Q1 2020 Earnings Call
Greetings and welcome to the Fair Isaac Corporation quarterly earnings call. During the presentation, all participants will be in listen only mode. Afterwards, we will conduct a question answer session at that time. If you had a question. Please press the one followed by the foreign your telephone should you.
Acquire operator assistance at any time, Please press Star Zero as a reminder, this conference is being recorded today Thursday January Thirtyth 2020, I would now like to turn conference over to Steve Weber. Please go ahead.
Thank you.
Good afternoon, and thank you joining bikers first quarter earnings call.
Hi, Steve Weber, Vice President of Investor Relations I'm joined today by our CEO will Lansing, and our CFO Mike Mcguire.
Today, we issued a press release it describes natural 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 statements made in this presentation, maybe characterize as forward looking under the private Securities Litigation Reform Act of 1995.
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 FCC in particular in the risk factors and forward looking statements portions of such filings.
Copies are available from the FCC from the FICA web site 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 those non-GAAP financial measures to the most comparable GAAP measure.
The early earnings release and regulation G. schedules are available on the Investor Relations page the company's website at <unk> Dot com.
On the Fccs website, it FCC dot Gov.
A replay of this webcast will be available through January Thirtyth, 2021, and now I'll turn the call over to will answer.
Thanks, Steve and thank you everyone for joining us for our first quarter earnings call.
I'd say, we're off to a good start delivering growth across our portfolio and also delivering innovation.
In our first quarter, we reported revenues of 299 million an increase of 14% over the same period last year.
We delivered 55 million of GAAP net income of 37% and GAAP earnings of $1.80 2 million.
Yep.
On a non-GAAP basis. The dollar 80 earnings per share was up 24% from last year.
We delivered free cash flow growth as well up 27% from fiscal 19.
On the software side of our business. The innovation, we're bringing to market is gaining traction among companies eager to use analysts have been decisioning sell their most difficult problems.
And FICO World in November we hosted more than 1400 attendees, representing 600 companies from 62 countries.
During the conference our solution specialist how close to 1100 consultations.
We sat down with customers and potential customers to understand their business issues and explain and demonstrate how franco's advanced analytics digital decisioning and dynamic workflows can transform their business.
The innovation on display at FICO World continues to translate into robust sales in our software business. We had another good bookings quarter at 112 million.
The 49 million up Dms bookings was the second largest quarter after last quarter 61 million.
In Ficos history.
That means we booked about a 110 million a dms business in the last two quarters I'm convinced we're developing software at the same time demand is emerging for analytic based decisioning software.
In our scores business, we had another good quarter scores were up 34% in the quarter versus the prior year.
The beat a beside revenues were up 46% over the prior year.
Our b to C revenues were up 11% versus the first quarter 2019, we continue to see strength throughout this course marketplace.
We also announced them and innovations in our scores business the release of the FICO score 10 suite to.
The suite has two new scores.
The score 10 relies on credit Bureau data and is consistent with previous FICO score versions that are in the market today.
Reflects a normal model development cadence extending features that were introduced in FICO score eight and FICO score nine.
Thanks, those core tenets designed to be backward compatible with.
Previous score versions.
Thank you for score 10 key incorporates a broader set of credit Bureau data, including trended data, which captures unique aspects of the consumers financial profile overtime.
Well the blueprint design is similar uses new characteristics to enhance predictive power.
Well, the FICO score, Ken and FICO score 10, Ti demonstrate greater predictive power over all previous versions of the FICO score more developed on recent datasets.
By adopting the FICO score 10 suite, a lender can reduce the number of defaults and its portfolio by as much as 10% among newly originated bank cards, 9% among newly originated auto loans compared to using FICO score nine.
The reduction in defaults is even higher for newly originated mortgage loans at 17% compared to the version of the FICO score used in that industry.
These improvements in predictive power can help lenders safely avoid unexpected credit risk and better control default rates, while making more competitive credit offers to more consumers.
