Q3 2021 Fair Isaac Corp Earnings Call
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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. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press. The 1 followed by the 4 on your telephone should you require operator assistance at any time please.
Star Zero as a reminder, this call is being recorded today Tuesday August 3.2021, and now I'd like to turn the call over to Steve Weber. Please go ahead.
Thank you.
Good afternoon, everyone and thank you for joining today.
<unk> third quarter earnings call.
And 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 and comparisons 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.
Those statements involve many uncertainties, including the impact of COVID-19, and macroeconomic conditions and the company's business operations and personnel that could cause actual results to differ materially.
Information concerning these uncertainties is contained and the company's filings with the SEC.
In particular, and the risk factors and forward looking statements portions of such filings.
These 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 the most comparable GAAP measures.
The earnings release and regulation G schedule are available on the Investor Relations page of the company's website and FICO Dot com.
And the SEC's website at SEC Gov and.
A replay of this webcast will be available through August 3.2022, and with that I'll turn the call over to will Lansing.
Thanks, Steve and thank you everyone for joining us for our third quarter earnings call.
Before I discuss our results I'd like to thank our FICO colleagues for their dedication adaptability and innovation. During this past year as we begin to open our offices backup.
We're moving to a hybrid system, where more of our team is working from home.
We've proven in the past year that we can make the most of the technology to collaborate and continue to serve our customers and optimize our business both remotely and in person.
And the Investor Relations section of our website, we've posted some slides that offer financial highlights of our third quarter.
And our third quarter, we delivered revenues of $338 million and increase of 8% over the same period last year.
As previously disclosed we completed the divestiture of our debt collections and recovery products during the quarter adjusting for that revenue grew about 9% year over year.
We delivered and $151 million of GAAP net income and GAAP earnings of $5.18 per share, including the gain on sale of the CNR products.
And a non-GAAP basis, which excludes the sale net income was $99 million up 29% and earnings per share of $3.38 was up 31% from last year.
We continued to deliver very strong free cash flow growth as well free cash flow was $99 million and the quarter and <unk>.
$462 million per the last 4 quarters.
And we're dedicated to using that cash flow to return value to our shareholders through our repurchase program.
This is a very strong quarter for us and we are well positioned for a strong finish to our fiscal year.
As we continue our strategy of migrating our business model tortoise and chip subscription based model, we see some disruption and our near term numbers, we're not recognizing as much revenue upfront and not selling and delivering as much lower margin services revenue.
These efforts are positioning the company for long term predictable and profitable growth.
Beginning next quarter, we will be providing additional metrics that will give additional transparency to our business metrics like <unk> will complement our revenue reporting and provide a better indicator of our growth trajectory.
We'll also be talking about the different delivery vehicles for our software specifically.
Whether the products are delivered on platform.
And off platform.
And the decision management platform is the linchpin to our software strategic vision, and bringing new customers onto that platform will enable us to scale the business and realize its full potential.
As I've stated, we believe we can become the preeminent player.
And Decisioning analytics.
That is our singular goal and our software business.
And the scores side, we remain committed to innovation, while maintaining the predictability that has always been the cornerstone of the FICO score and I am pleased to report that we continued to drive outstanding growth and our sports business.
Scores posted another record quarter of 31% versus the prior year.
On the <unk> side revenues were up 23%.
Mortgage originations as predicted and the marketplace appear to have peaked and were flat with last year's numbers and is now a year since the refi boom began and we expect those numbers to trend down as the market returns and more normal levels.
Idaho originations continue to be strong with those revenues up more than 30% year over year.
The most dramatic growth came from credit cards, and other unsecured lending product, we had a record revenue quarter and card originations with revenues up more than 50% from last year.
Acceleration and card origination activity throughout the quarter and expect that activity to continue to be strong.
Prescreen volumes were up more than 150% versus last year.
This is typically a leading indicator for new card origination activity and.
And shows the financial institutions have a strong appetite to market and originate new accounts and the unsecured market.
We believe banks are and a very strong financial position to pivot to other lending products as mortgage demand wanes and as expected by the industry.
On the consumer side, we continued to drive impressive growth BTC revenues were up 50% versus the same quarter last year.
That growth that might FICO dot com, while still strong and slowing which we expected as the mortgage market cools off.
Growth among our partners has picked up his experience and others find new ways to serve and increasingly sophisticated consumer.
Finally, this quarter, we closed the divestiture of our collections and our property product line and Mike will review the financial impacts and talk about how we are using the proceeds for share repurchases as we said last quarter. The divestiture further focuses our resources on refining and distributing the best in class Decisioning platform that we believe it and incredible opportunity for FIFA.
