Steven P. Weber - Vice President, Treasurer & Investor Relations William J. Lansing - Chief Executive Officer Michael J. Pung - Chief Financial Officer, Executive Vice President & Investor Relations.

Manav Patnaik - Barclays Capital, Inc. Brett Huff - Stephens, Inc. William A. Warmington - Wells Fargo Securities LLC Matthew Galinko - Sidoti & Co. LLC Katelyn Young - William Blair & Co. LLC.

Good afternoon. My name is Alex and I will be your conference operator today. At this time, I would like to welcome everyone to the Fair Isaac Corporation quarterly earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

Steve Weber, you may begin your conference..

Thank you, Alex. Good afternoon, and thank you for joining FICO's second quarter earnings call. I am 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.

On this quarter, 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. This call will also include statements regarding certain non-GAAP financial measures.

Please refer to the company's earnings release and Regulation G schedule issued today for a reconciliation of each of these non-GAAP financial measures to the most comparable GAAP measure.

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 4, 2017. With that, I'll turn the call over to Will Lansing..

Thanks, Steve, and thank you, everyone, for joining us for our second quarter earnings call. I'll briefly summarize our financial results for the quarter, and then I'll discuss the progress we're making on our strategic initiatives. In our second quarter, we reported revenues of $207 million.

We delivered $23 million of GAAP net income, $0.72 per share, both up 23% from the prior year. We delivered $35 million of non-GAAP net income, up 18% from last year, and non-GAAP EPS of $1.09 per share, an increase of 20% from the same period last year. Most importantly, we signed $132 million of bookings, up 67% from the previous year.

This included a large cloud-based engagement that will drive significant recurring revenue for the next several years. In fact, our transactional bookings this quarter were up 234% over the same period last year. This is a validation of our cloud products strategy and also an important driver of our recurring revenue in future periods.

Our Scores segment delivered $61 million of revenue this quarter, an increase of 22% over the same period last year, and the highest Scores revenue quarter in the history of the company. The consumer piece grew 42%, and now represents one-third of Scores revenue. Our B2B business is also performing well and is up 14% year-over-year.

Our Applications segment was down 9% over the same period last year, which included two very large up-front license sales. Many of our sales this quarter were transactional, with revenues to be recognized in future periods. Our Tools segment was up 4% over the same period last year.

We're now just past the halfway mark in our fiscal year, and we're making significant progress on our strategic initiatives. Our B2B Scores business is experiencing healthy growth, with volumes up across all life cycles over the prior year. And we just announced the general availability of FICO Score XD last week, at FICO World.

There is substantial interest among lenders for this innovative product, and we'll keep you posted on how that interest unfolds in the coming months. We continue to make significant progress on our B2C business. We recently announced that we crossed another milestone in our Open Access program.

150 million consumer accounts now have regular access to FICO Scores for free. We recently added Wells Fargo and Bank of America to the program. We're also pursuing new opportunities in Consumer Scores. This quarter, we signed an agreement with a specialty reseller of reports and scores to provide FICO Scores to consumers.

This agreement will ramp over the course of the year, and is expected to be fully implemented by the end of calendar 2016. We believe that FICO Scores can be a key differentiator for businesses marketing various financial services, and are pursuing a range of opportunities in this market.

We expect to soon announce programs that will allow lenders to make FICO Scores available for the first time to non-customers. While the potential of this is difficult to quantify at this point, we are excited about it, and we'll update you in the coming quarters. On the software side, our decision management products are continuing to gain traction.

As I mentioned, we had a record number of bookings this quarter. One large deal bundles elements of the FICO Decision Management Suite, including our marketing, originations and other analytic applications, into a SaaS solution that will produce profitable recurring revenues when it goes live this fall.

Recurring revenues from our cloud-based offerings continue to grow. Year to date, revenue growth was 8%. More importantly, bookings have grown over 300% compared to the previous year, so those bookings point to a recurring revenue stream that will propel revenue growth in future quarters. This cloud strategy has been a key long-term growth initiative.

We've focused investments on expanding our cloud offerings, and more recently, our distribution channels. The FICO Decision Management Suite 2.0, unveiled at FICO World last week, represents a major leap forward in the practice of prescriptive analytics and decision management.

It provides everything businesses of all sizes need to rapidly develop innovative analytic applications and improve business decisions. The expanded suite of analytic tools offers a unified and more intuitive user interface.

