Q1 2021 Fair Isaac Corp Earnings Call

January 28, 2021

Greetings and welcome to the Fair Isaac Corporation quarterly earnings call. During the presentation, all participants will be in a listen only mode and afterwards, we will conduct a question and answer session at that time. If you of a question. Please press. The one followed by the four on your telephone if at any time during the conference you need to reach and operator, Please press star zero the car.

And is being recorded the Thursday January 28, 2021, and now I'd like to turn the conference over to Steve Weber. Please go ahead.

Thank you.

Good afternoon, and thank you for joining FICO and the first 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 Mclaughlin.

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 and 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 of.

Those statements involve many uncertainties, including the impact of COVID-19 on macroeconomic conditions and the company's business operations and personnel that could cause actual results to differ materially.

Information concerning these uncertainties is concerned is contained and the company's filings with the SEC and 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 Dot com.

Or on the SEC's website at SEC Gov.

A replay of this webcast will be available through January of 28 2022.

And now I will turn the call over to will Lansing.

Thanks, Steve and thank you everyone.

And your first.

The quarter earnings call as we continue to deal with the effects of the pandemic, we remain focused on the health and safety of our employees.

We're still primarily working from home and most of our offices remain closed.

And grateful to our dedicated employees do every day.

The commitment to FICO and to our customers.

And the Investor Relations section of our website, we've posted some slides that offer financial highlights of our first quarter.

I'm pleased to say, we started 2021 well as we continue to make progress on the strategic initiatives.

We reported revenues of $312 million and increase of 5% over the same period last year.

We're pleased with that result, because we knew we would have headwinds on the software side as we transition towards more ratable recognition of our subscription and software license revenues and of course.

Fiscal quarter is typically our slowest software and new business quarter.

We delivered $86 million of GAAP net income and GAAP earnings of $2 90 per share of 57% and 59% respectively.

On a non-GAAP basis, net income was $82 million up 51% and earnings per share of $2 74 was up 52% from last year.

And as we reap the benefits of the cost reductions we put in place last year.

As we discussed last quarter some of those savings will be reinvested as we identify opportunities and hire additional individuals and key strategic areas.

We continue to deliver free cash flow growth as well Q.

Q1 free cash flow was 75 million of 39% from last year.

I am encouraged by the progress, we're making across the business the.

Decisioning market continues to grow and we are well positioned to serve it in fact and December Forrester issued of digital Decisioning platform report and named FICO as a leader in the space.

The FICO decision management platform was recognized for providing all of the tools necessary to manage and deploy digital decisions, which will stand up to the highest standard of regulatory rigor.

We've been helping financial institutions make lending decisions for decades, we now bring that same level of automated analytics decisioning to the broader market to help businesses respond quickly the customers needs and anticipate the future demands.

As we migrate more of our business towards the subscription based model, including SaaS software subscriptions and term license subscriptions for our on Prem software we.

We will see less upfront license revenue than we would have and the past as the revenue spread over the term of the deal.

Last quarter, we talked about how we would recognize less revenue upfront for on premise licenses and that change pushed about $9 million of revenue this quarter out to future quarters.

And this doesn't affect cash flows where total revenues recognized but it does delay the timing of revenues and over time, we'll smoothed the lumpiness, we've historically seen.

The changes in line with industry standards, and we believe it will provide a more represented the transparent view of the growth trajectory of our business.

And our application segment, we delivered of $135 million of revenue.

And 11% from last year. This was due to a decline in upfront and license revenues and to a lesser extent professional services revenues.

The license revenue was negatively affected by a smaller amount of term licenses upfront through renewal and the quarter and the revenue recognition change I mentioned earlier.

And our decision management segment, we delivered $32 million of revenue up 4%.

Many of the same issues, we described in our application segment.

All of our license revenue declined versus the previous year transactional revenues and Dms were up 36%, providing the steady predictable recurring revenue stream that we believe will continue to growth.

We've had a lot of interest and our Decisioning platform.

And we sold the number of large deals and the best few quarters, we're working hard to install and get those customers live. So we can begin seeing the impact from those recurring revenues.

And I've, often said, we're committed to becoming the preeminent platform player and Decisioning analytics. This is the strategic focus of our software business and like I said last quarter that may mean, exiting non strategic products or services or not signing or renewing and low margin services project work.

Last fall, we sold our enterprise security score business, because I've always believed and the effectiveness and value of the product.

As our strategy and we need to remain incredibly focused and maximize the opportunity that's in front of us.

In December we entered into a joint venture with the longstanding partner in China, the distributes FICO scores.

And the joint venture will now distribute our software solutions for the China market moving forward. This will allow us to serve that market with less infrastructure and therefore better margins.

All of this and the <unk> deal will have the small near term negative impact on the topline revenues, but will help our overall margins and again allow us to focus on our overarching strategy.

And we expect more adjustments, we made some of our software business as we make the necessary decisions.

Pursue our strategic initiatives.

And the scores side of the business continues to perform very well.

Orders were up 26% and the quarter versus the prior year and.

And the <unk> side revenues were up 20%. It was continued strength and mortgage originations volumes, although normal seasonality and that's it wasn't quite as strong as our fourth quarter.

Auto originations were relatively flat versus the previous year.

We're starting to see signs of cards and other unsecured loans beginning of the bounce back as the prescreen and origination activities picked up in that space.

As we discussed last quarter, we did institute some price increases across various volume tiers those price increases start to feather in during our second quarter and we can talk more about those and Thats. When we released the results of our March quarter.

On the consumer side, we continue to drive growth, our <unk> revenues were up 40% versus same quarter last year and.

The growth of my FICO Dot com is even more impressive of 69% this quarter versus last year.

The recent results of our Myfico business.

As well as our partners' experience.

Demonstrate the savvy consumers want the FICO score and the scores that lenders use.

Finally, as you know we haven't provided guidance since the middle of our last fiscal year, we are still operating in the marketplace and the economy with a great deal of uncertainty and volatility.

While our business has been remarkably resilient over the past year, it's still difficult to quantify what macro trends will impact our volumes and so while we're confident and our prospects of this year, we still believe that theres a wide range of possible outcomes, depending on the timing of vaccine rollout and the opening back up and the global economy.

As we move through the year, we'll provide more color and we believe it's prudent.

The final comments in a few minutes of the first let me turn the call over to Mike for further financial details.

Thanks, and good afternoon, everyone today I'll walk you through our first quarter results in more detail and briefly discuss the impact we're seeing from the restructuring and impairment charges, we took and the fall and the revenue recognition of assumptions, we talked about last quarter.

For the quarter was $312 million and increase of 5% over the prior year, our applications revenues were $135 million down 11% versus the same period last year.

Quarterly decrease in revenue was primarily driven by decreased term license revenue.

And our decision management software segment Q1 revenues were $32 million up 4% over the same period last year revenue increase was due to increased SaaS subscription revenue, partially offset by lower and license revenues.

As will mentioned our license revenues are down as we transition to a more ratable subscription revenue Mark last quarter. We explained how we will be recognizing less of our on premise software deals and as upfront license revenue and recognizing more revenue ratably over the term of the deal and <unk>.

And to this change we are also selling more SaaS deal, which further reduces the upfront revenues and finally, we are also deemphasizing low margin non strategic professional services engagement, which will likely have a negative near term impact on professional services bookings and revenues. This is driven by our core strategic goal of selling more high value of recurring software.

Turning to our scores segment revenues were 145 million of up 26% from the same period last year.

<unk> revenues were up 20% over the same period last year, driven by high volumes of mortgage originations as well as summit unit price increases across our four categories.

<unk> revenues were up 40% from the same period last year, both of my FICO Dot com and the BDC partner revenues grew significantly scores revenue was down 5% sequentially from Q4, but as a reminder, last quarter out of material one time royalty true up of that increased reported revenue.

This quarter 80 per cent of total revenues were derived from our Americas region, Our EMEA region generated 14% and the remaining 6% was from Asia Pacific.

Recurring revenues derived from transactional and maintenance sources for the quarter represented 81 per cent of total revenues and consulting and implementation services revenues were 13% of total revenues and license revenues were 6% of total revenue.

SaaS software revenues not including the related professional services revenues were $60 million per the quarter up 4% from the previous year.

Q1 bookings totaled $68 million down of 39% from the previous year those bookings generated $9 million of current period revenues of 13% deal SaaS bookings were $20 million per the quarter down <unk> 45 per cent from the previous year professional services bookings of $16 million were down 61% the last year.

Our fiscal first quarter bookings are generally lower each year, particularly after a strong quarter like we delivered last quarter and our quarterly bookings can be quite volatile from quarter to quarter.

We feel good about the bookings outlook for the rest of the fiscal year. Despite the relatively light bookings in Q1.

However, it is important to note that we do expect bookings to trend lower overall as a result of our de emphasis of professional service the sale and the somewhat shorter term life of typical of SaaS contracts.

As we discussed last quarter, we have shifted the sales of our on premise software away from the sale of the separate license and maintenance of opponents.

Scripts and that include both the rights to use the software and ongoing maintenance.

This quarter, we adjusted our revenue recognition to be consistent with this change and the industry standards for software subscription sales.

This change resulted in less upfront revenue recognized in the quarter, we signed the subscription contract and more revenue from that contract recognized ratably during the term of the subscription.

This quarter the impact of this change wasn't and quarter reduction of revenue of approximately $9 million. Those of revenues that would have been claims this quarter under the old sales model and will now be recognized over the term of the contract.

As a reminder of this will not have an impact on our quarterly cash flow for the total revenue recognized from the software license sales over the term of each of subscription contracts.

Our operating expenses totaled $218 million this quarter compared to $289 million of the prior quarter the car.

Current quarter included a $7 million gain on sale of product lines assets and of the prior quarter included $42 million of restructuring and impairment charges and excluding those onetime charges expenses were down $22 million due to decreased commission expenses associated with lower revenue reduced incentive expenses and cost savings, resulting from the restructuring.

<unk> actions, we took last September.

Compared to Q1, and 2020 operating expenses before one time events were down $14 million due to decreased marketing expenses, resulting from a large customer events held in Q1, and 2020, lower travel and entertainment expense and cost savings, resulting from our key part of it.

2020 of restructuring.

We do expect expenses to step up somewhat in the coming quarters and the as we gradually redeploy the restructuring savings to add strategic headcount primarily related to the development of our decision management platform software.

Our non-GAAP operating margin of shown on our Reg G schedule was 36 per cent for the quarter and margin expansion of 900 basis points from the same period last year.

GAAP net income this quarter was $86 million up 57 per cent from the prior year quarter and included a gain of about $7 million from the sale of our ESF type of technology, and our JV agreement and China are non-GAAP net income was 82 million per the quarter of 51% from the same quarter last year.

The effective tax rate for the quarter was 2%, including $19 million of reduced the tax expense from excess tax benefits, we expect our FY 'twenty and 'twenty, one recurring tax rate to be approximately 26 to 27 per cent and we expect the net effective tax rate for the year to the around 19%.

Free cash flow for the quarter was $75 million compared to 54 million of them. The same period last year and increase of 39% for the trailing four quarters free cash flow was $364 million.

Turning to the balance sheet at the end of the quarter, we had $145 million cash down 13, one from last quarter. Our total debt now stands at $881 million with a weighted average interest rate of four 2%.

And finally return of capital, we bought back 101000 shares and the fourth quarter and the average price of $494 per share at the end of December and we had about 175 million. The remaining on the board of purchase authorization and continue to view share repurchases as an attractive use of cash.

With that I'll turn it back over to <unk> for his closing thoughts.

Thanks, Mike and as I said in my opening remarks, we remain focused on building out our platform and taking it to an ever expanding marketplace.

We'll continue to invest at levels, we think are appropriate to make the most of our incredible opportunity and of course, we'll continue to innovate and make the most of our incredible scores assets I'm.

I'll now turn the call over 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 lines.

Thank you feel like the rest of of a question of at least first of the one followed by the four and your telephone and you will hear of three Tom prompt talk and all of your request.

If the question has been answered and you would like to withdraw your registration of please first of the one followed by the three.

Once again, that's one of four Tricia for a question on free format for the first question.

Our first question is from surrenders and from Jefferies. Please go ahead. Your line is open.

Yeah.

Good afternoon gentlemen.

My first question is actually on the scores business. If we were to look at the B to C. Revenues. If my math is correct. They were roughly flat quarter over quarter can you provide a little bit of color there because.

If we look back over the past few quarters, there had been a significant acceleration each quarter and the revenues.

And I thought that was a bit of of subscription based business. So if you can just help me understand the.

What appears to be.

And the slowdown in and new signings or if there is.

And offset where theres the of signings offset by certain in the.

The visuals just canceling subscriptions.

And I'm not sure I follow the question.

Yes.

And so for your <unk> revenues.

And if my math is correct.

We're.

And unchanged quarter over quarter can you provide a little bit of color because if we look at the previous quarters there was.

There was significant acceleration each quarter on a sequential basis and that doesn't it didn't appear to occur this quarter.

And then.

And it didn't occur this day, Mike go ahead, yeah, and all I can.

And jump in with some specifics so b to C revenues were up quarter over quarter, but not a lot of call it a million bucks.

If you look back to the Q4 of the Q1.

A year ago. It was kind of the same factors. So there is some seasonality Q4 and in Q1.

And the year over year compare continues to be very strong, but you're right the quarter over quarter additions just were not as large as they were in the lapsed.

Two quarters, particularly of late.

And and it's worth adding that there there was a settlement and the in the prior quarter.

Understood on the on the score.

On the BW part of understood.

In terms of the and then maybe.

And as my follow up question on the software side of the business. It seems like Theres, a and let's say it seems like there's a change of strategy and maybe focus more on the sales of SaaS.

And the products versus on premise is that a little bit of a change from our previous discussions or the the way because I thought the margins and the two businesses were relatively the same and that the thought was is that from a plan perspective.

And it's going to be a significant amount of time before that.

The transition and your business occurred and that.

And are you guys looking to kind of work.

And I would say.

From them.

From a strategy standpoint, the way, we don't emphasize the one business over the other we really try to do what's appropriate for the customer and so.

While we love the characteristics of the SaaS business.

Where appropriate we will.

And we'll absolutely do license on Prem deals and.

And we don't favour, we don't really favor one over the other.

Okay. Thank you.

Yeah.

We have a question from Manav Patnaik with Barclays. Please go ahead of your line is open.

Yeah, good afternoon, and good evening, I guess and <unk>.

On the software piece of firstly, you know the the the fraud licenses they get the decline there. It sounds like most of that is because you're not renewing lower margin services. I was just I was just hoping to get an example of what that is because I would imagine anything until it's probably valuable and whats sticking with it.

Maybe you can just help us how that decision.

Mike the other you're on that yes.

Yeah sure. So if you look at the license, yeah, and Manav and if you look at the license itself.

You know as we said it and I'm gonna.

Not just the address fraud here, because it's probably the.

The bigger question is that we are down about $15 million year over year for license sales.

As we said of about $9 million of that was purely related to the revenue recognition and sale. It was also a quarter where we.

<unk> had less.

License renewals available to renew.

And you followed us long enough and you know that that can be can be very lumpy.

And Q3, we had another low quarter of last year, but can you tell the Q2 was high and it just goes up and down and we can only renew that and which is available.

So and there's a low renewal quarter not that we missed renewals of people didnt renew their just didn't name came up for renewal.

The and then the rest of it is just the normal.

Normal volatility in Q1 is particularly volatile because it's typically our smallest quarter of it.

You know it can have the highest standard deviation of the services per se wouldn't hit that fraud.

Since.

Line.

And the total of fraud business and an example of the services.

Engagement that we would deemphasize would be some managed services that we perform.

Perform for some of our customers.

And we're helping them run the application on an ongoing basis.

And it's.

We do it well, it's a good service, but it's not strategic and software not emphasizing that we're also engineering our products to be less.

Professional services and intensive when they are installed.

And the can reduce the total dollars and our customers need to spend.

Two of them to install the product. So those are two examples of how.

And why and professional services are all around.

Expect the only been trending downward over time.

Got it.

Or will your comments around you know early signs of card marketing prospecting et cetera, picking up I was hoping you could.

Elaborate a little bit day on.

And which particular areas, perhaps and how we should.

And I get that debt, probably just tied to the reopening just curious what you're seeing there.

Well I think it is just that I mean.

What we're seeing is the decline from a year earlier is not as great as it was and so.

And so well.

Well the easy clearly have a long way to go.

And kind of recover form of volumes.

The trend is and the right direction.

We're seeing early signs of life.

Got it and just one last one for me of lifecycle of Dot Com I mean, I think I understand.

And why that's doing so well because of the of the.

The market macro out there, but are you guys doing anything really differently.

In that business to push that growth to that and you said the 69 per se.

This quarter.

And they set up for a big fall of basically somewhere down the road.

Hard to say I would say that it's a combination of us doing things differently, because we're always trying to do things that to run the business better and we've got a crack team there that is constantly experimenting and innovating.

And to improve the business.

But that said obviously we are.

And we're benefiting from the fact that you have so many consumers who are increasingly focus on their scores and their their FICO credit scores and they come to my FICO wherein the obvious place to come we don't promote it nearly as much as partners like the experience, but the.

The consumers find us and we do some some of them and marketing ourselves and so I'd say, it's both things. It's you know we are benefiting from the environment, where and where consumers are more focused than ever and I don't know how long that lasts and I think good less of one time, but we don't know and then we're also benefiting from excellent execution from the team.

Alright, thank you.

One of a question from Kyle Peterson from Needham. Please go ahead of your line's open.

Hey, good afternoon and guys. Thanks for taking the question.

So just wanted to touch all of them a little bit on the expense and the margin trajectory. I. Appreciate you know some of the color you guys mentioned on the kind of reinvesting some of that as we go here and I mean is it fair to think that.

Some of the the labor costs and the savings you guys had this quarter will eventually be redeployed and maybe some of the savings and facilities are kind of more permanent or how should we think about the cadence and the level of this reinvestment.

And maybe I'll just take a quick stab at that and might be and you can give.

Give your view.

Some of those labor savings will absolutely be redeployed into areas of the more strategic so we have a very.

Very healthy investment and our decision management platform and.

And so some of the savings will be redeployed there I think that on the and the facilities and some of the travel reduction of expenses.

Covid related some of them.

And that's been and persist I think some of that it becomes permanent.

And obviously travel and some of them and travel will resume but I think we've all learned how to do business with less travel and then we had before.

And I.

I mean I'm sure our experience is not unique we've become the zoom video company and then we had it before COVID-19 outbreak, but now it's the way of doing business and so so I would I would think that even when the when everything comes back we won't see our travel expense.

And at the same kind of levels.

And I'd add to that Kyle debt. We also when everything comes back won't see our real estate and facilities expense go back of the same model.

And those.

Restructuring actions and.

Footprint productions are.

You can consider them to be the permanent.

On the labor side, Yes, we are redeploying as we've talked about.

Some of the savings back into the.

And particularly engineering talent for our platform products.

And we're not guiding particularly ex.

And how that's kind of move, but we did say last quarter and I continue to feel comfortable with if you look at the full fiscal year, we expect our operating expenses to be flat to up a little bit and call. It and low single digit percentages, we are still comfortable with that.

And Directionally.

Got it that's helpful. And then I guess, just a little bit and a follow up on the gross margins. It seems like you guys are.

Strategically exiting.

Some lower margin businesses, especially on the services side.

I mean should that read to you know maybe a slight upward bias to gross margins over time and I realize you have some that'll be kind of mixed driven between scores and software but.

I'm all else equal just Wanna.

Any color that you guys could provide on the gross margin impact on the.

The upsizing services and some of these are the best.

And I suppose.

And I don't have a lot of the go ahead Mike.

Yeah, I was just going to say your mouth of your math Directionally the right all else equal.

If we deliver less professional services, it's going to have a positive impact on gross margin no question.

The next matters for sure.

But you know.

Our professional services margins gross margins are in line with what you would see at other well run and enterprise software companies that have in house and professional services and those margins are a lot lower than what the typical of Argentine.

Okay. That's helpful. Thanks, guys good quarter.

Our next question is from Ashish Sabedra Deutsche Bank. Please go ahead of your line is open.

Thanks for taking the question I just wanted to lack of broader question about the platform strategy last quarter, you talked about and Protraction of that trend and I was just wondering if you could provide any update on any.

The other customer conversations and how should we think about the fight the studio how's that coming along and that will be open API strategy. Thanks.

The.

FICO studio strategy is coming along just fine.

We're on track and we have a quarterly release cycle.

And every quarter, we make improvements.

The API strategy is very much and place we're very focused on and we're actually using the API is internally today and when the process of turning those outward and.

And documenting them, so that others can use them and I actually think that the bigger hurdle for us will be around building a partner ecosystem that can leverage those aps so the.

The the the getting the API is out there and is not something that we worry about I think building ecosystem takes a bit more work.

That's very helpful color and maybe just a follow up question on the the fraud piece of the product solution fees the.

But this work from home and cause death, Nicky increased traction for our fraud and digital identity solutions.

Seeing the.

The increased demand and the marketplace.

And in the nickel effects also and on certain products and and Equifax announced current acquisition as well.

Just wondering if you can just talk about the demand that youre seeing in the marketplace, but also talk about the competitive environment for Falcon and obviously falcon at the market either debt or on the financial side, but any change the competitive environment there. Thanks.

And we're not seeing tremendous changes any falcon is very much still of the market leader and were still selling Falcon and in all of its forms.

So no we're not really seeing the difference there I wouldn't say that demand is way up nor is it down for Falcon.

What we are doing and the fraud spaces is also looking at.

Some of what I would call it less traditional fraud opportunities for us and leveraging the decision management platform for them. So so some of the lower cost.

And not as heavy duty of south and into some of the other Kansas up and some of the other kinds of fraud solutions.

Coming on the on the platform.

That's really helpful. Thanks.

Yeah.

Our next question is from Jeff Mueller with Baird. Please go ahead of your line is open.