We believe this type of innovation, which we've developed with significant feedback from the lending community.
Will significantly increase performance and allow the industry to expand London revenue, while not increasing losses, we will continue to update you on this and other square innovations that will announced in the coming months.
Well talk more about how we see the you're playing out but first I'll turn the call over to Mike for further financial details.
Thanks, well and good afternoon, everyone Heico's total revenue for the quarter was $299 million, an increase of 14% over the prior year.
Taking that down into our reported segments. Our applications revenues were 152 million up 3% for the same period last year. This increase in revenue was driven by higher professional services revenues as well as higher usage based software revenues software applications bookings for the quarter were 56 million down to six per se.
From last year.
And our decision management software segment Q1 revenues were 31 billion up 8% over the same period last year. This increase was primarily due to services and usage based revenues in artist management platform Dms bookings were 49 million in Q1 up 56% from the previous year, which is what pointed out is the second highest.
In quarter in this segment's history FICA.
Finally, our score segment revenues were 115 million up 34% from the same period last year. The beat a beep work portion of our scores segment was up 46% over the same period last year and B to C revenues were up 11% B to C revenues were up 11% from last year.
Our strong volumes throughout the scores vertical that also signed an annual licensing deal worth several million dollars that was all recognized in the first quarter due to the new assay excess ex accounting rules.
In our first quarter, 76% of total revenues were derived from our Americas region, Our EMEA region generated 16% and the remaining 8% was from Asia Pacific.
Looking at our revenue by type for the quarter recurring revenues derived from transactional and maintenance sources represented 74% of total revenues.
Insulting implementation revenues were 15% of total revenues and software license revenues were 11% of the total.
Revenues derived from our cloud delivered software as a service products or 74 million for the quarter, which included 57 million in transactional software revenues and 17 million in professional services, an increase of 16% from the previous year until.
Bookings for the quarter totaled 112 million up 5% from last year. These bookings generated 16 million of current period revenue, a 14% yield SaaS bookings were 37 million for the quarter down 16% from the previous here.
Our operating expenses totaled 247 million in this quarter up one up 11 million from the prior quarter due primarily to expenses associated with FICO World in November and increased personnel costs. We also incurred about 3 million a restructuring costs related to headcount reduction actions taken during the first quarter.
Our non-GAAP operating margin as shown in our Reg G schedule was 27% for the quarter GAAP net income this quarter was 55 million up 37% from the prior year. Our non-GAAP net income was 54 million for the quarter up 23%.
Third quarter last year.
As you will see from our non-GAAP reconciliation, we had a large reduction to income tax expense. This quarter of 22 million or 73 cents per share associated with excess tax benefits, resulting from stock based compensation activities. This left us with an effective tax rate of negative 31%.
As we said last quarter, we expect our effective tax rate inclusive of excess tax benefits to be around 16% to 17% to this fiscal year.
Mike as free cash flow for the quarter was $54 million compared to 42 million and the same period last year free cash flow for the trailing four quarters.
Was 248.
Turning the balance sheet at the end of the quarter, we had $111 million in cash. This is up 5 million for last quarter due to cash generated from UBS.
Partially offset by 60 million in share repurchases.
Our total debt face value today that $930 million, including 95 million outstanding on our revolving line of credit.
Our debt has a weighted average interest rate up 4.57%.
During the quarter, we issued $350 million callable notes, which will mature in 2028, the fixed rate on those new nodes is 4%.
Proceeds and the notes were used to repay portion of the revolving credit facility, we anticipate drawing on the revolving credit facility to pay for the 85 million maturity of senior notes that is coming due in July .
And turning to return of capital we bought back 116000 shares in the first quarter at an average price of $356 per share total cash used for buybacks as I mentioned in the quarter was $60 million.
At the end of December quarter, we had about $160 million remaining on the board repurchase authorization.
And finally, we are confirming our previously issued full year financial guidance for fiscal 2020.
With that I'll turn it back over to well for his thoughts on that's why 20.
Thanks, Mike.