Business analysts can now model a decision using FICO Decision Management Notation Modeler, and put it into production with the Decision Management platform, without involving IT. Our new FICO Strategy Director gives users control over decision flow structure.

We also announced a partnership with iboss, to combine their web security platform with patented FICO Cyber Analytics for detecting and remediating cyber attacks. We believe this solution will reduce the dwell time before an attack is recognized, which is often months in duration.

These were among many announcements at our FICO World Conference last week, where I heard directly from our customers around the world how these products are helping them transform their businesses by making better decisions.

There's, for example, the insurer that is using the FICO Decision Management Suite to reduce enrollment time from 22 days to six minutes, enabling it to double volumes while keeping cost flat and improving the quality of customer interactions.

For another customer that used FICO Text Analytics solutions (7:16) take millions of unstructured legal documents and incorporate analytics and machine learning to improve fraud and abuse detection.

We helped a European Bank put Agile Champion/Challenger, Simulations which previously required IT development, into the hands of business users who were able to define, configure and control the solutions themselves quickly, and thereby gain important competitive advantage.

Another bank I heard from is now deploying Enterprise Fraud Management at the customer level across the lifecycle to significantly decrease fraud and reduce false positives. We're in the beginning stages of delivering tremendous innovation to our customers, and much of it's cloud-based, generating recurring revenue.

If you have not already done so, I would encourage you to watch the FICO World webcast on our website by our Chief Technology Officer, Stuart Wells and his team. It's a great overview of how our technology is enhancing the way customers manage decisions. Of course, we do all of this with an eye toward driving shareholder value.

We were again able to increase year-over-year margin by 200 basis points, even with more ratable bookings as opposed to upfront license fees. We do this by remaining disciplined about cost control and by pursuing high-margin revenues.

Combined with our ongoing repurchase program, we continually look for ways to leverage our growth and ways that maximizes value for our shareholders. I'll share some summary thoughts later, but let me now turn it back over to Mike..

Thanks, Will. Good afternoon, everyone. Today, I'll emphasize three points in my comments. First, we delivered $207 million of revenue, flat with last year, due to fewer upfront license deals but with a 9% increase in recurring revenue.

Second, we had $132 million of bookings this quarter, much of it transactional, which will generate around $12 million to $15 million of annual recurring revenue beginning next year.

Finally, we delivered $0.72 of GAAP EPS and $1.09 of non-GAAP EPS, which is an increase of 20% year-over-year, driven from growth in our Scores revenue and improving margins in our Implementation Services. Now, I'll begin by breaking the revenue down into our three segments.

Starting with applications, revenues were $122 million, up 1% sequentially but down 9% versus the same period last year. This decrease was due to a decline in license revenue this quarter. The prior year included two large term license agreements with upfront revenue associated with them.

As we continue to sell more cloud-based deals, our transaction-based applications bookings and revenue will continue to grow. This quarter, application bookings were up 112%, versus the same period last year. In the Tools segment, revenues were $24 million, up 4% versus the prior year.

We continue to invest in sales and distribution in order to drive growth in this part of the business. Finally, we had our largest Scores quarter ever, with revenue of $61 million, up 22% from the same period last year. On the B2B side, we're up 14% from last year. In the Consumer Scores revenue, we're up 42% from the same quarter last year.

As a reminder, our agreement with Experian will lap in our third quarter, making for tougher comps going forward. Looking at revenues by region, this quarter, 74% of total revenue were derived from the Americas. Our EMEA region generated 19%, and the remaining 7% was from Asia Pacific.

Recurring revenues derived from transactional and maintenance sources for the quarter represented 73% of total revenue. Consulting and implementation revenues were 19% of total, and license revenues were 8% of total revenue. We signed a record amount of bookings this quarter, at $132 million, up 67% from the prior-year quarter.

We generated $18 million of current period revenues on those bookings for a yield of 13%, which means we've built a significant amount of revenue that will be recognized in later periods. This quarter's bookings should drive $12 million to $15 million of new annual recurring revenues, starting next year.

The weighted average term for our bookings this quarter was 55 months, reflecting the large multi-year agreements we signed in comparison to prior periods. Operating expenses totaled $168 million this quarter, compared to $169 million in the prior quarter.

Entering the year, we restructured our expenses in order to reinvest the savings in sales and distribution of our products.

