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

Manav Patnaik - Barclays Capital, Inc. Brett Huff - Stephens, Inc. Adam Klauber - William Blair & Co. LLC William A. Warmington - Wells Fargo Securities 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 call is being recorded Thursday, April 26, 2018.

I will now turn the conference over to Steve Weber. Please go ahead..

Thank you. Good afternoon and thank you for joining FICO's second 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 with the prior year.

On this call, management will also discuss results in comparison to the prior quarter in order to facilitate an 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 April 26, 2018. Now I'll turn the call over to Will Lansing..

Thanks, Steve. I'm happy to say we delivered our highest revenue quarter ever, and our team is executing at a high level. We remain very bullish on our business and because of the increased visibility into our growth, we are today raising our full year guidance which Mike will explain shortly.

In our second quarter, we reported revenues of $258 million an increase of 13% over the same period last year. We delivered $32 million of GAAP net income and GAAP earnings of $1.03 per share. We delivered $48 million of non-GAAP net income and non-GAAP EPS of $1.54.

Most importantly, we're delivering revenue growth while we're successfully transitioning our business model from upfront license revenue to a recurring revenue base. This quarter year-over-year revenue grew at 13% even while license revenue declined by 36%.

We were able to drive growth through increasing our recurring revenue which is up 21% over the last year. In fact, recurring revenues accounted for 76% of our total revenues this quarter compared with 71% last year. In Applications, revenues were up 9% over the prior year.

Our Originations Solutions and Customer Communication Services were particularly impressive, up 50% and 17% respectively from last year. We were able to grow total recurring revenue in Applications by 14% giving us more visibility to predictable future revenues.

In our Decision Management Software, we continued to make progress even as this segment sees the most impact of the revenue model transition. This quarter for instance, upfront licenses were down 52% from last year, which caused total revenues to be down about 19%.

Historically, Blaze Advisor and Xpress Optimization were sold as perpetual or term licenses. More and more we're selling these in the cloud either our own FICO Analytic Cloud or on AWS. And as a result the revenue is reported as SaaS recurring revenue.

We continue to have a healthy pipeline of opportunities as our technology drives sales in both our DMS and Applications segments. In the Scores business we had a great quarter as we continue to look for new revenue opportunities. Total revenues were up 34% versus the prior year and are up 26% year-to-date.

On the B2B side, revenues were up 47% over the same period as last year. This was driven partly by increased volumes but much of it was due to targeted price increases.

As we've been saying for the last several quarters, we are continually reviewing our pricing practices and have identified instances where the pricing was not commensurate with the value delivered. We implemented some adjustments in January with pricing increases, in this case primarily, in mortgage originations.

B2C revenues were up 13% this quarter and 19% year-to-date. We continue to roll out new programs with existing partners and are beginning to see revenues from recently implemented deals. We still have a large pipeline of potential deals and see many opportunities to serve this constantly evolving space.

As always, we remain focused on driving shareholder value. We've repurchased nearly $125 million in shares halfway through our fiscal year. At the same time we're actively investing in exploiting the many opportunities that we're pursuing.

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

Thanks, Will, and good afternoon, everyone. Today I'll emphasize three points in my comments. First, we delivered $258 million of revenue, an increase of $29 million or 13% year-over-year. Recurring revenue was $195 million, up 21% from last year and bookings were $102 million, up 12% from last year.

Second, we delivered $32 million of GAAP net income which is up 29% year-over-year. And finally, we had $42 million of free cash flow this quarter and we spent $75 million on repurchasing shares. I'll begin by breaking the revenue down into our three reported segments.

Start with Applications where revenues were $147 million, up 9% versus the same period last year. We had a particularly strong quarter in Originations and our Customer Communications Services product lines, which both had strong increases in transactional volumes. Our Applications bookings of $69 million is up 42% from last year.

In the Decision Management Software segment revenues were $23 million, down 19% versus the prior year due to the decreased license sales. Recurring revenue in DMS were up 3% from the previous year and bookings were $20 million, while down 15% from last year it was up 68% over last quarter.

Finally, in our Scores segment, revenues were $88 million up 34% from the same period last year. On the B2B side, we're up 47% versus the same period a year ago due primarily to some targeted price increases in mortgage as well as overall volume increases. The B2C revenues were up 13% from the same quarter last year.

We continue to expect to see continued growth from both B2B and B2C in the back half of our year. Looking at revenues by region, this quarter 75% of total revenues were derived in the Americas, our EMEA region generated 17% and the remaining 8% was from Asia Pacific.

Recurring revenues derived from transactional and maintenance sources for the quarter represented 76% of total revenue, consulting and implementation revenues were 18% of total and license revenues were just 6% of total revenue. Cloud revenue was $63 million this quarter, up 26% from last year.

