Ladies and gentlemen, thank you for standing by. Welcome to the Fair Isaac Corporation Quarterly Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Thursday, November 1, 2018. I'd now like to turn the conference over to Steve Weber. Please go ahead.

Thank you. Good afternoon, and thank you for joining FICO's fourth quarter earnings call. I'm Steve Weber, Vice President of Investor Relations and I'm joined today by Will Lansing, our CEO; and Mike Pung, our CFO. 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 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 Web site or from our Investor Relations team. This call will also include statements regarding certain non-GAAP financial measures. Please refer to the company's earnings release and Regulation G schedule issued today for a reconciliation of each of 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 Web site at fico.com or on the SEC's Web site at sec.gov. A replay of this webcast will be available through November 1, 2019. And now, I'll turn the call over to Will Lansing.

Thanks, Steve, and thank you everyone for joining us for our fourth quarter earnings call. Today we reported the results of a strong fourth quarter with record revenue and earnings and have finished a year in which we topped $1 billion in revenue for the first time. In our fourth quarter, we reported revenues of $280 million, an increase of more than 10% over the same period last year. For the full fiscal year, we recorded $1,032 million of revenue, up 11% from 2017. We delivered $50 million of GAAP net income and GAAP earnings of a $1.64 per share. Results that included a number of one-time puts and takes that Mike will describe. On a non-GAAP basis for the $1.89 earnings per share was up 14% from last year. Now we were able to drive this growth, as we continue our shift to the cloud. In our software business, we were able to grow revenues by 4% for the full year, even as up front license sales were down 10%. This was possible because the significant bookings we've been reporting led to an increase in recurring revenues of 9% in software. We had a strong year with our compliance, customer communications, originations and customer management solutions. We're seeing opportunities with these solutions and areas we haven't served in the past. In many cases, because the cloud-enabled solutions are increasing our addressable market, these solutions have been refreshed over the last few years and are now driving growth. Strategy Director for instance is a product, we introduced in fiscal '18 in the customer management space. It's generating a lot of customer interest and we're already closing deals as we build out a healthy pipeline of potential deals. We are committed to our cloud first strategy. We now have an incredible…

Thanks, Will, and good afternoon, everyone. Today I will emphasize three points in my prepared comments. First, we delivered $280 million of revenue this quarter and $1032 million for the year, which is an increase of $100 million from last year. Our recurring revenue grew 17% from last year. Second, we delivered a $1.64 per share of EPS this quarter and $4.57 per share for the year, up 31% and 15% respectively. Finally, we delivered $53 million of free cash flow in the quarter and $192 million for the fiscal year. We repurchased 1.9 million shares during the year or 6% of our outstanding shares. I'll begin by reviewing the results in each of our three reporting segments. Our applications revenue were $156 million, up 10% from last quarter and up 4% versus the same period last year. Full year revenues for applications were $586 million, or up 6% from last year. The increase in revenue was driven from our recurring businesses, as our licensed revenues for the year were down slightly. We had particularly a strong year in compliance, originations and customer management solutions. In our Decision Management Software segment, revenues were $31 million, up 21% from last quarter and flat with the same period last year. Full year DMS revenues were $104 million, down 7% from last year due to the shipment in business model away from upfront licenses. DMS bookings were $24 million this quarter, up 11% from the previous year. And finally, our score segment's revenues were $93 million, up 1% from last quarter and up 29% from the same period last year. B2B was up 38% over the same period last year and B2C revenues were up 12% from the same period last year. For the full year, scores revenues were $343 million or up…

Thanks, Mike. As I said, I'm proud of our results to-date and I'm excited about our prospects for 2019 and beyond. On the software side, we're making steady progress with our cloud first strategy and we're seeing growth in our revenue, our pipeline and our backlog. Like last year a strong software bookings give us more visibility into future revenues, that predictable, reliable backlog continues to build as we put more customers into the cloud. In scores, we're finding new ways to extract even more value out of that incredible franchise through increased usage, repricing and innovation. With all this in mind, we're providing the following guidance for fiscal '19. We are guiding revenues of approximately $1,125 million, an increase of about 9% versus fiscal '18. We are guiding GAAP net income of approximately $168 million, up 18% over 2018. GAAP earnings per share of approximately $5.53, non-GAAP net income of $209 million and non-GAAP earnings per share of $6.88. I'll now turn the call back 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 line.

Thank you. [Operator Instructions] First question is from Manav Patnaik from Barclays. Please go ahead.

Hi, this is actually Greg calling on for Manav. Just wanted to ask about the software business growth implied in the 2019 guidance. I think you said scores is expect to be up 10%, which implies a decent acceleration on the software business. So maybe just walk us through the moving pieces there please?