We expect the rate and pace of these investments to grow in the back half of the year proportionately with the growth in our pipeline and associated revenue from our new products, and as we incur the implementation costs associated with the deals that we have booked to date.

As you can see in our Reg G schedule, our non-GAAP operating margin was 27% for the second quarter and 26% year to date. We expect that operating margin to be in the 26% to 28% for the full year.

GAAP net income this quarter was $23 million, up 23% from the prior year, and non-GAAP net income was $35 million for the quarter, up 18% from the same quarter last year. The effective tax rate was about 28% this quarter, and we still expect the effective tax rate to be about 28% to 30% for the full year of fiscal year 2016.

The free cash flow for the quarter was $34 million, compared to $37 million in the prior year. For the trailing 12 months, free cash flow was $143 million, up 17% from the previous periods. Turning to the balance sheet, we had $85 million in cash at the end of the quarter. Our total debt is $611 million, with a weighted average interest rate of 4.3%.

The ratio of our total net debt to adjusted EBITDA is 2.3 times, well below the covenant level of 3 times. During the quarter, we returned $40 million in excess cash to our investors, by repurchasing 420,000 shares at an average price of $95.26. Year-to-date, we have returned substantially all of our free cash flow to the shareholder.

We still have $51 million remaining on the latest board authorization, and continue to view share repurchases as an attractive use of cash. We also continue to actively evaluate opportunities to acquire relevant technologies and products that advance our strategy and strengthen our portfolio and competitive position.

Finally, we are reiterating our previously provided guidance for the full fiscal year. With that, I'll turn it back over to Will for some final comments..

Thanks, Mike. Halfway through our fiscal 2016, I'm pleased with the progress we're making on several fronts. Our Scores business is delivering record revenues, and we're pursuing additional growth opportunities as we expand into new markets and distribution channels. On the software side, the last few years have been an innovation renaissance at FICO.

Our technologies have been refreshed, expanded and cloud-enabled, to serve a broadening market that's eager to use analytics to make more precise decisions more quickly. We've made substantial progress in the last five years, but I believe the best is ahead of us.

We're on the cusp of a revolution, as companies everywhere look for ways to use data and analytics to automate and improve their decisioning. This is the promise that FICO was founded on 60 years ago. And with our portfolio of industry-leading technologies, we're better positioned than ever to deliver on that promise.

With that, I'll turn it back to Steve for Q&A..

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

Your first question comes from the line of Manav Patnaik from Barclays. Your line is open..

Thank you. Good evening, gentlemen. I wanted to first just get some color from you guys on the 14% growth on the B2B side of things. If you can just flesh out the drivers of that growth, were there any one-time big contracts or projects like we've seen in the past, or just if you can break down that 14% for us, that would be helpful..

Sure, Manav. So the 14% was driven primarily from across-the-board volume increases in what we call the lifecycles of how we sell the scores, so ranging from prescreened to new account openings through account management. Across the board, the range grew somewhere in that 10% to 14%.

We did have a one-time true-up of a prior-year number that was relatively minor and even if you back that out, we were still – are a high-single digit growth across the Scores business..

So when we think about the next couple of quarters, and we look at comps and the one-time true-up and everything, is high-single digit probably then the reasonable number we should be modeling?.

Well, on the B2B side, that would continue to be a very ambitious number for us to see, and it is really dependent upon continued health in the consumer lending that's going on in the U.S. This is probably the fourth quarter in a row where we've had high-single digit or greater.

And it's hard to predict whether that trend stays there for the next couple of quarters, but so far, reports are coming in quite strong..

Okay. And then, Will, in your prepared remarks, I think you talked about, it was on the B2C side, a contract, I think it sounds like a new contract you signed with a reseller to sell your Scores. And then I think you also mentioned something else in the works in terms of giving your Scores to non-lenders, I believe.

If you can just clarify those two, if they were separate, and maybe a little bit more color on each?.

Yeah, it's not non-lenders, it's to non-customers. So the thought there is, our Open Access program is to share scores with our customers' customers. And so this is more in the category of acquiring new customers, so it's a little bit of an exploration of a new business model for us..

Okay.

So – sorry, so were you talking about two different opportunities when you referred to something around the resellers, or were those tied together?.

No, those are different opportunities..