In fact year-to-date cloud revenues are $120 million, up 20% from the same period last year. Bookings this quarter were $102 million, up 12% from the prior year, we generated $13 million of current period revenue on those bookings for a yield of only 13%.

The weighted average term for our bookings was 30 months this quarter, and this quarter we had 13 deals over $1 million, and we booked six deals in excess of $3 million. In addition, our cloud bookings were $32 million this quarter and are $51 million year-to-date, which is almost double from the same period last year.

Operating expenses totaled $210 million this quarter, compared to $195 million in the first quarter. This increase primarily relates to variable expenses associated with our increased revenue and employee incentive costs including the special all employee restricted stock grant we announced last quarter.

We expect to maintain our current cost run rate over the back half of the year while we actively invest our resources in our highest strategic priorities. As you can see in our Reg G schedule, our non-GAAP operating margin was 27% in the second quarter.

We expect some margin expansion in the back half of the year and that the full year operating margin will be between 26.5% to 28.5%. GAAP net income this quarter was $32 million and non-GAAP net income was $48 million or $1.54 per share.

The effective tax rate was about 21% this quarter and we expect our tax rate to be in the low to mid 20s over the remainder of 2018. Free cash flow for the quarter was $42 million versus $61 million in the prior year. And for the trailing 12 months our free cash flow was $183 million.

Now, turning to the balance sheet, we had a $108 million of cash on the balance sheet at the end of the quarter. Our total debt is $704 million with a weighted average interest rate of 4.2% and the ratio of our total net debt to adjusted EBITDA this quarter is 2.24 times, well below our covenant level of three times.

Depending upon market conditions we may be refinancing some of our debt over the next two quarters. During the quarter we returned $75 million in excess cash to our investors, repurchasing 461,000 shares at an average price of $162.71.

And through the first two quarters of our fiscal year we repurchased almost 800,000 shares at an average price of just over $156. We have about $162 million remaining on our 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 or strengthen our portfolio and competitive position. Finally, as Will mentioned, we're raising our previously provided guidance. We're now guiding the full fiscal year as follows.

We expect revenues to be about $1.02 billion, up from the previously guided $990 million. GAAP net income which we previously guided at $136 million is now expected to be approximately $140 million.

GAAP earnings per share, previously guided at $4.34, is now approximately $4.47 and non-GAAP net income previously $191 million is now expected to be $200 million, which equates to $6.38 per share on a non-GAAP basis. With that, I'll turn it over to Will for his final comments..

Thanks, Mike. We are halfway through our fiscal year and I'm very happy with where we stand. Last week we hosted our FICO World Conference where we brought together more than 1,000 of our customers to showcase the latest in our decisioning solutions.

I had the opportunity to sit with many customers and those discussions confirmed for me that we are uniquely positioned to help a wide range of companies solve their most difficult decisioning problems. Our development teams have done a magnificent job of cloud enabling our IP and tailoring it to be delivered in an efficient cost effective manner.

And our sales team is successfully signing deals to build the backlog of recurring transactional revenue. At the same time our FICO Scores continues to prove the value they bring to the entire financial ecosystem. We believe we're poised to do great things in the remainder of fiscal 2018 and beyond. I'll now turn the call back to Steve 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 is from the line of Manav Patnaik with Barclays. Please proceed with your question..

Hi. How are you guys doing? Good evening..

Good..

My first question is just is the guidance raised entirely due to the B2B scores performance?.

It's pretty much all around our Scores business, yeah, both B2B and B2C..

So, I mean those price increases that you implemented, my guess is you, I guess, sort of knew that was happening.

So was there a hesitation that it wasn't going to take hold that you didn't include it in guidance in the beginning or maybe just some more color there?.

No, I think that it's a matter of certainty versus uncertainty. So we had our views about the way things would likely evolve. But until it's done, it's not done. And so as you know, we tend to be conservative on guidance..

Got it. And then maybe just on that specifically.

Obviously, in the context of the news around what TAM (14:29) you want to do and so forth in the mortgage market and the debate around the scores, I guess just some thoughts on your timing to put that price increase with that debate going on?.

Yeah. I think that's a fair question, we did talk about it. And I think our view is that who knows how this is going to shake up from a regulatory standpoint – from a statutory standpoint. But in the event that we wind up being a sole source score provider, we didn't want it said that we were leveraging that position to push through price increases.

I mean, I think that we're really trying to just have the pricing reflect the value being provided to the end user..

Okay. And then last one just on this, I guess what I'm trying to understand is on the B2B score side like what was just the market driven growth, so ex your price increases.

And I guess, just trying to make sure we don't – you don't take this 47% and add that to your numbers for the rest of the year basically?.