And final comment from a few minutes, but first I'll turn the call over to Mike for further financial details.
Thanks, well and good afternoon, everyone today I'll walk you through our third quarter results in more detail and provide some information on the divestiture of the collections and recovery products, we closed and the quarter.
Total FICO revenue for the quarter was $338 million and increase of 8% over the prior year. Our applications segment revenues were $133 million up 3% sequentially and down 6% versus the same period last year adjusting for the CNR divestiture applications revenues were up 6%.
Versus last last quarter and down 4% from last year and year over year decrease and revenue was primarily driven by reduced professional services revenue.
And our decision management software segment Q3 revenues were $33 million down 20% over the same period last year due primarily to decreased upfront license revenues as.
As will said our shifting business model is continuing to impact our software business and the near term our on premise license revenues will continue to decline as we move away from life.
License sales to a ratable subscription revenue model.
Second at the start of our fiscal year. We noted that we have also changed our revenue recognition assumptions for on premise term license subscription deal as a result, and we now recognise less upfront license revenue and more revenue ratably over the term and each deal.
The net impact this quarter was lower license revenue and our applications and Dms segments of about $4 million versus what it would have been under our prior methodology.
And we anticipate the full year impact will be about $40 million and lower software license revenue. This year, all of which will be recognized in future periods.
As a reminder, last year, we bought $61 million and upfront license revenue and our fiscal fourth quarter under the prior methodology, so that will be and especially difficult year over year comparison.
As we pointed out in the past this change in time and does not have an impact on free cash flow is for the total revenue recognized from software license sales over the term of each subscription contract.
I'd also like to remind you that we are deemphasizing low margin and non strategic professional services engagements, which is resulting in lower PFS bookings and revenues. This was driven by our core strategic goal of selling more high value software with recurring revenue. This quarter services revenues were down 18% versus last year.
As Paul said, we closed the divestiture of our collections and recovery product line in the third quarter, we recognized a pretax book gain of $93 million in the third quarter and.
Sales contribute to contributed $2.52 of after tax EPS to the quarter's GAAP results proceeds from the sale were used to fund a previously announced accelerated share repurchase program.
Turning to our score segment total revenues were 172 million up 31% from the same period last year.
<unk> was up 23% over the same period last year, driven by continued high volumes and credit card and auto originations as well as some unit price increases across our different score categories.
<unk> scores revenues were up 15 day I'm, sorry, 50 per cent from the same period last year, but my FICO Dot com and D to C partner revenues grew significantly.
And this quarter 80 per cent of total revenues were derived from our Americas region, Our EMEA region generated 14% and the remaining 60% was from the Asia Pacific region.
Recurring revenues derived from transactional and maintenance sources for the quarter represented 85% of total revenues consulting and implementation services revenues were 11% of total revenues and license revenues were 4% of total revenue.
SaaS software revenue is not including related P. S revenues continued to grow and were 67 million for the quarter up 10% from the previous year.
Q3 bookings totaled $75 million down 29% from the previous year and had an average weighted term of 40 months those bookings generated $9 million of current period revenues, a 12% yield.
Much of the decline in bookings was due to our D emphasis of low margin professional services and the shorter term lengths of deals signed and professional services bookings totaled $21 million down 50% from last year.
We continue to see a strong pipeline and our software business and typically we have our strongest period for new deals and our fiscal fourth quarter. As we have said, we expect bookings to trend lower overall compared to historical numbers as a result of our de emphasis on professional services sales and a somewhat shorter term length of chemical subscription and on Prem and term life.
And some contracts.
As will mentioned, we plan to begin providing more subscription software financial metrics next quarter, and we believe that the additional transparency and lead to better understanding and the results of the company, particularly and the software segment.
Our operating expenses totaled $144 million this quarter, which included the $93 million gain on the CNR sale compared to $230 million and the prior quarter.
Excluding that onetime gain expenses were up $7 million, primarily due to increased incentive compensation expense.
Compared to Q3.2020 operating expenses, excluding the onetime gain were up $6 million.
We do not expect expenses to complete and sorry, we do expect expenses to continue to increase and Q4 as we gradually add strategic head count to drive our decision management platform development and distribution and increased customer related travel.
Our non-GAAP operating margin as shown on our Reg G schedule was 39 per cent for the quarter and margin expansion of 500 basis points from the same period last year.
GAAP net income this quarter was $151 million, which included $93 million a pre tax gain from the divestiture of.
Our non-GAAP net income was $99 million for the quarter up 29% from the same quarter last year.
The effective tax rate for the quarter was 20%, we expect our FY 2020, 1 recurring tax rate to be approximately 26 to 27 per cent and we expect and net effective tax range for the year to be about 19%, including the impact of the divestiture of our collections and recovery business.