Yes, so there were two thoughts, Manav. The first thought was, we signed a second deal to distribute our FICO Score for a fee through a distributor. It's not a bureau, it's a – other kind of participant in the marketplace who uses scores and reports as a central part of their business model..

Okay..

That deal was signed, and it's beginning to get tested and will be rolled out towards the end of our fiscal year. So our first meaningful revenue will begin to hit next fiscal year for us on that.

And the second thought is the one that Will talked about, which is expanding the use of the FICO Score beyond a limited use for Open Access, providing a free score and a couple of reason codes. This would be providing that type of information to non-customers for things like pre-qualification and other activities.

The testing that we're doing in that area and that we plan to do are not for free; they're for service fee..

So is the latter one more like lead generation?.

Yeah. You could call it that..

Okay. And so just – sorry, on both these then, I guess, we'll get more color as the testing continues? Or (19:32)....

No, that's exactly right..

...that we missed? Or just trying to understand how we should model or size this..

Well, I don't know there is anything to model yet, but we have our toe in the water, is a way to think about it. And I think it looks promising, and we'll have to see over the coming quarters, whether this turns into a new line of business for us or not. It's new for us, so we're exploring it..

Okay. And then last one for me. Clearly, your PR team was busy during FICO World.

I mean we saw a whole bunch of press releases coming out, which was probably expected, but if you could help us just narrow it down to the key takeaways from FICO World, how much of that is more – just sort of lead gen with your customers, versus how much new business you really got? Is that why the $132 million of backlog?.

Well, I would say, they're related but not really related. So the FICO World is a huge event, and it's been going on for 40 years. And it's our goal for it to be the Davos of analytics. We take it ever-more seriously every year.

And this year, this program that we've put on for a thousand bankers and data scientists and analysts and people focused on decisioning who come together to explore the latest and greatest in technology, was really an incredible event.

Of course, a lot of business gets done at the event, and we have – the majority of the people who are at the event are our customers, and we explore ways in which we can use our technology to expand our relationship with the customers, but there is also a ton of people we have not yet done business with, and we spend a lot of time working with them on how to – again, how to use our products and solutions to move along their business.

So it's – I'm not sure how to answer your question, except to say, it's a big event in its own right, and it is a big driver of business for us..

Okay. None of the bookings this quarter, though, came from FICO World. FICO World was last week, so....

(21:38)..

It would be a future booking..

Got it. Fair enough. Thanks, guys..

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

Good afternoon. Thanks for taking my questions..

No problem..

First question is, can you give us a little more detail on the big – I think you said it was an applications deal, and it was – it sounds like it was more SaaS focused.

First of all, is that right? And can you just give us more detail on that? And is that the kind of deal that – I know that you all are striving for – and is that kind of the model going forward? And are there any others kind of in the pipeline of that size? I know it sounds like it was a big one..

diversification and cloud and Decision Management Suite, all at once. And then with respect to the size, Decision Management Suite is not just designed for a monster deal, it's highly flexible, and can be used for small deals as well. And so we are focused at FICO at having a pretty wide range of solutions.

And singles and doubles are also terrific, and we do lots of deals for $100 million dollars and are delighted to do it. We can create a ton of value for our customers with pretty fast to implement and pretty easy to build solutions wrapped around Decision Management Suite. At the same time, the power is there to do really, really monster deals..

And are there others like this? Is that the new platform? Is that opening some doors? And should we – is this the kind of thing where there is a big one every – periodically, I know it's hard to predict, but are those the kind of discussions that you're finding that you're having? And are those moving down towards (24:21)?.

I think that's exactly and it's hard to predict. There is no question that the capability is there, and certainly the desire on our part to do very large deals is there. We like to do deals that are transformational for our customers, and so how frequently will these occur? Will they become a regular part of our business? I sure hope so.

But I don't think you can model it. This is quite a big one..

Brett, I think it's safe to say that DMS has made us a fairly new and unique vendor in these kinds of offerings, wherein the past we likely wouldn't have made the final cut on it, and now we're seeing wins..

Okay. That's helpful. And then on the – just kind of stepping back on all SaaS revenue, I know that you've got a number of different sort of SaaSification methods (25:08) or projects going on.

Can you just give us an update of where we are, if you can quantify that on a percentage of your revenue that SaaS, and maybe distinguish that from hosted, and maybe distinguish that from the other versus maybe last year or sequentially?.