Yeah. Two points to that, Manav. So we're not going to get real granular in terms of how much of this came from price versus how much came from volume. But I can tell you that we saw volume increases across the board, across all the lifecycles that we talk about, B2B. And in certain cases some of the lifecycles were in the high-single digits.

But that being said, obviously a significant amount did come from some of the very targeted pricing that we did do.

As it relates to what we see in this guidance that we just provided, we see a run rate in scores similar to what we delivered in the second quarter and certainly the rest of the year will be dependent upon increases or decreases in volume and any other pricing schedules that begin to become applicable.

Again, the bureaus roll these out to their end customers over a period of time and so the uncertainty Will was referring to is because we're not party to those agreements, it's uncertain when exactly the bureaus pass on some of these increases. So that's one of the reasons why this wasn't included back in November when we gave our guidance..

Okay. Got it. Thanks guys. I'll turn it over..

Our next question is from the line of Brett Huff with Stephens. Please go ahead..

Good afternoon, and thanks for taking my questions..

Sure, Brett..

Can we – thanks for the detail on the B2B scores that (00:17:44) things like that given that you guys use channels to distribute those, I wanted to follow up on any new developments in the B2C relationships that you have, the channel solutions that you're working with Experian and then maybe some of the other credit card providers, it's one of the things that at least to us seems like a really big opportunity and it seems like those lead generation efforts on the part of more customized issuers seem to be doing well.

Any new developments there?.

Nothing new in terms of new clients that we're announcing today. I would say though that we've signed a number of deals in the past quarters. They're starting to ramp. Not all of them are fully ramped yet. In this quarter, our consumer revenue coming through those channels are almost as large each quarter as are myFICO business.

So both are growing at a very nice rate, I'd like to call out our myFICO business is growing better than 5%, 6%, 7%, so what you're seeing in our numbers on the B2C side is just continue to roll out of what we have and we're continuing to work deals as they arise, but nothing new to announce this quarter..

And then just to dig in a little bit on Scores. Any commentary, I think, you mentioned different lifecycles of the Scores, some were high single-digits, some were lower.

Where did pre-screen fall into that? I don't know if you want to get that granular, but sometimes you'll give us the data on pre-screen?.

Yeah. Our pre-screen, our acquisitions scores actually was the highest. It was very high-single digit this quarter. There were some very strong marketing from what we saw this quarter in the numbers we're reporting..

And then last question for me just a general kind of loan origination environment, anything you guys are seeing change either accelerate or decelerate, particular verticals that have changed since the last time we all talked?.

No, not really. Things are pretty solid in the same areas that it has been. We're not seeing any significant shift from certainly last quarter or even the last couple..

Okay. That's what I needed. Thanks for your time, guys..

Sure..

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

Thanks. Couple on Applications, clearly it's some good volumes, but how much of the growth, for just general sense, came from more products from existing clients or how much came from new clients.

In other words, what was not volume related?.

Yeah. So a lot of it came, a lot of the growth on the recurring line in particular came from deals that we signed or booked in our fourth quarter, third quarter last year. And they're starting to come online. So we had a lot of growth that came from deals at that point in time.

I would say the mix of new client logos versus existing client logos still is primarily existing client logos. It's more – more than half easily or coming from existing customers who are adopting some of the new products.

Though we do have a couple of new marquee customers and new logos that we signed to the latter part of last year where you're starting to see the recurring revenue. So it's a nice blend but mainly coming from our existing customer base..

Okay. Okay.

And then I know sometimes on renewals they can be lumpy as we think about the next quarter or two, have there been any renewals that have been moved up or down that we should think about that could cause some lumpiness?.

No, we have some scheduled renewals coming in quarter three and in quarter four, we've kind of baked in the effect of that into our new guidance but nothing sizable I would say..

Okay. Okay. And then in DMS, clearly you have the shift going on towards cloud and away from license.

Could you have just some sense when you think revenue will stabilize?.

Yeah, I think that's happening right now as we speak. We're seeing the revenues starting to climb in spite of the transition..

Yeah. I think, Adam, I would say the one kind of disappointment we maybe have this quarter was the timing of some deals.

Coming into the very end of the quarter we had, I don't know, roughly $10 million, maybe a little bit more, in deals that we expected to sign that would be book deals not upfront revenue, but book deals with recurring revenue and ended up either signing after the quarter or we're still closing them and pursuing them.

So there is the lumpiness that will occur in this business, probably less in license revenue and more in bookings....

Right..

As we go forward. But there is a lot of pipeline....

Okay..

...there in DMS and we're really happy with the market acceptance and demand around this product..

Okay. Thanks a lot..

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

Good afternoon, everyone..

Hi. Bill..

So, I don't know, in some ways, I'm speechless.

When was the last time you guys raised guidance within the year? I mean, are we talking like -?.

