Fair Isaac Corporation
Q3 2019 Earnings Call Transcript

Published: 31 Jul 2019

[Operator:]

Greetings, and welcome to the Fair Isaac Corporation Quarterly Earnings Call. And 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, July 31, 2019. I would now like to turn the conference over to Steve Weber, VP, Investor Relations and Treasurer. Please go ahead.

[Steve Weber:]

Thank you. Good afternoon, and thank you for joining FICO’s third quarter earnings call. I’m Steve Weber, and I’m joined today by our CEO, Will Lansing; and our CFO, Mike Pung.

[Will Lansing:]

Thanks, Steve. Thank you, everyone for joining us on our third quarter earnings call. I’m pleased to report we delivered a record quarter with some remarkable results. We recorded our highest revenue quarter ever at $314 million, up 23% over last year. It was a good quarter for license sales but notably, it was also very good quarter for recurring revenue. All three segments drove double-digit recurring revenue growth, and total company recurring revenue was up 18% over last year. We continue to see the benefits of our business model shift to the cloud. We had another good bookings quarter at $109 million with many being recurring revenue deals. Year-to-date, our recurring revenue bookings are up 18%. We delivered $64 million of GAAP net income and GAAP earnings of $2.12 per share up 116% and 122% respectively. We delivered $76 million of non-GAAP net income and non-GAAP EPS of $2.50. Perhaps most impressive this quarter was the strength of results across our entire portfolio. In Applications, revenues were up 19% over the prior year. Much of this is due to some term license renewals. We also drove double digit growth in transactional volumes. This of course is key to our cloud strategy is our customers use our products across larger portions of their enterprise, we can drive sustainable recurring revenue growth. We had a particularly strong quarter in our banking fraud solutions business where we closed some large renewals and also signed some sizable new deals.

[Mike Pung:]

Thanks, Will, and good afternoon, everyone. Today, I’ll emphasize three points in my prepared comments. First, we delivered $314 million of revenue, an increase of $59 million or 23% year-over-year. Recurring revenue was $226 million, up 18% from last year. Second, we delivered $64 million of GAAP net income, which is up 116% year-over-year. And finally, we had $61 million of free cash flow this quarter, and we spent $59 million of it on share repurchases.

[Will Lansing:]

Thanks, Mike. Next quarter, we’ll talk about our expectations for 2020. But for now, I’d like to review what we’ve been able to accomplish in 2019. In Scores, we continue to find new ways to extend the analytics in both the B2B and B2C markets, and we are working hard to make sure pricing is appropriate, given the massive value that the FICO Score adds in the financial markets.

[Steve Weber:]

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

[Operator:]

Thank you very much. Our first question comes from the line of Manav Patnaik from Barclays. Your line is over.

[Manav Patnaik:]

Thank you, good evening. And firstly congratulations and a big thank you to Mike as well. If I could just start with the bookings comments that you made about it being below expectations. And I was just wondering if you could help give a little bit more color on maybe how much below and why you think it is below the expectation?

[Mike Pung:]

I guess I would say, I wouldn’t put too much stock in it, that number does move around, how it is when deals push at the end of the quarter. We’ve pretty consistently shared with you that we don’t do unnatural acts to close deals at the end of the quarter. And so while we have an internal budget that has numbers for each quarter. I wouldn’t read too much into it.

[Manav Patnaik:]

Got it. And then maybe along the same lines, like you obviously had a pretty good quarter, and I guess I just wanted to get some sense on maybe why there wasn’t a guidance raise involved in there with only a quarter to go, presumably there’s enough visibility there?

[Will Lansing:]

That cuts both ways. Yes, there’s enough visibility, but at the same time, we’re one quarter away from closing out the year. I’m not sure what the point would be in raising guidance at this point.

[Manav Patnaik:]

Okay. And then maybe just one last one from me. We obviously heard Equifax talk about these products that you guys are putting out together. Just can you just help us with a little bit on, is it a revenue share model or who is going to do most of the heavy lifting on the sales front? Any other color there, please.

[Will Lansing:]

Sure. I mean it is a rev share model. We're in it together. We're trying to market the solution as a joint solution and make it easier for the customer to get the end-to-end solution on offer. The sales effort is on both sides, and it depends on who has which relationships and which product that – product and service we're working with. So I think that varies.

[Manav Patnaik:]

Okay, got it. Thank you guys.

[Operator:]

Our next question comes from the line of Bill Warmington with Wells Fargo. Your line is open.

[Bill Warmington:]

Good afternoon everyone.

[Will Lansing:]

Hi Bill.

[Mike Pung:]

Hi Bill.

[Bill Warmington:]

So the Scores revenue looked particularly strong this quarter accelerating from last quarter accelerating from last quarter. Is there any reason why that Scores volume should decline next quarter? It seems like it's pretty much a stairstep in terms of the price increases coming on.