As I said my opening remarks, I believe we're well positioned for success as we move into 2020 and beyond our scores business continues to excel and we work hard to get feedback from lenders and regulators to make sure we provide analytics to protect the safety and soundness of lending decisions on the software side.
We're producing higher bookings and building a backlog of recurring transactional revenue. We continue to look for innovative ways to serve our customers and improve efficiency in our business.
Do all of it with an eye toward building shareholder value.
I'll now turn the call back over to Steve for today.
Thanks will this concludes our prepared remarks, and we will now take your questions. Operator, Please open the lines.
Thank you very much if you would like to register a question. Please press. The one followed by the foreign your telephone you will hear three Tony talked to acknowledge your request. If your question has been answered and you would like to withdraw your registration. Please press. The one followed by the three one moment. Please for our first question.
And it comes from the line of Bill Warmington with Wells Fargo. Your line is open.
Good evening everyone.
So.
First question.
First question I wanted to ask was.
About the strong license revenue on the score side.
The business you know I don't see a lot of license revenue.
And scores and just want to ask for some detail on that.
Bill I wouldn't read too much into it. It was we did one larger deal in the way. It was structured was as a as a license and so we got a disproportionate pop there, but I would not read all too much into that.
Okay and then on on the scores business you guys have talked about special price increases we've seen a couple over the past two years and mortgage and auto.
Have you guys put through a especial price increase in in January .
And if so maybe you could talk a little bit about it.
Yes, we have and it's just going into effect and so we really haven't had an opportunity to read the results yet.
[laughter], Okay are you feeling good about it so far.
Well I always feel good about our business.
[laughter] David is it perhaps in the and the credit card.
Portion of the business.
Hi, some credit card is effective yes.
Okay.
Okay.
Switching over to the software part of the business you know.
Today, all of you a p. eyes are our inward facing meeting that you're in turn of developers are using those tools to build applications on the Dms platform.
The plan to make those EPA is available externally and if so what kind of timeframe.
Bill that is a great question a lot of insight in that question.
We very much planned to turn our guys. So that their outward facing eventually that's probably realistically 18 to 24 month timeframe before we can do that the advantage of it strategy behind it is.
Well you know as you know, we're taking our solutions, which are mostly financial services oriented we're getting them onto the platforms that we have multi tenant standardized highly configurable solutions.
Real returns to scale.
When we can turn the age guys outward a bunch of good things happen.
First we can enlist partners to do customization and beyond the CPI. So that it's not our job is it becomes that vars, and resellers and others and help us to get that Don.
Second we will be able to move into verticals beyond financial services, where we don't have a salesforce, but where there is an appetite and I would say that's true for all BDC companies any BDC company that wants to get into data driven decisioning and optimizing their consumer interactions would stand to benefit from leveraging our platform.
The outward facing eight guys will let them.
I have vertical custom kinds of solutions.
Based on our platform. So it's very much our strategy is it frankly, it's an inflection point for our software business when we achieved.
And then just wanted to ask a question on the SaaS bookings on the 37 million.
Those are.
Were down on a year over year basis.
That ccs impact or something else impacting that.
Well, it's Mike there's nothing particularly.
Particularly noteworthy in terms of where that shortfall is relative to typical bookings pattern. It's a reflection of the fact that bookings are relatively lumpy in our business and this is our seasonally slowest quarter in terms of bookings as you know, it's typically kind of high teens to 20% of full year bookings that come in.
First quarter. So if you combine a relatively lumpy business.
Lots of large deals.
With the smallest sample set being the lowest seasonal quarter.
Just the chances for aberration that doesn't have sort of long term just looking at bats is high and that's how you should think about this we continue to feel good about how that business is growing.
In terms of external demand looking pipeline. So I think it's I think it's just a one off this quarter.
Yeah, and then my last question for me, if I could the FICO 10 in the FICO 10 tea.
Your thoughts on when the G fees are going actually adopt those.
Boy, that's a little hard to say.
We certainly expect.
These scores to be in the consideration set.
All right well, thank you very much.
Our next question comes from the line of men.
<unk> with Barclays. Your line is.
Thank you good evening guys just to follow up on this call is pricing.
I know you said some card and you did something in January but is the mortgage and auto pieces that you did in the prior two years are those fully cycled through always the incremental opportunities there's still left.
I think you shouldn't think of them as being fully fully cycled through to use your words, it's it's been in place for a while now.
Okay.
And then just I guess on the DTC side, I mean that was from 11% was a pretty good number.
Are there or is it pretty broadly diversified is that you experienced relationship I was just hoping you give us some more color on the trends you're seeing there.
Yeah, it's broadly diversified model, there's again, nothing that really sticks and add up as being.
As as a single explanation, but it is both our own platform and the and the third party relationships we have.
Got it.
And then just.
Mike maybe on the margin fine, hoping maybe a few if you could just help us should the moving pieces there like how much if it was maybe the FICO world impact out to your point timing and Lumpiness in self they obviously it can be all of the base. How should we think led the progression through the course of year.
Yes, so we talked at the end of last quarter about.
2020, being here, where we're going to begin to focus on.
Turning the margins.
More favorable.
In this quarter, we took a.
Relatively small restructuring charge associated with head count reduction.
Most of the financial impact of that won't be realized financial benefit from that will be realized until the second quarter and beyond.
But we do expect that benefit to.
Materialize.
In the first quarter, we also had FICO world and of course that restructuring expense itself and if you. If you take those out probably 4% of our expense growth on an opex basis was due to those things.
And so we're still growing opex to rate that is.
It's double digit but lower than income are lower than revenue growth. We expect as the year progresses, as we can't guess more efficiencies and focus more on cost that.
Operating leverage that.
Difference between revenue growth and.
Expense growth will be greater than that.
But you're not seeing much of it yet in the first quarter.
Okay got it thank you guys.
Handles brief reminder to register for question you just the one full of but for on your telephone keypad. Our next question comes from one of Jeff Mueller with Baird Your lens.
Yes. Thank you can you just remind me it's the company's typical.
Methodology to adjust the full year guidance as warranted after the second quarter for special pricing has a bit more time has passed we shouldn't read anything into just maintaining this guidance in terms of the implementation of how the special pricing as is the implementation is going on that.
Correct.
We don't really have a schedule for adjusting guidance the guidance that we give at any point in time is our best our best estimate of where we're going to be and so the guidance that we Havent places what we believed to be the guidance.
Okay.
And then can you just help me on the application.
Transaction and maintenance performance in the quarter it was pretty muted growth the lowest year over year, it's been in a while just anything about end market transaction activity timing factors just any reason why there would be slower growth there.
I think that the best way to think about it it's it's by design.
You know, where if you take a step back and you look at that transition that we're making from license on premise.
Software business, which was what we were historically and predominantly and the transition to our future state of multi tenant standardize configurable platform business.
There's there's inbetween stage and the between stage, which is strategically in pure but important competitively is to be able to provide our solutions in the cloud even if theres single tenant hosted even if they're not.
The end state software platform that we'd like them to be and so we are in.
Gration pattern here, where three of our top five franchise as we move to the platform two of our top five have not yet moved to the platform and and yet we're not willing to abandon our customers' needs for having some of those solutions in the cloud and so what we do is.
We take that business, even though it's lower margin business, because we think its strategic we want to keep competitors out we want to satisfy our customers.
But the returns to scale really come when those solutions are fully migrated over to standardize multitenant platform. So the balance we strike in our software businesses. There is more business available in this inbetween space than we care to do.
So we we basically.
We basically meet the demand.
That we think is appropriate to meet our strategic customer needs without overdoing, it and that's really how we think about that call. It a lower revenue growth rate in the short term.
Got it and then just last.
You've had a competitor call up some I guess bookings delays in the UK just given the macro concerns Brexit concerns just.
Any comments on if you're seeing something similar or how you guys going for you. Thanks.