Yeah. I'll be happy to do that. So all-in or all of our cloud business, which includes some of our legacy managed services business, so all-in our cloud business is around 22% of our total revenue, growing at about an 8% rate.

If I put the managed services piece off to the side, which is on a small decline, the other parts of the business, which include products like Adeptra, Origination and Debt Manager on a cloud, examples that Will had given here, that's growing in the mid-teens, and in some cases greater than that.

As a percent of bookings year-to-date, so halfway through the year, about one-third of our bookings are actually coming from cloud-related deals that we have signed over the past six months. And looking at our pipeline, we expect that to continue to be a pretty solid percent going forward as well..

That's helpful. One other detailed question on that.

Have you split sort of the managed services versus the SaaS? Can you give us – the 15%-plus grower, is that half of that 22%, or I mean (26:33) ballpark?.

No. I'll give you ballpark. We haven't given that in the past. Give me a quick minute. I would say it's probably more like one-third managed services, one-third Adeptra, one-third the other Fair Isaac cloud – FICO Analytic cloud-type offerings, roughly..

That's helpful. And then one question on the Scores. It sounds like the Experian deal is going well.

And if I'm remembering right, that's fully ramped on all of their sites, or the majority of their sites? Or is there sort of more, whatever, organic kind of within that to go even before you start lapping it?.

Well, it is fully ramped, but there is more (27:13), to go because they're doing – their business is going well..

Okay. And then, I think you mentioned doing work with another partner that wasn't a bureau, but it is another person who uses your IP as sort of key to their business model. When you look out, I mean, how does that pipeline look? I know that maybe there are bigger, smaller deals, et cetera.

How does that opportunity continue to look for you all now that Experian is kind of in the door has a big nice base on that extension?.

There's continue – there continue to be opportunities on the horizon, more of the same kinds of things we do with Experian potentially, and then new business models as well, so there is a pretty wide range out there..

Great. That's exactly what I needed (27:55). Thank you for your time..

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

Good afternoon, everyone..

Hi, Bill..

First of all, congratulations on the quarter. I mean with the booking and landing an affinity deal in the same quarter, congratulations. So....

Well, Bill – thanks. Just, Bill, just to clarify, it wasn't an affinity deal in the way we've been talking about affinity. It's a new kind of deal but it's not exactly an affinity deal. But yes, thank you, we'll take the congratulations all the same (28:34). Thanks..

So help me understand the new deal and how it differs from an affinity deal then. Maybe that would be a good place to start..

Well, how to distinguish it without getting into a level of detail that we don't really want to get into. So....

Sorry..

No, so Bill, this is kind of maybe an off-the-radar kind of provider of credit report and credit score support organization for consumers around the U.S. And so they use scores and reports on a regular basis in coordination with the business that they do to their end-customer.

And in the past, they have been using a educational score, and in order to improve their offering, they struck a deal with us to include the FICO Score. So we're not trying to be real vague on purpose, but we expect they'll be making their own announcements down the road. And we don't want to steal their thunder.

On the other hand, we thought it's important to at least make our investors aware of the fact that we're continuing to make good progress in this area..

Got it. So this would be, just to – in terms of putting it into buckets, this would be more in keeping with the Experian-type relationship. I mean, I don't....

Yeah..

...know Experian is bureau, but I'm saying that would be more or like that..

I mean, you can characterize this as an affinity deal if you wanted to, it's just not the same players that we normally think of when we go thinking about that affinity business that we've talked about in the past..

Got it..

So it's a new player..

Well, on that topic of traditional affinity deals, how is that pipeline looking? Are you beta testing any of these – any of these – we've been talking about large banks as being some of the likely first movers in that space.

Are you beta tasting with any of those large banks?.

The pipeline continues to look good and we're in conversations, and some very early testing, but we're not really ready to talk about anything..

Got it..

Next quarter..

That's right. Now, on the DMS side, maybe you could give us an update in terms of the number of customers that you have there, the number of salespeople there. It sounded like the sales cycle was relatively short compared to the other parts of the business..

So, everything about DMS is shorter. The sales cycle is a little shorter. The implementation cycle, for sure, is shorter.

We can give you a sales – a dedicated sales number in a second, but I would caveat it by saying, DMS is becoming so much part of the fabric of our business, that we sell solutions to customers and we lead with the solution, not with the technology. We talk about what the solution is going to do for the customer, and not the underlying technology.

