Steven P. Weber - Fair Isaac Corp. William J. Lansing - Fair Isaac Corp. Michael J. Pung - Fair Isaac Corp..

Manav Patnaik - Barclays Capital, Inc. William A. Warmington - Wells Fargo Securities LLC Brett Huff - Stephens, Inc. Adam Klauber - William Blair & Co. LLC.

Ladies and gentlemen, thank you for standing by. Welcome to the Fair Isaac Corporation Quarterly Earnings 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, Monday, July 31, 2017.

I will now turn the conference over to Steve Weber, Vice President, Investor Relations and Treasurer. Please go ahead, sir..

Thank you. Good afternoon, and thank you for joining FICO's third quarter earnings call. I'm 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 call, 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 July 31, 2018. Now, I'll turn the call over to Will Lansing..

Thank you for joining us for our third quarter earnings call. We delivered another solid performance in our third quarter and I'm increasingly confident in our ability to deliver on our full-year guidance. In our third quarter, we reported revenues of $231 million, $25 million of GAAP net income and GAAP earnings of $0.78 per share.

We delivered $37 million of non-GAAP net income and non-GAAP EPS of $1.16. We had a very good bookings quarter with $95 million in deals. That's a 21% increase over the same period last year. And the $35 million in transactions bookings this quarter is a 64% increase over last year.

This means we're building more recurring revenue streams that will be realized in future periods. We continue to pursue and sign more and bigger deals. In fact, this was the third straight quarter with bookings of more than $90 million. In our software businesses, revenues were down from last year due to fewer upfront license deals.

This is primarily a timing issue and one of the reasons that we give full-year instead of quarterly guidance. The lumpiness of the license sales can overshadow the underlying recurring revenue, which has been growing nicely.

Our bookings were balanced across many of our key product lines, including Fraud, Originations Manager, and our Decision Management platform. We continue to see more of our pipeline and bookings related to cloud deals.

One notable deal this quarter was one of our cybersecurity offerings, where we signed our first seven-figure deal for our Enterprise Security Score. The deal was with a provider of IT solutions, including cybersecurity services for hospitals and others in the healthcare space.

We are still in the early stages with this product, but we are excited about our technology and the opportunities to help our customers protect themselves and their consumers.

The big story this quarter is our Scores business, where we continue to make significant progress on our strategic initiatives and are adding new revenue sources to our B2C business. We drove solid growth throughout Scores, with total revenues up 14% versus the prior year.

B2B revenues were up 13% for the quarter as we continued to see strong volume trends. Our B2C revenues were up 16% this quarter versus last year. On the B2B side, we had very strong volumes, as the demand for FICO scores in the U.S. continues to grow. One of the fastest areas of growth is fintech, as well as new verticals like telco.

We also had some exciting developments on the B2B side this quarter. A top-10 bank went live with our FICO Score XD, a product to score the previously unscorable. And we're seeing our first revenue from our global financial inclusion initiative with usage in China.

Neither XD nor financial inclusion will have a material impact this year, but both can provide growth in fiscal 2018 and beyond. As I've said for the last several quarters, we have a lot going on in our Consumer Scores business.

We are continuing to find new ways to monetize FICO Scores, the scores that are used by lenders, in products marketed to consumers. Those scores are a significant component in paid credit monitoring and identity theft protection products, like those sold at myFICO.com and through our partnership with Experian.

We are pursuing the white label affinity market with deals like we signed last quarter. We've entered the lead gen space with deals that have gone live over the past several months. And we just signed another lead gen deal with a large card issuer that will be rolling out in the coming months.

Finally, we are now seeing demand for more content from banks that have rolled out the highly successful Open Access program. As a result, we've recently signed deals with two different issuers to provide additional educational information for consumers.

These new deals will likely have little impact in the last three months for our fiscal year, but they will provide important recurring backlog as we enter fiscal 2018. As always, we remain focused on driving shareholder value. We're actively managing our expenses and generating significant free cash flow.

That discipline has allowed us to repurchase $140 million in shares so far this year. I'm pleased with the progress we're making executing on our strategy and I believe that we're well-positioned as we finish our year and look ahead to 2018.

I'll share some summary thoughts later, but now I'd like to turn call over to Mike for further financial details..