Free cash flow for the quarter was $99 million flat with the same period last year for the trailing 4 quarters free cash flow and was $462 million.
At the end of the quarter, we had $238 million in cash and $40 million from last quarter.
Our total debt now stands at just over $1 billion and with a weighted average interest rate of 364%.
Turning to return of capital, we bought back 489000 shares and the third quarter and an average price of $466 per share. This includes a $200 million accelerated share repurchase agreement we entered into following the close of the sea and our divestiture.
For the 9 months ended June 32021, we repurchased 1.031 million shares at the end of June we had about $225 million remaining on our stock repurchase authorization and we continue to view share repurchases as an attractive use of our cash.
With that I'll turn it back over to well for his closing thoughts.
Thanks, Mike and I said in my opening remarks, I'm extremely pleased with our team's ability to manage our business and serve our customers and the midst of all this uncertainty created by the pandemic. We continue to prove that the FICO business model was strong our customers rely on our mission critical software scores and other analytics to manage risk and optimize interactions with consumers.
We continue to invest and innovate to provide state of the art solutions for customers looking to use analytics to make better decisions I'll turn the call back over to Steve now for Q&A.
Thanks will.
This does conclude our prepared remarks, operator, if you'd like to open the lines were now ready to take your questions.
Certainly and thank you very much if you would like to register a question. Please press. The 1 followed by the 4 and your telephone and you'll hear a 3 total probe to acknowledge that request. If your question has been answered and you would like to withdraw your registration. Please press the 1 followed by the 3.
Our first question comes from surrenders and with Jefferies. Your line is open.
Thank you.
I think to start with a question about just the adoption of a competitor score by and large card issuer and that was recently.
Revealed I guess can you talk a little bit about the competitive marketplace at this point in terms of.
Just how you think about the FICO 10 suites, and maybe kind of if there was anything unique there.
And that prompted the issuer to switch from.
From using cycle.
Yeah. The short answer is without getting into all kinds of details.
That was a special situation I think.
Those scores has been around for a long time and our.
Our scores are very strong and continue to stand the test and the marketplace of being desirable.
We believe our scores are the most predictive out there.
And for what they're used for and our business in scores is as strong as it has ever been our volumes are very strong we have not seen a decline and we don't see major issuers switching away. So I you know I.
And I guess, the best way to characterize that as a 1 off.
And.
And I think that's really it.
That's helpful and then in terms of just.
And when I think about the scores business broadly and especially the strength that we're seeing and b to C.
Is there any additional color that you can provide in terms of.
The framework for how do we should be thinking about the growth of that business is seeing if we were to rewind to last year I think the thesis was that there's a lot of people that were concerned with.
Their credit scores and so there's kind of a kind of a rush to kind of do credit monitoring on a personal basis, but now that the pandemic has resided.
I guess at where further through that process.
Can you talk about the resiliency of that business and maybe are there additional factors that are now driving the growth when I think about it on a sequential basis.
The growth was still very impressive.
Yeah, I think that there's some offsetting trends here. So the the 1 trend that we worry about we don't worry about it but we recognize that mortgage was super hard over this last year and we cant expect it to continue at the same levels and.
And and that's what you know all of the market analysts predict and we don't see any reason to disagree with that.
And it is true that when consumers go shopping for a mortgage they they often go.
Go to credit credit score monitoring to get a sense for what they're able to get by way of mortgage and pricing. So so there's that's a positive factor that that won't be as present going forward at least until the next cycle.
Offsetting that I think is a level of awareness on.
On the consumer part of the importance of credit scores, which has just been on a steady upward trajectory for a very long time, certainly the last 5 years and.
And as I've shared with you and the past 10 years ago are.
The FICO score aided awareness was about 30% and the U S and today, it's over 90% and most consumers are well aware of how important the FICO score is and and continue to try to monitor it so and so we see that as a as a positive and a positive that'll continue and then finally our partners.
We provide credit report monitoring credit score monitoring services are increasingly sophisticated and the way they get the message out and what they provide to their consumer customers and they're doing very well and we think hurt that so we feel pretty good about the business.
That's helpful and then maybe 1 other quick 1.
It sounded like auto and credit card volumes.
And important contributor to the defeat of be part of it.
Growth story can.
Can you talk about maybe where we might be in terms of how closer are either pre pandemic levels within like the credit card segment at this point I feel like there's a good visibility into auto volume mortgage volumes, but just kind of the third leg of that stool.
Mike I don't know if you have any detail on that that we can share.
