Fair Isaac Corporation (FICO) Q1 2013 Earnings Report, Transcript and Summary

Good afternoon, and good evening. My name is Sheryl Lee, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fair Isaac Corporation First Quarter Earnings Conference Call. [Operator Instructions] Thank you. Mr. Steve Weber, you may begin your conference, sir.

Thank you. Good afternoon, and thank you for joining FICO's 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 Pung. Today, we issued a press release that describes financial results compared to the prior year. Today, management will also discuss results in comparison to the prior quarter in order to facilitate understanding of the run rate of our business. Certain statements made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve many uncertainties that could cause actual results to differ materially. Information concerning these uncertainties is contained in the company's filings with the SEC, in particular, in the Risk Factors and Forward-looking Statements portions of such filings. Copies are available from the SEC, from the FICO website or from our Investor Relations team. This call will also include statements regarding certain non-GAAP financial measures. Please refer to the company's earnings release and Regulation G schedule issued today for a reconciliation of 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 www.fico.com, and on the SEC's website at www.sec.gov. A replay of this webcast will be available through March 1, 2013. Now, I'll turn the call over to Will Lansing.

Thanks, Steve. Today, we announced the results of our first quarter of fiscal 2013. I'll briefly discuss those results and then discuss the progress we're making with the acquisitions we made in 2012 and how those acquisitions are helping us reach our strategic goals. First, I'm happy to report that we had another good quarter. Our revenue of $190 million was an increase of 12% over the same period last year and 2% over the previous quarter. We delivered $23 million of net income and earnings of $0.65 for the quarter, which includes $0.06 per share of onetime charges taken in the quarter. As we did last quarter, our revenues grew across our entire portfolio. Our Applications business was up 13% versus the same quarter last year. Scores was up 2% versus the same quarter last year, and Tools was up 24% versus the previous year. These results included about 1 month of contributions from our acquisition of CR Software at the end of November. Mike will provide more detail, but first I'd like to talk about what CR Software brings us and how, along with Entiera and Adeptra, it is helping us realize our strategic vision and accelerate our growth. When I moved from the board to the CEO position 1 year ago, I said this was a highly attractive business with bright prospects. We have a strong brand and are viewed broadly as a pioneer and leader in using analytics to help businesses make better decisions. We also have a terrific set of products that are highly valued by our customers and deeply embedded into their business processes. However, the maturity of our products and the deep market penetration has also met with modest organic growth. So I also said that we'd be looking at complementing our organic…

Thanks, Will, and good afternoon, everyone. Today, I will emphasize 3 points in my comments: first, we had a solid first quarter, delivering $190 million of revenue, a 12% increase over the same period last year and 2% over the prior quarter; second, for the first quarter, we delivered $23 million in net income and $0.65 of EPS, increases over the prior quarter of 10% and 8%, respectively; finally, beginning this quarter, we will begin discussing additional non-GAAP metrics, non-GAAP net income and non-GAAP earnings per share, in addition to the non-GAAP operating margin and free cash flow, which we've talked about in the past. Non-GAAP net income, EPS and operating margins all exclude the impact of amortization expense, share-based comp and restructuring and acquisition-related items. These non-GAAP financial measures provide meaningful supplemental information regarding our performance and liquidity by excluding significant non-cash expenses and other items that may not be indicative of recurring business results. And they are used by management in operational decision-making. While our current guidance is on a GAAP basis, we expect to add non-GAAP guidance in a future quarter. With that, let's talk about revenue. Revenue for the quarter was $190 million or 12% over the prior year. Approximately 9% of the growth is related to our M&A activity, with the remaining 3% organic. I'll break down the revenue into our 3 reporting segments. First, in Applications. Revenue from Applications was $125 million, up 13% versus the same period last year and up 4% from last quarter. Much of the increase is due to the acquisition of Adeptra, which accounted for about $13 million of revenue this quarter. The rest of the portfolio performed well and compares favorably to the same period last year, when we had an unusually high amount of license revenue. The…

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

[Operator Instructions] And our first question comes from the line of Manav Patnaik.

I guess, the first question -- maybe, it's housekeeping, but, I guess, you said $13 million was the contribution from Adeptra. What was the contribution from the other 2 acquisitions?

The other 2 acquisitions, Manav, contributed just about $2.5 million worth of revenue.

And would that be all in the Applications segment?

Yes, all of the M&A work we've done so far is rolling up in the Applications line.

All right, fine. And then, just in terms of the big picture strategy that, Will, you've laid out -- and, obviously, you said these 3 acquisitions, obviously, help you build in that. I was wondering, looking over the next 12 to 24 months, how would you break out the opportunity between making more such acquisitions versus organically investing internally and trying to get to some of those targets?

Well, we have a plan with a substantial amount of internal organic investment, and that happens with or without additional M&A activity. We're committed to leveraging our resources internally to advance our strategy. The M&A piece, I would say, is a little bit more opportunistic. We try to be systematic about evaluating things out there, but, as you know, it has everything to do with the prices at which these things are available and whether a deal can be had. And so I would say that the part that's certain in working against our strategy is the organic part and the part that's opportunistic is the M&A part.

Okay. And Mike, I guess, could you just repeat -- I think you had given guidance on the tax rate. I missed that. What was the range?

31% to 32%.

Yes, 31% to 32%, based upon the reinstatement of the R&D credit, which we will be able to claim here in quarter 2.

Your next question comes from the line of Carter Malloy.

This is actually Ben on for Carter. First, in looking at Adeptra, we expected it to be accretive this quarter. Was it accretive as expected? And can you kind of break out how much you have in guidance from Adeptra this year?

Yes, when we guide -- let's start with your first question. It was accretive this quarter, both on a GAAP and on a non-GAAP basis. The EBITDA margin was roughly in the low teens, and it was roughly breakeven, slightly positive on a GAAP basis. As a reminder, this was the first full quarter that we have had Adeptra rolling into our numbers. For the year, we gave guidance of roughly around $55 million for the Adeptra business. And we're tracking to either meet or beat that.

Okay. And can you help us kind of understand how much of overall guidance is from acquisitions? Outside of Adeptra, obviously. And how much of that is coming from organic growth?

Yes, we guided about 2% to 3% of organic growth embedded in our numbers, with the remainder coming from M&A. We basically guided an assumption that assumed that our Scoring business would continue to run flat with a little bit greater in the software side, similar to last year.

Okay. And then lastly, on the Blaze product, how much of that upside came from onetime license sales?

A lot of the Blaze deals are either perpetual or term license. And so most of the deals, the bigger deals this quarter, were perpetual licenses. And the whip [ph], therefore, would be a result of the 2 big transactions that we did this quarter, in addition to kind of the standard book of business we do.

[Operator Instructions] And there are currently no questions in queue. I'll turn the call back over to the presenters.

Thank you very much. This concludes our call. Thank you all for joining.

This concludes today's conference call. You may now disconnect.