Yes. Greg, the software business, right now we're expecting to grow somewhere around the 9% range with a similar mix that we had this year meaning our cloud business is growing roughly at a 20% rate and are on-prem legacy business is modestly up in the 2% to 3% range. As it relates to scores, both B2B and B2C are roughly growing between 9% to 10%.

Okay. Maybe on the B2B or B2C, scores business. Can you just talk through how you guys are thinking about the ability to continue to grow that business in that high single-digit, low double-digit range and what's going to drive that going forward?

Yes, sure. I'll start and let Will finish. A lot of the growth that we've built into the guidance number is frankly coming from deals that we have signed this year that have not gone live yet. So similar to what we did in this past year's guidance, we take a look at volume growth both on myFICO which we see growing in the mid-single digits and on our partner programs which have been growing obviously faster than that. And based upon that in the growth of what we've already signed in the pipeline, we're comfortable with the numbers that we included here in.

Okay. And last one from me. Maybe on the margins I guess at the mid point implies roughly flat. Can you just walk us through the areas of investment focus this year versus last year? Thanks.

Yes. I would say the investment focus is the same as what we had last year. There are no real new items that we are putting money into it. It's been a combination for the last couple of years of operations, network security and some sales and distribution. We provide obviously a big range in terms of margin outcomes because it's really highly dependent upon how we end-up with a mix of revenue is it, license revenue that comes at a 100% margin or is it more heavily skewed toward cloud revenue, which is ratable and the revenue and expenses don't necessarily match up all that cleanly. There's a little bit of noise in there related to the new revenue standard, which we have to implement here effective October 1, but even if you put that on the side, we saw basis growth of 50% on our -- our 50 basis points on our margin this year and we're looking at something quite similar for fiscal '19 again dependent upon the mix.

So our next question comes from Bill Warmington from Wells Fargo. The line is open.

Good afternoon, everyone. I was hoping you could give us some strength -- sorry, you could give us some color on the strength in CCS and the customer management solutions in the banking fraud that you referenced in the release?

Yes, absolutely. So our top performing products are the three of course that we mentioned. CCS is still growing in the teens. It's a volume driven business based upon deals that we signed, bookings that we signed and getting those bookings up and live. We have a very strong pipeline in CCS to go on top of the existing recurring revenue base. Our revenue for the year for that product line was somewhere around $109 million, $110 million again, growing in the teens. Customer management are really -- the new Strategy Director product is just starting to pick up for us. Last quarter, quarter three, we signed [indiscernible] deals in excess of $1 million, we signed another one over $3 million this quarter and the pipeline for that is big and growing. I would say on our collections and recovery product, which we didn't mention that's becoming the new engine around cloud, and in fact of all the application products we have our collections and recovery bookings were the largest across the entire portfolio and the entirety of it almost was cloud related. So deals that we signed and booked in fiscal '18, but really the revenue hasn't been recognized yet, it will start to flow in fiscal '19 and it's part of what provides us with the optimistic view of a high-single digit close to 10% growth in the software side. So, there's nothing new to this story other than we're executing very well on the pipeline. We're winning a lot of deals, many of them are cloud. And they help us enter fiscal '19 with a greater run rate certainly than what we had when we entered fiscal '18.

So I had a question for you on the score side, you mentioned, a lot of visibility you have into 2019 is based on deals signed in 2018. Are there some deals there that you guys maybe haven't discussed? I'd say maybe give a little color on what's actually in that pipeline of deals that you guys have signed or is just giving the visibility into score's?

Yes. My comment was specifically on the consumer side and it relates primarily to some smaller deals that we have signed with some existing resellers some expansions if you will. It also includes some deals that we have not announced yet, but we are in the process of wrapping up this quarter and will begin to go live at some point. We believe in our first quarter of fiscal '19. So most of them are already in the bag, but some of them are very close to that.

Got it. And so with the growth in score's, which has very high incremental margins and the relatively limited margin expansion that's in the guidance for next year that would imply that there's a lot of investment going into, I would assume the software business. And maybe you could talk a little bit about what that is, where that's going and I guess, the timeframe for when you think you're going to get some leverage on that business and start to see the margins in the software business expand.

Bill, that's right that we are continuing to invest in the business and the things we're spending the money on have not changed much from last year. We're very focused on improving our operations, our network operations are cloud infrastructure, the signaling and alerting, all of the things that you have to wrap that kind of an offering with. And we're getting better and better every day. And I think you have to recognize where we started as we made our transition to the cloud. We started with a lift and shift strategy, we literally took our on-premise software that we -- and put it into our own data centers and then provided it as cloud service. But we had now for several years been in this transition to more standardize, highly configurable, multi-tenant kind of a code base. And in words, we have a lot of progress on that front, but we're not finished, we probably won't be finished a year from now either. I mean I think there's still work to be done. That said we do have a lot of control over the R&D dollars that we spend. And we like to spend them holding software margin more or less flat because we think the opportunity is so great. We think we're in a little bit of a land grab. You saw in the Forrester report that we are on the leading edge for analytics platforms and decisioning platforms and it's a commanding lead that we want to maintain. And so I think you're going to continue to see a year or two of investment at this level.