Revenues remain at approximately $925 million. GAAP net income previously guided at $130 million is now adjusted by the third quarter excess tax benefit to a new total of approximately $133 million. GAAP earnings per share previously guided at $4.03 is now approximately $4.11.

Non-GAAP net income remains unchanged at $158 million and non-GAAP EPS is unchanged at $4.92. With that, I'll turn it back over to Will..

Thanks, Mike. Next quarter we'll talk about our expectations for 2018, but for now I'd like to review what we've been able to accomplish in 2017. In Scores, we're making significant progress in leveraging our B2B leadership into the consumer market. We're signing deals and are looking forward to seeing further, steady, sustainable growth.

On the software side, our SaaS-enabled products and Decision Management suite technology are gaining traction and opening new markets. The bookings we are now signing are building substantial future recurring revenue flows. We are well-positioned for 2018 and beyond.

We have extraordinarily valuable IP, a long heritage of our analytic prowess, and a very talented team to make the most of our opportunities. I'll turn the call back to Steve now for Q&A..

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

Certainly. Our first question comes from the line of Manav Patnaik with Barclays. Please go ahead..

Yeah. Thank you. Good evening, gentlemen. It looks like you explained a lot of, I guess, your numbers relative to what we had as timing differences around license deals and so forth.

Maybe asked another way, in terms of your segment expectations for the full year, particularly maybe on the DMS side, like, what should we think about what that should look like? Is one doing better than the expectations and one lesser maybe? Just maybe some color there would be helpful..

So, Scores and our Applications business are probably exceeding where we thought they would be in terms of top-line revenue. And I would say DMS is falling below where we thought it would be on top-line revenue, but in line, maybe a little bit better on bookings..

Okay. And then maybe could you just elaborate on DMS then? Like, what's going on there? Because I think you guys are obviously hiring sales people to help with that effort. There was a lot of positive talk on it through the years.

So is it just timing or is there something else going on there?.

Manav, I would say it's just timing. We're as excited about DMS as we've ever been. We are putting a ton of resource into DMS, not just in sales but across the board. All of the R&D activity is really pointed in that direction. And so it's kind of a question of when it happens. But we're actually highly confident about the future of DMS..

Yeah. Manav, said another way, it's all upfront software basically that is the shortfall in that area and that's offset by the transactional volume increases in Scores and in the Apps part of our business..

Okay. Got it. And then, just one more. On the Scores side, can you maybe give a little bit more color on the backlog you're talking about going into 2018, and maybe just some perspective on the lead gen initiative you have going on with Experian? Would you say that's sort of – I think they just launched that effort obviously recently.

So how should we think about the runway left there?.

To answer the second one first, with respect to the lead gen, we really rely heavily on our partner, Experian, and the timing of their efforts there. We are very much joined with them in partnership and in advancing ahead. And we're really happy with the value proposition, which is clearly the strongest value proposition in the market.

As we've discussed in the past, in addition to providing the genuine FICO Score to consumers, which is a substantial improvement over what all the competitors do, we also take into account the lender's lending criteria and match that carefully with what we know about the consumers who come.

And so the breakage in terms of the lead gen is much, much lower than with competitors. And so we're feeling really good about the value proposition. And it's just been launched, and so time will tell how that performs. And so we have high expectations for 2018 obviously, but it depends on kind of how things go there.

And then we mentioned backlog with respect to FICO Score XD and some of the other initiatives that are just getting started right now. So there's no significant revenue to show for them right now, but we're feeling good about the future of those. And again, we'll see how the market takes them, but early results are promising..

All right. Thanks, guys..

Our next question comes from the line of Bill Warmington with Wells Fargo. Please proceed with your question..

Good afternoon, everyone..

Hey, Bill..

Hi, Bill..

So the first question I had was on the B2C Scores business, the new education scores you referenced.

Maybe give us a little more color on how those work, what the revenue model is?.

Yeah. Bill, this is Mike. So what we did this quarter is we announced a couple of new deals where an existing Open Access customer of ours, a bank, is going to be adding additional features to their offering for their consumers, basically expanding additional educational information into the offering beyond what they get with the Open Access program.

Those features and capabilities, there are often additional reason codes and a simulator, and information to that degree that helps the consumer understand their credit position more thoroughly, are paid for by the bank to FICO, but are provided as part of the relationship that the bank has with its customer. Those deals were just signed.