I've been around 14 years, Bill. It's been a little while, but we've done it. We've done it..

It was like 2013, I think, right..

You got a better calendar than I do on these things..

Anyway. So, I think that probably says something right there. As I look at the 47% growth in the B2B side, it's definitely above anything that I was modelling. So is the thought that we rolled that 47% growth in that piece of the business forward, assuming volumes remain the same as they have been remaining.

Does the price increase continue to flow through for the rest of the year? I am assuming that's the way it is, I just want to make sure?.

Yeah. I think the run rate that we delivered this quarter, the overall run rate $88 million which includes this piece of the B2B is a fairly good run rate to be using right now if all things remain the same on the quantity side.

And again, as I mentioned, there is a little bit of uncertainty as to how the rate card gets applied through each of the three bureaus and so there could be a little bit of volatility along the way, but we're assuming in our numbers at least that the run rate is stable..

How are things going on the lead gen side, you had signed up deals with or you've been working with Experian, with Discover, and it was a different revenue model, are you starting to see some meaningful volumes coming to those channels?.

I think the meaningful volumes are still in our future, but we don't really control it, it's more in the hands of our partners. And so when they ramp we will be in good shape, but they're not really, they're in the process of ramping now..

Got it..

Yeah. It wasn't a big needle mover this quarter, but it was definitely some incremental revenue from what we've seen in the past but it wasn't a needle mover..

Okay. And then maybe you can talk a little bit about what's driving the strength in Originations and also in the Customer Communication side.

Those numbers seem pretty strong within applications?.

Yeah. I would say that the answer is the same in both situations. We have the best product in the market. So our Originations product is just a – it's a really high feature, high function elegant code, kind of an offering. And so it's not surprising that the marketplace has really embraced it. And so we're very busy selling it.

Customer Communication Services, same thing, I think that we're best in class and we continue to refine what we do and improve the analytics and the feedback so that they can – so that our customers can maximize the return as their – and optimize their interactions with their customers. So it's really having great product is what it is.

I mean, it sounds kind of like a throwaway, but it's – I mean it's truly because we have great products..

You know, Bill, I'd add to that, over the last couple of years, maybe over the last six, seven quarters but roughly call it two years. We've taken what was an Originations product that was not growing much at all.

In fact in some cases stepping backwards and over that two year, the last two year period, we signed 25 or more cloud customers, some pretty needy ones in the banking industry. And what you're starting to see in the revenue is you're starting to see the go lives and you're starting to see the recurring revenue coming on that.

That's what accounts for the 50% growth in Originations. These have been deals that we've talked about being booked in the past that are now starting to go live and we've got a lot of people working on Originations business, because, as Will said, it's been winning a lot of deals in the market..

Yeah. I remember last year the challenge had been that you have been booking a lot of business and the expense side, you had to invest in order to implement the business and also to build out the technology infrastructure to support the business.

Now, are you getting to the point where the incremental investment in implementations and infrastructure is starting to slow?.

I wish I could say we're getting to that point, but we're not really slowing. The opportunity set is so strong that we're investing for the future and cloud, security, managed services, professional services to support all that. And we're making the investments that show up on the cost side so that the business can be as strong as we think it can be..

Yeah, I would add one more thing, Bill. Where last year we talked a lot about originations pipeline and deals that we were signing. We believe we're at the frontend of seeing a lot of that on the collections and recovery side.

In fact this quarter our largest deal that we booked, which was just north of $10 million in the aggregate was a very solid collections and recovery in the cloud deal, probably one of the largest that'll to be implemented on the planet by us and so we're seeing a very good pipeline on that side as well and the hope of course is to see a repeat of what we've done on the Originations side with that product line..

Okay.

Now it also sounded like you guys have been working on a combination fraud and compliance product, two areas that typically within banks have been handled very separately, but would seem like they would fit together closely, is that the case and where is that paid?.

Bill, that is the case, we're very much focused on a broad fraud footprint and the way KYC and AML and fraud are all committing app frauds, they're all coming together and so we're looking at it more holistically and our customers are asking for it that way too..

Yeah, the product hasn't been released yet Bill, but what we're seeing in terms of deals that underpin some of these bookings is we're seeing a lot of Falcon/CCS deals happening together, those are already of course fairly well integrated.

And while we're integrating the AML Solution that we bought from TONBELLER, we're actually seeing a ton of standalone AML deals, some quite large ones and we expect a few more before the end of the year. Falcon X as Stuart calls it will be hopefully available by the end of the calendar..

Excellent. All right. Well, thank you very much. Congratulations on a really strong quarter..

Thanks. Thanks, Bill..

Thanks, Bill..

There are no further questions at this time..

Thank you. That concludes today's call. We would like to thank you all for joining us. Have a good day..

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..