Yeah, we need to be careful about that because of the nature of our relationships with the bureaus and of course, but.
It feels as though there's definitely still room to grow they have rebounded smartly and you can see that and our and our results, but we're not and the business of predicting and credit card volume since you can understand but.
From what we can see looking backwards, which is all we can do is.
It's still growing and it doesn't appear to be quite telling.
That's helpful. Thank you I'll get back in the queue. Thank you.
Our next question comes from Kyle Peterson with Needham Your line is open.
Yeah.
Hey, good afternoon, and they actually stay on Zalviso and fertile today.
I was wondering if you guys could provide a little more color around the pricing environment for the score business.
Did that last round of pricing changes have been and noticeable impact on the scores business this quarter.
Thanks.
Yeah, I would say not dramatic differences not dramatic changes not dramatic impacts from that.
Got it that's helpful. And then just a quick follow up how should we think about the expense and and margin trajectory of the business moving forward after that recent Douglas.
That's true true there.
I wouldn't expect tremendous changes I mean, there's some benefit that comes from deemphasizing lower margin professional services as we've talked about so there's a benefit there but at the same time, you've heard us talk about the opportunity and the platform space and the tremendous amount of R&D that we're pouring into it.
And so I think theres a theres theirs.
There is focus on cost and expense control on the 1 hand, but at the same time, our investment levels are high.
So I think those those offset 1 another and I wouldn't look for tremendous margin improvement.
There's there's also and this is much more modest effect, but there's also coming out of Covid and there'll be more travel expense and that sort of thing.
Yeah got it alright, thanks, guys.
Our next question comes from George Tong with Goldman Sachs. Your line is open.
Hi, Thanks, Good afternoon, I am going back to the scores business revenue grew 31% and the quarter and you mentioned mortgages were relatively flat from a volume perspective cards and autos strong can you at a high level discuss how much card and auto volumes grew by and how much pricing contributed to growth.
Well I don't think we break that down and I forgot something we kept to ourselves might go in and help me with that.
Yeah, well share there there were some numbers and the and the scrap to which we can revisit with you on the 1 on ones if if if you'd like.
But as well said and as previous answer the story this quarter was about volume not price.
And if there was no impact of price but.
It was up.
Lions share per sure about volume and the segments we discussed.
Okay got it and then I'd like to dive a little bit more into your on platform and strategy can you can you talk about evidence that youre seeing increasing customer adoption of it.
And platform.
Solutions and what initiatives you have to further drive.
Client adoption of your <unk>.
<unk> products.
Yeah, absolutely so all of our major if you think about our major franchises.
Customer management, and what used to be the triad franchise, which goes to line increases and judgments about how and how and what to do with customers existing customers.
And.
And our and our other franchises that we are increasingly putting those solutions on top of the platform. So we're selling we're selling our software and a couple of ways 1 is.
And where the customers after a solution and they happen to get that solution on top of the platform, where they will but but that you know they're still after a particular solution, but increasingly what we're seeing is major financial institutions, saying, we wanted to standardize and the platform and we wanted to do not 2 or 3 or 4 solutions, we have and intend to do.
And <unk> 10, or 15 or 20 solutions on top of this platform, we want to leverage all of our data across all the different places where it resides.
And and apply analytics and and do it and in a unified way. So we leverage everything that we have to make decisions with respect to customers and that's very much the future of our that's our platform strategy and that's our future is doing that.
We have it's a lumpy business. So we you know we've we've landed a number of big customers over the last 12 months for the platform for this very purpose with an intent to start with 5 or 10 or 15 use cases, and then expand beyond that so we're pretty happy that the solution is meeting the need and the marketplace that you know the platform.
<unk> strategy has legs and it seems to be working that said, we have a lot of work left to do not all of our solutions are completely ported to the platform and the platform isn't as modular and we wish it were working on that.
And there's definitely plenty of investments still going in but from a customer reception standpoint, we have.
Medium and large financial institutions, who who have adopted it.
Got it very helpful. Thank you.
Our next question comes from Ashish, So that true with RBC capital markets. Your line is open.
Hi, Thanks for taking my question.
And I was just wondering if it's possible to quantify how we should think about the C and the impact from the CNR divestiture and the fourth quarter on a quarterly impact going forward.
Mike do you want to take and I can take that 1 yeah, I'm happy to we mentioned last quarter and or perhaps it was and the press release, when we announced the deal.
That <unk>.
Roughly its a 6% of our revenues and.
And that's it.
Rounding sitting here a percentage.
And expenses are in the near term that we'll be able to flex our you know and the same ballpark as those as those revenue numbers.
It's a Q4 heavy business just like our other software businesses are so the year over year impact of not only and that business and Q4 and 21.
And would have some seasonality associated with it versus a pure layer.
But that's not 1 day to the ballpark of what zone.
And we expect.
What color.
And then maybe just to follow up on the earlier question around the software and I was wondering if you could talk about the adoption like the progress from the API the external API strategy as well as the studios and any color there would be helpful. Thanks.
Yeah, I would say both of those proceeds to pay it.
And that we have.
During this interference.
Oh.
We are making progress on both the external facing API and I'm sorry from studio this morning.
But much of that would be ready this year.
That's very helpful. Thanks.
The next question comes from Caroline and constantly with Autonomous research. Your line is open.
Thank you for taking my question and wanted to ask about the expectation for applications going forward. Following the recent divestiture and would you say that the business at this point and great taste and can you talk about the strategic role if it makes sense and you need at this stage, particularly as it relates to the decision management.
Yeah, I guess I would say that it is right size, we don't have any plans for any significant share going forward at least not at this time.
So I would call it right size I think the way to think about it is that the the the application solutions will increasingly be available on top of the decision management platform and so from.
And of course.
Share with you, how and how those things break out.
But you know price size, yes.
Okay. Thank you and my other question is and next quarter as you're talking about at sea and at the metrics and you're expecting to provide additional detail and.
And decision management profitability, especially the timing of turning to a profitable level and where we see and some guidance at that point cause and growth.
We will start with the revenue and I think we'll have the T. B D I'm getting down to a margin level.
Okay. Thank you.
And as a brief reminder to all to register for a question and it is 1.4 on your telephone keypad and next question comes from and Jeff Mueller with Baird. Your line is open.
Yeah. Thank you.
Anything further you can say on bookings it was the third quarter and a row of relatively weak bookings and it sounds like the.
The emphasis of professional services is a large part of that you also mentioned shorter term lengths and.
I guess is that customers.
<unk> shorter terms.
Were you and customers jointly preferring shorter terms because of how.
The subscription based software sold or is that timing of large deal activity just how much of the.
The weaker bookings is that how much of it is other things.
And the shorter term length is significant it's a you know.
Mike and keep me honest I think it's on the order of 25 per cent reduction and term language. So it's significant.
In terms of Who's idea is that we always do what the customer wants.
That said, if we had you know to the extent that we have a choice and the matter.
Our preferences for shorter because we do think that that's a better way to go we think that there are more opportunities for us to revisit things sooner. If we if we go for the short term length.
And this is part of why we changed the way we compensate our sales force as well, we we used to compensate on bookings and longer terms.
Emissions.
And and.
And and we no longer do that and they are our goal is to provide the terms and our customer wants but shorter is absolutely fine with us.
And Jeff if I can add a little bit of I can add a little bit of color to that so the.
Term lengths and the average from life was 37 months a year ago and it was 30. This time, that's about a 20 per cent decrease 19% to be specific and if you apply the rough math, that's $15 million to $20 million and bookings right. There just because of from life and the other factor is P. S intensity are.
Bookings were $20 million lower this quarter than they were last quarter.
You see where a $30 million down and total bookings. So those 2 factors alone would.
All else being equal.
Explain that.
Helpful and then when you're giving the example of customers landing on the platform with a eventual intent to do 10 or 20 solution.
How many how many skus are there like how many solutions could a customer buys a day if they bought everything.
Or like where is that going.
Well, what it probably skews and not even the right way to think about it because when we think about Skus. We're at I don't know call. It 150, skus, but but the platform and its modular form provides the opportunity to do hundreds and potentially thousands of combinations of things and so I think I think what we're moving.
2 is more of a usage based pricing and a modular pricing that lets customers mix and match the components that they want to achieve the goals that they want from a solution standpoint, and so it's not like everything will be pre package.
Okay, and then last 1 from me just on beta be scores.
How do you.
Maintain and ongoing.
I along with the ultimate.
And market enterprise customers. So I think technically it's your customers customer because your Q and K disclosure is.
Revenue concentration based on the Bureau relationships. So how do you maintain that and market dialogue and I guess monitor.
Their commitment to staying on FICO scores.
Obviously, we stay close to it through our channel partners the bureaus.
But we also certainly for all of the major institutions, we have direct sales relationships and so any significant activity in 1 direction and others as well understood by our people and we are and a dialogue with them.
Got it thank you.
And there are no further questions at present time I'll turn the presentation back to you. Please continue with your presentation or closing remarks.
Thank you thank.
Thank you everyone for joining this concludes today's call. We look forward to speaking with you again soon thanks for your time.
And that does conclude the conference call for today and we thank you very much for your participation you may now disconnect.
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