And so, increasingly – and this shouldn't be a surprise to anyone, customers say, they look at the technology as part of the diligence afterwards, but it's not – we're not selling DMS. We're selling a solution, and then DMS is the way that we fulfill it.

And, as a result, in addition to the dedicated sales staff that we have for DMS, we also have a ton of people who are not dedicated to DMS, but they know our solutions well, and they're out selling our solutions, and DMS as a service (32:04).

So, I would say the dedicated sales number is misleading, because we actually have a lot more of our sales force selling DMS than just the people who have DMS on their hats.

That said, we're in the high-20s, is that right?.

On dedicated..

On dedicated DMS salespeople..

So it sounds like what's happening is that the DMS, basically, is broadening its appeal as a solution, so that more and more of your existing sales force is able to sell it and leverage it.

Is that a way of -?.

Yeah, that's exactly right. I think what you're seeing is, what you're seeing is our business is starting to blend together. So we have – you could call it cannibalization, you can call it blurring of the lines – but basically, applications and tools and DMS are all blurring together.

And what you have is decisioning and analytics IT, which we have incorporated in DMS and we like to sell it that way, although we still sell tools, and you can buy Blaze Rules engine all by itself. And you can buy applications dedicated to a particular solution all by itself.

But the line is getting blurrier, so you're going to continue to see some amount of cannibalization. And we're actually careful to – we don't want turf wars internally with our salespeople. We want them to go put the best solution in front of the customer.

And so they'll get paid whether it's DMS, or whether it's an application, or whether it's a custom tool solution..

Okay. And so the poster child for this new way of selling, so to speak, is this large applications deal, the SaaS deal, the one – tens of millions a deal..

Yes, the one we just did. That's right, that's a good example. Although it's not the first, and we've actually done others that were large deals also, not this large, but this is not the first. We now have quite a few DMS deals behind us. It's (34:00)..

Are these deals – I think one of the thoughts was that these deals were going to be outside of the financial services space, is that actually coming to fruition?.

Yeah. I'd say that's mostly true, although DMS works for financial services just as well. So it's both. We happen to have done more deals outside than inside the financial services to-date, but I'm not sure how it's going to be in the future. I now would expect that lots of banks would be very interested in us..

Okay. And then, I wanted to ask for some help in terms of the modeling, in terms of where you thought expenses were going to come out by quarter over the next couple of quarters..

Yeah. Well, so we're sticking with our guidance for the full year. And what that would imply is that you'll see a step-up in our spend beginning in quarter three and into quarter four, kind of commensurate with the revenue ramp-up that we have built in to the plan for the back half of the year as well.

There is a few things that are driving the ramp-up and the expenses. I'd say the main one is the hiring that we have done on the sales side. Since the beginning of the year, we've added about 48 salespeople across various parts of the company, and they have been layered in over the last six months with many of them coming in, in the last three months.

And so you'll start to see a full quarter's worth of salary and commission expense associated with that hiring. We also held FICO World, which is kind of a one-time expense you'll see in our third quarter, from our last week's event. That's a fairly expensive event for us.

And in addition to that, with the sizable bookings that we've done, there is a fair amount of implementation costs that are going to begin to hit our cost-to-revenue, along with the top-line implementation revenue. It will scale as the revenue does.

So there'll be a noticeable increase in the back half of the year expenses for kind of those reasons and to the degree we continue to find a few good salespeople..

Okay. Well, again, congratulations on a really strong quarter. Thanks..

Thank you..

Thanks, Bill..

Your next question comes from Matthew Galinko of Sidoti. Your line is open..

Hey, guys. Good afternoon. Thanks for taking my questions..

Hey, Matt..

First one being how should we think about the pace of adoption of FICO XD over the next two quarters?.

It's in test. It's been in successful test with 12 institutions and they're happy with their early returns. And so I would imagine that people are going to start turning it on. That said, I don't think that we can expect it to be a massive revenue driver any time soon. And I think we have to be realistic in our expectations.

These things are long, slow build. In terms of who it applies to, we think that there is about 50 million people who were previously un-scoreable who are now scoreable with XD. So that's a pretty big TAM if you want to think about it that way. But I just think it's going to take time to build; it will ramp slowly.

It's also more expensive than traditional FICO Scores, which is a little bit of a barrier..

Do you see a secondary distribution strategy for that going B2C like you do the traditional score? And....

We've....

Sorry..

We have thought about that. We don't have any immediate plans to do it, we've thought about it and we've been asked about it..

Okay.

And then probably won't answer me on this, but excluding a large cloud deal, can you say what bookings growth looked like this quarter?.

Matt, we're not going to break it apart, but you can probably back into it if you do a little bit of head scratching. I mean it was a very large deal..

Okay. Fair enough.

And then you kind of alluded to your Decision Management 2.0 release and you called out the user interface getting a little bit more simple, can you just kind of qualify how important that is to your customer, to the people who have kicked the tires on this? Is it important that business users can implement models without going to the IT department?.

Yeah. I mean that's – those are just a few little words, like doing models without going to the IT department, but they're pretty important words.

A lot of things are going on with the Decision Management Suite, but essentially we've gotten to the point now where you can take decisions and break them down using Decision Model and Notation, and record the decision in a way that you can go back to afterwards.

And so what you're doing is you're creating a knowledge repository in a business around its decisioning that opens up all kinds of possibilities.

It lets you audit, it lets you go back and see what worked and what didn't work, and it gives – suddenly you're not at the mercy of whether an employee walks out the door carrying all the decisioning intelligence of the firm. The UI is quite important from a usability standpoint.

So it's – when you don't have to go to IT to change things around, things get a lot easier. And that promises to be a pretty big deal for us. So I would say, yeah, that's not a trivial thing, it's a huge thing..

Great. All right. Thank you..

Your next question comes from the line of Katelyn Young from William Blair. Your line is open..

Thank you. Good afternoon, everyone..

Hi, Katelyn..

First question, it sounds like you guys are continuing to invest in the sales and distribution side on the Tools segment.

My question is do you think you'll be hiring more people than you thought you would have maybe a quarter ago or at the end of last year?.

I wouldn't say more. Here is what I would say. I would say I wish it could be more, okay? I think we hire as many people as we can that we can bring in productively and that we think have the qualifications to sell our quite sophisticated offerings.

We're probably hiring a little more slowly than we anticipated, and that's probably a little bit of wishful thinking on our part on how fast we could get people up to speed on our products and services and our IP. This is not a simple sale. This requires a really intelligent, highly-trained, sophisticated salesperson. It's a very complicative sale.

We have a 270-day sales cycle, on average – now, of course, some things are much faster – but it's a different kind of sale than your average software sale. And so it's – I would say it's going more slowly than we would like. I wish we could make it go faster..

Okay. That's helpful. Thank you. And then secondly on the one large contract, are you able to tell us which industry that client is in? It sounds like they are outside of the traditional FS space..

This is a telecom client. We've actually started to do a lot of work in telecom. FICO had a robust telecom business some years ago, and then telecom went through a downturn, and FICO went through a downturn, and we put a lot less focus on it. In fact we sold off some of that business.

And more recently, especially with Decision Management Suite, we have offerings that are highly relevant and useful to that industry. And so we're seeing a lot of appetite both in the U.S. and overseas. And so we have quite a few telecom clients now, and that large one was a telecom deal..

That's great.

And then, I guess just thinking more broadly about the pipeline, I know it's a lot of moving pieces to think about, but is there anything characteristically different about the pipeline now or that you're learning more about it than you had seen maybe six months or a year ago in terms of size, or types of customers who have a larger demand appetite?.

I think one of the things that we're seeing that's really encouraging is that, in the past, people would – they'd have an analytics problem, a decisioning problem, they have a very high-stakes decision that needs to be made, and they'd come to us for a point solution for that kind of decisioning.

It might be originations or line management and site triad (42:40) or some other kind of application decisioning. But usually some kind of point solution. And customers still think that way and buy that way. They come to you with their specific problem that we're trying to solve.

But what's interesting is that with Decision Management Suite, because all of the IP is common underneath and you can do so much more than just solve a particular decision with it, what we're seeing is the discussion around deals and the scope of disillusion is expanding. And so I think the deals, they might be getting a little bit more complicated.

They're certainly getting broader in function and in solution. That's a little bit different in the pipeline, but I wouldn't read too much into that. It's just early days on that but it feels good..

Okay. Fair enough. Well, thank you. That's all I had..

No further questions at this time. I turn the call back over to the presenters..

Thank you..

Thank you, everyone, for joining us today. This concludes our call..

Conference is now complete. You may now disconnect..