Yeah. Thank you Hello, everyone.

Well I know that you said youre going to give us more detail next quarter on how the calendar 'twenty, one special pricing and PDP scores of feathering in but just hoping you can confirm that four weeks and the execution of the special pricing implementation is going smoothly and as planned.

Everything is going as smoothly as expected everything's going as planned.

It really it happens later and so we'll talk about it later.

Fair enough and.

And then on software any more perspective, you can provide on license and maintenance and I understand what's going on from or I'm, sorry for a transaction and maintenance and I understand what's going on from a license perspective, but for transaction and maintenance application down year over year and I know, that's not usually of huge area.

Growth, but it was down and and DNS. It was I guess modest growth by Dms standards against what mathematically looks like not too tough comps.

Yeah, a lot of.

The that is a category that is.

The more usage, driven and then a fixed minimum driven and it's not entirely and usage by them and.

And we did see some usage fluctuations of this quarter.

And in some of our products and some which would be.

And it would seem to be reluctant related and the macro like we saw some less usage of our originations.

Solutions and a couple of spots.

And then there's the normal variability and usage of things like fraud.

Some of that may be macro related and it's less growth or transactions are being processed and so part of it there's not there's not a big story. There again I think the you know the big.

You know the bigger swing was the just the license number overall, which was impacted as described by the Rev. Rec change and then just the.

The normal Q1, combined with the smaller renewal thing available.

Got it and then well sorry, the after the repeat yourself, but.

The mortgage comments in your prepared remarks was it just that mortgage is seasonally a smaller percentage of the mix this quarter.

Yeah.

Go ahead Paul.

But I was just going to say, it's the mortgage is holding up fine actually and.

So for.

And for now it looks right.

Right I guess equifax reported that mortgage inquiries should actually accelerate a little bit this quarter and I thought you out of comment that.

You know, it's something related to mortgage debt almost like it was a lesser benefits and I. Just didn't know if that was just seasonal mix of what you were saying and maybe I just misheard you.

No I don't.

Maybe I need to go consult my notes.

I don't I think that.

You know, we don't really opine on kind of the future mortgage youre better off looking to the bureaus and their forecasts and to us because we're kind of a lagging indicator on that but what we see of at least what we're seeing right now is strong mortgage.

Yep Gotcha. Thank you.

Yeah.

Once again and for like the rest of for a question and please crystal one followed by the four on your telephone.

Question from Brett Huff with Stephens, Inc. Please go ahead of your line is open.

Good afternoon, and we'll make and Steve of hope, you're all safe and thanks for taking the question.

The two big two bigger picture ones.

We've been watching the Dms for a long time and still think it's a really important long term strategic product and I think you talked about your commitment to that.

And last quarter, we had I think of Big Brazilian bank, the kind of win enterprise.

Net anything in the pipeline similar to that or conversation that you can.

Give us anecdotally any sort of signs that this is this wave of starting to build a little bit.

Yeah, I think it's too early to talk about specifics, but we have a lot of DNS opportunities and the pipeline and.

And and there is interest from large financial institutions.

And the and so yeah.

And that being able to get into specifics right now I would say that it is consuming a lot of our sales activity.

Yeah.

Okay. That's helpful.

And then the second question is on margins.

We've been working through sort of of enhancing.

Enhancing our tech kind of infrastructure and then spending all of the money on Dms and some of the SaaS application if you will.

The platform solution.

And I know that we've talked about the potential margin benefit from that but I know, we're kind of running and a little bit to the Rev. Rec change.

And some other things maybe exiting some businesses can you sort of give us a sense this year and next year not numbers, but just.

How we should think about margin benefits and the headwind as we look to to see the business start expanding margins, maybe a little more rapidly.

You know what the margins the margins.

We have.

Pulling and pushing and two directions, the margins are improving because we're getting better on expenses.

And <unk>.

Mix is changing with less PFS.

We are reviewing our products.

Products and identifying the ones that really aren't contributing enough and are not strategic and and so we talked about.

The China and.

<unk> for example.

But set against that is this incredible opportunity that we see with DNP.

The decision management platform and.

We worked through year by year of what we can afford to spend on investing in it.

But it's not trivial and and given the market opportunity, we're not kind of short change. It. So I think some of the margin improvement will be consumed by the incremental investment now which way that goes I know youre looking for a direction of our margins getting better or are they getting worse are they going sideways.

Just not prepared to say yet.

You know flat is probably a good way to think about it but I wouldn't I wouldn't put a lot of stock and that because it could move.

It really is you know.

The constant press internally for us to improve margins from an operating standpoint.

With cost reduction with getting getting better and pods all of those kinds of things while.

And while at the same time, recognizing that we're not going to Miss this opportunity with your platform.

That's really helpful. Thank you guys.

And we have a follow up question from surrender of thin with Jefferies. Please go ahead of your line's open.

Thank you for the follow up question.

A quick question on the kind of the M&A front.

You talked a little bit earlier about kind of fine tuning some of the businesses that you're in and being a little bit more focused is there an opportunity for M&A within that or has anything potentially change there that we can think about where and he needs.

Needs that you might have.

And I don't think of a lot has changed you know that our stance on the M&A is we're always open and looking and we rarely find anything significant that that makes sense for us.

And and the issue, especially given our platform strategy of the issue is debt.

Introducing business other businesses with other code basis debt.

We just have to be put on the task of be brought into our platforms. It is it's just a little bit complicated and the and potentially off strategy. So while we're always looking.

It makes more sense for us at this time the continue to invest organically and build organically now that said, we're always doing the small small acquisitions typically talent acquisition, and sometimes small technology acquisitions that fill a little gaps but in terms of large.

Large acquisitions.

Wouldn't hold my breath, but never say never it could happen, but the.

And not imminent.

That's very helpful. And then one other quick question just there were a lot of questions and kind of the bookings numbers and you guys provided some color on the the seasonality component and how the first fiscal quarter is certainly the weakest.

Is there anything else I mean, when I look back that number was actually the lowest that I have on record for you guys and in the past three plus years and so is there anything sort of there to read into other than just the lumpiness in the sense that maybe the clients are hesitating, a little bit as or maybe a little bit of uncertainty. That's like what are those client dialogues or is it just clients are.

Waiting for more of the.

The Dms platform and maybe if you can talk about the the roadmap for the Dms platform over the next year.

I'll take a stab at it and Mike can chime in.

I think.

I think that the the.

The bookings there is there are other changes going on and so for example term length has shrunk a bit.

That's by design, because we would rather have the renewal sooner then didn't have it pushed way out because we think there'll be opportunities to to do better down the line.

So and that's reflected in the sales compensation is reflected and the fact that meaning that our salespeople are now compensated on kind of the <unk>.

Annual recurring revenue as opposed to.

And as opposed to the total bookings value.

And that has a natural impact on.

In terms of like today.

I'd say Thats one factor I would also say, it's and I'm not sure. It's the right I mean, obviously, we've been promoting and as a metric for ourselves for a long time, and we're not going to stop sharing yet, but I do think that over time, we have to really start the folks on the business on this kind of of annual recurring basis.

Mike do you want to add anything of that.

Yeah, I'd say that it does look it doesn't feel like there's a COVID-19 or otherwise.

Yeah of systemic.

Hesitancy on the part of customers.

You never can tell for sure.

But the pipeline and still feels good and we said we still feel good about the full year on of new business day for us and.

And we came off of.

The the highest ever booking quarter as you know and.