We really didn't claim anything, if you will, from that at this point. That'll be kind of ratable revenue as it rolls out across the Open Access platforms..

So, when do you expect that to actually go live at the banks?.

It'll differ from bank-to-bank in terms of how quickly they roll it out across their portfolio. So I can't give you like a specific date, but I'm imagining it'll start to feather in beginning here in our fourth quarter and, more importantly, into the winter months..

Got it. And then I wanted to ask also about the Cybersecurity Score. That sounded like sort of a proof-of-concept win, if you will.

Maybe you can give us a little more detail in terms of what the revenue model is there and how you think about the revenue opportunity?.

Yeah. So this is kind of a basic reseller for us. It's, as we said in our prepared remarks, a health care provider – IT provider to the healthcare industry. And they offer a number of products, including now some additional cyber products, the ESS Score from FICO, and they'll be selling it to their end customers.

The way the economics work for us essentially is that the fee that will be charged to the healthcare provider by this reseller of ours will be based on their number of endpoints. Number of points like computer terminals, or phone terminals, or whatnot. They're commonly called endpoints.

And there's a grid that they pay based upon the number of endpoints and the number of employees the end customer has. And we do a very simple revenue share with the reseller. They keep a piece and they pay us a piece for that..

Got it. And so, on the implied EPS guidance for Q4, I just wanted to check something with you. The last year was kind of an unusual year in that Q3 was as strong as it was in pull some revenue forward from Q4. If I go back 2014, 2015, it looks like the sequential increase from Q3 to Q4 was running in like the 55 to 60% range.

So is the conclusion there that basically 2006 was an aberration and now you're returning to more of the seasonal pattern that you've had in prior years? Is that the message?.

You could definitely take that away from the way the numbers are falling out. But I would just say that we don't focus that carefully quarter-to-quarter.

The truth is that we really think about our business on kind of an annual run rate basis and we get near the end of the quarter, and of course, everyone in this company is scrambling to try to deliver revenue by quarter-end. We're a software company like every other software company.

But the place where we're not like every other software company is, it is rare that we want to provide incremental discount or make concessions in order to rush the revenue into the quarter. And so we do wind up in situations where these deals, which are increasingly complex and take longer to sort out, slide from one quarter to the next.

And so, this year, I think that that conclusion that you've drawn is accurate. And I would just say, in general, that the revenue comes when it comes. We try to bring it in, we try to bring in kind of a rational way, and we don't rush it. We take our time to do it right..

Okay. And one more question, if I might, on the Experian relationship. On their call, they had mentioned the strength on both the identity protection side and the lead gen product side. And they had mentioned that they were in the process of rolling that out more aggressively during the September quarter.

And they made some comments around the Experian website seeing traffic that was converting well and that the revenue generation on those leads was very strong.

And so my question is, do we see some of the benefit of that flowing through already in the June quarter? Or is that really going to be coming in more the September quarter and beyond?.

Not really in the past, in the current, and more in the future. But as go their fortunes, so go ours. That is accurate..

Okay. All right. Well, thank you very much..

Our next question comes from the line of Brett Huff with Stephens. Please proceed with your question..

Thank you. Congrats on a nice bookings quarter. One question that I had on guidance, just want to make sure that I understand it. I know that you guys don't discount, and I think holding firm on price is obviously a really good thing.

But knowing what we know now, do we need to be thinking about deals that might slip for the full year on that $925 million revenue? Any more risk there than they normally might have, just based on what you're seeing?.

No. I would say, Brett, that the reason we confirmed guidance at $925 million is that's what we feel pretty good about and I think that's what you should focus on..

Okay. Thanks. And then the Open Access cross-sale of the additional value to product sounds really interesting.

Have you kind of contemplated or shared at all what kind of penetration you think you might be able to get of those banks that use Open Access, or sort of size that for us? Because I know Open Access doesn't officially generate revenue, but I think it does increase score usage sort of indirectly.

This seems like the first sort of more direct revenue from that.

And given the broad adoption of Open Access, how do you guys think about that in terms of size of opportunity?.

Yeah. Great question, Brett, and I'm glad you gave us an opportunity to kind of clarify. So, as you noted, we don't charge for Open Access, and it's very much designed to be available to consumers with no charge.