[Will Lansing:]

Well Bill, so this quarter, we saw some of the additional feathering in of our auto scores that we described in the last call. We also saw a couple of residual customers start to roll in on the mortgage increase we did just over a year ago. And so beyond that, we had small audit settlement that's one-timer that was in these numbers. From time to time, we have global FICO Score deals that are license oriented, and we had a little bit of that this quarter. Those come and go on a variety of basis. And we saw volume increases in the mid-single-digit range and in a couple of cases on the origination side a little bit better than that. So with all that as a background, the revenue model could grow, assuming volumes continue to grow strongly over where it was last year in the fourth quarter, and that's probably the biggest variable that's uncertain at this point is how much of the volumes will look like in our fourth quarter and whether we have any other kind of onetimers that come along.

[Bill Warmington:]

Okay. So now CCS, there've been some client departures last quarter, but this quarter, you guys signaled that one out as being particularly strong performance. I just wanted to ask about how that business was doing and what had happened with those clients who had left and whether you've been able to get new clients to replace them, just a little color on that.

[Will Lansing:]

Yes, I'd say that we have business coming and business going. Some of the business goes when big banks decide that they're going to try to achieve the same thing that our CCS offering does on their own by putting together with a fair bit of systems integration on their side the components of it. And while we have very large banks who are happy with CCS, there's also the ones that used to do it alone. We are adding business. We're adding business in Asia. We're adding business around the world, and so we're still very happy with the business.

[Bill Warmington:]

So I noticed that the average term of the bookings this quarter went up to 38 months, and maybe you could talk a little bit about that occurrence. Is that a one-off event in terms of some of the deals that you signed? Or maybe you can give us a little quarter color on what's behind that increase.

[Will Lansing:]

It's been trending upward for years, and I think it's a reflection of the fact that the solutions that we're putting in place are more complex, more comprehensive and once installed, the customer has a desire to lock down longer term. And so we're seeing some of that. We don't have tremendous financial incentives for our salespeople to go push long terms. We really want to do just what the customer wants. And so I would say that the term length is really dictated by the customer, and I think it's largely because they put and our solutions, and they're not quick to take them up, and they feel more comfortable signing up the bigger deal.

[Bill Warmington:]

And how's the rollout of Falcon X doing?

[Will Lansing:]

It's rolling. We're excited about the prospects we're getting in onto the marketplace. The early reception to what's coming has been extremely positive, and so we think we have the right – we have the right solution coming at the right time. We have a lot of people working on it right now.

[Bill Warmington:]

And then the last question for me is on the UltraFICO Score. Experian has been running ads on their Boost product. I want to know it's actually generating revenue for yet? Or is it still pre-revenue?

[Will Lansing:]

With Boost, we actually participate in that. With UltraFICO not generating revenue, yes, we're in test mode still.

[Bill Warmington:]

Got it. Before I go, I just wanted to say congratulations to Mike on a great run and happy trails.

[Mike Pung:]

Thanks, Bill. We'll come out and see you sometime.

[Will Lansing:]

Thanks Bill.

[Bill Warmington:]

Pleased to do.

[Operator:]

Our next question comes from the line of Brett Huff with Stephens. Your line is open

[Brett Huff:]

Hey guys, congrats on a nice quarter and thanks for the detail as always. And Mike sorry to see you go, but I hope things go well in the next chapter.

[Mike Pung:]

I appreciate that Brad.

[Brett Huff:]

Well thanks for taking the questions as always. Can you guys – you guys talked a little bit about some of the SaaS products that you're developing and I know that we're midstream on those. Can you give us – I don't know if you mentioned TRIAD or the next-gen product that TRIAD is. I think it's a customer director if I'm remembering it right. Any update on how that's coming along?

[Will Lansing:]

Yes. Yes, it's actually called Strategy Director, which is the successor to TRIAD. Customer Management is what it does. It's going really well so there's absolutely uptake the market for it. And for us, Strategy Director is a lot of the TRIAD functionality but ported over to our Decision Management Platform business, and that's becoming increasingly important for us. I mean we're really focused on how to resolve our customers' needs with our platform solution. And although we still sell some things that are not on the platform, increasingly, the solutions are on the platform. And so Originations is on the platform, Strategy Director is now on the platform, Falcon X will be in the platform. And so this idea of getting to a unified kind of single code based platform with tremendous ease of use and ability to manipulate data across for different purposes, it's coming together very nicely. But with respect to Strategy Director, in particular, we're doing very well or selling it, and we're happy with it.

[Brett Huff:]

That's a nice segue to my next question. I know a lot of folks look at your business and think there is sort of margin in there to be realized over time. I know you're investing kind of in demand that you really see coming over the hill. Just kind of – you're mentioning sort of centralizing on a more common platform raises that question, maybe highlights that possibility for showing some more margin over time. Is that how we should think about? Is that sort of a gross margin focus once you get everything centralized? And how do you think about the tenor of that?

[Will Lansing:]

Yes, I would say that's a very astute question because that really is how you should think about it. Today, we have really broad portfolio software solutions with a lot of customization, and it's expensive – not expensive but it takes a lot of PS resources to install and to customize to our customers' satisfaction. And with the platform, that's going to be simplified. With the platform, there will be a lot much higher level of configuration, there will be returns to scale for us and there will be benefits for the customer from total cost of ownership. So as more and more of our new business winds up on the platform, yes, I think it's reasonable to expect that margins will go up. That's not guidance for next year, but that's just a reality that's in the economics of getting to a platform business.

[Brett Huff:]

That’s helpful. And then can you just remind us your view on total Scores through the cycle? If I recall I think it went from maybe $8 billion, or now at $11 billion, something like that. Is your sense – first, remind us if that's right. And then the second is we get a lot of questions, is the FICO Score less cyclical now than it was before? I think the answer is yes, but kind of give us your view on that and how – I won't say revenues will go for Scoring, but how the durability of the score usage might be this time around if we have a recession.

[Will Lansing:]

Sure. So the low point was right after the 2008 reset and we were about $9 billion scores then. The high point was 13.5 billion right before that. Today, we have not yet hit that $13.5 billion…

[Mike Pung:]

$14.5 billion

[Will Lansing:]

I'm sorry $14.5 billion today, so we've just surpassed that level. But the more important part of your question is right, which is how sensitive are we to economic cycles and what happens in the future? And I would say that we have a lot more scores than we used to have. I mean we have more breadth there. We're starting to sell scores internationally and so there's a little bit of high diversification there, and we have more flexibility in what we charge. So I think that the – well, obviously, we're not immune, we would suffer with volumes declining. I don't think it would be anything like what it once was.

[Brett Huff:]

Okay. And then last question from me, when we think about DMS and I think about Big Data and analytics. I think the Equifax partnership looks great. But it seems to me that DMS and Big Data are going to be, I'm not sure, is there a killer app for Big Data out there. I know you kind of had killer apps in Falcon and TRIAD, I know those are all kind of based on the same thing. But are you seeing emerging a use case that that we're not seeing yet that you're getting more excited about that might power more consistent DMS growth?

[Will Lansing:]

We definitely expect more consistent DMS growth and a lot more of it. I'm not sure that I would call it a single use case except it's a very high level. I think that the use case is digital transformation. I think what we have is a situation where financial services has run 7%, 8% of GDP for quite a long time. And over the coming 10 years, it will probably get cut into half as those products and services are provided through automation, through using lower cost means. And I think that our Decision Management Platform is aimed at providing data-driven decisioning to power those kinds of decisions. So I would say that as banks continue on their journey to – their digital transformation journey, as they continue to try to look at disparate data to have a more comprehensive view of a customer, the 360-degree view of the customer. As they seek to understand the customer journey better, all those things speak to the value of our Decision Management Platform as a solution. I don't think it's a single use case, I mean I think historically banks have had a need for a single use, for Originations for some area, for collections and recovery for some area, for fraud for some area. I think increasingly, we're going to see the lines blur there and banks will be seeking more comprehensive solutions, but the likes of which we have in decision management suite.

[Brett Huff:]

Great. Thanks for taking my questions and good luck, again, Mike.

[Operator:]

Next question comes from the line of Adam Klauber with William Blair. Your line is open.

[Adam Klauber:]

Good afternoon. Thanks. As far as price increases, you obviously got mortgage, auto. How is the dialogue now in credit cards? And if you could give us an idea, do you think that's likely or unlikely?

[Mike Pung:]

I think that all the scores beyond mortgage and auto is a bigger and more disparate group of scores, and so there is not a simple answer to that. I think that we always evaluate where there's opportunities. And it's not as clean as saying well here's the next thing that we're going to go do. But I think you can expect that we'll systematically look for opportunities.

[Adam Klauber:]

Okay. And then on the Scores, what do you think is going to drive B2C revenues going forward – revenue growth going forward. Still growing at a decent pace, but somewhat slower than it was in the last year or two?

[Will Lansing:]

I would say, more of the same. It'll be some time before ultra FICO and things like that really make an impact. The volumes were more of a lagging indicator than a leading indicator. And so the volumes, you have greater visibility into what the volumes are likely to be than I would say we do, because we follow interest rates. So I think your guess is as good as ours on where it goes. We feel pretty good about things. But I think you should consult your own crystal ball.

[Adam Klauber:]

Sure. Okay. And then as far as Falcon, I know you've had some sales internationally, I think South America. How is the pipeline for future Falcon sales?

[Will Lansing:]

Strong and South America has been really strong.

[Adam Klauber:]

Okay. Is that…

[Mike Pung:]

Adam some of our biggest deals this quarter were Falcon and Falcon in the cloud. Two of our top 10, as an example, were deals that we signed down in Latin America in the last three months that were tied to Falcon. So despite the fact that we have a pretty big installed base, there are pockets of opportunity especially with the cloud that are coming along.

[Adam Klauber:]

Okay. Thanks a lot guys.

[Operator:]

And gentlemen, there are no further questions at this time. I'll turn the call back to yourselves. Please continue with your presentation or closing remarks.

[Will Lansing:]

Thank you very much. That concludes today's call . Thank you all for joining.

[Operator:]

And that does conclude the call for today. We thank you for your participation. And I ask you please disconnect your line.