Got it. And then I have to ask about the UltraFICO score. Is that have been adopted or in beta with any clients and how long do you think it will be before you actually start to see it rolled out commercially?

Yes. Thanks for asking the question. We are extremely excited about UltraFICO and for the benefit of those not so familiar and we had a lot of fanfare over the announcement last week at Money 20/20. Bringing consumer data to the equation is attractive to regulators, attractive to lenders and attractive to consumers. And giving consumers the opportunity to improve their FICO score is a huge deal. And so the value proposition is strong. Operationally, it's not simple. I mean, we're working closely with our partners Experian and Finicity to make this a reality and it will be operational in 2019. We have some pilot clients already lined up. And I think we'd be prepared to take one or two more. And we're feeling pretty good about it. I mean we'll see what the uptake is once it's out there.

Well. Thank you very much.

Thank you.

[Operator Instructions] Our next question is from Brett Huff with Stephens. Please go ahead.

Good afternoon, and thanks for taking my questions. I think you guys mentioned the B2B pricing that was normal in '19 kind of like normal tweaking and things like that. And then, you gave us some volume views, but Will I think you said that there could be another sort of not typical price increase, but you're not including that in guidance just because you're not sure kind of if or when. First of all, that I hear that right and any more color on that would be helpful.

Yes. So, I think the way to think about our business is that we have kind of ordinary course price increases that are probably a little more than inflation. And then, we have all of the volume expansion kinds of initiatives that go on. And what's not included is the impact of what we call a special pricing situations and what that really is a recognition that in some segments where we haven't changed pricing in many, many years, that there's an opportunity to move more than 5% or 7%. And so, we don't have the timing of it, completely lined up. It's not completely in our control. It's a function of the length of contracts that our bureau partners have with their customers. And so, we're not really in a position to say it's going to be dollars X in 2019. What we do know is that there's some of these opportunities and we'll be working on them.

All right. That's helpful. And then, when you guys think about the investments, I know that a lot of it is around the cloud infrastructure. As I recall the network security was sort of a general, you just making sure you have capacity and make sure that the security is upgraded. But then, the results are some specific development associated with the cloud products that I know you're replatforming some of your old products and building some of the new. Is that investment kind of split evenly or is there an emphasis on one or the other or is there -- how should we think about that investment?

Yes. So Brett, this is Mike. I would say, the majority of the spend around the cloud is spent on development. There's one big kind of project we're working on right now, we plan to deliver in fiscal '19. And it's a successor product to our Falcon product along with a combination of our anti-money laundering and compliance products. So it's basically --, and said in another way, we're using the decision management platform to bring out the next generation of Falcon, which will have a lot more capability on it. So that's a pretty big undertaking that was started this last year and flows a little bit into '19. But that being said on the operations side, if you think about it our cloud bookings are growing 50% almost year-over-year, which means we have lots of customers to stand up and lots of demands on the operations side of our business. Last year, we built out a network operation center that operates 7/24 worldwide. And we don't have a lot of incremental investments around that, but obviously as volume goes up there is some element of additional investment that goes along with the volume. And when the volume is booked, it doesn't get claimed as revenue, but for a period of two to three years. So there's this mismatch that happens with all cloud companies including our own around that. I would say this year, we don't have any step function investments and our numbers are planned, but it will all be depending upon the continued demand for the cloud product.

I would add a couple of things. I'd say that we have a lot of dedicated security spending under the very capable leadership of our CISO, Hilik Kotler and that continues and we're pretty happy with where that stands. Beyond that I think that we've got a lot of initiative from Hilik and from Claus Moldt, our CIO to move to a more of a [indiscernible] ops model. And I think that's the new gold standard in non-develop software and so we are very much adopting that. You'll see security built into all of our products from the get-go not added as an afterthought. So that -- so some of the security dollars are actually being spent in development.

Okay. And then last question for me is just a guidance question. I want to make sure, I got the tax benefit, in the pro forma EPS you gave us that does not include the $0.82 tax benefit. And can you just describe what that benefit is? So that we know if we think it's kind of a one timer or if it's a normal course of business kind of thing? I want to make sure I understand what that was as you called it out.