Of course, it was our hope always that financial institutions would be interested in sharing more about credit, more about the FICO Score, more about consumer capabilities and capacities and how to influence those things. And it was our hope that we would be able to monetize them.

The most aggressive form of that monetization comes in the form of paid subscription offerings, which we do with myFICO.com, but we largely do with our partner, Experian. And the question has always been which direction the financial institutions would go.

Would they favor kind of the paid offerings and the fee income that comes with that? Or would they treat it as more of a customer relationship strengthening, free content kind of a thing? And it was never really clear which way the market was going to evolve. And I think what we see is both.

But we're pleasantly pleased with the market receptivity to the idea of increasing content for consumers for free, because it means that they go out to all of their consumers, not just a subset.

And we do think that the kind of raising awareness about FICO Scores that has occurred because of Open Access is getting the banks into a mode of thinking, how do they provide more credit content, and FICO credit simulator, and so on to all of their customers. And we're obviously working with them on that..

Great. That's helpful. And then last one from me. You talked a little bit about the DMS deals in the pipeline and the bookings were good. I know we have the big telco deal and that seems to be going well. And I think you said that you felt that was kind of a repeatable product in that industry.

Based on how good the bookings are, is there a pattern emerging in terms of what verticals are most assimilating this product, or are there specific use cases that are sort of emerging as the killer app? Any trends there yet?.

telcos, utilities, cable companies, and power companies. And there's a very natural play there. And so, in the fullness of time, we anticipate growth in those verticals. But those aren't the only ones. Obviously, it goes beyond that. It goes to retailers and online e-commerce retailers too.

So, pattern emerging is – the easiest way to predict it is to say, what is it that we do well for the financial institutions that we serve today and who has the most natural need for the same kind of thing. And we are seeing success with that..

Great. Thank you for your time..

Our next question comes from the line of Adam Klauber with William Blair. Please go ahead..

Oh, thanks. Good afternoon. One or two questions. First one on expense and margin. As you've sort of let us know that over the last year or so you had this step-up in expenses, as you've been investing in sales and infrastructure.

I guess, going forward, are there any initiatives that would cause a major step-up as we look forward over the near term, the next 12 months? And if not, is it possible that 2018 could be more margin-accretive than 2017?.

That's a great question, Adam. So there's no particular categories that are looking like big step-up in expenses in the near- and intermediate-term, and I can't speak to the long-term. But certainly, in the near future, we don't see anything that would be a big uptick. In terms of margin expansion, this is what we wrestle with every day.

We're in our 2018 planning cycle right now. We're wrestling with how much to increase margin and how much to reinvest in the business, and it is, frankly, a choice. There is certainly margin that could flow through in terms of market expansion, should we choose to do that.

And if we decide to not do that a lot or not do it at all, it will be because the investment opportunities are quite compelling. And so you've caught us a little bit early in the planning cycle. We haven't given guidance for 2018 yet.

I'm fairly confident that we're looking at neutral to improved margin for next year, not a shrinkage, but how much margin expansion remains to be determined..

Okay. Thanks. That's helpful. And then, on the Scores, B2B growth, and I'm sorry if you mentioned this before, was pretty strong.

What was driving that this quarter?.

Adam, a lot of it was volume. We've had good volume increases with some of the big banks, especially on the pre-screen side. We also are picking up volume through fintech and some telco providers, call that new volume for us. And then there was a little bit of price increase in there from some of the smaller lenders that all netted into the number..

Okay. Thanks. And then, as far as the XD effort, again great news that the first one is coming through.

Are there a couple others near the finish line? Or is it more of one's going to jump in and then the others maybe take a look and maybe eventually jump in?.

It's really up to the financial institution when they want to deploy in production. So, typically the rhythm is that they take it in-house, they evaluate it, they decide that it's interesting because it scores a population they don't otherwise score. They decide to test it for a period of time, and then they make a go/no-go decision.

So far, no one has ever said no-go. So far we're in the introduction, the education and the testing mode. We've got one that's decided to go live, one big one trying to go live, and we expect that there will be others that follow. But we're still on that getting to know the score and evaluate it phase..

Okay. That's helpful. Thanks..

There are no further questions at this time. I will now turn the call back to the presenters..

Okay. That concludes today's call. Thank you all for joining us..

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines..