And then finally, the key -- the Prime Directive in our software business is platform. And so we'll help you get better insight into what our platform revenues are doing. And what's happening in our revenues that are -- call them to-be platform. Not yet, but on the roadmap. So those are the things we're trying to achieve as we think about how best to expose it to you.

[Jeff Mueler:]

I think we all look forward to that. So thanks, guys.

[Operator:]

And there are no further questions at this time. I will now turn the presentation back to Mr. Weber.

[Steve Weber:]

Thank you. Thank you everyone for joining today's call. Have a good day. We look forward to speaking to you again soon. Thank you.

[Operator:]

And that does conclude today's conference. We thank you for your participation and ask that you please disconnect your line.