Yes. So think about our income tax, it's two separate pieces that net to what we report, okay. The first piece of the two are just the normal recurring tax rate in accordance with worldwide tax rules. That's the 26% or 27% rate that we see worldwide. There is a offset to that number, which basically decreases tax expense. That's been around for a couple of years called excess tax benefits associated with stock-based compensation. In the past, as you may recall that used to flow through equity beginning last year it began to flow through income tax expense. That's the $25 million or $0.82 a share benefit that offsets that 26% to 27% cost. The net of all that which is what we report on the phase of the income statement, we believe is going to be around 14%. So for simplicity, when you're modeling, your tax rate for us take pre-tax net income and multiplied by 14% and that's roughly what we believe our tax expense will be for the year.

Okay. And comparability to the number we just reported on a pro forma basis I can't remember what it was for the year. Which is the most comparable number the guided 688 or should we add that $0.82 to get I think it was 770, which one of those two is more comparable to the number that you guys just reported from a pro forma EPS point of view?

Yes. So to further complicate the tax expense that we recorded on the phase of the income statement this year was around 27%. If we were to have excluded the one-time costs that we had in fiscal '18 to implement tax reform, it would have been around 14%, which is about what we're guiding next year. So in fiscal '18, we had a charge, the income statement by over $22 million for the total tax charge in the recalculation of the deferred tax assets we had on the balance sheet. So that's just yet one more piece of noise if you will on the tax rate, but if you separate it all out, the reported rate was 27% in '18, it's going to go down to 14% in fiscal '19. And if you want to make it apples in apples and pull out the one-timer in fiscal '18 it's roughly the same 14% for both years. I hope that helps.

That is helpful. And then going forward is the -- do you guys sort of see that tax floating -- if you look at the 14%, does that slowly deteriorate or I guess get less favorable and go back get up to the mid-20s, or does it stay kind of at 14% for the long term. I'm just trying to make sure I get the cash flows right?

At this point, our long-term models, we keep it pretty static. But the benefit that I described the excess tax benefit will go up and down depending upon our stock price. And so, once you've got that figured out then you'll have the model completely figured out for the next five years. So for our benefit, we just kind of hold it static, so that we aren't introducing yet another variable that confuses this already confusing area.

So that's why, so the static is sort of that mid-to-high 20%, I think you said, 25%, 26%, 27% that's a better place to start and then sometimes you get more benefit than not from the additional tax pay. Okay, Sorry to ask so many questions, just wanted to make sure we got it. I just wanted to make sure, we got that.

Nope, you figure it out.

All right.

[Operator Instructions] Next question is from Adam Klaub with William Blair. Please go ahead.

Hi, guys. Good afternoon.

Hi, Adam.

In scores B2B, if you include the price increase and mortgage, what would have been the growth rate this year?

Well, we don't really break that out, the majority of that growth rate of course came from the mortgage repricing, but we did see volume increases I'd say in the mid-to-higher single-digits, higher single-digits to the beginning of the year and it tapered off a bit toward the end though the fourth quarter was quite strong volume wise.

Okay. And then as far as the guidance next year, what are you assuming for just the volume is that low mid-single-digits for next year?

Yes. It's a great question. So you're absolutely right. We have one more quarter worth of price increase for mortgage that shows up here in quarter one. And then, it becomes apples-and-apples beginning January 1, with last year. So a part of the growth is the fact that we have mortgage for four full quarters in '19 versus three in '18. And then, the rest of it is related to volume growth or little bit in the U.S., but some outside the U.S. in particular in our China market.

Okay. [Indiscernible] team as and you may have said this, but do you think most of the transition is over at this point? And should we see growth -- revenue growth in that segment next year?

I think we've said before that trying to distinguish between DMS and the rest of our applications business is a hard thing to do because it's the same IP that underlies the solutions, as well as the platform. And so it's a little bit of an artifact that the DMS numbers look the way they do. And I don't think it's particularly useful to look at the growth rate in that alone. I really got to look at on combined basis.

Okay. Okay. That's helpful. And then, as far as the nature of the bookings, how is the -- how the amount of $1 million, $3 million plus deals compared to year ago?

Yes. For the fourth quarter, we had slightly fewer than last year because we had a record fourth quarter last year. Our bookings were 146, this year they were 134. So it included a couple of additional deals last year. For the full year, I'm just looking at the numbers now. It was pretty comparable fiscal '18 versus fiscal '17 for deals in excess of $1 million and in excess of $3 million. So let's call it, about the same amount as last year.

Okay. And how about the -- again that's the rough breakdown versus existing verticals -- your existing core financial versus non-financial verticals? Has that been around the same too?

Yes. It's of course heavily weighted on financial services.

Okay. Thanks a lot. That's helpful.

No further questions at this time.

All right. That concludes today's call. Thank you all for joining.