And Q4.

And two what it seasonally the slowest quarter.

So at the time.

And again, we don't think that what you're you.

You know thinking about as is the case.

Time will tell but the indicators, we see is that the.

Pipeline continues to look good for the year.

Yeah.

That's very helpful. And then one kind of final question here just the the roadmap for the <unk> platform over the next year.

And I'm not sure what we're prepared to disclose about the roadmap we continue to make progress on and studio and we continue to work hard against getting the Apis turned out and I would say those are the big the big points.

Okay. Thank you so much guys.

Thanks, a lot.

And there are no further questions at this time.

Thank you.

This concludes today's call. Thank you all for joining and we look forward to speaking with you again soon thank you and have a good day.

That concludes today's call.

Thank you for your participation and please disconnect your lines.

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The current.

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Yes.

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Greetings and welcome to the Fair Isaac Corporation quarterly earnings call. During the presentation, all participants will be in a listen only mode and afterwards, we'll conduct the question and answer session at that time. If you are of a question. Please press. The one followed by the four on your telephone if at any time during the conference you need to reach and operator. Please press Star Zero and the conference is being reported Thursday January <unk>.

2021, and now I'd like to turn the conference over to Steve Weber. Please go ahead.

<unk>.

Good afternoon, and thank you for joining and FICO is the first 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 Mclaughlin.

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 and 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.

Information concerning these uncertainties is concerned.

And in the company's filings with the SEC and 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 Dot com.

Or on the SEC's website at SEC Gov.

Replay of this webcast will be available through January 28, 2022.

And now I will turn the call over to will Lansing.

Thanks, Steve and thank you everyone for plenty of fish.

Quarter earnings call.

As we continue to deal with the effects of the pandemic, we remain focused on the health and safety of our employees.

We're still primarily working from home and most of our offices remain closed.

And grateful to our dedicated employees, who every day.

So the commitment to FICO and to our customers.

And the Investor Relations section of our website, we've posted some slides that aqua financial highlights of our first quarter.

And I'm pleased to say, we started 2021, well as we continue to make progress and our strategic initiatives.

We reported revenues of $312 million and increase of 5% over the same period last year.

Fiscal quarter's typically our slowest software and new business quarter.

We delivered $86 million of GAAP net income and GAAP earnings of $2 90 per share of 57% and 59% respectively.

On a non-GAAP basis, net income was $82 million up 51% and earnings per share of $2 and 74.

And was up 52% from last year.

As we reap the benefits of the cost reductions and put in place last year.

As we discussed last quarter some of those savings will be reinvested as we identify opportunities and hire additional individuals and key strategic areas.

The continued to deliver free cash flow growth as well.

Q1 free cash flow of 75 million of 39% from last year.

I am encouraged by the progress, we're making across the business. The Decisioning market continues to grow we are well positioned to serve it in fact and December Forrester issued of digital Decisioning platform report and named FICO as a leader in the space.

The FICO decision management platform was recognized will provide and all the tools necessary to manage and deploy digital decisions, which will stand up to the highest standard of regulatory where the we've.

As we migrate more of our business towards the subscription based model, including SaaS software subscriptions and term license subscriptions for all and pump software we.

We will see less upfront license revenue than we would have and the past and the revenue spread over the term of the deal.

Last quarter, we talked about how we would recognize less revenue upfront for on premise licenses and that change pushed about $9 million of revenue this quarter out to future quarters.

This doesn't affect cash flows of total revenues recognized but it does delay the timing of revenues and over time, we'll smoothed the lumpiness, we've historically seen.

The changes in line with industry standards, and we believe it will provide a more represented the transparent view of the growth trajectory of our business.

And our application segment, we delivered $135 million of revenue.

And 11% from last year. This was due to a decline in upfront and license revenues and to a lesser extent professional services revenues.

The license revenue was negatively affected by a smaller amount of term licenses upfront through renewal and the quarter and the revenue recognition change I mentioned earlier.

And our decision management segment, we delivered $32 million of revenue up 4%.

Many of the same issues, we described in our application segment.

We've had a lot of interest and our Decisioning platform.

And we sold the number of large deals and the best few quarters, we're working hard to install and get those customers live. So we can begin seeing the impact from those recurring revenues.

And I've, often said, we're committed to becoming the preeminent platform player and Decisioning and analytics. This is the strategic focus of our software business and like I said last quarter that may mean, exiting non strategic products or services or not signing or renewing and low margin services project work.

Last fall, we sold our enterprise security score of business, because I've always believed and the effectiveness and value of the product is off strategy and we need to remain incredibly focused and maximize the opportunity that's in front of us.

In December we entered into a joint venture with the long standing partner in China, the distribute FICO scores.

And the joint venture will now distribute all the software solutions for the China market moving forward. This will allow us to serve that market with less infrastructure and therefore better margins.

With debt and the S. S deal will have the small near term negative impact on the topline revenues, but will help our overall margins and again allow us to focus on our overarching strategy.

We expect more adjustments, we made sure of our software business as we make the necessary decisions.

Pursue our strategic initiatives.

And the scores side of the business continues to perform very well scores were up 26% and the quarter versus the prior year.

And the <unk> side revenues were up 20%. It was continued strength and mortgage originations volumes, although normal seasonality and that's it wasn't quite as strong as of fourth quarter.

Auto originations were relatively flat versus the previous year.

We're starting to see signs of cards and other unsecured loans beginning of the bounce back as the prescreen and origination activities picked up in that space.

As we discussed last quarter, we did institute some price increases across various volume tiers.

Price increases start to feather in during our second quarter and we can talk more about those impacts when we released the results of our March quarter.

On the consumer side, we continue to drive growth, our <unk> revenues were up 40% versus same quarter last year.

The growth of my HEICO Dot com is even more impressive of 69% this quarter versus last year.

The recent results of our my FICO business.

As well as our partners Experian Derma.

Demonstrate the savvy consumers want the FICO score this of course, the Blender Hughes.

Finally, as you know we haven't provided guidance since the middle of our last fiscal year, we are still operating in the marketplace and the economy with the great deal of uncertainty and volatility.

While our business has been remarkably resilient over the past year, it's still difficult to quantify what macro trends will impact our volumes. So while we're confident in our prospects of this year, we still believe that theres a wide range of possible outcomes, depending on the timing of vaccine rollout and the opening back up into the global economy as.

As we move through the year, we'll provide more color and we believe it's prudent Isaac.

And the final comments and a few minutes. The first let me turn the call over to Mike for further financial details.

Thanks will and good afternoon, everyone. Today I'll walk you through our first quarter results in more detail and briefly discuss the impact we're seeing from the restructuring and impairment charges. We took in the fall and the revenue recognition of assumptions, we talked about last quarter.

Revenue per the quarter was $312 million and increase of 5% over the prior year.

Applications revenues were $135 million down 11% versus the same period last year. The quarterly decrease in revenue was primarily driven by decreased term license revenue.

And our decision management software segment Q1 revenues were $32 million up 4% over the same period last year.

And the increase was due to increased SaaS subscription revenue, partially offset by lower and license revenues.

As will mentioned our license revenues are down as we transition to a more ratable subscription revenue model last quarter. We explained how we will be recognizing less of our on premise software deals and as upfront license revenue and recognizing more revenue ratably over the term of the deal and the addition to this change we are also selling more SaaS deal, which further reduces the upfront.

And finally, we are also deemphasizing low margin non strategic professional services engagement, which will likely have a negative near term impact on professional services bookings and revenues. This is driven by our core strategic goal of selling more high value of recurring revenue software.

Turning to our scores segment revenues were 145 million of up 26% and the same period last year and.

<unk> revenues were up 20% over the same period last year, driven by high volumes and mortgage originations as well as some unit price increases across our four categories.

The revenues were up 40% and the same period last year bulk of my FICO Dot com and the PVC partner revenues grew significantly scores revenue was down 5% sequentially from Q4, but as a reminder, last quarter had a material one time, a royalty true up of that increased reported revenue.

This quarter 80 per cent of total revenues were derived from our Americas region, Our EMEA region generated 14% net of the remaining 6% was from Asia Pacific.

Recurring revenues derived from transactional and maintenance sources for the quarter represented 81 per cent of total Robyn and consulting and implementation services revenues were 13% of total revenues and license revenues were 6% of total debt.

SaaS software revenues, not including related professional services revenues were $60 million per the quarter up 4% from the previous year.

Q1 bookings totaled $68 million down 39% from the previous year, those bookings generated $9 million of current period revenues of 13% yield SaaS bookings were $20 million per the quarter down <unk> 45 per cent from the previous year professional services bookings of $16 million were down 61% the last year.

Our fiscal first quarter bookings are generally lower each year, particularly after a strong quarter like we delivered last quarter and quarterly bookings can be quite volatile from quarter to quarter.

We feel good about the bookings outlook for the rest of the fiscal year. Despite the relatively light bookings in Q1.

As we discussed last quarter, we have shifted the sales of our on premise software away from the sale of a separate license and maintenance of opponents.

A description of that include both the rights to use the software and ongoing maintenance.

This quarter, we adjusted our revenue recognition to be consistent with this change and the industry standards for software subscription sales.

The result, and less upfront revenue recognized in the quarter, we signed the subscription contract and more revenue from that contract recognized ratably during the term of the subscription this.

And this quarter the impact of this change wasn't and quarter reduction of revenue of approximately $9 million those of revenues that would of been claims this quarter under the old sales model and will now be recognized over the term of the contract.

As a reminder of this will not have an impact on our quarterly cash flow for the total revenue recognized from the software license sales over the term of each of the subscription contract.

Our operating expenses totaled $218 million this quarter compared to $289 million and the prior quarter the curve.

Current quarter included a $7 million gain on sale of product line assets and of the prior quarter included 42 million of restructuring and impairment charges. Excluding those onetime charges expenses were down $22 million due to decreased commission expenses associated with lower revenue reduced incentive expenses and cost savings, resulting from the restructuring.

<unk> actions, we took last September.

Compared to Q1, and 2020 operating expenses before onetime events were down $14 million due to decreased marketing expenses, resulting from a large customer event held in Q1, 2020, lower travel and entertainment of expense and cost savings, resulting from our Q4.

2020 of restructuring.

We do expect expenses to step up somewhat in the coming quarters, and and as we gradually redeploy the restructuring savings to add strategic head count primarily related to the development of our decision management platform software.

Our non-GAAP operating margin as shown on our Reg G schedule was 36 per cent for the quarter of margin expansion of 900 basis points from the same period last year.

GAAP net income this quarter was $86 million up 57 per cent from the prior year quarter and included a gain of about $7 million from the sale of our SaaS type of technology, and our JV agreement and China are non-GAAP net income of 82 million per the quarter of 51% from the same quarter last year.

Free cash flow for the quarter was $75 million compared to 54 million of in the same period last year and increase of 39% of the trailing four quarters free cash flow was $364 million.

Turning to the balance sheet at the end of the quarter, We had 145 million cash down 13 million from last quarter. Our total debt now stands at $881 million with a weighted average interest rate of four 2%.

With that I'll turn it back over to <unk> for his closing thoughts.

Thanks, Mike as I said in my opening remarks, we remain focused on building out our platform and taking it to an ever expanding marketplace.

We'll continue to invest at levels, we think are appropriate to make the most of our incredible opportunity and of course, we will continue to innovate and make the most of our incredible scores assets I'm.

I'll now turn the call over 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 lines.

Thank you feel like the risk of a question. Please press the one followed by the four and your telephone and you will hear of three Tom pump technology of request.

And for your question has been answered and you would like to withdraw your registration of please press the one followed by the three.

Once again, that's one of for trust or for question. One brief moment for the first question.

Our first question is from surrenders and from Jefferies. Please go ahead. Your line is open.

Good afternoon gentlemen.

If we look back over the past few quarters, there had been a significant acceleration each quarter in the revenues.

And I thought that was a bit of of subscription based business. So if you can just help me understand the what appears to be a sudden slowdown in and your signings or if there is.

A and offset where theres the signings offset by certain <unk>.

The visuals just canceling subscriptions.

And not sure I follow the question.

So for your <unk> revenues.

And if my math is correct.

And we're.

Unchanged quarter over quarter can you provide a little bit of color because if we look at the previous quarters. There was there.

There was significant acceleration each quarter on a sequential basis and that doesn't it didn't appear to occur this quarter.

And then it didn't occur this might go ahead, yeah, and all I can jump in with some and some specifics so b to C revenues were up quarter over quarter, but not a lot.

Call It a million Bucks.

If you look back to the Q4 of the Q1 a year ago.

And of the same factor and so there is some seasonality Q4 and in Q1.

And the year over year compare continues to be very strong, but you're right the quarter over quarter editions, just were not as large as they were in the last.

Two quarters, particularly of late.

And and it's worth adding that there there was a settlement and the in the prior quarter.

The.

Understood on the on the on this corridor.

On the <unk> part of understood.

In terms of the and then maybe most of my.

As my follow up question and the sulfur side of the business. It seems like Theres, a and let's say it seems like there's a change in strategy and maybe focus more on the sales of of SaaS.

Products versus on premise is that a little bit of a change from our previous discussions or the the way because I thought the margins and the two businesses were relatively the same and.

And then the thought was is that from a planning perspective.

It was going to be a significant amount of time before that.

The transition and your business occurred and that and are you guys looking to kind of already and I would say.

From them.

From a strategy standpoint, the way, we don't emphasize the one business over the other we really tried to do what's appropriate for the customer and so.

While we love the characteristics of the SaaS business where appropriate.

And we will absolutely do license on Prem deals and and we don't favor, we don't really favor one over the other.

Okay. Thank you.

Yeah.

We have a question from Manav Patnaik with Barclays. Please go ahead of your line is open.

Yeah, good afternoon, and good evening, I guess and <unk>.

Just on the software piece of Firstly, you know the the.

Fraud licenses they get the decline day it sounds like most of that is because you are not renewing lower margin sales I was just I was just hoping to get an example of what that is because I would imagine anything until it's probably valuable and whats the can't yet. So maybe you can just help us how that decision but.

My guess of you on that.

Yeah sure so.

Look at the license and Manav and if you look at the license itself.

You know as we said it and I'm gonna.

Not just the address fraud here because of probably a bigger question and then we're down about $15 million year over year for license sales.

And you've had about $9 million of that was purely related to the revenue recognition and sale. It was also a quarter where we.

<unk> had less life.

The license renewals available to renew.

And you followed us long enough and you know that that can be can be very lumpy.

Now in Q3, we had another low quarter of last year, but can you tell the Q2 was high and it just goes up and down and we can only renew that and which is available.

And there's a low renewal.

Quarter, not that we missed renewals of our people didn't renew they just didn't name it came up for renewal.