Not really.
Our EMEA business, our UK business is fine.
Okay. Thank you.
And the next question comes from the line of surrenders signed with Jefferies. Your line is open.
Good afternoon.
I'd like to start a question about the FICO score 10 suite.
Can you talk a little bit about the benefit of providing the cycle 10 score versus the tendency in a sense that.
At face value, obviously 10 key comes across as a superior score, but then it sounds like cycle 10 teams or like a 10% news for backwards compatibility is that the primary weighted to clients will be thinking about it in.
How should we be thinking about.
I think thats a to.
That's a good characterization and the difference so.
We have you know the goal is always to have a more predictive score and to help lenders make better decisions.
We have all we have kind of a regular cadence of.
Updating our scores every several years and so FICO score 10 is right on time.
For the update from FICO nine it is completely backward compatible so it's the same reason codes and although the weighting of some of the factors is different it can be used interchangeably in some sense with with FICO nine.
With that with FICO tend to see where using different data set the trended data and.
And we've introduced some increase some additional reason codes and what that does it makes it not so backwards compatible but it does provide.
You know better predictive nest for certain kinds of things. So that's the right way to think about it is backward compatibility versus not.
Understood and then from a generally from a client perspective, how much more.
I will say effort would be involved in going to Psycho 10 team because I assume that will become the paradigm in terms of.
Like you wouldn't have another let's say the next generation without a completely different set of FICO scores because I think.
Obviously want to maintain further competitive wins from 20 beyond.
Yes. So every lender is due to touch.
Every lender is different than what you see is different lenders have different adoption rates for new scores, we still have FICO nine out there. Obviously, we have FICO eight we had earlier scores that are still very much in Houston still work just fine.
So it's up to the lender to decide what pace they want to change change the scores that they use.
Obviously fin techs and.
Startups and brand new.
Customers gravitate to the latest and greatest which would be 10 and 20.
That's helpful.
And then touching base on the there were a topic about the software revenues I think you characterize them as there are some natural volatility and this quarters in particular tends to be the I'd like to some here.
We also talk a little bit about perhaps.
And then just want to verify or at least a color that you were providing allowed when we think about software margins for the year.
The call there to keep them essentially flat year over year.
Well, how should we think about that versus the overall for point lunches.
I think flat is safe.
We we take it as we go here right now we're trying to focus on matching expenses revenue growth. So that we don't have big changes in margin one way or the other.
Maybe we'll do a little better than that maybe a little bit worse that depends on kind of how the factors in the year.
Take out.
And I apologize for is that is that at the firm wide level or is that still level.
Sorry.
That's what the software level, obviously the margins the incremental margin discourse is there is very very different.
And our goal is in the software business too.
As I say start to show some improvement there over time, but this year as we're kind of turning that now turning to steering wheel little bit there as well said say flat as safe and we'd be happy if it's better than that.
Understood.
One final question.
I think one of the.
I think the the more anticipated product launches is going to be the new focus we towards the end of the year.
[music].
As you will that as you will products weed out how should we think about the strategy around that is the idea to migrate as many existing users over to that platform or.
It to let the natural client upgrade cycle run its course.
Maybe target as many new users for that platform. It's possible. Thank you guys were kind of providing some color around that but.
Any additional color would be helpful.
Yeah, I would say, it's more the latter I think that our customers decide the rate and pace of.
Grades and.
Our our software tends to go in and stay in for quite a long time. It has a long shelf life and so we're not pushing customers to migrate you're really are quickly we do it on the pace. They want if they want to do it right away great and if they if they want to take their time that's also okay.
We certainly for new customers were going to be pushing them in the direction of our latest and greatest products.
Okay.
That's helpful and.
That's it for me thank you.
And Mr. wherever there no further questions at present time, I'll turn the call back to yourself. Thank you.
Thank you. This concludes todays call. Thank you all for joining.
Good science.
We thank you for your participation S that you. Please disconnect your lines.
[music].