Got it and then the rest of it is just the normal volatility.

<unk> and Q1 is particularly volatile because it's typically our smallest quarter of it.

You know it can have the highest I have standard deviation of the services per se wouldn't hit that fraud and license.

Line.

And the total of fraud business and an example of the services.

Engagement that we would deemphasize would be some managed services that the perform for some of our customers.

And we're helping them run the application on an ongoing basis.

Okay.

We do it well, it's a good service, but it's non strategic and software not emphasizing that we're also engineering our products to be less.

Professional services and intensive when they are installed.

And can reduce the total dollars and our customers need to spend.

And two to install of the products. So those are two examples of how.

And why professional services are all around.

Expect and even trailing downward over time.

Got it.

Will your comments around you know early signs of card marketing prospecting et cetera, picking up I was hoping you could.

And elaborate a little bit day on you know you know.

Of which particular areas, perhaps and you know, how we should and I get that debt, probably just tied to the reopening of just curious what you're seeing there.

Well I think it is just that I mean.

What we're seeing is the decline from a year earlier is not as great as it was and so.

Wow.

Well the easy.

Clearly have a long way to go and take kind of recover form of volumes.

The trend is and the right direction. So we're seeing early signs of life.

Got it and just one last one for me of lifecycle of Dot Com I mean, I think I understand you know why that's doing so well because of the of the <unk>.

Market macro out there, but are you guys doing anything and really differently.

In that business the push that growth to net can you say the 69 per se this quarter.

And at least the set up for a big fall of basically somewhere down the road.

The hard to say I would say that it's the combination of us doing things differently, because we're always trying to do things that to run the business better and we've got a crack team there and it is constantly experimenting and innovating.

And to improve the business.

But that said, obviously, where we're benefiting from the fact that you.

So many consumers who are increasingly focused on their scores and their their FICO credit scores and they come to my FICO wherein the obvious place to come.

We don't promote it nearly as much as partners like the experience but.

The consumers find us and we do some some of them and marketing ourselves and so I'd say, it's both things we are benefiting from the environment, where and where consumers are more focused than ever and I don't know how long that lasts and I think the less of a long time, but we don't know and then we're also benefiting from excellent execution from the team.

Alright, thank you.

We have a question from Kyle Peterson from Needham. Please go ahead of your line is open.

Hey, good afternoon and guys. Thanks for taking the question.

So just wanted to touch on a little bit on the expense and the margin trajectory. I. Appreciate you know some of the color you guys mentioned on the kind of reinvesting some of that as we go here.

And then is it fair to think of that I'm, you know some of the the labor costs and the savings you guys had this quarter will eventually be redeployed and maybe some of the savings and facilities.

The kind of more permanent or you know how should we think about the on the cadence and the level of interest rate investments.

And maybe I'll just take a quick stab of that and might be and you can.

To give you a view.

And.

Some of those labor savings will absolutely be redeployed into areas of their most strategic so we have a.

And very healthy investment and our decision management platform and.

And so some of the savings will be redeployed there I think that on the AR and the facilities and some of the travel reduction of expenses.

Covid related some of them.

And that's been and persist I think some of that it becomes permanent.

And obviously travel and some of them on the travel will resume but I think we've all learned how to do business with less travel than we had before.

And I.

I mean I'm sure our experience is not unique we've become the zoom and video company and then we had it before COVID-19 outbreak, but it's the way of doing business and so so I would I would think that even when the when everything comes back we won't see our travel expense.

And at the same kind of level.

And I'd add to that Kyle that we also when everything comes back won't see our real estate and facilities and expense go back of the same model.

Those.

Our restructuring actions and the footprint reductions or.

You can consider them to be the permanent.

On the labor side, Yes, we are redeploying as we've talked about some.

Some of the savings back into the.

Particularly engineering talent for our platform products.

And we're not guiding particularly.

All of that Directionally.

Got it that's helpful. And then I guess, just a little bit out of follow up on the gross margins. It seems like you guys are kind of strategically exiting.

And some lower margin businesses, especially on the services side.

I mean should that lead to you know maybe a slight upward bias to gross margins overtime and I realize they have something that'll be kind of mix driven between scores and software, but all else equal just wanted to get any color that you guys could provide on the gross margin impact on the upside of.

The services and so these are the best.

And I suppose.

And I don't have a lot of the go ahead Mike.

Yeah, I was just going to say your mouth of your math Directionally the right all else equal.

If we deliver less professional services, it's going to have a positive impact on gross margin no question.

The next matters for sure.

But you know our professional services margins gross margins are in line with what you would see at other well run and enterprise software companies that have in house and professional services and those margins are a lot lower than that of life.

One of ours and time.

Okay. That's helpful. Thanks, guys good quarter.

Our next question is from Ashish Sabedra with Deutsche Bank. Please go ahead of your line is open.

Thanks for taking my question I, just wanted to lack of broader question about the platform strategy last quarter, you talked about some protraction of that trend and kind of just wondering if you could provide any update on any.

The other customer conversations and how should we think about the FICO studio how's that coming along and that will be open API strategy. Thanks.

The.

And FICO studio strategy is coming along just fine.

We're on track, we have our quarterly release cycle.

And every quarter, we make improvements the.

The API strategy is very much and place we're very focused on and we're actually using the API is internally today and when the process of turning those outward and.

And documenting them, so that others can use them and I actually think that the bigger hurdle for us will be around building a partner ecosystem that can leverage those aps so the.

The the the.

Getting the AAP is out there and is not something that we worry about I think building ecosystem takes a bit more work.

That's very helpful color and maybe just a follow up question on the the frog piece of the product solution fees. The AR, but this work from home does debt for Nicky increased traction for our fraud and digital identity solutions Youre.

And Youre seeing.

The increased demand and the marketplace.

Once you get a nickel of effects also announced certain products and and Equifax announced count the acquisition as well I was just wondering if you can just talk about the demand that youre seeing in the marketplace, but also talk about the competitive environment plus the alcon, obviously felt going into the market either debt or on the financial side, but any change the competitive environment there.

Thanks.

Uh huh.

Not seeing tremendous changes any thoughts and is very much still of the market leader and we are still selling falcon and in all of its forms.

So no we're not really seeing the difference there I wouldn't say that demand is way up nor is it down for Falcon.

What we are doing and the fraud spaces is also looking at.

Some of the I would call it less traditional fraud opportunities for us and leveraging the decision management platform for them.

So some of the lower cost.

Not as heavy duty of south and but some of the other Kansas up and some of the other kinds of fraud solutions will be coming on the on the <unk>.

Platform.

That's very helpful. Thanks.

Our next question is from Jeff Mueller with Baird. Please go ahead of your line is open.

Yeah. Thank you Hello, everyone.

Well I know that you said youre going to give us more detail next quarter and.

How is the calendar 'twenty, one special pricing and PDP scores of feathering in but just hoping you can confirm that four weeks and the execution of the special pricing implementation is going smoothly and as planned.

Everything is going as smoothly as expected everything's going as planned.

It really it happens later and so we'll talk about it later.

Fair enough.

And then on software any more perspective, you can provide on license and maintenance and I understand what's going on from or I'm, sorry for transaction and maintenance and I understand what's going on from a license perspective, but for transaction and maintenance application down year over year and I know, that's not usually of huge area.

And of growth, but it was down and and DNS. It.

It was I guess modest growth by Dms standards against what mathematically looks like not too tough for comps.

Yeah.

Yeah, a lot of.

The you know that is a category that is.

The more usage driven than fixed minimum driven and it's not entirely usage claim and.

And we did see some usage fluctuations of this quarter.

And some of our products and some which would be.

And it would seem to be reluctant related to the macro likely saw some less usage of our originations.

Solutions and and a couple of spots.

And then the normal variability and usage of things like fraud.

Again, some of that may be macro related and is less credit card transactions are being processed items and so forth it and theres not theres not a big story there again I think the you know the big.

You know the bigger swing was the just the license number overall, which was impacted as described by the Rev. Rec change on the and just the.

The normal Q1, combined with the smaller renewal thing available.

Got it and then well sorry, the after the repeat yourself, but.

The mortgage comments and your prepared remarks was it just that mortgage is seasonally a smaller percentage of the mix this quarter.

Yeah.

The the more.

Yeah.

Well.

But I was just going to say, it's a mortgage holding up fine actually and.

So it's for.

For now it looks right.

Right I guess equifax reported that mortgage inquiries should actually accelerate a little bit this quarter and I thought you out of comment that.

You know, it's something related to mortgage debt almost like it was a lesser benefits and I. Just didn't know if that was just seasonal mix of what you were saying and maybe I just misheard you.

No.

Oh no.

Maybe I need to go consult my notes.

I don't I think that.

And we don't really opine on kind of the future mortgage you're better off looking to the bureaus and their forecast and to us because we're kind of a lagging indicator on that but what we see of at least what we're seeing right now is strong mortgage.

Yep Gotcha. Thank you.

Once again and for like the rest of the first question and please press the one followed by the four on your telephone.

Question from Brett Huff of Stephens, Inc. Please go ahead of your line is open.

Good afternoon, and we'll make and Steve of hope, you're all safe and thanks for taking the question.

Two the two bigger picture ones.

We've been watching the Dms for a long time and still think it's a really important long term strategic product and I think well you talked about your commitment to that.

And last quarter, we had I think of Big Brazilian bank, the kind of win enterprise.

Anything and the pipeline similar to that or conversation that you can.

Give us anecdotally any sort of signs that this of this wave is starting to build a little bit.

Yeah, I think it's too early to talk about specifics, but we have a lot of DNS opportunities and the pipeline and.

And and there is interest from large financial institutions.

And the and so yeah.

That being able to get into specifics right now I would say that it is consuming a lot of our sales activity.

Yeah.

Okay. That's helpful.

And then the second question is on margins.

We've been working through sort of of.

Enhancing our tech kind of infrastructure, and then spending a lot of money on Dms and some of the SaaS application if you will.

The platform solution.

And I know that we've talked about the potential margin benefit from that but I know, we're kind of running in a little bit to the Rev. Rec change.

And some other things maybe exiting some businesses can you sort of give us a sense this year and next year not numbers, but just.

And how we should think about margin benefits and the headwind as we look to to see the business start expanding margins and maybe a little more rapidly.

You know what the margins the margins.

We have.

Pulling and pushing and two directions, the margins are improving because we're getting better unexpected where and <unk>.

Mix is changing with less P S.

We are reviewing our product.

Products and identifying the ones that really aren't contributing enough and are not strategic and and so we've talked about.

The China and.

<unk> for example.

But set against that is this incredible opportunity that we see with DNP.

The decision management platform and we.

We worked through year by year of what we can afford to spend on investing in it.

But it's not trivial and and given the market opportunity, we're not going to short change. It. So I think some of the margin improvement will be consumed by the incremental investment now which way that goes I know youre looking for a direction and are margins getting better or are they getting worse are they going sideways.

And just not prepared to say yet.

And you know flat is probably a good way to think about it but I wouldn't I wouldn't put a lot of stock and that because it could move it.

It really is.

Constant press internally for us to improve margins from the operating standpoint.

And with cost reduction and with getting getting better and pods all of those kinds of things.

While at the same time, recognizing that we're not going to Miss this opportunity with the platform.

That's really helpful. Thank you guys.

And we have a follow up question from surrender of thin with Jefferies. Please go ahead of your line is open.

Thank you for the follow up question.

A quick question on the kind of the M&A front.

You talked a little bit earlier about kind of fine tuning some of the the businesses that you're in and being a little bit more focused is there and.

The opportunity for M&A within that or is there anything potentially change there that we can think about running needs that you might have.

And I don't think of lot has changed you know that our stance on the M&A is we're always open and looking and we rarely find anything significant that that makes sense for us.

And and the issue, especially given our platform strategy and the issue is debt.

Introducing business other businesses with other code basis.

And that would just have to be put on the path to be brought into our platforms.

Is it just a little bit complicated and the and.

Potentially off strategy, so while we're always looking at.

And it makes more sense for us at this time to continue to invest organically and build organically now that said, we're always doing the small small acquisitions typically talent acquisition, and sometimes small technology acquisitions that fill a little gaps but in terms of large.

Large acquisitions.

I wouldn't hold my breath, but never say never it could happen but.

And the net.

That's very helpful. And then one other quick question.

There were a lot of questions and kind of the bookings numbers and you guys provided some color on the seasonality component and how the first fiscal quarter and certainly the weakest.

Is there anything else I mean, when I look back that number was actually the lowest that I have on record for you guys and in the past three plus years and so.

Is there anything there to read into other than just the lumpiness in the sense that maybe the clients are hesitating, a little bit as or maybe a little bit of uncertainty. That's like what are those client dialogues or is it just clients are waiting for more of.

The Dms platform and maybe if you can talk about the the roadmap for the Dms platform over the next year.

I'll take a stab at it and Mike can chime in.

I think.

I think that the the booking there is there are other changes going on and so for example term lengths has shrunk a bit.

And that's by design, because we would rather have of renewable sooner than that and have it pushed way out because we think there'll be opportunities to to do better down the line.

So and that's reflected in the sales compensation is reflected in the fact of meaning that our salespeople are now compensated on kind of the.

Annual recurring revenue as opposed to.

And as opposed to the total bookings value.

And that has a natural.

Impact on and.

And so that I would say that's one factor I would also say, it's and I'm not sure. It's the right I mean, obviously, we've been promoting and as a metric for ourselves for a long time, and we're not going to stop sharing yet, but I do think that overtime, we have to really start to focus on the business on this kind of the opinion of recurring basis.

Mike do you want to add anything of that.

Yeah, I'd say that it does like it doesn't feel like there's a COVID-19 or otherwise.

Oh of systemic.

Hesitancy on the part of customers.

You never can tell for sure.

But the pipeline still feels good and we said we still feel good about the full year on of new business day for us and.

And we came off of.

The highest ever booking quarter as you know and in Q4 into what is seasonally the slowest quarter.

So it's.

And again, we don't think that what you're.

You know thinking about as is the case.

Time will tell but the indicators we see is that the the pipeline continues to look good for the year.

That's very helpful. And then one kind of final question here and just that the roadmap for the <unk> platform over the next year.

Yeah, I'm not sure.

And we're prepared to disclose the bought the roadmap we continue to make progress on and studio and we continue to work hard against getting the Apis turned out and I would say those are the big the big points.

Yeah.

Okay. Thank you so much guys.

Thanks, a lot.

And there are no further questions at this time.

Thank you.

This concludes today's call. Thank you all for joining and we look forward to speaking with you again soon thank you and have a good day.

That concludes today's call.

Please thank you for your parts of participation and please disconnect your lines.

Q1 2021 Fair Isaac Corp Earnings Call

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